Energy Supplier Failures - more costs coming our way

Qyburn

Why do these failed suppliers run up such huge debts, are the not paying the producers? Our a Gov or Ofgem guarantee to their creditors? Normally if a company goes bust owing money that's just tough on the creditors, so there must be some reason why the Gov is picking up the tab in these cases.

[Deleted User]

Qyburn said:

Why do these failed suppliers run up such huge debts, are the not paying the producers? Our a Gov or Ofgem guarantee to their creditors? Normally if a company goes bust owing money that's just tough on the creditors, so there must be some reason why the Gov is picking up the tab in these cases.

Because the creditors (at least the ones that OFGEM cover with this charge) are customers who had credit balances with the supplier.  Do you thing we should just say "tough" about that?

Many went bust in part because the government cap on what they could charge did not cover their costs.

[Deleted User]

tough on the creditors, so there must be some reason why the Gov is picking up the tab in these cases.

Consumer credit balances are not protected by the Government: the Ofgem Consumer Levy provides this protection. That is, all consumers contribute to the failed supplier’s consumer credits that otherwise would realise just pennies in the £.

We also pay for any additional costs that a SoLR incurs providing energy and support to the SoLR’d consumers.

Bulb Energy was deemed to be a special case because of the number of customers. Control was handed over to a Special Administrator. For some unfathomable reason, the SA has not be allowed to hedge (buy future energy at an agreed price). It follows that as wholesale energy prices have risen so have Bulb Energy’s costs. The result of this is that Bulb Energy has been accruing very large losses over the past 12 months.

As I indicated in my original post, the Government response to the BEIS Select Committee’s suggestion that these losses/ costs should be covered by taxpayers has been dismissed. Bulb Energy’s losses will be passed on to all energy consumers.

Last month, the Government agreed that Octopus Energy would takeover Bulb Energy. However, other suppliers cried foul so the status quo ante prevails and Bulb Energy will continue to accrue losses until such time as the matter is resolved - and probably for many months to come.

Responsibility for the above mess sits within BEIS which was led by a recently sacked Chancellor. 

This probably gives a better explanation:

https://www.theguardian.com/business/2022/nov/17/bail-out-bust-energy-supplier-bulb-cost-taxpayers-65bn-octopus

inspectorperez

How disappointing that the new rules do not require stipulated capital parameters and do not ring fence customer credit balances.

There are already protocols in place in other sectors (legal profession/travel industry/insurance/financial.....) which provide this protection with rules and processes which have stood the test of time. Why does the government not see fit to apply a similar protocol to energy suppliers?

This has been a key flaw in the terms of reference for OFGEM throughout its stewardship of the utility industry IMO.

[Deleted User]

inspectorperez said:

How disappointing that the new rules do not require stipulated capital parameters and do not ring fence customer credit balances.

There are already protocols in place in other sectors (legal profession/travel industry/insurance/financial.....) which provide this protection with rules and processes which have stood the test of time. Why does the government not see fit to apply a similar protocol to energy suppliers?

This has been a key flaw in the terms of reference for OFGEM throughout its stewardship of the utility industry IMO.

Customer deposits are not ring-fenced in banks, which nobody seems to think is a problem despite the amount of money there being huge.  That's because of FSCS protection that customers are indirectly paying for.

Why, then, is it a problem that customer deposits are not ring-fenced at energy companies when there is an equivalent (and actually uncapped) protection provided by the SoLR process, again indirectly paid for by customers.

Making suppliers borrow money at market rates to use for hedging is only going to make things more expensive.  Not hedging at all would not make things cheaper.

It's even less likely that customers are going to suddenly decide to withdraw all their credit, and most credit balances are not withdrawn, they are simply used up.  Having the money ring-fenced in case it's needed to be withdrawn seems niche at best.

This is not the massive problem that some seem to think it is.

Chrysalis

Its getting even worse, Ofgem backing down now from ringfencing credit balances, do they learn anything?

Centrica called them irresponsible, Octopus supported the backdown, so Octopus why are you resisting ringfencing of credit balances?

https://www.bbc.co.uk/news/business-63756303

Chrysalis

QrizB said:

Chrysalis said:

We need to discourage high usage as well.

The goal is to recover £230 per household; over two years, that would be about 4p per kWh if added solely to electricity (2900 x 4p x 2 = £232 ).

If 34p/kWh for electricity isn't discouragement enough, I'm not sure increasing it to 38p/kWh will make much of a change.

The issue it shouldnt be a fixed amount per household.

It becomes disproportionally higher for lighter usage which to be frank is just weird (compared to other countries) and does nothing to discourage higher use.  It also disproportionally hits single adult households higher, those multi adults splitting their bills pay less per person on the recovery.  Doing the maths its in danger of becoming one of the mosts expensive taxes in the country for poor singletons.

