The REAL reason so many small energy suppliers have failed - it was inevitable.

ihatetrump

I know many won't agree with the following, but please read carefully and please show me where I'm wrong.

Yes, we all know that there is a global energy crisis that has hastened the demise of so many small energy suppliers, but for me, this is not that the real reason so many have failed?

Blaming the current energy supply crisis is an absolute cop out - so many of these companies were set up to eventually fail.

Almost without exception, virtually all of the failed suppliers have many  things in common (besides their inability to trade through the current crisis) - consider the following:

1. Almost without exception, these suppliers were established only in the last few years as small limited companies, with a very limited (some would say minute) share capital - usually £100 or less - yes, even the largest failure to date - AVRO Energy. For those of you who do not understand corporate finance and company law (and why should you?), it's not a crime to set up a company with such a small amount of capital - but this is the amount of their own cash that the owners of a business are putting at risk should the company fail. The owners (shareholders) of these small suppliers were in most cases also the Directors of the business.
2. Setting up any company with such a small share capital normally means that the Directors have alternative sources of funds in addition to the share capital to get the business established so that it can start trading - usually a bank loan or Directors' loans. Not so with almost all of the failed suppliers - in all of the balance sheets of the failed suppliers (filed on Companies House) I have yet to see even one that managed to secure bank lending - banks don't usually lend to businesses with a poor or unsustainable or even non-existent business plan. There's no evidence either of the Directors/Shareholders putting any of their own money into these businesses - WHY?
3. The reason they didn't put any of their own money in was really quite simple - they didn't have to - YOU & I (usually unknowingly) acted as their bank and lent them the money - YES - customer advance payments funded these businesses - ALMOST EXCLUSIVELY. These customer advance payments served as an almost bottomless pit of money which these businesses could call upon whenever they needed to.
4. There was never any risk for these customer advance payments (they were always secure through OFGEM terms of trade) - and the Shareholders/Directors of these businesses knew that only too well.
5. Even in the good years, many (not all) of these businesses failed to make a profit - why should they? they attracted new customers with energy prices that were too good for many of us (including me) to pass up on - often selling at their own cost (check out AVRO again - almost 100% cost of sales). It didn't matter that their revenues weren't enough to cover their costs, they could always use customer advance payments to fund their growing yet unprofitable businesses - especially with so many new customers joining and adding to their cash pile - more fresh blood to the feeding frenzy.
6. Some of them even had the gall to use some of their surplus cash to lend (unsecured and interest free!) to companies also controlled by their Directors but in totally unrelated industries (again check out AVRO Energy and what their CEO Jake Brown did) - or even pay 'fake' expenses to their own companies.

These companies were able to go merrily along milking more and more cash without any OFGEM oversight or financial regulation. They were often defined as 'too small' to be required to have an independent audit - and so they didn't.

Even when some of these suppliers got large enough to be required to have an audit, they were appear to have been frequently able to pull the 'wool over the eyes' of the auditors when they were required to justify the ability of the company to continue trading even in the face of sustained and accumulating losses.- they did this by producing forecasts that showed they still had plenty of cash (Yes yours and mine!) and could pay all their suppliers.

It is illegal for a company to trade in the UK while insolvent and the Directors (but not the Shareholders) can be held personally liable - but it is rarely a process that is acted upon by the regulatory authorities.

What none of these failed suppliers appear to have reasonably considered was their ability, if required, to repay ALL of their creditors - which would include all the customer advance payments - because of the sustained and accumulating trading losses, none of these companies would ever have had the cash to repay ALL of their creditors if required. It was only because of a continued growth in their customer bases (through offering artificially low energy rates) that they were able to generate the cash required to continue trading and to pay their wholesale energy suppliers. They all (or at least most of them) appear to have finally been caught out by their inability to continue fuelling their cash supply (advance customer payments) to match the cash requirements of paying for their wholesale suppliers. 

The message is and always should have been clear - if the costs of running your business exceed the revenues it generates, then you lose money and unless you have a business that is well capitalised (Shareholder investment) or a legitimate source of business funding then the business is going to fail - and to be perfectly clear, borrowing from your customers without their knowledge is not a legitimate source of business funding.

Deregulation and government encouragement of competition fueled this crisis without any apparent forethought as to the oversight and regulation that may be required. How else can it be explained that a company such as AVRO can be allowed to trade up to a turnover approaching £400 Million as far back as 2019, have accumulated losses of over  £27M and yet the shareholders (Jake Brown and his Dad) only put £100 of their own money in to the business? You and I are already picking up the pieces through the cost of the increased tariffs that are now in the market - Jake and his Dad lost 100 quid (big deal!) but at the same time pocketed millions through fees and loans that will never be repaid.

wittynamegoeshere

The biggest annoyance to me is that I never set up an energy company, I would have done if I'd known it was so easy and almost completely risk-free.

wakeupalarm

Yes, it's all been a big con, there is no real competition, it's just made up. These suppliers aren't selling energy, they are just unnecessary pen pusher middlemen.  They take on no risk and retail customers are left picking up their failures.

