How can so many Energy Companies Fail?- who's next? AVRO? IGLOO? SYMBIO? COLORADO? NEON REEF?

ihatetrump

I haven't posted on this part of the Forum before, so apologies if the following has been addressed before.

I know that Martin has been on the radio this morning - but.......

Maybe one for Martin & his team to get stuck into and publicise, but there really needs to be a deep dive into the incestuous world of these smaller energy companies and how they have come into existence - OFGEM certainly doesn't seem to have a clue, unless they're in bed with some of these operators also.

Companies House is a great resource and starting point to investigate the smaller energy supply companies, (some not so small any more) who's behind them and how little money is required to startup.

As an example, (selected totally at random) take AVRO Energy:

Setup in 2014 by Jake Brown (owned 100% by him and presumably his father Philip Andrew Brown) at the time a 20 year old with no experience in the Energy industry (per his own interviews - say's it's simple economics!) - started with a share capital of £100 - selling cheap energy by taking on the larger suppliers.

Roll forward a few years, the last accounts filed on Companies House are for the year ended June 2019, here is the P&L snapshot:



£27 MILLION LOSS!!!!!!!!!!!!!!!!!!!!!


And the Balance Sheet:




So still only £100 of share capital - the loss funded entirely by creditors of £98 MILLION,

but who are those creditors? - note 11:



Customer Advance payments of nearly £46 MILLION!!

So, lets get this right, the company losses of £27 Million are being sustained only through the £46 Million of advance customer payments - CUSTOMER CREDIT BALANCES!!!!!!!!!!!!!!

Because the company has no retained earnings, it cannot legally pay dividends, so what does it do? Note 



You guessed it, Loans to Directors - effectively funded again by Customer Advance payments!

And what about the auditors? - First audit in 2019 when turnover went form £80M to 

This is a company with a turnover of just short of £390 MILLION and  at the time nearly 600,000 customers - why have the auditors no qualified these accounts on a going concern basis? - this company is insolvent and is totally propped up by it's customers  advance payments.

When you dig deeper on Companies House and search by Directors Names - Both Jake & Philip Brown are directors of multiple other companies, including Dyball Associates - and here's what they do (amongst other things):



Follow the trail with Andrew Dyball and he's a director of 40 companies, including numerous ones named after American States - i.e Michigan energy Ltd, Utah Energy Ltd etc etc. Other include Square1 Energy Ltd - who do or have featured on energy comparison sites.

The plot thickens...

There's too many small players in the market/industry, which does not appear to have enough financial regulation - so many of them are primed to fail - at a cost to the Government - which will only have itself to blame because the industry has not been tightly regulated enough.

[Deleted User]

I bet that you are glad that you have got that off your chest. We could always go back to Nationalised energy suppliers with two tariffs: one for electricity and another for gas.

PS. There is no cost to Government of energy supplier failures. HMRC and Ofgem get first dibs on the supplier’s assets and consumers end up paying for any costs levied by the SoLR.

niktheguru

Quite a deepdive into the company accounts.

What I do wonder is that there is current outrage at the situation, but i didn't really see people complaining too much when these smaller companies were offering customers extremely cheap electricity and gas unit rates. Like dolor says, if we go back to nationalised energy, we'll be back to paying high prices with no choice.

If people don't like the smaller companies they can quite easily just go with british gas for their gas and eon/edf etc for electricity and pay what they offer.

I completely agree that ofgem and the government haven't covered themselves in glory here, and the whole system needs to be better regulated but at the end of the day NO ONE will be without electricity and gas when these companies fail, Credit balances are PROTECTED and so you won't be "directly" out of pocket. The only inconvenience is the lengthy solr process and the fact now that when the small companies that you've fixed low prices with fail, you'll end up having to pay the higher/standard prices from the bigger companies.

[Deleted User]

The issue here is energy security - or, more precisely, the lack of it. Most sensible Nations hold a high level of reserves which they can draw on if there are difficult Market conditions. Our Government decided to do away with our ability to stockpile gas on the flawed assumption there would always be enough gas to go around at an affordable price. Sadly, our LPG suppliers prioritised Asia, and Europe is struggling to get gas to meet its own needs. Add the loss of an inter connector and a 60 year low in wind, and you have the situation that we now find ourselves in.

The only answer that Ministers can come up with is that we need more renewables. Sadly, unlike the cavalry, renewables are not coming across the Horizon anytime soon.

Inigo_Montoya

Certainly not an expert but is the crux of the issue the company directors ability to withdraw money from a loss making company via loans ? (since apparently they cannot pay themselves in dividends as the OP said)

If so it sounds like that facility needs to be removed so company directors cannot game the system

On a separate but related issue I suspect something shady is going on with UP and Neon Reef who have directors in common & the automatic transfer of customers from UP to Neon Reef earlier in the year

QrizB

One solution (not necessarily a viable one, I've not thought about it much at all) would be to ring-fence customer advance payments, similar to the way a solicitor has no access to your money when you buy a house.

