A total 24 UK companies that supply or sell electricity went bust in 2019, the highest number on record, according to data obtained by an accountancy firm.
Price Bailey’s study found that the number of business failures among electricity providers and sellers increased more than 40 percent last year from 17 in 2018, and from just five in 2017. The data was obtained from the Insolvency Service under the Freedom of Information Act.
The study found that price caps on the rates consumer pay for usage, along with rising wholesale energy costs and obligations on green tariffs, are squeezing margins in the electricity trade sector.
Other than businesses engaged directly in the sale of electricity to the user, the figures obtained by Price Bailey include businesses lower in the supply chain, such as electric power brokers; agents arranging the sale of electricity; and operators of transmission capacity exchanges for electric power.
Price Bailey said that while the challenges of businesses supplying electricity directly to UK households have received significant attention, the turmoil lower down the supply chain among businesses that are creditors of those retail businesses, has been largely overlooked.
The firm warned that the insolvency of energy retail businesses is having a knock-on effect, which is now reverberating among businesses engaged in the wholesale trade of electricity, sending increasing numbers to the wall.
Paul Pittman, partner at Price Bailey, said: “There has been a lot of focus on the retail end of the supply chain but whenever an energy retailer goes bust there is a knock-on effect down the supply chain.
“The number of retail energy suppliers going bust is just the tip of the iceberg. Businesses engaged in the trade of electricity, which are creditors to retail energy suppliers, are going to the wall in record numbers.”
He added: “We are seeing a domino effect. Every time a small energy retailer goes bust, that increases the financial strain on the rest of the supply chain, making those businesses more vulnerable to collapse.
“Energy retailers typically owe money to other businesses in the supply chain, so that a single insolvency can potentially push multiple wholesalers into financial difficulty, or even collapse.”
He adds: “As the risk of doing business with small energy retailers increases, many suppliers are likely to respond by hiking their prices, which further squeezes margins at the retail end. It’s a vicious cycle. In a regulated market in which retail prices are capped retailers have very little room for manoeuvre.”
According to Price Bailey, small energy retailers have been squeezed by a “perfect storm” of rising wholesale costs (though these peaked in 2018), the energy price cap and their renewable power obligations.
The renewable power obligations are onerous because if one supplier collapses, the cost of their unmet obligations is distributed across the wider market, thereby leading to higher costs and risk of further insolvencies.
Paul Pittman explains: “The renewables obligation scheme had a shortfall of £97.5m in 2018/19 due to suppliers going bust owing money to the scheme. When a supplier cannot meet its obligations, that cost is passed on to other suppliers.
“Ofgem wants a competitive energy market but by forcing struggling businesses to pay the debts of failed suppliers and pushing some towards insolvency, the renewable obligation scheme is undermining that aim.”