I have a feeling the government isn't intervening to save these firms going bust, so that they can reset the supposed market, by letting their chums and party donners set up new energy companies once this carnage is over.

Who would go with a smaller energy company in future when you know the directors are just filling their own and families bank accounts with customers money and letting other customers pick up the cost.

Stick with the big 6 or better still just merge them into one.

MWT

With respect, there is nothing surprising or new in your post, this is why many of us have been predicting failures this winter for many months now.

I wouldn't overly focus on the low shareholder funds, that is essentially meaningless and common for a start-up.

Nor is it useful to critique a lack of ability to repay all creditors regardless of their due date, many businesses would fail on that point without being poorly run, nor is it a valid criticism to focus on the lack of audit, that is entirely normal for smaller UK companies in general.

I would expect the administrators to look at the use of fund s involving related parties where appropriate, and that is something we will have to wait a while to hear more about, especially where such payments have occurred in recent months or where they were outside the normal business of the company.

Thrugelmir

wakeupalarm said:

I have a feeling the government isn't intervening to save these firms going bust, so that they can reset the supposed market, by letting their chums and party donners set up new energy companies once this carnage is over.

As a taxpayer why should I pick up the tab?   Not as if there's any ability to control wider global events. 

[Deleted User]

I can that the OP is ticked off.  Sorry but I quit about halfway through.  I'm sure you are right though.  

The only thing I would say is that most small and large suppliers are now expecting payments upfront (at least on DD).  When I switched to Eon Next on 1st October, the first DD went out on the same day.  I know with Avro the first DD went out on switch day -10!  I don't really mind this, but what I would and do object to is conflating DD's using a bogus excuse to do so especially when folk are in a healthy credit situation and/or there is enough credit to get out over the winter months.

bagand96

I phrase I read on the Neon Reef thread the other day:

"selling £10 notes for £5"

Which sums it up really with a lot of these small suppliers. Even before the wholesale rates rocketed. I guess the business plan is "draw people in with cheap rates, then once we've reached a critical mass we can start to raise the prices and move into profit"

Only problem is they attract the serial switchers. As soon as the rates become less competitive we all move on to the next cheap upstart! 

booshya

ihatetrump said:

I know many won't agree with the following, but please read carefully and please show me where I'm wrong.

Yes, we all know that there is a global energy crisis that has hastened the demise of so many small energy suppliers, but for me, this is not that the real reason so many have failed?

Blaming the current energy supply crisis is an absolute cop out - so many of these companies were set up to eventually fail.

Almost without exception, virtually all of the failed suppliers have many  things in common (besides their inability to trade through the current crisis) - consider the following:

1. Almost without exception, these suppliers were established only in the last few years as small limited companies, with a very limited (some would say minute) share capital - usually £100 or less - yes, even the largest failure to date - AVRO Energy. For those of you who do not understand corporate finance and company law (and why should you?), it's not a crime to set up a company with such a small amount of capital - but this is the amount of their own cash that the owners of a business are putting at risk should the company fail. The owners (shareholders) of these small suppliers were in most cases also the Directors of the business.
2. Setting up any company with such a small share capital normally means that the Directors have alternative sources of funds in addition to the share capital to get the business established so that it can start trading - usually a bank loan or Directors' loans. Not so with almost all of the failed suppliers - in all of the balance sheets of the failed suppliers (filed on Companies House) I have yet to see even one that managed to secure bank lending - banks don't usually lend to businesses with a poor or unsustainable or even non-existent business plan. There's no evidence either of the Directors/Shareholders putting any of their own money into these businesses - WHY?
3. The reason they didn't put any of their own money in was really quite simple - they didn't have to - YOU & I (usually unknowingly) acted as their bank and lent them the money - YES - customer advance payments funded these businesses - ALMOST EXCLUSIVELY. These customer advance payments served as an almost bottomless pit of money which these businesses could call upon whenever they needed to.
4. There was never any risk for these customer advance payments (they were always secure through OFGEM terms of trade) - and the Shareholders/Directors of these businesses knew that only too well.
5. Even in the good years, many (not all) of these businesses failed to make a profit - why should they? they attracted new customers with energy prices that were too good for many of us (including me) to pass up on - often selling at their own cost (check out AVRO again - almost 100% cost of sales). It didn't matter that their revenues weren't enough to cover their costs, they could always use customer advance payments to fund their growing yet unprofitable businesses - especially with so many new customers joining and adding to their cash pile - more fresh blood to the feeding frenzy.
6. Some of them even had the gall to use some of their surplus cash to lend (unsecured and interest free!) to companies also controlled by their Directors but in totally unrelated industries (again check out AVRO Energy and what their CEO Jake Brown did) - or even pay 'fake' expenses to their own companies.

