Utility Week

UTILITY WEEK | OCTOBER 2021 | 29 Customers the market. While some companies such as Eon began decoupling its generation busi- ness, others such as SSE (with its business arm) continue to see vertical integration as a viable model. Je Hardy, a senior research fellow at the Grantham Institute for Climate Change and the Environment at Imperial College London, believes vertical integration to be an asset, especially considering the steep rise in prices. Says Hardy: "Big, vertically integrated companies probably have got some risk miti- gation because they will have bought a lot of their fuel in advance, and will have power purchase agreements. "What's going on at the moment is a per- fect storm. You have several things happen- ing, exceptionally high gas prices globally, low wind and a number of nuclear power stations o† ine and interconnector issues. All of those things combine, and none are going away immediately." Hardy believes there are both advan- tages and disadvantages to being vertically integrated. He says: "An advantage is exactly what's happening now: you have got a little bit more control of where you get your electric- ity from, which means you are less exposed to the ‰ uctuations in global markets because you can sort yourself out in advance with for- ward contracts. However, if you are vertically integrated and you've taken past bets on par- ticular technologies, such as coal, that does not look like a very good bet now. "If you have got a gas plant and operated it for the past six months then I suspect you are doing very well indeed because it's been around 40 per cent of power for quite some time and is still very important for heating. "But looking forwards, what is an opti- mal mix of plant to have in an increasingly zero carbon power system? That's where you might end up being quite exposed if gas keeps getting pushed out. Once we hit 40GW of wind in the 2030s, which is a 10-point plan commitment, then there are going to be plenty of days where you have got an entire system which is almost renewables driven." For some a good hedging strategy, rather than being vertically integrated, is key to a successful retail business. Ultimately this means that small suppliers who have histori- cally bene™ ted from low energy prices and by not hedging are now facing the full brunt of rising wholesale costs. Keith Maclean, managing director of Providence Policy, says: "We are now seeing the imbalance in the system driving prices to almost unheard of levels. Those companies who have not hedged and who in the past by not being hedged had an advantage because the price went down with time, are now fac- ing the opposite problem as prices go up. They have got commitments to their consum- ers and they run the risk of not being able to a ord to buy either the power or gas in order to serve those customers. "That's at a time when they are already going to be under strain from having to make their Renewables Obligation, feed-in-tari and other payments. This is traditionally the time of year when Ofgem calls in the money and some go bust. This year looks a bit more extreme still in terms of the peaks both with gas and electricity." Ultimately, there are indications that the energy retail market is about to turn back the clock and consolidate around several suppliers. If the trend of soaring wholesale costs continues, and there are smaller retail- ers who have failed to hedge correctly, it may well be the only players resilient enough are those vertically integrated or with deepŸpockets. One expert expects this to be a handful of large players with a smattering of more niche energy brands such as Good Energy, a sup- plier dedicated to developing green genera- tion, and app-based Pure Planet. "I think what we will end up with is two types of large supplier: those that are asset or ™ nanced backed (I see that as around 7-8 suppliers); then we will have the di erenti- ated suppliers beyond that, the likes of Good Energy, Ecotricity and Pure Planet, players that have a unique selling point. "They don't need to be big, they prob- ably never will be big, but they have a way to speak to the market through their models." Whatever happens eventually, there will be a growing sense of dread within the o¤ ces of the energy regulator over the com- ing weeks and months. As such, attention will be turn towards what the sector can do in the meantime to battle the price spikes. Speaking on 22 September, both Ofgem chief executive Jonathan Brearley and energy secretary Kwasi Kwarteng stressed they were prepared for a range of contingencies. However, Kwarteng gave a fairly unam- biguous commitment to retaining the price cap and said the government would "not be bailing out failed companies". He added: "There will be no rewards for failure or mis- management. The taxpayer should not be expected to prop-up companies who have poor business models and are not resilient to ‰ uctuations in price." One industry leader suggested the price cap leaves the market in a "challenging position", and that a good way of reducing consumer bills would be to look into energy e¤ ciency. Michael Lewis, chief executive of Eon UK, said: "The current situation of rising energy bills is nothing to do with the e ectiveness or competitiveness of the energy retail mar- ket. We are already in a challenging position since the advent of the price cap on suppli- ers and the industry in aggregate has been loss-making. "The price cap on suppliers doesn't a ect global commodity prices or the price paid to generators and that's where the current price pressures are coming from." He added: "We know this is a concern for consumers and we need to consider both short-term and long-term solutions to help people reduce their energy use and cut theirŸbills. "Energy e¤ ciency is still the most e ec- tive way to reduce bills and we must have a joined-up approach to improving millions of homes around the country." Furthermore, Lewis said he believed cer- tain policy costs on energy bills should be shi¦ ed to general taxation. He explained how around a quarter of an average domestic electricity bill is additional charges to pay for government policies, com- pared to about 2 per cent of the gas bill. Lewis labelled this as "regressive" in that the poorest in society use proportionately more of their income to pay for these so- called hidden taxes, which disadvantages electricity over gas, setting back the need to prioritise cleaner forms of heating to reach net zero. "Simply put, we should take those charges o the electricity bill and into gen- eral taxation so these costs are funded more progressively and we level the playing ™ eld on the cost of cleaner heating. Then we can also start to apply something like a carbon tax on gas on a 'polluter pays' principle. A carbon tax is factored into electricity genera- tion price anyway but there's no carbon tax on gas when it's used in homes," said Lewis. Adam John, senior reporter "We are now seeing the imbalance in the system driving prices to almost unheard of levels." Keith Maclean, managing director, Providence Policy

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