Collapse of small/medium energy suppliers in the UK: An opportunity for big energy suppliers

Published on November 18, 2021 by Vivek Gupta

Key takeaways:

• Twenty small and medium energy suppliers (out of c.50) in the UK with a cumulative customer base of over 2m have failed over the past two months. More than 15 are struggling to stay afloat, due to a near 3x increase in the wholesale power prices over the past two months

• Most of these suppliers do not hedge their energy purchase costs and they cannot pass these additional costs to their end consumers due to the energy price cap¹ and fixed one-year energy contracts with the customers

• The UK energy regulator (Ofgem) appointed large energy suppliers to take on the customers of these failed energy suppliers. The industry expects only 10 firms to survive by end-2021

• The crisis could prove to be an opportunity for the big energy suppliers to increase their market share, whose combined market share² has declined to ~70% as of 1H21 (vs. 99% as of 2011)

Wholesale power prices have increased sharply

• Less gas storage capacity in the UK (9TWh³ vs storage capacity of 25TWh in Spain, 114TWh in France, 147TWh in Germany and 166TWh in Italy). Hence, the country is more vulnerable to short-term price fluctuations in the wholesale gas market

• Storage levels in Europe are well below historical levels (storage utilisation is c.70% full vs the five-year average c.90%), after the prolonged cold weather at the start of the year drew down stocks, which also delayed the start of the traditional injection (refilling) season

• Post-COVID economic ramp-up: Gas demand in China jumped c.10% YoY in 9M’21. To meet higher demand from China as well as from other Asian countries, higher Liquefied Natural Gas was transported to Asian countries, which means less LNG went to Europe (including the UK, which fulfils 20% of its gas imports from LNG)

• High reliance on Gas in the UK: 85% of UK homes use central heating and the country generates c.40% of electricity from gas. However, with lower wind (due to adverse weather) and nuclear (driven by unplanned outages) power generation, 60% of electricity was generated from gas in 1H21; resulting in higher gas demand

• Decline in imports from Norway: UK imports 40% of its gas from Norway; as such higher maintenance activity in the Norwegian continental shelf had an adverse impact on the UK’s gas import from Norway (down~10% YoY)

Unhedged Small/medium suppliers to be the worst impacted firms

The UK’s energy sector is relatively diversified, with small to medium players commanding ~25% of the market share. Majority of the small suppliers in the UK do not hedge their energy purchase costs (~80% of total expense). Furthermore, energy price cap¹ and fixed one-year energy contracts with the customers limit energy suppliers ability to pass on cost increase limited ability to pass on higher costs. Hence, rising wholesale power prices erodes operating margins

At the current levels, these unhedged suppliers are expected to incur a loss of c.GBP700/year⁴ for serving one customer. Twenty such utilities have failed with a combined customer base of 2m over the past two months and over 15 suppliers are struggling to stay afloat. The Government has stated that it will not bail-out these firms

Big energy suppliers in the UK such as Centrica, E.ON, EDF and Scottish Power hedges most of their energy purchase costs. Hence, these firms will have limited impact from the current crisis. The UK’s business secretary has been warned by the industry that out of c.50 energy suppliers (before the crisis) in the UK, only c.10 could survive by end-2021. Most of these suppliers are private with limited access to Capital Markets. Hence, there failure will have limited repercussions in the credit market

Twenty energy suppliers2 in the UK have failed over the past two months

New appointed supplier	Domestic customers	Old supplier	Timing of the exit
Centrica (British Gas)	511,700
	50,000	Simplicity	Jan. 27, 2021
	82,000	PfP Energy	Sept. 7, 2021
	9,000	MoneyPlus Energy	Sept. 7, 2021
	350,000	People's Energy	Sept. 14, 2021
	5,900	Bluegreen	Nov. 1, 2021
	14,800	Zebra Power	Nov. 2, 2021
EDF Energy	580,000
	360,000	Green Energy Network	Jan. 27, 2021
	220,000	Utility Point	Sept. 14, 2021
E.ON Next	239,000
	6,000	Hub Energy	Aug. 9, 2021
	179,000	Igloo	Sept. 30, 2021
	48,000	Symbio	Sept. 30, 2021
	6,000	Enstroga	Sept. 30, 2021
Octopus Energy	580,000	Avro Energy	Sept. 22, 2021
Shell Energy	536,000
	255,000	Green Supplier Limited	Sept. 22, 2021
	235,000	Pure Planet	Oct. 13, 2021
	9,000	Daligas	Oct. 13, 2021
	15,000	Colardo Energy	Oct. 14, 2021
	22,000	GoTo Energy	Oct. 18, 2021
Yu Energy	2,600	Ampoweruk Ltd	Nov. 2, 2021
SmartestEnergy	300	MA Energy	Nov. 2, 2021
Utilita	6,000	Omni Energy	Nov. 2, 2021
Pozitive Energy	41,000	CNG Energy	Nov. 3, 2021
Total domestic customers	2,496,600

Saving these energy suppliers could be a risky bet

• At the current energy price cap and the elevated wholesale power prices, an energy supplier with 1m customer could end up incurring a loss of GBP350m over the next six months (until the next revision in the energy price cap, scheduled for Apr’22)

• EBITDA margin (3%) is razor thin for the energy supply business. This loss of GBP350m could be equivalent to energy supplier’s 9 years of EBITDA

• Hence, recovering the invested capital (if any) in these firms could be challenging for Asset Managers/ lenders of last resort

UK energy supplier could take c.9 years to cover up the losses from the current gas crisis in the UK

Expected loss from the current gas crisis in the UK			P&L of an energy supplier with 1m customers
Total customer	1m		Revenue (based on current price cap) in GBPm	1,270
Loss for serving one customer (per year)4	GBP700		EBITDA margin (for most energy suppliers)	3%
Loss until next energy cap revision	GBP350m		EBITDA in GBPm	38
Total number of years to cover this loss	9 years

Consolidation in the sector: Opportunity for Big five⁵ energy suppliers

• The Big five energy suppliers’ (Centrica, E.ON, EDF, OVO and Scottish Power) market share² dropped to 70% in 1H21 from c.99% in FY11 due to stiff competition (energy suppliers has increased by four times over the past ten years driven by low entry barriers) in the region

• The industry expects only 10 firms to survive by end-2021 vs c.50 firms before the crisis. Hence, the crisis could prove to be an opportunity for the big energy suppliers to increase their foothold in the energy supply business in the UK

How Acuity Knowledge Partners can help

Acuity Knowledge Partners has partnered with some of the asset managers in Europe, UK North America who have invested in the UK Energy sector. We have helped our clients by providing time bound, scalable and idiosyncratic solutions at various level of complexities – such as sector reviews, credit rating recommendations, detailed financial models and new deal reviews. This is well supported by our sector expertise and proprietary solutions, ready to use templates across Utilities and other sectors.

Sources

¹To protect these consumers from a spike in wholesale power prices, the UK energy regulator (Ofgem) imposed a price cap in the UK in 2019 for c.11m customers (which uses variable contracts rather than fixed contracts). The energy price cap puts a limit on the amount that the energy suppliers can charge for per of unit gas and electricity to domestic customers. The cap is reviewed every six months, and is adjusted based on wholesale power prices. The price cap was increased 12% from Oct’21 but was the cap was decided during the summer (before the current crisis).

² Ofgem;

³ BBC;

⁴ FT

⁵ There were six big suppliers in the UK earlier. However, it reduced to five after E.ON merged Innogy’s Npower (part of big energy supplier) in FY20

EIA, Ofgem, S&P, ourworldindata, FT, CNN, BBC, Guardian, UBS

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