A 4p increase on electric unit rate is far more desirable I think.  Way more affordable for lighter users.  If your annual electric cost is £600 a year, the £115 SC increase amounts to over 15% inflation.  Also why do they need it back in such a short period of time?

Chrysalis

Deleted_User said:

inspectorperez said:

How disappointing that the new rules do not require stipulated capital parameters and do not ring fence customer credit balances.

There are already protocols in place in other sectors (legal profession/travel industry/insurance/financial.....) which provide this protection with rules and processes which have stood the test of time. Why does the government not see fit to apply a similar protocol to energy suppliers?

This has been a key flaw in the terms of reference for OFGEM throughout its stewardship of the utility industry IMO.

Customer deposits are not ring-fenced in banks, which nobody seems to think is a problem despite the amount of money there being huge.  That's because of FSCS protection that customers are indirectly paying for.

Why, then, is it a problem that customer deposits are not ring-fenced at energy companies when there is an equivalent (and actually uncapped) protection provided by the SoLR process, again indirectly paid for by customers.

Making suppliers borrow money at market rates to use for hedging is only going to make things more expensive.  Not hedging at all would not make things cheaper.

It's even less likely that customers are going to suddenly decide to withdraw all their credit, and most credit balances are not withdrawn, they are simply used up.  Having the money ring-fenced in case it's needed to be withdrawn seems niche at best.

This is not the massive problem that some seem to think it is.

The SOLR process depending on point of view is horrible.  I replied in another post on why I dont like recovery via standing charges, but I will make this point to explain my point.

You could buy something and decide your means of recovery is to buy it again if its lost or broken, or you could insure for say 3% of its value as an annual cost.  The latter is far far cheaper than buying again, but of course is a 3% annual overhead that isnt there if you never need to replace it.  However to ringfence money you dont need to insure it, you just need to put it somewhere isolated to prevent it been touched other than to pay a due bill, which will have a cost far lower than 3%, it wouldnt even be 1%, so this costs excuse is just that, an excuse, its nonsense.

With something like credit balances and people setting up an energy supplier company that is nothing more then a reseller, then without ringfencing you just opening up to problems of the money been used for things it shouldnt be used for alongside the risk that these small resellers can just go !!!!!! over night which indeed did happen for several last year.

I really dont like this recent "oh lets just stick everything thats a result of bad decisions and risks on standing charges and is no problems".

At this point I want either ring fencing or no consumer protection of credit balances, make it the consumer choice, you can have a credit balance, but you on your own if the company does a runner.

Banks are very large entities that have ran for decades with much more regulation (even with all the deregulation that happened they much heavier regulated than energy suppliers), plus there is still a degree of ring fencing of deposits, its just not full ring fencing.

The energy sector needs massive reform, I did post it my list earlier, but edited it out to avoid arguments as sadly this forum has too many people who are resistant to changes in the industry.

If you are interested in the discussion and recognise changes are needed I will start a proposed reforms thread.

MattMattMattUK

Chrysalis said:

QrizB said:

Chrysalis said:

We need to discourage high usage as well.

The goal is to recover £230 per household; over two years, that would be about 4p per kWh if added solely to electricity (2900 x 4p x 2 = £232 ).

If 34p/kWh for electricity isn't discouragement enough, I'm not sure increasing it to 38p/kWh will make much of a change.

The issue it shouldnt be a fixed amount per household.

It becomes disproportionally higher for lighter usage which to be frank is just weird (compared to other countries) and does nothing to discourage higher use. 

It is not disproportionate though, every household with a connection pays for the protection every household gains under SoLR.

Chrysalis said:
It also disproportionally hits single adult households higher, those multi adults splitting their bills pay less per person on the recovery.  Doing the maths its in danger of becoming one of the mosts expensive taxes in the country for poor singletons.

Single adult households are far more likely to be electric only flats, therefore putting it on the unit rate of electricity would disproportionately impact single adult households. It is also not a tax and one can choose to live with others, so it is a mitigatable problem. 

Chrysalis said:

A 4p increase on electric unit rate is far more desirable I think.  Way more affordable for lighter users.  If your annual electric cost is £600 a year, the £115 SC increase amounts to over 15% inflation. 

Far less desirable for the reasons pointed out, the major one being all-electric households will be the ones who pay the vast majority of it, where as households with other fuel options will pay comparatively little. It also does not reflect the SoLR system where it works on a per connection basis, not on the number of people living at a premises, but protects the balance regardless.

Based on the cost workings that are on here and remember that they are not plans for the scheme, just people on here working out if the cost if spread over a period of time, or if it were put onto unit costs. However if it were put on the Standing Charge the 30p per day addition to the standing charge, which would recover the cost in two years (around 17p higher than the current Standing Charge, as there is already a SoLR component on it) would cost anyone with an electricity connection £109.50 per year. If it were put on the unit rate at an additional 4p per kWh it would cost a low user with solar panels around £58 per year, it would cost the average duel-fuel household around £115 per year and it would cost the average all-electric household £172 per year. If you complain of disproportionality then adding it to the unit rate is far more disproportionate than a scheme where every household pays the same.

