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.

Well, whatever the reason, G B Energy Supply have gone out of business and I happen to believe the reason given by the company because it is in line with predictions made by credible economists and commentators.

So far as customers with credit balances are concerned [for whom it seems you have absolutely no sympathy whatsoever], the following from an Ofcom press release [26/10/2016] explains the position:

“As unsecured creditors, these customers . . . . [would have been] unlikely to get their money back if their supplier became insolvent. However, under the new safety net, Ofgem will now take into account who can best protect consumers’ credit balances as part of the process for selecting a replacement supplier. Where necessary, Ofgem would allow the replacement supplier to recoup the cost of reimbursing the credit balances through an industry levy. This levy, which would be spread across all energy customers, would only have a small impact on bills.”

It is interesting that the new ‘safety net’ regime only came into effect one month ago. Were GB Energy Supply waiting in the wings to be the first through the trap door? Did Ofcom know they were on the brink of collapse?

I sincerely hope that we do not lose the small players in the industry. As with mobile service providers, the larger companies have, I believe, rather let the side down – if we are to believe the rankings published by Which? Maybe there are too many small players and we would be better served if some of them were to join forces.

I agree with that, Wavechange. But the industry seems to be divided between the companies with generating capacity or gas production facilities and those without either. Is it not time to force the separation of the upstream and downstream operations in the Big Six so that all domestic suppliers can compete on an equal footing?

I also think there needs to be a way of making customers’ credit funds inalienable in the event of a business failure. It would appear that some companies are actually floating on them. I can’t think of another service industry where customers’ advance payments are at risk of being withheld in a liquidation. Ofgem has rightly reassured customers that their credit is safe but that is only because others could be forced to pay a levy.

I don’t know enough about the industry to pass useful comment on the activities of different companies but I do agree about the need to protect customers’ credit. I also agree about the need for proper governance and management of companies and nowhere is it more important than in providing essential services.

No absolutely not, Beryl. I would have liked to see The Cooperative Energy as a mutual organisation be the chosen vehicle for taking over the G B Energy Supply accounts, but they had a heavy fine from Ofcom for bad customer service recently. One could argue that they have paid the penalty and should now be given an opportunity to redeem themselves [if they wanted the extra business, that is].

Thats funny John I am with Co-op Energy but I missed the fine bit , they have been pretty good to me –so far. I am listening to the Hebrides overture on my PC as I post this.

From Ofgem’s press release issued on 27 October 2016 :

“Following engagement with Ofgem, Co-operative Energy has agreed to pay £1.8 million to energy consumers, because it let customers down in its complaints resolution, call handling and billing processes. £1.6 million of this money has already been paid with the remainder to be paid shortly to those customers not yet compensated. The money that Co-op is unable to return to customers will go to the charity StepChange to help energy consumers who are in financial difficulties.“

Early this year I switched to GB Energy purely no cost grounds. I was not too happy at paying the first DD at the beginning, but the payments were higher in the winter and lower between April and September which suited me. By coincidence I began a switch to one of the Big 6’s fixed price deals which was more competitive than that of GB’s. That switch is complete, and I had an email from GB advising me of my credit balance. 5 days ago I asked when this would be refunded and they promptly replied “within 10 days”. Having heard the bad news I checked my bank account and, to my surprise, the amount had been credited and seemingly cleared. I hope that is the case but I’m also relieved that otherwise I should get a credit from my new supplier.

Should I expect to deal with a trader and if they go bust, have any money the owe me refunded by someone else? No, I don’t think so. I took the risk, I suppose. Maybe Ofgem make a levy on all suppliers to cover such an event to which all customers effectively contribute and then it would seem more fair. But if one of the major players went under who would fund the huge amount required then?

Why do we need 44 energy suppliers? Competition gone beserk in such a 2 product industry. I suspect many are just entrepreneurs out to make a quick profit with no real thought for a long term business.

I go along with John and would be happy to see what could be customer-owned (real cooperative) energy suppliers where the profits are paid out in dividends.

Thanks John .

Hopefully this will be an isolated case but perhaps there may be a need for something like the Financial Services Compensation Scheme. Some people are hundreds of pounds in credit with their energy supplier. Investment in shares etc. is a gamble but not buying energy – well that’s my opinion. I’m glad you had your money refunded, Malcolm.

malcolm r said (27 November 2016)

“I go along with John and would be happy to see what could be customer-owned (real cooperative) energy suppliers where the profits are paid out in dividends.”

That’s assuming there would be any – how would a customer owned co-op deal with any losses?

Malcolm – By my reading of the situation, if you had not already received your credit refund from G B Energy Supply it would not have been your new Big 6 supplier that would have credited your account but whichever company is appointed by Ofgem to take over GB’s customers. People currently in the middle of the switching process are presumably in that position, but the reality might be different and set out in the small print which I have not seen.

