The head of British Gas-owner Centrica has warned that more UK retail energy suppliers will probably go bust this winter, with some who are “struggling for cash” already likely to be trading while technically insolvent.
Chris O’Shea, head of Britain’s biggest energy supplier, said some of the larger UK energy providers were also at risk of folding following 30 supplier failures in the past 18 months, even as government support for household bills was helping to prop up the market.
“I think we will see supplier failures,” O’Shea told the Financial Times during a visit to the Easington Gas Terminal in Yorkshire.
Asked whether he believed some suppliers were trading while technically insolvent, he replied “yes”, and warned that the “cash flow” created by government support schemes was one of the few things keeping “companies that are struggling for cash” afloat.
Britain’s energy retail market was plunged into chaos last year as surges in wholesale electricity and gas prices exposed the weak business models of many companies.
The demise of Bulb Energy alone, the biggest supplier to have collapsed, is forecast to have cost taxpayers as much as £6.5bn after it was placed into special administration in November last year and funded with government loans.
O’Shea said a decision by Britain’s energy regulator last week not to force suppliers to ringfence customers’ cash was “deeply flawed” and an admission that “there are companies in our market that are unable to raise the capital required to properly back their business”.
He also predicted the sector as a whole had made losses as a result of warm weather in October and November, saying companies would have bought forward electricity and gas to meet expected demand, but they would have made losses when that level of consumption did not materialise.
“For a company like Centrica, our shareholders bear that loss. For other companies including extremely large companies where they don’t have adequate capital . . . every day this happens they become risker,” he said.
Other senior industry figures have privately expressed concerns that the number of retail energy supplier bankruptcies was likely to increase this year, arguing that at least five companies could be at risk — roughly a fifth of the suppliers still active in the UK.
Ofgem last Friday set out a series of reforms for the energy retail market and said it would “closely” monitor company use of customers’ money, but it stopped short of forcing suppliers to ringfence those deposits. It had been consulting on ringfencing proposals.
Households that pay their energy bills via direct debit normally build up credit with their suppliers in the summer when consumption is lower, but eat into that buffer in the winter when their usage rises.
O’Shea also hit out at the government’s decision to raise windfall taxes on energy producers and said it was damaging investor confidence in the UK.
The Easington terminal is where gas from Rough, Britain’s biggest storage site that was recently reopened by Centrica, is brought onshore. Rough was reopened in October and is currently operating at a fifth of its full capacity.
O’Shea said Centrica had been in talks with UK ministers over potential financing mechanisms to help it justify a £150mn investment to double gas storage capacity to 60bn cubic feet by next winter. But an agreement had not been reached on the “right regulatory framework”, he added.
“We won’t be able to expand the capacity for next winter,” O’Shea said.
Centrica will be hit by windfall taxes on its gas production assets in the UK North Sea and on clean electricity generators as it has a 20 per cent stake in Britain’s nuclear power stations. The company has yet to disclose how much tax it will have to pay under the levies.
“It’s damaged the investability of the UK in investors’ eyes and that’s obviously a concern as the only way you get that back is by a prolonged period of stability,” O’Shea said.
Additional reporting by David Sheppard in London