Reduced energy offtake likely to hit UK suppliers

Author: Chetan Patel

2020/04/08

LONDON (ICIS)--A growing number of British energy suppliers could be at risk of collapsing through reduced energy offtake and cash-flow constraints amid the coronavirus pandemic, according to industry sources polled by ICIS.

The concerns come at a time when most suppliers were already struggling due to fierce competition from challenger brands, which was exacerbated after the government imposed a retail price cap on energy bills last year.

Over 19 suppliers have gone bust since 2016, while acquisitions and operational restructuring have changed the UK retail market dynamic.

Industry sources said the combination of a prolonged economic downturn on top of the current collapse in business activity and consumption could see more suppliers fall into financial difficulty.

PAYMENT ISSUES

To counter the brunt of cash-flow constraints, suppliers have asked for government support to provide payment holidays to customers who are struggling to settle bills due to financial constraints relating to the virus.

The exact details surrounding the support scheme are yet to emerge, although any support will help struggling supplier margins. If too many households and businesses default on their payments, then this could place further pressure on balance sheets.

Serge Mazodila, head of trading and risk management at contract management company The Monarch Partnership says that contract terms are a key issue with suppliers having to address take-or-pay clauses of supply contracts in order to minimise losses.

Mazodila added that “clients may also have the option to declare force majeure within their contracts and thus force significant loss onto suppliers.”

The resultant dynamic could cause long-term issues to the company’s balance sheet post the coronavirus pandemic. A reduction in industrial and commercial demand and payment defaults increases the risk of poor debt scenarios, which could mean capex reductions across the industry in the months to come.

Centrica, the UK’s largest supplier, announced an unplanned trading update earlier in the month in which it suspended dividend payments and the sale of its nuclear and upstream assets, the first real impact on the energy sector.

Beyond the cashflow constraints, suppliers still face operational costs, such as grid connection charges.

One industry source said that some suppliers have lobbied against the government to cover all supplier gas distribution network (GDN) charges and for utility suppliers to pay back into an organised fund aimed at recouping GDN cost.

REGULATORY RESPONSE

Regulator Ofgem urged suppliers in an open letter on 8 April to ensure extraordinary measures to protect consumers, setting out an enabling framework which will judge steps by suppliers on a case by case basis.