The Great British Energy Crisis!

The news of the crisis that has befallen the UK energy industry has been so well covered in the media that it is doubtful there are many people left unaware that something has gone terribly wrong.

Whether this reporting has been wholly accurate or fair is a different question; it would demand incredible naivety to begin accusing the UK press of incomplete, inaccurate or indolent journalism based on this story alone.

The wholesale price for gas has soared in 2021 – to eye-watering, never-seen-before levels.  This is a predicament with causes which are various, it is a predicament with reach which is global, European and UK specific even, but an intense predicament nonetheless!

This chart illustrates the alarming rise in gas prices this year.  Today’s price (late November 2021) is more than £2.30 a therm!

Rising prices alone would have been a significant challenge for the UK energy supply industry.  Runaway wholesale prices have immediate impact.  Price hedging provides some protection for those better prepared in this way, but it is not the holistic contingency that many might have you believe

In the UK we also have the Government enforced price cap mechanism.  A political tool employed with the original intention to protect consumers from ‘rip-off’ supplier tactics and to guard against what has been an inertia of legacy customers to switch away from the older, larger supplier businesses (the previously labelled ‘Big-6’).

This price cap control, introduced to stop legacy supply companies from profiteering, was never designed to offer protection from the impact of high wholesale prices.

The current price cap level assumes a wholesale cost of 60p a therm…  somewhat short of the current £2.30!

“The government protects consumers.”  Sounds great, doesn’t it?  A line that Westminster is continuing to use as it ignores the pleas from the industry as business after business hits the wall.

Energy suppliers must observe some very clear rules – statutes they must obey…

  • They must purchase energy (gas and electricity) at wholesale prices. (Yes, they can hedge, but the ability to hedge is finitely limited and being smart after the event of huge price rises is not particularly impressive.  Hedging also costs money – money you have to have in the first place.)
  • For consuming that energy, they cannot charge their customers a penny more than the limit set by the Government’s price cap.
  • If they have a customer, they must serve that customer – they cannot, at their discretion (like other businesses can) decide to stop providing a service to that customer.

Do you see the problem?

If you are an energy supplier in Q3 of 2021: (i) you must continue to provide product to your customers without interruption; (ii) you must pay the wholesale price for that product; (iii) you must sell that product to your customers at a continuing loss.

That’s it.  That’s the business you are in.  Good luck!

Ironic that those best placed to weather this storm, to survive the financial and commercial perils of these incompatible constraints, just happen to be the larger legacy supply businesses to which the smaller challengers were being encouraged to offer competition.

Which then are the companies hardest hit by the surging wholesale prices and the restrictive price cap?  Those very same smaller challengers.

At the time of writing, we have seen 22 (TWENTY TWO) energy suppliers go out of business since August.

Government ministers peddling the line that these are “badly run businesses” and that the government is “protecting consumers” is spin.  Neither of these claims are true.

The headlines in the newspapers and on news websites don’t paint the correct picture and often, sadly, the accompanying stories don’t explain what is really happening because the scrutiny and the questioning we might expect is absent.

The media reporting of this crisis is largely neither fair nor accurate.

This is an avoidable crisis – make no mistake about it!

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Stuart Convery, Managing Director

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