Friday 10 January 2020

Downfall: Small Energy Suppliers, part 2

.... continues

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 stout thin party when the cash finally runs out.  It's been happening left and right all through the last 24 months: estimates vary, but those who watch it closely reckon around 30* have gone under.  And there are dozens more of these chancers still out there!

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.


hovis said...

Thanks ND, very interesting. I'd agree free markets need good regulators.
Perhaps this could be reframed as (natural) monopolies/oligopolies are nor really free markets (as envisaged in the dreamtime of some of their more extreme supporters), given the asymetric distribution of information/power.

david morris said...

As per Hovis, an interesting read

A chance perhaps to monetise the site by naming names in regard to those domestic energy suppliers most likey to default ?

Nick Drew said...

Thanks, chaps. Hovis, you are of course 100% right. I'm reluctant to accept the phrase "natural monopoly" without careful interrogation, because so many aspects of the energy sector (to name but one industry) have been successfully split out and subjected to competition where people previously asserted it couldn't be done. So one shouldn't give up easily.

HOWEVER, a few things really are natural monopolies (elec and gas grids, for example, in energy - at least on a regional basis); and those should be borne down upon rigorously - and forced (e.g.) to go out to tender for anything it's remotely possible for someone else to provide on their behalf. It's also a good idea to break them down regionally, so that different regional NMs can experiment "competitively" with different methods, and the regulator can insist everyone at least adopts current best practice. (A bit like state legislatures in the USA.)

To be fair, the UK set-up is structurally quite sound in this respect - though the devil is in the details, and Ofgem is sometimes prone to slipping up on details. And it's not easy for them, either.

FAOD, I don't consider energy supply to be a NM. And oligoply is there to be busted open.

Libel is libel, DM ! - and "slander of product" is a Thing. I realise this is beyond the average energy-switcher; but the superb Companies House website makes it pretty easy to spot the egregious wrong'uns, if you've any ability to read a balance-sheet and a company report at all. Balance-sheet is all you'll get in many cases, because some of the companies are so small, they only need to file "micro-business" accounts, which allows them to omit P&L and cashflow statements.

That alone ought to make you suspicious!!

Seems to me people will just drift back to the Big 6, and perhaps a handful of other names they may have really heard of.

I have no scruples about slagging off the local authorities who've got involved, however - in a later post ...

E-K said...

Obviously the regulators are not as sharp witted, fleet of foot nor as unscrupulous as the chancers in the private sector.

In utilities/infrastructure it is quite clear that gravity builds towards monopolies.

I wonder if privatisation would have been better undertaken via a central state-owned corporation contracting out every one of its operations to private firms.

I see this on the railway all the time. Most of the Orange Army are on zero hours/short term contracts. In all but name Network Rail is nationalised but its track workers certainly aren't. Signallers are part of the nationalised arm of the railway yet have taken huge hits in job losses since privatisation but even more after renationalisation with the recent introduction of digital and centralised power boxes - have you heard of signallers striking much ? It doesn't follow that nationalised = power to unions.

david morris said...

Thank you ND

Look forward to the Local Authorities post

Kind regards

Mark Wadsworth said...

"some worthless little supply companies have subsequently changed hands for [high] prices that make it virtually certain there's a scam involved)."

Well of course there was, no smoke without fire, but you are the expert and it's up to you to find out exactly what and to entertain/infuriate your readers with it!

Anonymous said...

thank you. most interesting, why is the council setting up an energy supplier. to put people before profits. apart from the odd corbyn type, are the great masses wanting to pay more for this? seems not, even assuming they could get organised.

an interesting tangent from this is the next few years of offshore windfarms coming online. a few comments on that would be appreciated.
seems we're committed to trying to get to 40gw offshore 10 years from now. right now we're about 10gw with another 7-8 arriving in the next 4 years. the ramp up from 2025 onwards looks pretty steep.

there is some big money going into the 1gw+ farms 50+ miles offshore with the mammoth 10mw turbines and the backers seem convinced that £40per mw will turn a profit.
even now on an windy night in the north sea the price can go negative on spot. though the windwills that keep turning as they still get paid.
wonder what we will do with these temporary surplus. split water to store hydrogen, charge our cars, sell it to norway. or how the gap will be filled when its foggy and quiet.

Anonymous said...


with respect to your comment below:

"HOWEVER, a few things really are natural monopolies (elec and gas grids, for example, in energy - at least on a regional basis); and those should be borne down upon rigorously - and forced (e.g.) to go out to tender for anything it's remotely possible for someone else to provide on their behalf. It's also a good idea to break them down regionally, so that different regional NMs can experiment "competitively" with different methods, and the regulator can insist everyone at least adopts current best practice. (A bit like state legislatures in the USA.)"

All very well and good in theory, meanwhile over here in the real world... it is "possible" that procurement processes take you down the route of choosing inappropriate contractors to deliver bundles of work.

Through out the natural monopolies, there have been instances of contractors pursuing endless compensation events for any changes to the scope of work (no matter how small or who's fault the change is), this is a very challenging situation when a lot of utiliteis are operating assets that could be 40+ years old. No matter how much front end planning, something invariable will pop up to provide a contractor with an excuse to try it on.

Further, some principal contractors don't even employ anyone who does any of the real graft... they consist of an army of project managers and bean counters who select the cheapest sub-contractors to deliver elements of the contract. A good example of the market at work you might think? The reality is this approach creates more layers of governance, nonsense and confusion, and it makes it very difficult for the client to effectively and efficiently manage the contractor (without a shadow army of REMFs to scrutinise everything the PC does...)

Alternatively - the more proffesional contractors will price in a large amount of risk to any work they pitch for. If they are able to convince the procurement bots this is appropriate, they normally do a good job and by and large deliver on time and quality. But they are very expensive! You could argue it would be cheaper for the utility/client to upskill and do the work themselves...!

And the final flaw in the model... The contractor doesn't have to live with the efficiency (short cuts) they have delivered. That comes down to the poor saps on the ground who have to operate and maintain the assets. Many of whom are professional techs who take great pride and ownership in "their" assets!

hovis said...

Anon 5.22pm: "[I] wonder what we will do with these temporary surplus"

How about some intermittent Bitcoin mining ;-)

Nick Drew said...

anon @ 9:35 - oh sure, I've suffered from dumb contracting, dumb specifications, dumb project management; and I expect we all have. Atrocious examples of public sector tendering are legion: and private sector cock-ups can be just as bad, even if (a) less publicly bruited about and (b) probably less of a drain on the public purse

But clever competitive tendering, for services that can be tightly defined, is, errrr, clever. Things need to be made contestable. There are loads of examples of stuff the Grid procures, that they've done very successfully (in terms of outcome) AND dragged prices right down in the process. And who in their right minds would (e.g.) develop their own spreadsheet app etc? Outsourcing is a continuum, and knowing where to draw the line is critical. Of course.

There are naturally some very important skills involved; and principles: e.g. Risk belongs in the hands of those best able to manage it.

The siren voice of "it's much more efficient if we do everything ourselves / optimise centrally / don't just accept the cheapest tender / " etc etc leads rapidly to the old British Gas & CEGB mentality, still to be found, with truly grotesque gold-plating and waste. Nobody is gonna tell me that was optimal.

(A story I often tell: in the run-up to BG's privatisation, a guy who gloried in the title of "The Central Controller" said to me over a beer: I don't understand. We're reliable. We're safe. Why are they so obsessed about what we cost?
I believe he genuinely didn't understand.)

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