Energy market crisis in the UK: what should customers do?

How to stay clear of the explosion of energy bills?

The main reason for this crisis is simple: Wholesale gas prices have spiked across Europe with the U.K. being hit particularly hard. Indeed ​​since January, trading prices have risen more than 250%, 70% since August alone, with two clear victims of the situation:

• First energy suppliers that caught between this surge in energy price wholesale market and the default tariff cap. Meaning suppliers are now paying the difference between the Cap and the real market prices with loses that only big players could weather.
• The customers: that are seeing, and will most likely keep on seeing, a significant increase in their energy rates and therefore bills.

In this article, we will inform you on things you can do to prevent this crisis to hit your finances too hard and to avoid any disruption in your daily lives.

Will the Energy Price Cap be increased?

The Energy Price Cap was created by Ofgem in January 2019 to protect customers from overpaying for their energy. It sets the maximum amount suppliers can charge their customers for gas and electricity. It is reevaluated twice a year, in February and October, to mirror the change in energy wholesale costs.

On 6th August 2021, Ofgem’s announced the latest Energy Price Cap that will go into effect on the 1st of October and it was already recognised as a record high, with a 12% increase in bills. Customers on default plans would face an increase of £139 vs the previous cap, going from £1,138 to £1,277, while customers on prepaid plans will experience an increase in the price cap of £153, going from £1,156 to £1,309.

Theoretically this Cap should remain in place until next February when it will be reviewed again by
Ofgem. Nevertheless the government is under increasing pressure to lift the Cap between now and next year to help suppliers cope with the rise in wholesale prices. So far the government indicated the price cap would remain in place “this winter” but couldn’t rule out removing it in future.

Finding the Cheapest energy suppliers

There is no doubt that bills will go up this winter and many people will face difficulties sustaining their budget. Therefore, it is important to always be on the lookout for a cheaper energy supplier and the possibility of switching to a better and more reasonable tariff.

Switch Plan’s role is to help you achieve just that by guiding you through the best energy deals available on the market. Though the offers are changing on a daily basis due to that unprecedented volatility in rates, we are frequently updating our guide on the cheapest energy suppliers in the UK to keep it up to date.

What about switching to a bigger supplier?

If you are currently on a contract with a smaller energy supplier, you might be wondering if the best decision is to move to a bigger one. Indeed, smaller suppliers are at higher risk due to the energy crisis, whereas larger companies have more cash, more political back-up and are more likely to survive. Nevertheless you should have in mind that all suppliers will be going through a tough moment and while some of them are bigger and more resilient than others, scale doesn’t automatically equal resilience.

Our recommendation if you are already in contract with a smaller supplier would be to keep true to that supplier. Indeed even if it does go bust, Ofgem will appoint a larger supplier to take over your energy supply with no disruption in your energy supply and a relatively limited price difference.You could therefore wait to see how the crisis will evolve in the coming weeks and make an informed decision, since it is still unclear which suppliers will survive or go bust.

If you were to switch now, then switching to bigger suppliers could be a good option as they are “too big to fail”.

What can the government do to help?

The secretary of State for Business Energy and Industrial Strategy, Kwasi Kwarteng, confidently addressed the house of commons on September 20th to ensure there would be no supply issues:
”Firstly, I must stress that protecting consumers is our number one, the primary focus and will shape our entire approach to this important issue. Secondly, I want also to reassure the House that while the UK like other countries in Europe has been affected by global prices, Britain benefits from having a diverse range of gas supply sources.”

“We have sufficient capacity and more than sufficient capacity to meet demand and we do not expect supply emergencies to occur this winter. There’s absolutely no question of the lights going out or people being unable to heat their homes. There will not be three-day working weeks or throwback to the 1970s. Such thinking is unhelpful and completely misguided.”

“In any scenario, we will ensure UK consumers have continuity of supply through a Supplier of Last Resort or a special administrator if needed.”

He informed that the government is working on ways to make sure that the transition of customers of failed suppliers goes smoothly. And as we previously said, the government is not willing to drop the Energy Price Cap, as it believes that customers will be better protected from the increasing prices.

