Utility Week

UTILITY WEEK | 19TH - 25TH JANUARY 2018 | 13 Policy & Regulation Analysis S hortly before Christmas, ethical sup- plier Brighter World Energy shut up shop, passing its customers to partner Robin Hood Energy. The company cited an "unsustainable business model" for the cur- rent market environment as its reason for closing. This is the second small supplier to have been pushed out of the market, but it may not be the last. Contrary to some reports in the national media, a source close to the company tells Utility Week that it was not "forced to close down" because it had gone bust. Nor was its termination the result of a rise in gas prices. The company made the decision to close – with money still in the bank – because the market has changed so dramatically in the past two years and it didn't feel it had a sus- tainable business plan. More than 60 suppliers now operate in the energy market, compared with about 20 two years ago when Brighter World was building its model and it found itself ill- equipped for this unexpectedly cut-throat competitive environment. In particular, its status as a white label supplier hampered its ability to innovate on tariffs – notably a green tariff, which it was not able to offer. On top of this, the company lacked an offering for vulnerable customers – currently centre stage in industry debate. Tough decision Commenting on the closure of Brighter World, founder and chief executive Cheryl Latham said: "We have taken the tough, but responsible, decision to close at this time, because we no longer believe that market conditions, or our underlying operation, make for a sustainable business model in the long term." However, regardless of Brighter World's reasons for closing, its announcement sug- gests a long-anticipated shakeout of the retail market may be starting. In November 2016, Cornwall Energy asso- ciate Peter Atherton said that the number of suppliers could fall from more than 50 to as few as 15 because of rising wholesale prices and other costs imposed on energy suppli- ers. This prophecy looked set to come true when GB Energy Supply went out of business later that month, blaming "swi and signifi- cant increases" in energy prices over recent months – and its inability to forward buy energy to allow it to access the best wholesale prices – for making its position "untenable". Although the host of remaining small sup- pliers have so far avoided succumbing to the same pressures, it's still true to say that they can generically find it hard to hedge ahead, and are therefore vulnerable to the scourge of half-hourly imbalance charges imposed by the central wholesale trading market. These charges, combined with volatile wholesale prices, have put pressure on sup- pliers that offer fixed-price deals designed to undercut their larger competitors. For those that lack scale and remain wed- ded to aggressively low pricing as a competi- tive proposition, danger still lurks around the corner. Green Energy chief executive Doug Stew- art suggests that "any of those at the top of the Uswitch table" of cheapest tariffs could be next. "You have to make sure that you don't get caught by the market," he tells Util- ity Week. Eyeing the market for signs of vulner- ability, it's notable that small supplier Toto Energy hiked the prices of two of its variable rate tariffs by up to 27 per cent between 27 December 2017 and 5 January 2018, blaming higher wholesale costs. And the Telegraph reported on 20 December that independents Flow Energy and Spark Energy had both missed payments into an Ofgem- run funding pot, backed by a 15-strong group of energy suppliers, that is designed to cut up to £140 from energy bills for the most vul- nerable customers over the winter. Both of these cases are worrying. Toto Energy because this hike feels very similar to the 30 per cent rise announced by GB Energy shortly before it closed down, and suggests the company may be offering loss-leading tar- iffs. And Flow and Spark because it suggests they were unprepared for extra policy costs. "They say it's a short-term cashflow prob- lem, they've not budgeted, and clearly they haven't been hedged against the market because they're blaming the peak in gas sup- ply prices for their problems," says Stewart. He suggests a lot of new companies get caught out on all of the other elements to do with the cost of energy, which are not about the wholesale market. "The mainstream media are a bit fixated on the wholesale mar- ket," he says. "The wholesale market has been really quiet for the last six years yet prices have continued to rise, while profits have continued to go down. This is because there are a lot of policy costs that are being passed on to the industry and, ultimately, passed on to customers." Stress tests Stewart also worries that there are still no "stress tests" on new electricity suppliers entering the market – something Ofgem said early last year that it would look into. "The media insist on telling everybody they can save £300, and suppliers which join the mar- ket think 'well, we can do it cheaper than the big six too'. The fact is they can't do it much cheaper than the big six because there is a real price for energy." He suggests a vetting process to ensure small suppliers coming into the market have a sustainable business plan that means they will be able to survive the "cut-throat environment". However, Ofgem is satisfied with its cur- rent approach. A spokesman tells Utility Week the regulator has "acted to improve its readiness to take action if suppliers fail, closely monitoring suppliers' conduct and any risks to consumers, and strengthened its monitoring of wider financial risks such as wholesale price rises in winter". Ofgem will consider the timing of a wider review of its approach to awarding supply licences, "as part of next year's work plan". In the meantime, Brighter World's clo- sure – in contrast to the mega-merger of SSE and Npower, and Shell's acquisition of large independent First Utility – serves as a sharp reminder to fellow small suppliers that while size may not be everything, it does matter in the world of energy. The end of Brighter World Brighter World Energy is no more. Will it be the last energy supplier to fall victim to "market pressures", or are more set to follow? Lois Vallely investigates.

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