top of page

UK Energy Retail: Planning to Fail?

OFGEM's latest consultation published yesterday, is positioned as 'raising standards for existing suppliers', but start reading and it is quickly clear that its primary focus in the actions proposed are an attempt to shore up the number of suppliers failing due to poor management. Equally prominent, and probably more important for the wider market, are proposed measures to help limit the costs, that when a supplier fails, get shared amongst those peers still standing.

On one hand the proposals are to be welcomed. Too many businesses have come into the market and failed through lack of risk management and competence. The knock on impact on customers and ultimately remaining suppliers has been nothing but a negative influence (even if some of those suppliers have won valuable customer share by picking up stranded customers at a low cost ). The measures as proposed will be welcomed by those well run businesses that still remain in the market.

But take a step back and you have to question why the proposals are needed in the first place. What other industry shares the cost of failure amongst the remaining competition? How are businesses supposed to plan for the failure of others? The Supplier of Last Resort (SOLR) process was designed back in the day, very much as the name suggests, as a 'last resort' process. However, over the last 18 months, it has become a process that has been used multiple times as poorly managed businesses have failed. The costs of each failure have been shared amongst the remaining suppliers. Energy retail is an incredibly complex business, which demands sophisticated cash and risk management processes, to be successful. The hurdles for market entry have historically been too low, focusing on ensuring that new entrants will not break industry systems rather than competence. OFGEM have now largely shored up this market entry process but the damage is done. It is not surprising that more businesses are up for sale than there are new entrants coming to market. Investors are looking at the carnage of the last couple of years and seeking fortunes elsewhere. This shift in market confidence is largely a consequence of poor competitors damaging the market through unconsciously pricing at a loss. In a field of rational players there is still inherent value in serving customers with a range of innovative energy products.

Despite the headline of 58 active participants in the retail market, 93% of market share is now held by the top 11 suppliers and 74% by the top 5. Switching remains at around 20% and more importantly it tends to be the same people switching on an annual basis. We are hopefully reaching the end game in the current market shake out, and those left in will be able to operate in a more rational competitive field. A period of stability may also help in re-attracting new disruptive business models and investors.

It feels like we're at a tipping point, which the timing of OFGEM's consultation reflects. The big question is whether one of the 11 hits the buffers and the sharing of their SOLR costs causes a catastrophic domino effect on remaining players- or there is a genuine stabilisation of the market and existing and new competition can focus on delivering all the customer benefits that the transition to a zero carbon world offers. My hope is that it is the latter.

It feels like we're reaching the end of Round 1 of a big experiment in competitive market design. Let's hope Round 2 is more successful.

EnergyBridge helps businesses, investors and local authorities navigate complexity, unlock value and reduce carbon in the UK energy market with a combination of deep market and operational expertise and experience.


bottom of page