These companies were able to go merrily along milking more and more cash without any OFGEM oversight or financial regulation. They were often defined as 'too small' to be required to have an independent audit - and so they didn't.

Even when some of these suppliers got large enough to be required to have an audit, they were appear to have been frequently able to pull the 'wool over the eyes' of the auditors when they were required to justify the ability of the company to continue trading even in the face of sustained and accumulating losses.- they did this by producing forecasts that showed they still had plenty of cash (Yes yours and mine!) and could pay all their suppliers.

It is illegal for a company to trade in the UK while insolvent and the Directors (but not the Shareholders) can be held personally liable - but it is rarely a process that is acted upon by the regulatory authorities.

What none of these failed suppliers appear to have reasonably considered was their ability, if required, to repay ALL of their creditors - which would include all the customer advance payments - because of the sustained and accumulating trading losses, none of these companies would ever have had the cash to repay ALL of their creditors if required. It was only because of a continued growth in their customer bases (through offering artificially low energy rates) that they were able to generate the cash required to continue trading and to pay their wholesale energy suppliers. They all (or at least most of them) appear to have finally been caught out by their inability to continue fuelling their cash supply (advance customer payments) to match the cash requirements of paying for their wholesale suppliers. 

The message is and always should have been clear - if the costs of running your business exceed the revenues it generates, then you lose money and unless you have a business that is well capitalised (Shareholder investment) or a legitimate source of business funding then the business is going to fail - and to be perfectly clear, borrowing from your customers without their knowledge is not a legitimate source of business funding.

Deregulation and government encouragement of competition fueled this crisis without any apparent forethought as to the oversight and regulation that may be required. How else can it be explained that a company such as AVRO can be allowed to trade up to a turnover approaching £400 Million as far back as 2019, have accumulated losses of over  £27M and yet the shareholders (Jake Brown and his Dad) only put £100 of their own money in to the business? You and I are already picking up the pieces through the cost of the increased tariffs that are now in the market - Jake and his Dad lost 100 quid (big deal!) but at the same time pocketed millions through fees and loans that will never be repaid.

nPower

... and you may want to include E.on & SSE to that list according to some (since 6 characters was not enough)

How long ago was Octopus established?

Octopus - incorporated 2014, share capital on incorporation £1.00

wakeupalarm

Customers credit balances should never have been allowed to be used as working capital for these energy firms.  It should have been ringfenced and protected.  If they wanted funding for their activities, they should have put there own money in, or taken out loans to finance it, just like any other business has to.  This is a failure of regulation.

Remember we all end up paying for this mess because the cost of all of this is added onto our bills.  The directors or owners are not the ones paying for it, we are.  It was a no risk investment for the owners and directors.  Privatisation of the profits, socialisation of the losses.  They live the good life and when they go belly up, we pay for it.

MWT

wakeupalarm said:

Customers credit balances should never have been allowed to be used as working capital for these energy firms.  It should have been ringfenced and protected.  If they wanted funding for their activities, they should have put there own money in, or taken out loans to finance it, just like any other business has to.  This is a failure of regulation.

The error is in not stamping down on the creativity that was employed by some, there is nothing intrinsically wrong in having people pay in advance for something that needs to be bought in advance (at least in part) and that the customer is already consuming...

[Deleted User]

Two other factors.

1) Most, if not all, of the large suppliers are foreign owned. This is the problem with selling off the ‘family silverware’ - you can only sell it off once. If you want to buy it back, the price will have gone up. Furthermore, if there is a problem, when push comes to shove, a multinational will always prioritise its domestic customer base, and others will be pushed to the back of the queue. Those customers are at the mercy of the vagaries of the market, and factors they have no control over whatsoever. Not to mention the fact that the EU seems determined to punish us for Brexit, with France in particular having seen their !!!!!!. 

2) Geo-political factors. Apparently, Putin is amassing troops on the Russian border with Ukraine, or at least leaving them there after ‘exercises’. Meanwhile, he is manipulating gas supplies to Europe, and in particular Germany and Poland, via Gazprom, and seemingly trying to blackmail them into using his new, super duper, gas pipeline, which will make the situation even worse. 

What is the British customer supposed to do in the face of this?