Energy suppliers must take action to help customers

GB Energy too small to buy forward contracts? Sorry, untrue. Well run small suppliers like Good Energy have been around for years with a fraction of GB Energy’s customer numbers. GB Energy’s problem was that they’d built a business promising lower prices than were sustainable in the market, and faced by rising wholesale costs they found that they couldn’t survive.

Whether in telecoms, pay TV, insurance or energy almost all “customer acquisition” tariffs or prices are not profitable. If a supplier doesn’t do this it sees its customer numbers decline – problem is that wherever those price-led switching customers move to will be in the same bind. Another fairly common practice in smaller energy suppliers is to try and keep costs down by buying shorter term “hedging” contracts than a large supplier would consider prudent. Can’t comment on GBE, but I wouldn’t be surprised if this affected them.

There’s no magic sauce here – cost to serve doesn’t vary hugely, everybody has to buy a government mandated volume of expensive renewables, and then contract the rest in the wholesale market. Electricity distribution costs and government policy costs on renewables are a big and rising cost that all have to pay. Small suppliers even have it easy, in that they are allowed to dodge the welfare schemes that the large companies have to pay into (Energy Company Obligation, Warm Homes Discount). Some are even given direct subsidies (Feed In Tariff “qualifying costs”). So if you’re with a small supplier then you’re mostly opting not to pay the costs of this, which is around £50-70 a year. Those who are with a small supplier, but believe energy suppliers aren’t doing enough to help customers may wish to examine their own conscience on that.

Will others follow GB Energy to the energy supplier graveyard? Probably. There’s now a lot of inexperienced new entrants who have saved money by not buying forward and not hedging their risks, who aren’t making money overall, and whose customers (because they’re people who switched to cheap and unheard of suppliers) are price conscious with little loyalty. With all the EU-mandated power station closures the wholesale market is very “tight” and any company that needs to buy more power at short notice will find that difficult. A cold winter could easily take out several small suppliers.

A the P, I think your comment about GB Energy was what has already been stated. They introduced lower cost fixed price tariffs at a time of low wholesale spot prices, and did not have the financial means to protect themselves by buying ahead. So, when the prices they had to pay on the wholesale market rose they became unprofitable. Other companies who do buy forward for 1 or 2 years will protect the viability of their fixed price contracts, albeit they will inevitably be more expensive in the first place. It may well be other small companies will follow suit.

Algernon – What Malcolm said was not untrue.

In a letter to customers on the company’s website, the managing director of G B Energy Supply said: “Due to swift and significant increases in energy prices over recent months and, as a small supplier our inability to forward buy energy to allow us to access the best possible wholesale prices, means that the position of the business has become untenable.” Nothing you have said has disproved that statement, in fact you have confirmed its validity.

Thank goodness measures were recently put in place by Ofgem to protect customers’ credit balances when an energy supplier goes out of business. While in budgetary terms it might make sense for customers to switch to smaller companies offering cheaper tariffs because of a short-term fall in wholesale prices, no one really wants to be with a supplier with an unsustainable business model as other aspects of their service could start to deteriorate or their prices will have to rise at an above average rate [but short of triggering commercial failure]. It will be interesting to see who Ofgem picks to take over GB Energy Supply’s customers and what the criteria will be. If any more energy companies fail it will be a source of embarrassment for the government.

I believe it will be very difficult for many of the smaller and newer entrants to the energy market to survive over the longer term since they cannot possibly have sufficient buying power to get the best prices on the forward market, do not have raw material resources or production capacity of their own to trade in the market and balance prices, and in general do not have bulk commercial contracts for energy supply with which to stabilise the domestic energy demand and pricing structure.

Sorry gentlemen, with respect I believe you’re still both wrong. Despite what GBE might claim, they’re insolvent. Do you really believe the “it wasn’t our fault” statements from somebody who has just bankrupted a business with a run-rate turnover of what, £150,000,0000 a year? As for protecting the credit balances of customers, I offer a hollow cheer for Ofgem – if GBE have gone under why should the rest of us pay to bail out the cheapskates who signed up for the cheapest price regardless?

But rather than disputing with me, think whether the justification is fair, that GBE were somehow too small to buy forward contracts. Think about it, and it’s rubbish. The would have been buying about £70m a year of wholesale energy, if you’re buying £70m of ANYTHING you’ve got options. GBE CHOSE not to buy long forward contracts in order to offer the lowest price, crossing their fingers that prices wouldn’t go up (when most industry player believe that they would and will). That has nothing to do with buying power, everything to do with a calculated gamble. With circa 160,000 customers GBE were not somehow helpless minnows. There’s energy supply companies been around for decades with around 30,000 customers. I know, I work in this market, and you might think it is full of fat cats on luxury yachts – I can assure you that it is a brutal and unforgiving market place, where costs are cut wherever they can be, and that the average pay is poor, and for investors regulatory risks are enormous.

So, despite GBE having £70 a year per account benefit over larger players, and despite fairly decent scale, they’ve still not managed to cut the mustard. I do feel sorry for one group of people – not the investors in GBE who got what they deserved, not the management of GBE who created this situation, certainly not the customers of GBE who wanted the cheapest deal regardless of consequences. The people to feel sorry for are the employees – this is a grim Christmas present for the employees of GBE.