UK energy suppliers collectively lost £1bn last year. This year, ongoing intense competition as well as new cashflow challenges, including regulatory initiatives and Covid-19’s impact on customer incomes, will make that loss seem mild. Consequently, we see the trend for energy supplier consolidation continuing and accelerating in 2021.
Let us start with where we are today. Any sector in which almost no company is making any money, is one that will change. While some suppliers made less of a loss than others, there are very few that made no loss at all. Some business plans will include a long period of losses to obtain a favourable strategic position from which to deliver ongoing profits. Even those companies and their investors must now suspect that period could be very long indeed, if in fact it ever ends.
The surest route to profitability is to gain a high volume of customers to achieve the economies of scale to deliver margin. That is easier said than done when there are over 40 B2C suppliers and 50 B2B suppliers all competing for the same customers, mainly on price. The period of rapid organic growth of challengers due to customers switching from the large incumbents is losing pace. Significant growth is more likely to now come from M&A and SoLR activity, picking up the portfolios of suppliers that have exited the market. Growth, and therefore profit, is becoming a game of who can hold their breath the longest.
At the beginning of the Covid-19 pandemic last year, Ofgem supported supplier cashflow by allowing them to defer payment of network charges. Nearly 20 suppliers took advantage of the scheme. Those businesses are required to pay those charges by March this year. The payments are likely to be substantial.
Customer debt is another area of huge concern. Suppliers already collectively carry £300m of debt. Ofgem is proposing to raise the price cap by £21 to help suppliers manage increased customer debt due to the economic impact of Covid-19. This means that Ofgem anticipates Covid-19 induced bad debt of around £550m. That debt will not fall evenly across the industry. Suppliers who find themselves particularly exposed, especially if they already have high levels of debt, may find their cashflow under huge pressure.
Other Ofgem initiatives will add to supplier cashflow challenges. For example, the ECO payment threshold has been lowered to include more suppliers. Ofgem is also consulting on a policy of automatically switching customers to best priced tariff at the end of their contract term, which will close off a margin opportunity.
A further cashflow issue for some suppliers is rooted in their approach to the wholesale market. While wholesale prices were relatively low last year, this year they have increased considerably. Companies that take a short-term approach to the wholesale market will find a significant shortfall between the price they pay for power and the price they charge customers, once all operating costs are factored in.
And if a supplier succumbs to these pressures and enters administration, the amount they owe the industry is mutualised to become payable by the remaining suppliers, creating a further unwelcome drain on cash.
Look at all these factors in the round and it is inevitable there will be significant changes in the industry this year.
Sadly, there will be further supplier failures, with all the disruption that causes. However, mergers and acquisitions (M&A) will also accelerate. Some suppliers will decide they can’t succeed, so will look to sell. Others will take well-priced acquisition opportunities to gain the scale they need to reach profitability.
A final thought is that this coming year’s disruption may prove to be the foundation of a much more effective and sustainable energy supply sector. Creative use of M&A is likely to enable innovation that supports the development of new energy applications, such as EV adoption and other requirements of the UK reaching net-zero.
Ian shapes the BFY vision and inspires our team to bring it to life, while remaining central to complex client engagements in Strategy, Commercial, and Operations.View Profile