A combination of high winter demand and the pandemic is adding to financial pressure on the network
By Rachel Millard 9 January 2021 • 5:00am
Those in charge of making sure the nation’s lights stay on could see a problem looming as they took stock of power flows from suppliers last Tuesday.
With wind turbines spinning slowly on a calm winter’s day, demand rising in the cold weather, and the BritNed link bringing power from the Netherlands unavailable, they needed to increase the buffer for the next day, fast. An urgent call to the market for a potential 584MW of capacity was answered and the notice stood down.
It came at a price, however, with hourly wholesale electricity prices briefly shooting up to £1,000 per MWh – a 10-fold increase.
It is the fourth time National Grid’s Electricity System Operator has issued such a notice since late 2020, in a sign of the growing complexities of managing the system, which has a greater proportion of wind power and also some gas and nuclear plants offline.
“It seems that the warnings issued to date have done their job, just at some exceptionally high prices,” says Tim Dixon, who leads the wholesale team at Cornwall Insight, the energy consultancy.
As winter rolls in and the pandemic rumbles on, the intricacies of power supply and demand are just one of the many challenges facing the energy sector, particularly household suppliers.
Wholesale prices are increasing just as many suppliers are braced for a rise in customers struggling to pay their bills. Prices could go higher still if the Met’s warning last week of an impending cold snap likened to the “Beast from the East” in 2018 is borne out.
Some payments owed to network companies were deferred during the first lockdown to help suppliers, but will fall due in March, just as Government support such as the furlough scheme is about to unwind.
There are fears of further collapses among under-funded smaller suppliers, in a market that has been convulsed in recent years by numerous entries and exits.
Consolidation and potential price rises for hard-pressed consumers also loom. “By April, a lot of payments will come due, and March is also typically the last big month for gas usage,” says one industry executive. “I think by then there is a chance we will see quite substantial failure.”
The pandemic has taken a heavy toll on workers’ security, with 819,000 falling off payrolls between February and October last year, a number likely to rise with the latest lockdown.
Citizens Advice thinks more than 600,000 households have fallen behind on their energy bills since February, owing an average £760 for electricity and £605 for gas.
Ofgem has made it a condition of suppliers’ licences that they put customers in debt on “realistic and sustainable” payment plans rather than disconnect them, and to offer emergency credit to customers struggling to top up pre-payment meters.
Suppliers are braced for an increase in bad debt, with Centrica booking a provision of about £60m in June, helping to dent its operating profits by £220m for the half-year. It is expected to indicate how things turned out in a trading update this week.
Energy UK, the trade body, says suppliers are “doing all they can” to support customers struggling with bills, and it is “keeping a close eye on the situation and conscious that the full consequences of the pandemic are yet to be seen”.
The increase in unpaid bills comes as wholesale power and gas costs have also risen, putting further pressure on suppliers. It is said to be £175 more expensive to supply a customer with energy bought now compared to in April, depending on the terms.
In December 2020, power and gas prices for the month ahead were 31pc and 30pc higher respectively than in December 2019.
There have also been increases in some of the policy costs shared among industry, such as to balance supply and demand, and for transmission.
Some of the smaller suppliers that have entered the market in recent years without enough financial backing or experience are particularly vulnerable to these price spikes.
More than 20 small to medium-sized suppliers have gone bust since 2018 in the hyper-competitive and heavily regulated market – the latest being Yorkshire Energy, which tumbled in December leaving 74,000 customers to be taken on by Scottish Power.
It is unlikely to be the last. “Rising wholesale prices alongside some charges that could be adversely affected if the latest lockdown suppresses demand could cause some issues,” says Dixon at Cornwall Insight.
“However, there are various mitigation measures put in place to offset some of the costs to suppliers, with some costs either waived or deferred, which should help.”
Those measures include a proposal by the energy regulator to help suppliers cover the costs of bad debts by increasing the level of the price cap on energy bills by £21 per customer.
The cap was reduced by £84 in October after wholesale costs fell at the start of the pandemic. (Even with the £21 increase, bills would actually rise by about £6 after a separate temporary increase comes to an end.
Not everyone feels it is necessary. A second energy executive questioned whether suppliers were exaggerating levels of bad debt, in order to get the price cap increased.
“Any decently run company can afford to carry this,” the executive said. “But they have successfully lobbied to put the price cap up prospectively. The principle of companies helping people through this and then recovering through pricing might be OK. What’s not OK is that they have preemptively done this before we see what the impact is.”
Difficulties caused by the pandemic come as the whole sector is struggling with wafer-thin or negative margins due to the price cap and intense competition.
Legacy Big Six suppliers such as British Gas and EDF have had their market share eroded by challengers ranging from the tiny, badly resourced rivals to well-backed companies with leading technology who are able to withstand years of heavy and widening losses as they pursue growth.
Of the three most prominent, technologically adept challengers during their 2019 financial year (which covered different periods), Ovo’s losses widened from £41.9m to £106m; Bulb’s from £26m to £129.2m; and Octopus’s from £5.9m to £30m.
Shell Energy Retail, owned by the Anglo-Dutch oil and gas giant, and Scottish Power have publicly voiced concerns about an “unsustainable” market with knock-down tariffs.
Critics say some smaller, underfunded companies are taking advantage of Ofgem’s safety net – which means their customers and costs will get picked up if they fail – to run risky business models and loss-leading offers.
Winter and pandemic pressures may now add to what many see as an inevitable shrinking back of the market, as companies seek strength in numbers.
“There is going to be more consolidation in the industry,” says one industry adviser.
“I can see us heading back to the world we came from where we had Big Six energy suppliers.
“They won’t be the same Big Six – but I think the economics of the market drive scale.” https://www.telegraph.co.uk/…/perfect-storm-leaves…/

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