Chrysalis said:
Also why do they need it back in such a short period of time?

"They" do not, there are suggestions, however if the amount is left for a longer period of time then more overall will need to be collected when adjusted for interest and inflation. It also means that it will likely still be paying it off when the next component arrives that needs to be added so we would end up in a perpetual cycle of additions to the costs which are never going to be repaid.

MattMattMattUK

Chrysalis said:

Deleted_User said:

inspectorperez said:

How disappointing that the new rules do not require stipulated capital parameters and do not ring fence customer credit balances.

There are already protocols in place in other sectors (legal profession/travel industry/insurance/financial.....) which provide this protection with rules and processes which have stood the test of time. Why does the government not see fit to apply a similar protocol to energy suppliers?

This has been a key flaw in the terms of reference for OFGEM throughout its stewardship of the utility industry IMO.

Customer deposits are not ring-fenced in banks, which nobody seems to think is a problem despite the amount of money there being huge.  That's because of FSCS protection that customers are indirectly paying for.

Why, then, is it a problem that customer deposits are not ring-fenced at energy companies when there is an equivalent (and actually uncapped) protection provided by the SoLR process, again indirectly paid for by customers.

Making suppliers borrow money at market rates to use for hedging is only going to make things more expensive.  Not hedging at all would not make things cheaper.

It's even less likely that customers are going to suddenly decide to withdraw all their credit, and most credit balances are not withdrawn, they are simply used up.  Having the money ring-fenced in case it's needed to be withdrawn seems niche at best.

This is not the massive problem that some seem to think it is.

The SOLR process depending on point of view is horrible.  I replied in another post on why I dont like recovery via standing charges, but I will make this point to explain my point.

You could buy something and decide your means of recovery is to buy it again if its lost or broken, or you could insure for say 3% of its value as an annual cost.  The latter is far far cheaper than buying again, but of course is a 3% annual overhead that isnt there if you never need to replace it.  However to ringfence money you dont need to insure it, you just need to put it somewhere isolated to prevent it been touched other than to pay a due bill, which will have a cost far lower than 3%, it wouldnt even be 1%, so this costs excuse is just that, an excuse, its nonsense.

With something like credit balances and people setting up an energy supplier company that is nothing more then a reseller, then without ringfencing you just opening up to problems of the money been used for things it shouldnt be used for alongside the risk that these small resellers can just go !!!!!! over night which indeed did happen for several last year.

As Sparky explained (and has explained many times before) energy providers currently use balances to hedge energy purchases as well as cover operating capital, if they are unable to use balances to do that because the money is ringfenced then they have to borrow on the capital markets, that has a cost which in normal times might be 1-3% and in current times could be 5%, that would significantly increase bills as it would need to be passed onto consumers, the average bill would need to rise by an additional 3-4%. The reason the energy providers went bust over the last few years was not how they used balances, it was because the government forced them to sell below cost, the collapse and the cost was caused by the government and that means taxpayers in one form or another, in this case in the form of those with energy bills, have to pick up the tab.

Bulb's administration costs got so high as whilst it was in special administration it was blocked from hedging by the government, so it was buying energy at spot rates which were considerably higher, the actual cost of covering the balances was around £1.8 billion, the rest of the £6.5 billion cost was due to the sheer incompetence of the government.

Chrysalis said:

I really dont like this recent "oh lets just stick everything thats a result of bad decisions and risks on standing charges and is no problems".

I really do not like it when people create straw man arguments.

Chrysalis said:

At this point I want either ring fencing or no consumer protection of credit balances, make it the consumer choice, you can have a credit balance, but you on your own if the company does a runner.

If you ring fence balances then bills will rise around 3-4% over where they would otherwise be. If you want to let consumers decide then bills will rise due to a combination of lower balances being held and the likely increase in bad debt, how much would be hard to quantify, but likely somewhere in the 1%-5% range.

Chrysalis said:

Banks are very large entities that have ran for decades with much more regulation (even with all the deregulation that happened they much heavier regulated than energy suppliers), plus there is still a degree of ring fencing of deposits, its just not full ring fencing.

There is, but that is not relevant, different sectors, different economics  and different arguments at play.

Chrysalis said:

The energy sector needs massive reform, I did post it my list earlier, but edited it out to avoid arguments as sadly this forum has too many people who are resistant to changes in the industry.

I doubt you will find anyone on here that disagrees with the notion that the industry needs reform, they just do not agree with the direction you want to take the reforms. Disagreeing with you does not mean that people do not want reform of the energy sector, however many have no desire to make things worse, not better.