Supplier Failure – Natural Event or Avoidable Calamity?

Published on 1st March, 2019

In 2018, eight companies licensed to supply electricity in the UK market ceased trading and another one was taken over. Subsequently in January 2019, the names of Economy Energy and Our Power were added to the list of casualties. These developments followed a period of five years in which the volume and share of energy supplied by small and medium sized suppliers grew significantly – eventually accounting for about a quarter of UK domestic customers. At the same time, the market share of the six largest suppliers steadily fell.

Until the recent misfortunes, these trends had been hailed as an unambiguously positive development, bringing greater choice to consumers, increased price competition and pressure on incumbent suppliers to improve their customer service offering.

What has caused this reversal and what have been the consequences?

The first and most obvious point to make is that all of these failures have taken place at the smaller end of the supply market. Spark Energy, one of the larger of the small suppliers had 290,000 customers while One Select had 36,000 customers – and the other failed suppliers broadly fall in this number range. This points strongly to a lack of overall financial strength as a key factor in determining the ability of a supply company to weather the various financial storms to which suppliers are regularly exposed.

The main business risk faced by a conventional supply company is a mismatch between the fixed prices offered to its customers and the variable costs of buying power from the wholesale market. When wholesale prices rise steeply – as happened in 2018 – this can leave suppliers with no option but to dip into reserves and if these reserves are insufficient, business collapse may be unavoidable.

To manage this risk, businesses can put in place hedging strategies. A number of the failed suppliers do not appear to have done this – which indicates a lack of understanding of the market they had entered. But even for those that did, if the hedging strategy is misconceived and/or pursuit of customer growth has been fuelled by an overly aggressive pricing strategy, then the problem remains.

The spate of recent failures has created a ripple of financial consequences spreading throughout the energy industry.

When a supplier ceases to trade, Ofgem has a Supplier of Last Resort (SoLR) process which is designed mainly to protect domestic, micro business and SME customers and to ensure continuity of physical energy supply to those customers. While trade creditors will usually be left high and dry – as is normal in an insolvency process – the SoLR process means that customers’ credit balances are often taken on by the new supplier or, if not, are funded by the industry as a whole through network charges, to the detriment of other suppliers.

As an aside, one interesting aspect of the recent supplier failures is that many of the affected customers were transferred to other smaller suppliers ie suppliers other than the ‘Big 6’ – leading some to conclude that the shake-out has had little or no impact on the overall competitive structure of the supply market.

The financial effects have also been felt in the Renewable Obligation (RO) scheme. In the normal course of events, a supplier collects RO payments from its customers on a monthly basis and passes these on to Ofgem in one lump sum each year. Suppliers who were under financial pressure, and with insufficient capital reserves, dipped into these balances with the result that the payments due to Ofgem – due by 31st October 2018 at the latest – fell short by £58.6 million. In the likely event that most of these funds cannot be recovered, the balance will be met by spreading these costs between the remaining suppliers through a mutualisation process, which imposes additional costs on the existing players through no fault of their own.

Another factor behind the supply failures is that all these companies were primarily active in the domestic and small business markets (otherwise known as the non-half hourly market). The licensing and regulatory regime for the non-half hourly market is stringent and requires investment of substantial resources in systems, billing engines and customer service performance. Suppliers who operate solely in the Industrial and Commercial (I&C) market – such as EnDCo – whilst still subject to the commercial pressures of living up to their contractual obligations benefit from a regulatory regime that is less prescriptive on the grounds that I&C customers are viewed as being big enough to look after themselves and do not need the support of the industry Regulator.

Consequently, when market conditions deteriorate, domestic suppliers who may have underinvested in billing and customer service, or who may wish to cut back on costs in those areas, find themselves squeezed between financial pressures and the demands of the regulator. In explaining why its proposed Supplier Licensing Review is needed, Ofgem has made the point that financial difficulty and poor customer service are often interrelated.

Another often raised point of concern is the use of the so-called supplier-in-a-box approach which enables new entrants to purchase a supply operation “off the shelf”, which has oft been cited as a contributing factor to supplier failure. The “off the shelf” approach has been designed to reduce and/or remove barriers to entry into the supply market by reducing costs. The argument against this approach is that by not growing a supply operation organically, the business fails to develop a proper understanding of how everything really works in a supply business and where and how money should be spent in order to maintain proper functioning of the operation. This is to be looked at as part of Ofgem’s review, but it is interesting to note that of the dozen or so recent supply failures only three of them had used supplier-in-a-box.

EnDCo is a supplier in the I&C market and offers direct and transparent access to the wholesale market. Our business model means that we do not trade ‘for own book’ and as a result the secured wholesale prices and the retail prices offered are matched, thus removing one of the main business risks faced by suppliers.

For further information, please email me at:

Les Abbie, CEO, EnDCo