I take no pleasure in saying to Ofgem, “I told you so.” Thanks to a perfect storm in the energy sector, many suppliers have been failing. But with all storms, you can see the clouds building first. Utility Point, the business I helped set up and build to one with more than 220,000 customers, was a victim of the regulators’ inaction.
What began in late spring 2021 as a search for strategic partnerships and investment to help us grow, quickly became, as the market deteriorated, a quest for funds to see us through a difficult winter. It wasn’t long before it became apparent that we were fighting for Utility Point’s survival.
The board held weekly meetings, to ensure we monitored our position and the market as closely as possible. It was when the search for outside investment or partnership was exhausted that we knew we’d reached the end of the road. We immediately contacted Ofgem to let them know we were in a position where we could not meet our liabilities. We had a few days before the news became public, and were not permitted to tell our employees. That period was torturous. My biggest concern was, and remains, the impact on our 192 wonderful members of staff, as well as the businesses that we worked with, all of whom were suddenly facing an uncertain future through no fault of their own.
“Badly run businesses should not be bailed out” is a truism often repeated. Yet it’s evident that not all energy suppliers that have failed were mismanaged. To say so demonstrates a lack of understanding of how energy suppliers operate. Any implication that this was the case for our business is offensive and untrue.
I do not hesitate in pointing the finger of blame at Ofgem for what happened. For years now, the government and Ofgem have tinkered with regulation – from the poorly designed and calculated price cap, to passing more obligations on to suppliers, and new initiatives for supporting vulnerable customers without provisions to recover costs. All this made it harder for suppliers to operate, and created an environment in which it felt inevitable that small operators would fail. When gas prices surged this autumn, lightning struck, and many of these smaller providers found themselves exposed.
Customers are no better off. The price cap was put in place to prevent suppliers from penalising their customers who remained on standard variable tariffs after their fixed-rate term had ended, and to ensure everyone paid a fair price. This mechanism was not designed to protect customers from the price rises we are now seeing. Based on current average wholesale prices, I would not be surprised to see the price cap increase in April 2022 by more than 20%. This is not protecting people from higher prices, it is merely facilitating a delay in costs being passed on.
When suppliers fail, their costs – such as customers’ credit balances – will be passed on to the remaining suppliers and also included in the price cap. Every supplier failure will increase the cap, further pushing up customer costs.
The frustrating thing is that a simpler approach to regulation that encourages competition and innovation, while guaranteeing that the most loyal customers are not penalised, is possible. Why not bin the price cap? Fixed tariffs could be charged at a small premium, reflective of the risk, for the customers who want the security, in a way similar to mortgages. It could then be ensured through a licence condition that a supplier’s cheapest tariff must be its standard-variable tariff. When your fixed-rate tariff comes to an end, you would automatically then be moved to the cheapest tariff and suppliers would compete on this basis: those with the best-run businesses would be the most competitive and grow.
So instead of pointing the finger at “badly run businesses”, what do we do when we have a badly run regulator?