So several factors combined to give artificial incentives, and a leg-up, to tiny companies wanting to become energy suppliers in the UK residential sector a few years ago. What happened next; and do we care?
What Happened Next?
The small-supplier movement started slowly, and a number of the companies that were encouraged to join the fray were, in the early days, purposeful and professional - just the kind of new entrant the authorities were hoping for. Some of them are doing great things today, and look set to be a big part of the future of energy supply.
Unfortunately, word got around that there was a money-for-old-rope game in town and, as rapidly became evident, eye-off-the-ball Ofgem wasn't hesitating to give licences to even miniscule companies with no obvious professional capability or viable business plan. Enter the chancers; some of whom set up several suppliers. (Their intended trick is sometimes hard to divine; but some worthless little supply companies have subsequently changed hands for [high] prices that make it virtually certain there's a scam involved). Using the truly excellent Companies House website you can readily check up on any you come across - or, out of curiousity, from the list of those that have already gone under - and you'll find they frequently stink. If anyone at Ofgem had been bothering, they'd have spotted this, too.
The early straw in the wind came in November 2016 when the first of the minnows, GB Energy, went bust. A glance at their books shows there were some very costly "related party transactions" involved just before they went under (something that's been repeated in other cases), never a healthy sign. Still, Ofgem simply reassigned their customers to another supplier (the 'Last Resort' process) - who was then able, under the rules, to charge us all any costs they incurred in taking over the stranded accounts. GB Energy, though, was in one critical aspect not typical of much of what followed: because the steady decline in wholesale prices hadn't yet reversed. That came a year later.
It will have occurred to many readers that the trick we noted last time, of going short into a falling market and buying in the Spot (thereby undercutting all the forward-hedgers), wouldn't work if prices started rising as, inevitably, eventually, they did. At this point a prudent player - even one with an appetite for risk - switches strategy and starts locking in (either using the traded market, or via an OTC Power Purchase Agreement [PPA]) before prices go any higher: "risk off", in the jargon. That is, a prudent player with sufficient line of credit to buy forward ... and of course many of these jokers are chronically under-capitalised. No proper wholesale player is going to countenance selling forward to that type of counterparty (except on punitive terms like cash upfront) - what we might call Northern Rock Syndrome.
Game over, and collapse of
They delay their demise, of course, by hanging onto the VAT and "green" levies they've collected from customers and ought to be remitting promptly to the authorities. The highest-profile delinquent in this game has been Robin Hood Energy** (supplier to J.Corbyn esq.), established by the Momentum eejits who run Nottingham City Council, and much lauded by Ms Nandy (a mistake, that). Owing £9.5mm in Green levies, their licence was on the point of being cancelled by Ofgem last autumn, when the hapless Nottingham tax payer rode to the rescue ...
Does it Matter? (Ans: Yes)
Many of the capitalists amongst us instinctively say 'no' - it's the role of the market to facilitate those with good ideas and with bad ideas alike, to take their chances at their own expense. The good will thrive, the useless will fail, and Darwin will decide which ones are which.
That's fine, up to a point. But as some of our perceptive BTL commenters have noted, these particular corporate failures are not victimless. OK, the customers get reassigned to other suppliers: but there's hassle for them, and cost for us all, as the new supplier gets to recharge any costs it incurs through the process. Furthermore, when a company goes under owing Green levies etc, the deficiency thus arising is also automatically "mutualised" - through all our energy bills. Meantime, the founder of QueerStreet Energy (formerly NoName Energy) may have been making out like a gangster for several years, and retires comfortably to plot the next scam.
Ofgem is truly culpable in all this. The warning signs were there even before GB Energy went under (how the Hell could anyone imagine there could be 100 viable suppliers in such a market - FFS!); but if they'd at least acted decisively at that point, they'd have saved us all no end of trouble. I'm often broadly congratulatory towards Ofgem: but on this one they've screwed up bigtime, in the most disgraceful fashion, and seriously brought the open energy market into disrepute.
As I wrote on Monday in another context: free markets need good regulators!
* Some are so small and obscure, their names and departures have passed unrecorded in the MSM nor even in the trade press.
** Another time we'll look at the sorry tale of Local Authorities getting into energy supply. Also, from yesterday's episode, we'll look in future at how Industrial & Commercial energy buyers who should know better often get shafted - and how those that know even less get seriously turned over.