Utility Week

UTILITY WEEK | 2ND - 8TH NOVEMBER 2018 | 17 Finance & Investment our right in line with our terms and condi- tions to transfer all of our supply contracts over to Nabuh Energy," Snowdrop said. Usio had also been under pressure and appeared to run out of money. It was pre- vented from "accepting the committed fur- ther funding" from its investors because it was threatened with a "substantial damages claim" by one of its former service providers. In a statement sent to Utility Week by Usio's founder and chief executive Vincent Tuk, the firm insisted it "strongly disputed" the claim from the providers and it con- sidered that it "did not have merit". The statement said Usio's management "deeply regrets" the situation. The London-based supplier used artifi- cial intelligence to supply customers with green energy at low prices. Usio's soware used data from customers' smart meters to calculate the amount of energy needed to be bought. Usio was identified in a list compiled by Which? for offering one of the top five cheap- est energy deals for August 2018. Usio told Utility Week at the time that it could offer such low prices because it took advantage of new regulations allowing it to buy energy in 30-minute slots. The company also said a focus on customer service would be key to its survival. Rik Smith, an energy expert at Uswitch and a customer of Usio, posted a blow-by- blow account as the news emerged that the supplier had gone under. In one of his tweets on 15 October he wrote: "Usio have now hit the Elexon credit default buzzer – maybe it's trickier settling half-hourly than they thought?" The Energy Ombudsman has suggested the collapse of Usio Energy provides further evidence of the "instability" of some of the newer, smaller suppliers in the market. Survival strategies Industry experts and insiders warn that sup- pliers will need to have a "robust plan" if they want to survive past winter. Wholesale prices and pricing strategies were cited as possible problems for some small suppliers. Greg Jackson, founder and chief executive of Octopus Energy, told Utility Week: "Rapid increases in wholesale costs have really stretched suppliers who have been selling below cost. "Sadly, while the market is dominated by two- tier 'tease and squeeze' pricing, it's impossible for most companies to compete without either very deep pockets or charg- ing loyal customers exorbitant prices to sub- sidise loss-leading prices. This is good for no-one." Ian Barker, managing partner at BFY Con- sulting, warns that some suppliers could struggle due to a lack of hedging or hedging at the wrong time. "Suppliers will need to have a robust plan to get through winter and make sure they have a close eye on daily cash flow," he tells Utility Week. He suggests that several suppli- ers who had "not hedged at all" have started hedging in the past few weeks. "It is great to see steps being taken to min- imise risk through the winter, however there is a risk that if the wholesale price plummets they could face cash pressures with mark-to- market margin calls due to hedging at the wrong time." Barker suggests there are "still a number of suppliers who are struggling with hedging all of their volume". He adds: "The more sophisticated sup- plier may well know that hedging at high prices will 'lock in' unrecoverable losses and that leaving an open position is the only plausible option – and may have taken a deliberate calculated risk." Barker explains that some suppliers may be "accelerating growth" during the winter to increase the cash flow coming into the business, while others may be "struggling with credit limits with their trading part- ners" and may not have the cash to purchase in advance. But in order to survive past winter, energy suppliers need to get through autumn first and with an "unprecedented" number hav- ing missed the deadline for making their Renewables Obligation Certificate (Roc) pay- ments in full it could prove to be a tricky time for them. The Renewables Obligation was introduced by the government in 2002 to encourage the deployment of large-scale renewables. A total of 34 suppliers failed to meet their full obligations by the 1 September deadline, resulting in a combined shortfall of £102.9 million in the England and Wales, Scotland, and Northern Ireland buyout funds (up from £18.7 million in 2017). This works out at an average of £3.02 million per supplier. These suppliers subsequently owe late payments, with interest, due by 31 October. A letter from Ofgem to suppliers, seen by Utility Week, says the regulator is "con- cerned" to have seen an "unprecedented" number of companies deferring payments into the late payment period. Compliant companies may be forced to pick up the slack if companies fail to meet their obligations by the late deadline, and this could lead to these noncompliant com- panies benefitting from "unwarranted finan- cial gain". "Small suppliers have brought innovation and competition to the sector, but there is a need for checks and balances to protect consumers. "We therefore welcome the fact that Ofgem is reviewing existing arrangements for supply market entry, exit and monitoring." Matthew Vickers, chief executive, Energy Ombudsman In 2015/16, five suppliers made late pay- ments. This increased to 21 suppliers in 2016/17. One industry source says there are some "relatively large" suppliers in the mix for late Roc payments. They tell Utility Week they foresee a "bloodbath" in the small and mid-tier supplier space. Ofgem says it will consider what steps to take against suppliers who fail to make their Renewables Obligation payments. A market expert told Utility Week that late Roc payments are an indication that they are under cash flow pressure, or are under some form of other covenant – such as a bank- ing covenant – which doesn't allow such a large adverse one-off movement in the balance sheet. Speaking at Energy UK's conference on 16 October, Dermot Nolan, said: "It's impor- tant to ensure that all suppliers, particularly those coming into the market, are financially viable and able to provide a decent level of customer service." Something certainly needs to be done to address the revolving door situation in the energy market.

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