Pay up or have licences ripped up, Ofgem warns five suppliers

Experts worry that only a handful of energy suppliers might be left in the British market by Christmas after gas prices soared

Energy regulator Ofgem says gas crisis not its fault

The head of Ofgem has rejected claims from the industry the current energy crisis represents a failure to adequately regulate the market.

Six suppliers have gone bust recently, leaving about 1.5 million customers facing higher bills, with more firms expected to fold.

Ofgem boss Jonathan Brearley, told the BBC: “No-one could have predicted the kind of gas price rises we have seen.

“In a situation like that any market would be under strain.”

Gas prices are up four-fold, Mr Brearley said.

However, his view has little support from senior executives in the industry who have told the BBC the regulator knew full well that many smaller suppliers would not be resilient in the face of rises that should have been part of the regulator’s stress testing of the sector.

The boss of the UK’s fifth largest energy provider, Scottish Power, said the government was essentially asking larger providers to weaken their own financial position by shouldering billions in additional cost to provide these customers with energy that costs more to buy than they are allowed to sell it for under a government-imposed retail price cap.

Ofgem insists its primary concern has been protecting consumers, but that promise sounds slightly hollow when millions of customers face being moved to higher tariffs from bigger suppliers and the cost those larger companies incur from taking on new customers will be added to all consumers bills through an industry wide levy.


Larger suppliers, including Centrica owned-British Gas, have agreed to take on hundreds of thousands of marooned customers, but expect the cost of doing so to be recouped in a mechanism that Ofgem described as “tried and tested” but which bigger companies say is not designed for the mass failures we are now seeing.

The Ofgem boss admits that the energy cap (£1,277 for a dual fuel household with average energy consumption) which limits the ability of companies to pass on higher wholesale costs to retail customers, is likely to rise again when it is reset in April 2022 after a 12% rise due to take effect at the end of this month.

Industry sources also agree that many of the larger companies may be prepared to take on new customers not only because the retail price cap will inevitably rise, but also because the new customers they acquire will be “stickier”. This means they will be less likely to switch in future given a lack of confidence that cheaper suppliers can be relied upon in the future,

The received wisdom and advice of the last ten years to continually switch suppliers now looks less persuasive.

Ofgem’s Mr Brearley insists he wants a competitive market in the future. Critics argue that it presided over a market that it knew would collapse in a gas crunch – resulting in fewer companies and meaning a less competitive market.


UK energy crisis: Big firms positioned for further gains

FTSE 350 Oil Gas and Coal has risen 9.3%

1.5 million UK customers have been left out in the cold without a gas provider in recent weeks.

However, perverse though it may seem, it is the gas sector that is winning from an investment perspective and it could see further benefits as industry commentators expect the government to rethink their energy transition strategies.

In the month to 22 September, the FTSE 350 Oil Gas and Coal index has risen 9.3%, while the FTSE 350 has risen just 0.2% and the MSCI ACWI Climate Paris Aligned index has returned 0.1%, according to Morningstar Direct figures.

Some of the top gainers in the Oil Gas and Coal index include Centrica, which was up 8.4% in the five days to 23 September and Tullow Oil up 3.3%, Royal Dutch Shell up 3% and BP up 2.4% over the same time period.

“There have been some gains as far as the bigger energy providers are concerned given that the failures of smaller companies would extend their customer base significantly,” explained Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

Countries’ climate action plans point to rise in emissions by 2030, UN warns

Harrison Williams, equity research analyst at Quilter Cheviot, agreed and said Centrica and E.ON were both “positioned well for further market consolidation”.

Both Streeter and Williams also thought some of the share price uptick was down to conjectures on the UK Government’s next move.

Streeter pointed to “speculation that the UK Government could provide extra funding for the bigger companies to take on stranded customers”. However, she expects that to be “short lived”.

Williams said a more long-term shift could be in the UK Government “tweaking or dropping entirely recent proposals for further increasing competition in the space with the proposals for opt-in switching from 2023 and a trial for opt-out switching to make it easier for consumers to find a cheaper deal.”

However, it is not just government policies on the sector itself that could lead to long-term boosts to the big oil companies. The shortage, not just in the UK, but across Europe and in Texas, has highlighted the need to re-think climate change proposals and incentives, according to Robert Minter, director of investment strategy at ASI.

“Many governments worldwide have sought to restrict capital flows to fossil fuel companies,” explained Minter.

Has the wind gone out of alternative energy?

He highlighted the global depletion rate of oil production is 5%-7% per year, which means if no investments are made into future production, the oil supply constricts naturally by five-to-seven million barrels per day.

“The plan of governments has been to restrict capital, allow oil supply to fall by this amount or more, and force users, the demand side, to shift to alternatives,” explained Minter. “While this is a ‘cheap policy’ that does not affect government budgets, it does nothing to incentivise people to demand more renewable energy.”

Clive Hale, chief strategist at Albemarle Street Partners, agreed that lack of investment was playing a significant role but said there were other important factors when it comes to the UK’s recent shortage including that France is short on power-generation and there has been a fire at the UK end of the under-Channel power cable,  “which will be running on much reduced capacity until next spring”.

So where next for government’s climate change policy?

“There has to be more focus on other alternative generation and energy storage sources that complement the intermittency to ensure energy security,” according to Richard Lum, co-CIO of Victory Hill Capital Advisors.

However, Streeter said it could be that gas is seen as “a vital transition fuel” going forward, particularly liquefied natural gas.

Streeter added the big oil companies are diversified in low carbon energy so “if gas proves a vital transition fuel as we move toward a lower carbon energy mix, then oil majors are in a position to capitalise on that short-term gain and future green investment at the same time”.