How the energy crisis could realign the UK energy market
There were 49 domestic energy suppliers at the start of 2021.
The unprecedented wholesale costs which hit the market in September caused 28 suppliers to collapse, including Avro Energy and Green Network Energy who held a 2.4% and 1.2% share of the market respectively.
There are now just 10 small suppliers left in the energy market, and there are predictions they may not remain viable either.
But the energy crisis we’re now seeing has actually been on the horizon since 2018 when we saw the first eight suppliers collapse due to rising wholesale costs, which highlighted a market that had boomed on the premise of easy entry to profits.
So the crisis we’ve seen in 2021 is really the tail-end of a boom and bust cycle that’s been waiting to happen since the boom started in 2012.
While we will all need to weather the immediate difficulties to be faced from rising prices, the longer-term result of this crisis will help to both consolidate and realign the market in several ways.
Here are five reasons for long term optimism for energy customers.
1. Market regulation
Ofgem didn’t begin any regulatory testing of new energy suppliers until June 2019, by this time the horse had bolted as the market peaked with 70 suppliers in mid 2018.
It had taken Ofgem three years to bring in regulation of new suppliers then, after the first signs of the instability of these small firms was seen in 2016 when GB Energy collapsed leaving 160,000 customers to be moved to Co-op Energy.
And indeed, it was Co-op Energy’s chief executive who went on to correctly predict “we will see far more volatility in the [wholesale] market, and therefore I think we will see more of the small suppliers go bust”.
Yet considering the market had already peaked with an excessively high number of smaller firms, strength testing of existing suppliers wasn’t extended after until after the market crashed in 2021.
Ofgem had begun outlining proposals in 2020, but very little was in force before 2021 and we’re only now seeing some of the reforms coming into effect from January 2022.
So, while it has taken far longer than it should have, better late than never, and we should at least see all suppliers being strength tested for financial stability from now on.
2. Preventing collapses will help lower prices
After the first wave of 2018 collapses, it was reported £58million had been left unpaid in renewables obligations — a sum that would have to be repaid by the remaining suppliers and ultimately passed onto the consumer in increased prices.
And so, the sheer number of small firms without the financial stability to weather any wholesale volatility has had an ongoing negative impact on the prices customers are paying for their energy.
With only 10 small suppliers left in the energy market, and strength testing finally coming into effect, this should prevent further collapses happening and the staggering amounts of unpaid debts that end up being passed onto the customer.
3. Competition for the Big Five
Prior to the 2021 crash the energy market was made up of predominately small energy firms. In June 2021 we had 48 domestic suppliers in total, made up of 36 small firms, seven medium and five large firms.
28 firms collapsed in the crash; 26 small and two medium firms (excluding Bulb). We also saw the merger of npower and E.ON complete in May 2021.
While it can be said many companies in a sector help to ensure competition to bring down prices, even with just ten large and medium suppliers, that’s easily still enough to create healthy competition on price, innovation and renewables.
In fact, the growth of smaller suppliers Ovo and Octopus will help to stimulate new competition for the Big Five. Octopus, who made a name for themselves as a 100% green energy supplier, now holds a 10% market share for example.
4. A more balanced market
With a reduction in the number of small suppliers to a more proportionate number, the energy market will become fairer and more balanced for suppliers, which should trickle down in benefits to the customer.
For example, there’s been on-going criticism of the way the market works due to obligations on fuel poverty payments, like the Warm Homes Discount, being restricted to just medium and large suppliers.
This means up until now, the market has been disproportionately balanced — with wealthier customers switching frequently between the lowest tariffs with small suppliers who aren’t required to contribute, while more vulnerable households are supported by the larger companies alone.
While it’s easy to argue the larger suppliers have more resources to support these contributions, by balancing the market it will surely enable those medium and larger suppliers to invest more as they benefit from the more dynamic proportion of customers.
5. Improved customer service
Lastly, part of the reason Ofgem needed to bring in regulation of new and existing suppliers was the number of smaller firms who struggled with providing a reasonable level of customer care.
There are many examples [1, 2, 3] of small firms that collapsed prior to the energy crisis where Ofgem had been forced to step in and ban them from taking on new customers until they had rectified the problems faced by their existing customer base. Unsurprisingly the poor customer service was often a symptom of a larger problem and the firms went on to collapse merely months after the bans were bought in.
Debatably as a result of the energy market really being a little bit of a wild west up until now, while we’ve seen record switching rates that have grown year-on-year, and by as much as 30% in 2017, customer satisfaction has remained low, with utilities being one of the lowest ranked sectors for customer service in the UK.
While it’s fair to say poor service in the sector has far from been confined to the small suppliers, many of which actually out-performed the Big Five in this area, it’s a reasonable bet the consolidation and new regulation of the market will help to focus companies into upping their game and improving their service levels.
Octopus, whose recent growth from taking on Avro Energy customers includes them in the (new) Big Six, has scored consistently well in customer satisfaction reports, for example, so we could see their new influence help to level up the market.
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While consumers have a tough road ahead over the next year and suppliers a very rocky one, the signs are hopeful that when wholesale prices do stabilise, we will see a fairer, steadier energy market, that can start to focus more securely on providing customers with good service, green energy and fair and reliable prices.
By Lyndsey Burton, MD of Choose.
