In this alert, we consider the impact of rising wholesale gas prices on energy suppliers and discuss some of the actions that suppliers and their counterparties should be considering in the face of a difficult trading environment.
This alert follows on from our previous client alert in which we considered (1) Ofgem’s supplier of last resort (SoLR) regime, which was introduced as a safety net to protect consumers from the effects of energy suppliers’ insolvency, and (2) Ofgem’s proposals in relation to the second stage of its Supplier Licensing Review. Ofgem has since introduced a number of modifications to the licence conditions for gas and electricity suppliers in order to further minimise the likelihood and impact of disorderly supplier failure, which we discuss in further detail below.
Wholesale gas prices in the UK have experienced significant volatility of late and have risen to a record high, doubling in value over the last six months. A number of factors have contributed to the sharp rise, including increased global demand due to a cold winter and continued industrial output rebound, and lower-than-expected power generation from renewables. In addition, a fire at National Grid’s IFA interconnector site in Sellindge last week has resulted in a loss of 2GW of interconnection capacity between the UK and France until March 2022, and has further tightened supply and increased pressure on natural gas prices1
In response to rising wholesale gas costs, Ofgem announced last month that it will be increasing the energy price cap for customers on default or standard variable tariffs with their supplier from 1 October 2021,2 and another tariff increase is widely expected when Ofgem carries out its next review in February 2022. Note that unlike retail prices, there is no cap for wholesale gas prices. On that basis, suppliers, who are subject to increased prices, are unable to pass down increased costs to their customers.
A range of potential measures is being considered, including a ‘bad bank’ system, to take on unprofitable customers or the government underwriting debt for the large suppliers. However, as at the time of writing, it appears that a full-scale bailout for struggling energy firms has been ruled out.
Surging wholesale prices have also placed pressure on energy suppliers, in particular smaller suppliers who, due to having insufficient hedging strategies or weaker balance sheets, are likely to be more exposed to changes in market prices than their larger counterparts. Indeed, just this month, four energy suppliers (PfP Energy, Moneyplus Energy,3 Utility Point, and People’s Energy4) have ceased trading, and there are concerns that more suppliers could fail in the next few weeks.