The government is also working on creating bailout loans to help eligible energy companies with the crisis.

Energy suppliers have called for the formation of “bad banks”, which are supported by the government to cover the expenses of customers transferred to their services that they are not able to afford.

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Which energy suppliers went bust?

In the past few weeks many suppliers already went bust. As more are expected to go out of business, the table below will be continuously updated.

Will my energy supplier go bust?

It is clear that smaller energy companies are at a higher risk of going bust because it is even harder for them to keep up with the high wholesale gas prices. The record prices have stopped companies from being able to provide the customers with the energy they have paid for.

At the beginning of this year, there were 70 energy suppliers in the UK. With the ongoing crisis, industry sources predict that by the end of 2021, the UK might be left with just 10 suppliers.

More smaller companies are expected to go bust over the coming days and weeks. According to industry sources, four firms have asked larger providers to bid to take over the supply to one million customers.

The biggest surprise came from the sixth largest energy supplier, Bulb, which has been financially struggling for the past few months. The supplier sought a bailout and was in talks with investors for potential financial injection to help stabilise. There were also many speculations about a potential merge or acquisition by other energy suppliers. However, Bulb was not able receive any financial support and has recently went under a special administration. This measure is used for the first time since it has been created ten years ago.

If you are on a contract with a smaller provider, it is indeed possible that it can go bust in the coming weeks. However, the situation is very dynamic and it is still unknown which providers will be forced to close their business.

The table below shows the level of risk of going bust for each supplier that is still active. The suppliers in green, are the most stable ones and have the highest chance of surviving the crisis. The first six companies are also the so called Big 6. Most of the existing providers are in a moderate risk of going bust, while four are at high risk. Good Energy is fighting off a hostile takeover bid from Ecotricity while also dealing with the energy crisis. Bulb is seeking a bailout and facing a potential buyout from Octopus Energy. Since the situation on the energy market is very dynamic, any company in the moderate and high risk can go bust. The table below will be updated constantly.

What happens if your energy supplier goes bust?

If your energy supplier goes bust, your household will still have access to gas and electricity. Ofgem will choose your new supplier and will try to get the best deal for you. You do not have to do anything during the process of moving to the new supplier. It is recommended to take a meter reading for future reference and a note of your account balance.

You are in credit to your old supplier

If you are in credit to your old supplier, your new one will pay back the remaining credit. Once Ofgem appoints a new supplier, they will contact all customers with instructions and information on how this will work. If you have energy consumption that is not billed yet, this will be deducted from your account.

You still have to pay your debt

If you are in a situation where you still have to pay your debt to your previous supplier, there are a few options that will be available to you depending on the agreement between the two suppliers.

If the new supplier makes the arrangement to take on the customer debts, then you will have to pay your debt to them. However, if this is not arranged, you will have to pay back the debt to your old supplier or their administrator. You should be contacted regarding this matter and receive instructions by the new supplier.

You have a smart meter

In the very unlikely case that your appointed supplier does not operate with smart meters, your smart meter will be used as a traditional one and the meter readings will be taken manually.

What tariffs will customers be switched to?

When your supplier goes bust, your tariff with them will end. The new supplier will put you on a deemed contract, a tariff that you do not choose but you are automatically switched to.

Although, Ofgem will try to get a good deal for you, deemed contracts can be more expensive and you might experience higher bills. They cost more because the supplier might need to buy more wholesale energy to quickly cover the new customers. If you are not happy with the deemed contact, you can always ask your new supplier to put you on a cheaper deal or you can switch to another supplier of your choice.

When can I switch to another supplier?

Usually when a supplier goes bust, Ofgem will appoint another supplier to take on the customers and they will be contacted for the transfer by the new supplier. If you want to switch to another supplier, you are free to shop around and look for another deal. However, you have to wait for the transfer to the newly appointed supplier to be completed and only then you can switch to the supplier of your choice.

What caused the UK’s energy market crisis?

There are many reasons for the energy crisis that have been building up and all together resulted in extreme gas prices, leaving smaller suppliers unable to sustain their businesses and continue to operate.

What’s behind the steep rise in gas prices?

