UK pays the price of the energy market in which everyone could participate

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(Bloomberg) – Starting a gas or electricity distribution business can seem complicated if you’re not in the energy business. In the UK, however, all you needed was internet access and a package from a software company that even came with its own license from the regulator.

Without the need to access homes, a team of engineers or a company headquarters, the ease of entry is why the number of suppliers in Britain peaked at over 70 in 2018. It also shows why the most open energy market in any major European economy is now in turmoil.

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Thirteen suppliers have collapsed in the past two months, and there are likely to be more as soaring prices sink businesses. The latest, Daligas Ltd., was registered at an address in the north London suburbs and had 9,000 customers.

The failures have forced 2 million people to switch providers. The absorption cost of these customers already stands at around 2 billion pounds ($ 2.7 billion), which is split between companies and added to bills under an agreement with the regulator Ofgem. What the final tally will be when other businesses fail is a puzzle, but it will be watering for many households, according to energy market analysts.

“The collapse of the UK’s energy supply continues, pooling costs will rise and there will be sector tax claims that will cost us all,” said Martin Young of Investec Plc. “Questions about market structure and regulatory oversight will no doubt intensify.”

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The threat of skyrocketing heating bills and state emergency response adds to unease in Britain which is standing out from its continental peers. Indeed, Prime Minister Boris Johnson and his government are fighting the fires on several fronts, many of which are on the country’s own initiative.

The UK’s departure from the European Union resulted in a labor shortage that disrupted supply chains. The military was deployed this month to deliver fuel to gas stations due to a shortage of truckers. Food prices, meanwhile, are rising and charities have warned that this winter, the poorest people will choose between eating and heating.

When it comes to the energy supply market, there is now the benefit of hindsight, according to Josh Buckland, former government adviser and now partner at consultancy Flint Global. He compared lax checks and balances to those of banks during the 2008 global financial crisis: it is only after the fact that the regulatory environment is called into question.

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“The competition has been good, it has driven consumer prices down, but it has created a consistent consumer churn and short-term pricing model to access new customers for growth,” Buckland said. “This has created a situation where the companies themselves are not financially stable. “

QuicktakeWhy UK gas suppliers are going bankrupt and who is paying

This is how it works. Once a business has a sourcing license, it can sell online. The company buys electricity and gas on the wholesale market, often through an intermediary, to supply households. Energy is transported through infrastructure owned by grid companies and is measured at the point of use. Many newcomers have worked like aggressive start-ups offering low prices – often at a loss – to encourage customers to sign up.

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Business Secretary Kwasi Kwarteng remains confident that Ofgem’s existing procedures are working for now, according to a person familiar with the matter. They said the regulator has strong powers and that failing suppliers pay the price for not protecting themselves or their customers from volatile energy markets.

But that ultimately leaves UK consumers with the cost. With gas and electricity prices near record highs, the total initial charge for utilities to accept new customers is estimated to be around £ 1,000 per household. About 70 to 80 percent of that can be recouped through an industrial tax added to energy bills, said a person familiar with the procedure.

Suppliers that fell back had customers between 6,000 and 580,000, but even those backed by big companies like BP Plc and Glencore Plc struggled. With the collapse of Pure Planet, BP’s five-year experience in the UK retail electricity business comes to an end. Royal Dutch Shell Plc is losing money in its sourcing business. Shares of the UK’s largest supplier, Centrica Plc, continue to rise as more competitors disappear.

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The irony is that the opening of the market was supposed to guarantee consumers a better offer from energy companies after an investigation by the Competition and Markets Authority found that customers overpaid $ 1.4 billion. books on their bills in the three years prior to 2015.

Attempts to increase competition by dismantling the so-called Big Six companies resulted in the introduction of a limit on the amount that utilities could charge customers on default rates.

The current crisis has now put this in the spotlight. The government says it is protecting consumers against higher bills this winter, while utilities say it cripples them because they have to supply energy at a loss.

The way the cap price is calculated will likely have to change in the future, according to Jonathan Brearley, CEO of Ofgem. The cap rose 12% on Oct. 1 and could rise another 30% from April, according to industry consultant Cornwall Insight Ltd.

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The cascade of failing suppliers did not happen out of the blue. The requirements to enter the market were lowered about ten years ago. Then, in 2018, the collapse of nine companies prompted the regulator to introduce new licensing requirements for new businesses to demonstrate that they have “the funds and resources to run their business for at least 12 months after entering the market ”.

Now, in the event of a major supplier failure, Ofgem will appoint an emergency administrator to limit the risk of market chaos created by trying to quickly transfer large numbers of customers to another supplier. Ofgem, the Department of Economic, Energy and Industrial Strategy and the Treasury may decide to financially support the supplier while another company is designated to take over its customers.

“It is becoming clear that Ofgem and the government have built a system that was not designed to withstand this kind of market shock – the current energy crisis confirms this,” said Justina Miltienyte, energy policy expert at Uswitch. .com, a website that helps people switch providers for various services. “This should serve as a wake-up call for Ofgem and the government to completely overhaul the regulatory regime.”

© 2021 Bloomberg LP

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