Why YOU will pay for energy collapses
Eight energy suppliers have gone bust this year, meaning thousands of households have been left wondering who will be supplying gas and electricity to their homes, and even if their supply will be cut off completely.
The good news is that Ofgem’s ‘Safety Net’ means no-one will suffer any disruption to their supply and will automatically be switched to a new supplier. The bad news is that the estimated £80 million it’s costing to transfer customers is going to be added on to each of our energy bills.
It’s fair to say that while the UK’s energy market isn’t broken, it’s certainly not working as well as it should be.
Why are so many suppliers going bust?
Possibly the biggest flaw in the way the UK’s energy market works is that while the process of privatisation and deregulation has certainly offered consumers more choice, it’s not necessarily served up cheaper rates or even a better quality of service.
In recent years, we’ve seen a number of new players enter the energy market – there are now 67 smaller suppliers battling it out with the Big Six, 13 of which entered the market in between January and June this year - but while some of these smaller suppliers offer good value for money and great customer service, others fall well short of the expected standards.
OneSelect, for instance, is the latest supplier to have gone bust and did so shortly after it came bottom of the Citizens Advice star ratings table, which ranks the customer service levels of energy suppliers.
Some smaller suppliers also seem to be struggling with the financial strain of supplying domestic gas and electricity and mitigating ever-increasing wholesale prices – absorbing these costs can quickly push them to the brink financially, while passing them on to customers means they may lose business as they can no longer offer the most competitive prices.
These financial pressures have since been exacerbated by the government’s energy price cap, which means suppliers are limited to the amount they can charge households on standard variable rate tariffs. Although this cap will be regularly reviewed to take into account issues like rising wholesale costs, it’s been cited as a contributory factor for the collapse of a number of energy firms.
And then there are the financial pressures of hitting government renewable energy targets – news of the Spark Energy collapse came just days after it missed a deadline to make a £14.4 million renewable energy payment.
There are now concerns that Economy Energy, which has around 250,000 customers, could be struggling, having come under Ofgem investigation for not meeting renewables obligation payments. It’s also closed it social media pages, which suggests customer service issues.
What happens when a supplier goes bust?
When an energy supplier goes bust, Ofgem starts a tendering process whereby other suppliers effectively bid to take over the now vacant energy contracts in a process known as ‘Supplier of Last Resort’.
Once a successful bidder is chosen by the energy regulator, all customers of the now defunct energy firm will automatically be switched to the new supplier. Ofgem’s ‘Safety Net’ means there’ll be no disruption to anyone’s gas and electricity supply.
So far, so good. But if you find yourself in this position, it’s unlikely you’ll be placed on the best-priced deal by your new supplier. The most recent collapse, for instance, saw Together Energy take over the contracts of former OneSelect customers, who it then placed on deemed rates, a type of tariff that charges notoriously high rates.
That’s why we recommend you switch to a better deal as soon as your energy contract has been reallocated.
Why do we all pay when a supplier goes bust?
When a supplier goes bust, the new ‘Supplier of Last Resort’ not only has to cover the cost of taking on its customers, it also has to take on its debts, which are usually a combination of renewable energy payments and unpaid bills.
It's not just affecting the smaller firms either - just this week, SSE pulled the plug on a merger with Npower, that would have seen the creation of the UK's second-largest energy firm. citing the price cap and worsening business performance and changing energy market conditions as the main drivers of the decision. And the reason the merger was even on the table was because Innogy, Npower’s German parent company, wanted pull out of the UK domestic energy market, which it sees as overly-competitive and unpredictable.
Spark Energy and Extra Energy, which went bust within days of each other in November, between them owed around £58m in renewables obligation payments, while Co-Operative Energy claimed £14m for taking on the 160,000 customers of GB Energy when it went bust in 2016. More recently, Octopus Energy has claimed a Last Resort Supply Payment of up to £13.8 million for taking on Iresa’s 90,000 customers following its collapse in August.
These costs are then passed onto to consumers, who pay via increased energy bills – although the exact amount depends upon the amount of debt owed by the collapsed firms and the amount of credit balances held, it’s estimated that each of the UK’s 28 million households could see £3 added to the cost of their annual energy bills.
And while £3 a year might not sound like a great deal of money, it will undoubtedly increase if more energy suppliers go bust, and is a cost that households could certainly do without.
To try and prevent future collapses, Ofgem has proposed more stringent financial and customer service tests for new suppliers, which will mean any company looking to enter the energy market will now have to demonstrate they have adequate financial resources and can meet their customer service obligations before the regulator will award them a licence to supply energy.
Unfortunately, given the amount of uncertainty and inconsistency in the UK’s energy market, it could well be too little, too late.
Click here to run an energy price comparison, and see if you could be paying less for your gas and electricity.