The wholesale prices of gas have increased by 250% since January, and with a 70% rise since August. There are several reasons for the record increase, one of them being the global demand for gas post lockdowns. Furthermore, the UK experienced clamer weather in the past weeks, resulting in lower wind power production, which usually generates over 20% of the total electricity.

*the graph is sourced from Bloomberg

An increased stress on natural gas reserves

The lower provision of natural gas from Russia to north-west Europe during the long winter, has resulted in less access to natural gas. To cover for this shortfall, there has been an increased need of natural gas for the production of electricity. Moreover, the higher demand for liquified natural gas in Asia, has caused lower access to it in Europe. Russia’s state-backed monopoly gas exporter, Gazprom, has managed to complete its long-term contracts with customers but has not offered any additional gas fulfilment, which has resulted in shortage of gas in Europe. Asia, and especially China have been in high demand for gas as they restart their post-covid economy. Shipments of gas have gone from Europe to China and the supply from Russia to Europe has not covered the gas deficiency. The chief executive of Gazprom, Alexei Miller said: “the Asian market is more attractive for producers and investors”.

Is Brexit to blame?

In 2016, Brits were reassured that gas prices and bills will go down after Brexit and that VAT rate on energy bills will be cut. However, VAT is still in place and energy bills are hitting new records. Gas prices have been going up across Europe, with the difference that EU nations are able to effectively balance energy prices across the union.

What consequences could the UK’s energy market crisis have?

The UK energy crisis has already led to not only suppliers going bust and struggling to keep up with increasing gas prices, but also to production issues in the food sector. The real consequences of the crisis are yet to be seen in the coming weeks and months.

Back to “the cosy oligopoly of years past”?

With smaller suppliers going bust one after another, you might be wondering if there will be just a few firms left to dictate the market. The business secretary Kwasi Kwarteng reassured that the government does not want to allow the energy market to go back to “the cosy oligopoly” of the past, where a few firms ruled the market and dictated the prices. They want to keep the energy market as competitive and as diverse as possible to ensure fair pricing. Therefore, the government is hoping that its plans for supportive loans will help eligible companies stay in business and survive the crisis.

Will there be any Knock-on effects?

Knock-on effects from the crisis are already in place. There has been a huge shortage of carbon dioxide caused by the closure of energy intensive fertiliser producers who cannot sustain the high gas prices.

Carbon dioxide is used by food manufacturers to stun animals prior to slaughter and to keep food fresh for storage, increase the shelf-life, and ensure the safe transportation to supermarkets. As a result, the food industry is facing a problem with the production of food products and the supply of supermarkets, which could lead to shortage and empty shelves. The chief executive of the British Meat Processors Association warned that consumers might not be able to find meat products in supermarkets in the coming weeks. CO2 is also used for poultry and fizzy drinks, which could soon be hard to find too.

FAQ

What caused the UK energy crisis?

Many factors have caused the crisis. There has been a global demand and shortage of gas, while economies are recovering and restarting after the Covid lockdowns. Calmer weather in the UK has affected the wind power production, resulting in increased need for natural gas to produce electricity. The lower provision of natural gas from Russia to north-west Europe during the long winter, has resulted in less access to natural gas.

Which suppliers have gone bust?

The suppliers that have gone bust are HUB Energy, MoneyPlus Energy, PFP Energy, Utility Point, People’s Energy, Green, Avro, Igloo Energy, Symbio Energy, ENSTROGA, Pure Planet, Colorado Energy, Daligas and GOTO Energy. As more suppliers are expected to go out of business, this list will be updated.

What should energy customers do?

The situation is changing every day and it is unclear which suppliers will go bust. If your supplier goes bust, you should wait for Ofgem to appoint you a new one. You do not need to do anything but just wait to be contacted with instructions. If you are not happy with the appointed provider and tariff, you can switch to another supplier of your choice, after the transfer is completed.

What is the government doing about it?

The government is working on plans to help eligible energy companies with the crisis. This might be in the form bailout loans. Furthermore, the government is trying to ensure the smooth transition of customers of failed suppliers to new providers.