There is also a curious form of words in the public statement by Ofgem about their ‘safety net’ scheme : “Ofgem will . . . take into account who can best protect consumers’ credit balances as part of the process for selecting a replacement supplier. Where necessary, Ofgem would allow the replacement supplier to recoup the cost of reimbursing the credit balances through an industry levy. This levy, which would be spread across all energy customers, would only have a small impact on bills.” Ofgem might be assuming that if the failed company is small enough, and the replacement supplier is big enough, there will be no need for an industry-wide levy and the enlarged replacement supplier will fund return of the credit from its own resources. This, presumably, would be the price they would have to pay in order to capture a volume of new business. The question of “who can best protect consumers’ credit balances” is also interesting; the credit balances will surely fall into the hands of the liquidators or administrators and become part of the dissolution process for paying taxes, loans and creditors. What Ofgem meant to say, presumably, was to “replace” rather than to “protect” credit balances. Perhaps that is a semantic nicety that could have made Ofgem’s announcement appear less palatable.

The Ofgem statement certainly makes it clear that any levy would be across all energy customers; that implies the impact would not be limited to domestic customers, but since regulation only operates across the domestic markets it must be restricted to domestic customers only, thus putting a question mark over the other comment that it “would only have a small impact on bills” in the event of the collapse of a major supplier.

In the event of a major supplier getting into difficulties, I would expect Ofgem to send out a lifeboat and put together a rescue package with the Big 5 remaining suppliers dividing up the customer base between them. One problem is that most of the Big 6 are either wholly or partly owned by foreign companies which, in the first place, puts their economic fortunes outside the influence of the UK energy market, and, second, might make them less likely to want to bail out another company.

I think Ofgem have got out of this by the skin of their teeth having only just put up their safety net to catch a falling tightrope walker. But perhaps they knew G B Energy Supply was wobbling and steadied the rope for a few weeks while they got their act together.

If a mutual energy supplier was reaching a position in which its income was not covering its outgoings, and was already heavily in debt, it would have to stop trading and hand back its operating licence to Ofgem. It would be no good putting up its prices and trying to trade its way out of its difficulties as rampant switching would occur, and it could not change its product lines because gas is gas, etc. A co-operative energy supplier would not be able to claw back past dividends paid to members but, depending on its constitution, it might have the power to levy on its members, but that would surely be limited to a nominal sum in each case. Losses by a mutual organisation would be treated the same as in any other commercial company so that any creditors would have to wait to see what assets remained to be distributed. Some of the smaller energy companies probably have very little in the way of assets and could be heavily indebted if they have purchased energy supplies in advance; such supply contracts could constitute assets but might not have the same value to other companies. Economic regulation by Ofgem is the mechanism that is supposed to keep all the plates spinning. I share the view that there are probably too many acts in a small ring.

As a Co-op Energy customer I wait to see if it will affect the next contract with them in about a year. I cant see this as being a bad move in the governments eyes in relation to British public opinion of them .

I think it’s a good move in a number of ways. G B Energy Supply’s customers are in a better place with an ethical company. Their customers who might have wished to quit G B Energy Supply can now do so without penalty or they can hang on and see what The Co-operative Energy has to offer. The Co-operative Energy has enlarged its customer base which gives it better bargaining power for energy supplies. It prevents any of the Big Six from getting any bigger for virtually no effort. And it reassures consumers and hopefully avoids a panic flight from the smaller energy companies. It all happened much quicker than I was expecting, too, which is good.

Peppercat ,if you had checked into Co-op Energy you would have found it makes use of British renewable energy.

Many farms in my area have bought into the full size wind turbine project and installed their own ones already Christopher, and you know farmers they wont outlay large amounts of money unless it pays dividends.

The landowners don’t outlay anything, Duncan. Investment companies rent space on their land at agricultural rents and then install the turbines [or solar panels more usually these days] and sell the electricity to the power industry; the landowner might get a percentage of the income generated but the overall returns are not massive – albeit somewhat better than from farming and without all the difficulties of looking after livestock or crop production.

Didnt know they didnt contribute John , it certainly seems worthwhile and would help with their own use of electricity as well as quite a good income.

Other suppliers would soon align their tariffs or offer different rates for special terms [direct debit, dual fuel, paperless billing, contract lengths, exit penalties, and so on] so there would still be multiple suppliers. Even under nationalisation each region had its own tariff to reflect operating costs and economies of scale. Some areas of the country are more self-sufficient or have low-cost generation [hydro, for example].

My priority would be to lift the burden of government levies and obligations from domestic energy prices. That would lead to a more transparent and equitable market.

If only it were that simple Robert as cheapness doesn’t always equate with Best Buy as proven time and time again on the web by complaints to Which and other websites about the unforeseen drawbacks 6 months later, and that applies throughout the consumerism range.

Which?Switch can be that “someone”. You just put in your basic information and it will provide a list of all available deals (as far as I know) starting with the cheapest. You can then choose which one to switch to – either through Which?Switch or directly with the new supplier. Almost certainly it will be a fixed price deal for a fixed time, probably 1 year .However as deals change you will need to check new deals within a few weeks of yours coming to an end to see what to then move onto.

You got that last sentence right Jerry , thanks for the info coming from an “insider ” -Pay as You Go energy ? that sounds alright , you are a “smart meter ” company, uSwitch says you are a pre-payment company but dont have enough responses to actually judge you. Fund raising for Shelter -got to approve of that. Money Supermarket have got you down evenly in the Love/Hate customer experiences Liberty 100 by Secure meters (UK ) , according to Bloomberg its an Indian based company. still checking for more info.