Britain’s energy retail sector remains in crisis territory

Is the financial crisis in Britain’s energy retail sector finally over? No more electricity suppliers collapsed during the winter, despite warnings. Bailed-out Bulb Energy is back in private hands. Some companies are even offering electricity deals cheaper than Britain’s regulated energy price cap.

For a sector that 18 months ago was crumbling faster than the banking industry in the 2008-09 financial crisis, all of this could suggest a semblance of normality may be returning.

Not so fast. The eye of the storm may have passed but it doesn’t take a degree in meteorology to see that the sector is still fragile.

Households’ energy debts are rising fast. As a result, analysts warn cash flow will probably remain under strain at companies that don’t have access to external funding. Even well capitalised companies may cut their losses and exit. Shell, for example, is reviewing its British supply business.

Some of those companies that collapsed after the surge in wholesale gas prices from 2021 onwards were poorly run and won’t be missed. Some of them should never have been allowed to enter the market in the first place. But what remains of the sector must be able to withstand future external shocks. The government and Ofgem should use this period of relative calm to examine how to fix the industry for good.

Granted, energy suppliers aren’t high up in the public’s affections. It’s small wonder, given scandals such as the alleged forced installation of prepayment meters in vulnerable customers’ homes by British Gas.

The millions of pounds made by a number of energy entrepreneurs in the years before their companies collapsed have fuelled the belief that suppliers make out like bandits while households suffer.

Suppliers are a vital link in the energy system, whatever their misdeeds might be. They are the interface between households and the rest of the industry. When one supplier goes down, consumers are left to pick up the tab via a surcharge on energy bills. The damage from the last meltdown runs into the billions. Suppliers are also responsible for rolling out initiatives such as the smart meter programme that ministers say is crucial to deliver reforms for the UK’s net zero target.

Some of the suggested solutions won’t be popular. Chief among the industry’s complaints is profitability, which is limited by the price cap. Industry leader British Gas last year made a £72mn operating profit from its residential customers, but it is an outlier. The aggregate pre-tax margin across the industry in 2021 — the last year for which data are available — was minus 2.55 per cent, according to regulator Ofgem. Analysts don’t expect 2022 figures to show much improvement. Businesses’ ability to attract external funding will be limited if they can’t prove a path to sustainable profits.

“If I was a pension fund at the moment would I be putting my money into an energy supplier? Unlikely,” said Ellen Fraser, a partner at Baringa, the consultancy that was among the first to flag the looming energy retail crisis in September 2021.

UK ministers are examining a “social tariff” to help protect the most vulnerable households against high energy bills longer term. Prices are forecast to fall this summer so that a “typical” household bill is expected to be about £2,000 a year from July, down from £2,500 currently.

But the consultancy Cornwall Insight has warned prices are likely to remain above pre-2021 levels for the rest of the decade. Beyond a social tariff, energy chiefs such as Utilita boss Bill Bullen warn “honest” but difficult conversations will be required. For example, how much households that aren’t considered vulnerable can afford to pay and if they will have to change their behaviour to cope with higher prices for longer.

The UK government published an “energy retail strategy for the 2020s” in July 2021. But the market crash only two months later made much of it redundant. The first objective of that 2021 strategy was to ensure a “sustainable retail market” that would make it “easy and rewarding” for consumers to “adapt their usage to support decarbonisation”.

The principles behind that objective still stand. But how to get there requires an urgent rethink in the light of the recent crisis.