Those particular regs were introduced after too many solicitors ran away with their PA and Mr&Mrs Smith's deposit.

ihatetrump

I bet that you are glad that you have got that off your chest. We could always go back to Nationalised energy suppliers with two tariffs: one for electricity and another for gas.

PS. There is no cost to Government of energy supplier failures. HMRC and Ofgem get first dibs on the supplier’s assets and consumers end up paying for any costs levied by the SoLR.

No where in my post did I advocate nationalisation - heaven forbid, I happen to be a capitalist and entrepreneur. What I would advocate is more robust financial regulation.

Maybe I'm just old school, but I find it incredulous that a 20 year old law graduate with no industry experience can form an energy supply company with just £100 and by June 2019 has a company with revenues of nearly £360M annually and accumulated losses of over £27 million, and owes its' customers £45 million. His total loss when the company fails? - £100.

If the Government backs these companies with loans or guarantees and they still fail, then there is a cost to the government - yes the taxpayer - we all pay the price for lack of financial regulation.

[Deleted User]

ihatetrump said:

I bet that you are glad that you have got that off your chest. We could always go back to Nationalised energy suppliers with two tariffs: one for electricity and another for gas.

PS. There is no cost to Government of energy supplier failures. HMRC and Ofgem get first dibs on the supplier’s assets and consumers end up paying for any costs levied by the SoLR.

No where in my post did I advocate nationalisation - heaven forbid, I happen to be a capitalist and entrepreneur. What I would advocate is more robust financial regulation.

Maybe I'm just old school, but I find it incredulous that a 20 year old law graduate with no industry experience can form an energy supply company with just £100 and by June 2019 has a company with revenues of nearly £360M annually and accumulated losses of over £27 million, and owes its' customers £45 million. His total loss when the company fails? - £100.

If the Government backs these companies with loans or guarantees and they still fail, then there is a cost to the government - yes the taxpayer - we all pay the price for lack of financial regulation.

Please explain ‘robust financial regulation’. Octopus Energy has a backer with very deep pockets but even it made a loss last year - mainly due to the costs of future expansion. Airlines which are probably the most regulated businesses in the World can and do fail if they are hit by unexpectedly high fuel prices. What you are suggesting would require energy companies to deposit £Ms in some form of bond. The cost of these bonds would be reflected in higher consumer bills. It would also need an army of compliance officers.

Sadly, ML et al have for years advocated switching to the cheapest deals on the market and, Lemming like, consumers have followed this advice in their droves. If people chose a supplier with unusually low prices, then they really shouldn’t be surprised when their chosen supplier is the first to go under. That said, this crisis is unusual: many well run suppliers will also go under because they failed to foresee a 5 fold increase in wholesale gas prices or a shortage of wind.

tim_p

I can see ihatetrumps point on this. Presumably the 20 yr old (or whatever he is now) and his father won’t have any money worries around fuel poverty given the millions that have passed through their hands, yet the taxpayer foots the bill for all those millions lost including every penny that got siphoned off along the way. 

ihatetrump

@QrizB has already come up with one potential solution - ring fence customer advance payments so they can't be used to finance the business - really the way some (not all) companies are financed at present is not a lot dissimilar to a pyramid or Ponzi scheme. 

The airline and travel industry post bonds to protect customer deposits - not so with Energy Suppliers.

In Avro's  Balance Sheet at June 2019, they have £18.5M in the bank and owe their customers (through advance payments) nearly £46M.Their next accounts to June 2020 are due to be filed in the next 7 days - that will give a more up to date picture, I wouldn't expect them to show anything that would give me comfort.

Octopus is a totally different kettle of fish - parent company is Octopus Capital - who have retained earnings of nearly £280M - backed up with Net Assets of nearly £323M. They can afford to sustain some annual losses. In 2019 they lost £14M (When Avro lost £27M). In 2020 they lost £26M - Avro have yet to file.

Octopus has share capital of £466,000,000 - Avro £100 - enough said?

Sadly, ML et al have for years advocated switching to the cheapest deals on the market and, Lemming like, consumers have followed this advice in their droves. If people chose a supplier with unusually low prices, then they really shouldn’t be surprised when their chosen supplier is the first to go under. That said, this crisis is unusual: many well run suppliers will also go under because they failed to foresee a 5 fold increase in wholesale gas prices or a shortage of wind.

Yes - very true - couldn't agree more.

Well (financially) Structured Companies can usually weather market downturns, those not well structured have been built on sand and are destined to collapse when the tide turns against them.

YoghurtCloset

I agree that there is not enough financial regulation. With banks the FCA does a 'stress test' with them, so they must prove that should another financial crisis happen they don't need to be bailed out like RBS in 2008 or a 'run on the bank' happen like Northern Rock.
It is the same if you apply for a mortgage, whilst interest rates are at record lows, as a customer you are 'stress tested' to see if you can still afford repayments should interest rates increase by 7%.

It doesn't appear that OFGEM do anything like this meaning the firms go bust and customers are moved to a bigger firm under the solr process, or now potentially be bailed out by the government.