Why are gas price rises creating ‘national crisis’ in the UK?

The situation in the UK´s energy market has been getting increasingly grim for the last six months. The starting gun for sizeable suppliers going to the wall was fired when Avro Energy collapsed, owing millions to its customers and subsequently costing £680m to the taxpayer as Ofgem handed the money to Supplier of Last Resort, Octopus Energy to help with running costs.

26 suppliers went bust

While Avro had already come under fire from Citizens Advice for their horrendous operating model, customer service and strategy for buying energy from whe wholesale market, other, well run medium sized suppliers like People´s Energy, Utility Point and Green all collapsed as well under the strain of the price cap, stopping them from increasing rates to pay higher wholesale prices. In total 26 suppliers have gone bust, though there are expected to be many more. Scottish Power´s CEO Keith Anderson stated blunty in October that the market may be reduced to just five or six suppliers.

What are the warnings of the crisis?

Now major suppliers, such as EDF and Scottish Power are issuing storm warnings. Good Energy, have said “this is a national crisis” as wholesale prices rise. Energy UK, a trade body for the industry has pointed out that the government could being doing more with Emma Pinchbeck their Chief Excecutive commenting that

“Other Treasuries in Europe have already responded to the crisis, but in the UK, the energy sector is still asking if the chancellor knows that energy bills going up by over 50 per cent in the new year is a problem for ordinary people, businesses, and the economy,”.

While pressure on small and medium sized suppliers is acute, the likes of Bulb, the 7th largest supplier in the UK going bust has served as a rude wake up call that no one is safe. While Bulb´s business model is now looking to have been highly flawed and their claim to be a green supplier widely discredited, the idea that they were too big to fail has proven to be untrue.

Perfect storm for customers

The balance between keeping suppliers afloat and avoiding taking bread off customer tables is also becoming a struggle. Possible ways to stop customers from facing even higher bills would be to cut VAT or to expand the warm home discount. There is also an urgency around keeping suppliers afloat. For every energy company that goes bust, the costs across the industry add up, with a vicious cycle driving up prices.

The main strategy here revolves around an increase to the price cap, that limits how high the unit rates and standing charges can be for a variable plan. The current cap, a loss maker for suppliers as they cannot pass on the costs of the wholesale market price they have paid. An increase would potentially be double the amount of the current one and lead to a severe impact on household budgets.

As Ofgem moves to protect suppliers by raising the price cap this April, the general consensus in the industry is that the knock on effects will potentially be severe for most customers, without a government intervention of some kind.