Why are so many smaller energy suppliers failing?

Why are so many smaller energy suppliers failing?

In the past two years, we’ve lost many smaller energy suppliers that once showed so much promise.
Why is this happening and what does this mean for the industry and the consumer?

Solarplicity, Brilliant Energy, Our Power, Eversmart, Economy Energy. Just five of the smaller energy suppliers that ceased trading in 2019, added to another eight that we lost in 2018. Anyone who follows the UK energy industry must be concerned. The idea that smaller, nimbler companies, many delivering energy from renewable sources, can compete with the Big Six, appears to be a non-starter.

Many consumers want to switch away from their Big Six supplier in search of a greener or cheaper supplier, but confidence in using a smaller supplier is bound to have been undermined. This is counterproductive, creating a vicious circle which disadvantages the smaller supplier, even if they are on a sound financial footing.

What happens when a smaller supplier goes down? Why is this happening and can anything
be done?

Why business is challenging for smaller energy suppliers

There isn’t one primary reason why smaller energy firms are struggling to gain traction in the UK. It’s a combination of reasons, coming together to create a perfect storm. Trading conditions are difficult for all energy suppliers at the moment. However, these challenges hit smaller suppliers the hardest.

As mentioned in the previous section, when consumers see small suppliers go down, they will be less likely to switch to another small supplier in the future. They do not want to be left without power if the supplier goes down, although that will not happen, as we shall see later.

The UK Government has set a price cap on energy, limiting what suppliers can charge their customers. While this is generally seen as a good thing because it protects consumers, it ties the hands of suppliers to make changes in response to external conditions.

In addition, because most customers are on fixed tariffs, their scope to pass on price increases is extremely limited. Wholesale energy costs are currently quite volatile, meaning an energy supplier that is profitable one day can slide into unprofitability the next.

Smaller energy suppliers are also finding it hard to get investment. Because so many other smaller suppliers have failed, asset funding for small energy companies comes with a significant risk. Investors are wary of losing their money without a return. When investors do offer funding, interest rates are higher than average, increasing the costs to smaller firms.

Finally in this section, smaller energy suppliers are finding that running an energy company isn’t easy. Customers, OFGEM and the markets have high expectations. Running costs in functions such as customer service have exceeded expectations. Some smaller suppliers have received extremely poor customer reviews because they were not equipped to deal with the demands of today’s customer.

What can be done to improve this situation?

There is not much the energy industry can do to stem this tide. Energy supply is an open market. However, in a bid to protect consumers, the energy regulatory body, OFGEM, is doing more to ensure new energy suppliers are fit to trade.

Deregulation of the energy industry led to a situation where any company could set up as an energy supplier if they had the means to buy energy wholesale and sell it back to their customer base. This lack of governance is one of the reasons behind the number of companies setting up, then failing.

Now, OFGEM has laid out a series of stringent tests that new suppliers must pass before they can trade in the UK energy market.

From July 2019 onwards, in order to obtain a license to supply energy, new companies have to be able to prove:

  • Funding arrangements
  • Plans to deal with customer complaints
  • Strategies to help customers in vulnerable situations

There are also plans to go back and reassess companies who are currently supplying energy to consumers, to ensure that fewer firms cease trading. In the future, large and small suppliers may have to undergo regular stress tests around their finances and their customer service functions.

The impact of failing energy suppliers on the consumer

For consumers who chose to switch their energy supplier to a smaller firm, there could have been several contributing factors: perhaps they thought they would be able to get cheaper prices, or they wanted their energy to solely come from renewable sources, or maybe they just wanted to support the little guy against the Big Six Goliaths.

If the smaller supplier you chose collapses, everything changes. The good news is that you do not lose supply of your gas or electricity. There will be no sudden blackouts. However, you will be automatically switched to a new supplier, chosen by OFGEM. Then, you have the opportunity to begin a tariff with your new supplier, or switch to a different one without incurring any exit fees. Plus, if you were in credit with your original supplier when it ceased trading, your balance is guaranteed. You won’t lose any money.

While this sounds reasonable on the surface, in reality, it can be quite troublesome. You do not have any choice in who your new supplier will be and you could be switched to a tariff that is more expensive than the one you originally had with the small supplier. While you’re welcome to switch suppliers further down the line, this requires long phone calls to customer services and filling in forms.

Also, it is important to note that while there is a guarantee that consumers won’t lose any outstanding balance if their original supplier goes down, this balance will not be paid by the firms themselves, it will be supported by the UK taxpayer.

Looking to the future

Operating conditions are challenging for large and small energy suppliers alike. A volatile economy after Brexit will not make things any easier. Time will tell if OFGEM’s new initiatives will be able to weed out suppliers who are not on a sound footing. However, we expect the number of companies in the energy industry to continue to reduce, due to companies failing and industry consolidation. In time, we hope there will be room for everyone.