Energy retail companies supply heat, light and power to 28 million homes as well as every business in the country. The industry responded quickly to the challenges presented by the pandemic, adapting their operations and providing millions of pounds of extra support to customers while ensuring that supplies went uninterrupted.
However, in recent months, record spikes in the global wholesale price of gas have taken a heavy toll on the sector with 27 energy retail companies exiting the market since August 2021 – almost 2.3 million households have seen their supplier fail. The costs involved in the supplier of last resort process is reported to be around £2.6 billion to date -and is likely to increase. These costs will ultimately be picked up by customers.
Industry and consumer groups have been calling on Ofgem and the Government to improve regulation for many years - for example ensuring that companies are financially viable before they enter the market or being quicker to act when rules have been broken (for example when there are customer service issues). However, unprecedented, high global prices mean we’ve also seen well run companies going out of business.
Every country has been affected by the high prices, but the UK is particularly reliant on imported gas, using it to heat over 80% of our homes (which is exacerbated by the UK’s draughty housing stock) as well as generating around 40% of our electricity through gas powered plants.
The price paid by domestic customers on standard variable -or default - tariffs (SVT) is capped by Ofgem. The current cap was set in August before the recent increases in wholesale costs – it doesn’t reflect the actual costs suppliers are facing – and the unavoidable losses have proved too much for many of them to withstand. The price cap applies to domestic consumers, and we know business groups are worried about the prices paid by non-domestic energy customers too.
This issue has been further exacerbated as customers who were on cheaper fixed term deals have moved onto the price capped SVTs when their fixed deal expired (because they are by far the cheapest on the market). Even before the current crisis, the retail sector was in a fragile state with the largest energy suppliers operating at a loss. Most companies in this market are not able to withstand or absorb such sudden and extreme cost increases. The recent upheaval has prompted a very welcome (and long-overdue) review of the retail market and strengthening regulation to build the resilience of the market. However, with wholesale gas prices rising by over 500% in over a year, even well-run and financially responsible suppliers have struggled to cope.
As well as the mismatch between what they are paying and what they can charge, retailers have little room for manoeuvre elsewhere as roughly 80% of the costs in an energy bill are out of their direct control - by far the biggest component is wholesale costs (around 40%).
The biggest worry for the industry is that while the current price cap is shielding customers from the record wholesale prices, when these feed into the next price cap, which comes into force in April, customers are likely to face a 50% increase in their bills (an extra £600-£700 a year for households with typical usage). We’re in a position where energy suppliers are losing millions of pounds serving their domestic customers, and this is unsustainable in the long term.
Energy retail suppliers have provided millions of pounds of support for people who are struggling to pay their bills over the past two years – and will continue to do all that they can to help their customers. But this is an economy wide issue.
Inflation rose by 5.4% in December 2021 and there is little doubt that people are experiencing a cost-of-living crisis that is set to get worse with rising prices for food as well as other goods and services. We know that many people are going to struggle to make ends meet – and this includes paying their energy bills. While there is understandably a lot of concern for people who are already financially vulnerable, Energy UK is worried that millions more will be pulled into difficulty. These pressures are likely to continue to grow, with further price rises outstripping pay growth.
If Government doesn’t act by April the impact of the cost-of-living crisis will be felt by the vast majority of households.
We’re pleased Government is considering a whole suite of options to support help people so they can afford to pay their energy bills when the price cap is increased. Energy UK wants Ministers to ensure that the action they take:
- Delivers fair prices for customers
- Supports people in vulnerable circumstances (recognising this group may grow)
- Addresses any economy wide impacts of high energy prices
- Enables the investment in a secure, Net Zero energy system
- Enables a retail market which is investable, stable and innovating for Net Zero
In the long term it’s in all our interests to ensure the energy market is a competitive successful market that attracts investment so that energy retail companies can innovate and deliver Net Zero.