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

  • 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 cap 1and 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 share 2has declined to ~70% as of 1H21 (vs. 99% as of 2011)
  • Less gas storage capacity in the UK (9TWh 3vs 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)
  • 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
  • The Big five energy suppliers’ (Centrica, E.ON, EDF, OVO and Scottish Power) market share 2 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

--

--

--

We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points. https://www.acuitykp.com/

Love podcasts or audiobooks? Learn on the go with our new app.

Recommended from Medium

Plastic Waste, Plastic Bags, and their Impact on Business

Here’s a Better Way to Argue About Climate Change

Earth Day 2021: Awakened Not Woke

Eco-Buddhism: How it Teaches us to Reconnect with Nature and Live Sustainably

How did the roof not blow away just because they had Solar Panels? WHAT! It saved them money also?

Barred owls hit by cars, admitted to von Arx Wildlife Hospital

Expert Canvas for Sustainable Environmental Structures in Nigeria

The Synergy of Climate Change and Conflict in the Middle East

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Acuity Knowledge Partners

Acuity Knowledge Partners

We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points. https://www.acuitykp.com/

More from Medium

#180 Peter Kelly-Detwiler 2021 Energy Review & 2020 Outlook

Are Loans to Carbon Intensive Firms the New Subprime?

oil rig and energy production

Full Steam Ahead With Freight Electrification

Elon Musk — could he be the world’s first trillionaire?