Utility Week

16 | DECEMBER 2021 | UTILITY WEEK Policy & Regulation Analysis Crisis costs must be smoothed out for billpayers As part of our Energy Reset series, Adam John looks at the fallout of more supplier failures and how a potential cost shock for customers can be mitigated. A s the crisis in the energy retail mar ket has continued to escalate, Ofgem and the government have come under increasing pressure to act. Utility Week's Energy Reset campaign has been pushing for regulators and policy makers to address the root causes of the problems within the market and look at long term reform. This message has been echoed by sector leaders, trade bodies and experts on the retail model. Ofgem insists it is taking action and points to its proposed amendments to the cap methodology that in exceptional cir cumstances would allow it be adjusted more o•en than every six months. It is also con sulting on reflecting extra costs borne by suppliers within the wholesale risk element of the cap. Welcome as this flexibility is, with a final decision not expected until February it does little to ease the pressure on retailers over the winter. Sector leaders have told Utility Week they see little evidence of a plan from government or Ofgem to deal with the sheer scale of the rise expected in the next price cap review, also due to be announced in February. One said: "There doesn't seem to be any recognition of how bad this will look. This will be a serious challenge to people already struggling with bills and will be compounded in other areas. We need to get a handle on this and mitigate the impact on customers. As an industry we have taken massive hits but we can't carry this on our own." One suggestion proposed by Energy UK is for the government to pick up the tab for Last Resort Supply Payment claims to spread out the costs of the industry levy and protect consumers from the sharp increase in energy bills next year. The trade body's deputy chief executive, Audrey Gallacher, told Utility Week the gov ernment had to be thinking about how to smooth the costs out for customers, given the unprecedented number of Supplier of Last Resort (SoLR) claims that need to be factored in. She added: "What we don't want is those billions of pounds hitting customers' bills next year. We say the government could step in and cover the supplier levy and then reclaim it back over time through network charges. They could even sell it on as a type of government bond. "It's an interesting proposition and it's a way to minimise that big financial hit on cus tomers. And that is the key concern – how do we minimise the impact on customers in terms of cost and affordability?" Asked about the impact Bulb entering the special administration process (see Review, p6) will have on the government, Gallacher said she hoped it makes the government realise the reality of the situation and how important it is that the market is resilient. She pointed to failures such as those of municipalbacked suppliers Robin Hood and Bristol Energy as proof of how difficult the market is. She continued: "I hope it will be recog nised that the market can be difficult to navi gate, and there needs to be greater controls on it. And that some of the distortions that allowed a lot of new entrants with unsus tainable pricing are addressed. "It might be, in the short term, a really attractive proposition for a customer to get a £900 deal, but the mutualisation costs are now in the billions. Ultimately we are going to have to pay for some of those savings later." She continued: "We've been saying for two years that most retailers have been loss making and we are worried about the ability to invest in innovation and what signals cur rent policy and regulation gives for attracting investment in this country." Meanwhile, an industry expert has said energy suppliers outside of the largest seven would be "mad" not to question their future in the domestic retail market a•er the recent turmoil. Ellen Fraser, energy retail partner at Bar inga Partners, said smaller suppliers should be asking not just "whether they can survive in the market, but whether they actually want to survive in the market", whether they are "going to have to take so much of a loss that the payback period is not worth it". Fraser suggested some players could exit by selling their customer books (at a loss) or by winding down the company and entering the SoLR process. She continued: "There are a few players there outside of the big 7 who would be mad not to consider their position in the market. Some will have big hedges, which is great as they are valuable, but some may also have large exposure. If they are 90% hedged, that 10% delta is really expensive. "Their churn assumptions will have gone out the window, there are a number of plan ning assumptions that have unwound quite rapidly and it's therefore a question for them in terms of whether they see a route to profit ability in the longer term. "The key question is around whether hav ing an energy retail business is genuinely a big stepping stone in terms of being involved in net zero. I think there is a degree of uncer tainty around that." Adam John, senior reporter All customers will ultimately foot the bill for suppliers offering unsustainable discounts

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