Utility Week

8 | 2ND - 8TH FEBRUARY 2018 | UTILITY WEEK Policy & Regulation Analysis O ne of the big stories in the retail sec- tor last winter was the closure of GB Energy Supply. The challenger sup- plier was forced to shut up shop aer being caught out by rising wholesale prices in the power market, prompting concerns within the industry that others could follow suit. This winter has so far seen the closure of two further suppliers – Brighter World Energy in December and most recently, Future Energy last week. In the instance of the latter, the reasons given for the closure read very similar to those given by GB Energy Supply. In a statement, Future Energy chief oper- ating officer David Stroud said the company had been "unable to convert sufficient cus- tomers to enable us to forward purchase energy at the most competitive rates". He added: "The marketplace is difficult for challenger energy suppliers, which lack the financial advantages of larger, national energy firms." Ryan Thomson, energy and resources partner at Baringa Partners, says Future Energy may have fallen victim to a major spike in gas prices in December, which fed through to the power market. Gas prices shot up to multi-year highs aer a number of events – including a deadly explosion at an important gas processing facility in Austria and the closure of the For- ties Pipeline System (FPS) integrated oil and gas terminal due to a crack – coincided to create a perfect storm. "What you might have found with some- one like Future Energy is that they are buy- ing quite close to delivery, buying a lot on the spot market, and have suffered quite badly from that situation," Thomson tells Utility Week. "It doesn't look like they hadn't managed to secure a wholesale trad- ing agreement from the likes of Shell or BP, which a lot of the other small suppliers have managed to do." Inability to forward buy Without such an agreement, Thomson says Future Energy may have lacked the collateral and creditworthiness to forward buy energy in sufficient volumes to adequately hedge against price shocks. "There's definitely quite a few out there that will be in similar situations, that might be running low on capital," he adds. That might be worrying for the array of small investors backing the minnows of the energy retail market. Following the supplier's collapse, a report in The Times claimed its investors had been stung to the tune of "millions of pounds". The newspaper reported that shareholders had been asked to invest more money in the company late last year, aer it struggled to hit growth targets and buy power in the wholesale market. Investors elsewhere will now be on the lookout for similar warning signs, and may be more willing to support mergers and acquisitions with market players who can offer security in scale while the going is good. Robert Buckley, research director at consultancy firm Cornwall Insight, warns against reading too much into the closure of Future Energy and predicting the failure of others on that basis. He says the company, whose 10,000 cus- tomers were centred around the North East and Yorkshire, had a "very particular busi- ness model focused on a particular region and customer group, and we're not close enough to know what went wrong for them". That said, Buckley does believe the mar- ket is ripe for consolidation: "If you just look at the distribution and the number of com- panies in the market and the number of cus- tomers that they've got, you would think that some kind of consolidation might occur." He says Cornwall's analysis has found a high level of customer churn in certain seg- ments of the retail sector, "particularly in the price-sensitive online fixed market". Thomson agrees: "With everyone com- peting at the lowest rates at very marginal prices, it's going to be difficult for any of them to get to a sustainable revenue position." Although challenger suppliers may have relatively cheap customers to service when compared with the big six – mostly paying in advance by direct debit – they also lack the economies of scale of their larger, more established rivals. Thomson also questions whether there are enough skilled staff avail- able to support effective operations at the 60-odd suppliers now in existence. He says many challenger suppliers believe they need to attract between 50,000 and 100,000 customers for their business models to become sustainable over the long term. Consolidation could help them to pass that threshold. Supplier of last resort The closure of Future Energy also puts the spotlight back on Ofgem's arrangements for entry and exit to the market. Shortly before GB Energy Supply went bust in 2016, Ofgem unveiled plans to beef up its procedures for protecting customers in the event of a supplier failure. It said the new system ensured a "safety net" for customers that would carry them through the process of transferring to a new supplier, without the need to worry about credit or debt on their old accounts. At the time of publication, the regulator was still in the process of appointing a sup- plier of last resort to absorb Future Energy's customers. An industry source quoted by the Tele graph suggested a big six supplier will prob- ably be most keen to take on the role in an effort to curry favour with the regulator. But Buckley says the calls received by his office in the 24 hours following the closure indicate "there's a lot of interest from suppli- ers of all different shapes and sizes in acquir- ing the customers of Future Energy". He expects the appointment process to be "very competitive", adding: "I don't think it's a question of doing favours for anybody. I think there's a lot people out there who are interested in taking on these customers." Again, Thomson agrees: "The big six sup- pliers will certainly go for it. I think some of the mid-size suppliers as well. I think there might be one or two smaller ones too, espe- cially if they're operating on the same IT and Future is a thing of the past Future Energy is the latest small supplier to fail in the retail market. Could this be avoided if Ofgem better scrutinised business plans before firms began trading? Tom Grimwood reports.

• Cover