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28 | 8TH - 14TH DECEMBER 2017 | UTILITY WEEK Customers Analysis S mall energy suppliers are generally considered to be more vulnerable to fluctuating wholesale prices than their larger counterparts. This is because their lack of financial muscle makes it harder for them to hedge. Many will be quaking in their boots as prices rise this winter, threatening to send them the way of GB Energy Supply, which was forced to shut up shop last winter. Even before the season has fully set in this year, UK electricity prices are around £7/MWh – 16 per cent – higher than they were last year. But small suppliers need not give up hope just yet. For its part, energy regulator Ofgem is not daunted by the threat of price hikes, saying it fully expects sufficient supply to meet the increases in demand throughout the winter. Meanwhile, Oxford Energy consultant William Blyth is confident energy prices will not spike as high as last year, because reserve margins are almost double what they were in 2016. These wider supply margins allow the market some breathing room, because National Grid is less likely to have to pay very high prices to generators to provide power at short notice. This happened last September when power prices surged to record highs as several power plants were unexpectedly shut down and unusually warm weather for the month pushed up demand. As a result, the UK power market saw record high prices paid for short-term electricity contracts, with National Grid accepting bids of £1,500/MWh to balance the system. Low LNG prices should also shield the country from such seasonal upward pressure on prices, and dampen fluctuations. To hedge or not to hedge? The main instrument employed by energy suppliers to protect themselves against price fluctuations is to hedge a proportion of their electricity purchases against future price rises. However, not all small players can afford such a strategy. Without easy access to the wholesale markets to forward buy their customers' consumption profiles, they are hit by half-hourly imbalance charges imposed by the central wholesale trading market. These charges, as well as the increasingly volatile wholesale prices, have put pressure on suppliers offering fixed-price deals. When wholesale prices shot up last year, they killed off small Preston-based sup- plier GB Energy Supply. The company said its failure was due to "swi and signifi- cant" increases in energy prices over recent months. The sudden increase followed by a period of falling wholesale prices proved fatal for GB Energy, as it endeavoured to ful- fil the rates it had guaranteed to customers, through fixed-price deals, when wholesale prices were lower. "As a small supplier," chief executive Luke Watson wrote, in a letter to customers, "our inability to forward-buy energy to allow us to access the best possible wholesale prices, means that the position of the busi- ness has become untenable." The supplier put up its prices to custom- ers by 30 per cent in a desperate attempt to save itself. However, market observers said the move was "too little too late", and it failed to save the supplier. With around 54 independent suppli- ers now active in the UK, it is reasonable to suggest comparable firms could face similar challenges this winter. There were eight new entrants in the first half of 2017, and it is these newest entrants that are most vulnerable to price fluctuations and to the impact of the "consolidation and shake out" that Blyth expects in the coming months. Other market commentators agree. It's difficult to second guess just how bumpy a ride the winter months will give suppliers from year to year. Cold snaps and unseasonably warm spells bring their own challenges (though cold is generally wel- comed by energy retailers as a source of beefed up revenues) and the chance of unex- pected power plant shutdowns is hard to predict. With weather sages forecasting a par- ticularly hard winter for 2017/18, however, companies can make sure they are armed for strong demand. A comfy capacity margin should head off too much painful spot pric- ing for unhedged suppliers. But nonetheless these fiercely price competitive market play- ers should consider whether their fixed-rate pricing strategies can endure another year of wholesale cost spikes, or risk following in the footsteps of GB Energy Supply. Will suppliers catch a cold? Wholesale prices are set to soar this winter. Does this signal the death of small energy suppliers? Or will wider supply margins and hedging strategies be enough to save them? Utility Week reports. ELECTRICITY PRICES: DAY-AHEAD BASELOAD CONTRACTS, MONTHLY AVERAGE 70 60 50 40 30 £/megawatt-hour 2010 2011 2011 2012 2013 2014 2015 2015 2016 2017 Source: Icis, October 2017 Harsh winter forecast for 2017/18