Small Energy Companies Run Out of Steam

What’s Going On Here?

Ofgem has introduced strict requirements on new energy companies entering into the market due to an outbreak of insolvency declarations for small suppliers.


What Does This Mean?

Ofgem (The Office of Gas and Electricity Markets) is the government body responsible for regulating the companies which run the gas and electricity networks. This regulatory change means that it will become significantly harder for new energy suppliers to enter the market, as companies will have to prove to Ofgem that they have the financial resources available to operate for 12 months and show that the company has adequate customer service systems in place. These new requirements have been introduced in the wake of two energy firms (Extra Energy and Spark Energy) declaring bankruptcy. These are the sixth and seventh UK energy suppliers to go bankrupt in 2018, both having cited an inability to pay money owed to Ofgem.

Why Should Firms Care?

This highlights the inherent tension in competition law; trying to balance the interests of smaller companies, who should be given a fair chance in the market, and the competing interests of larger companies, who seek to increase their power and consumers who need to know that the companies they deal with can effectively operate. 

With seven energy suppliers collapsing this year, hundreds of thousands of customers have been affected resulting in a huge loss of trust in small energy companies. This, combined with the fact that it will now be very difficult to enter the UK energy market, means that there may be significant consolidation in the UK energy market. The ‘big six’ firms will be able to expand to fill the gap the smaller firms have left and approach other firms with a view to their sale if they are near insolvency. This may mean the ‘big six’ are able to regain the market share they have lost over the last few years; they held 98% of the market share in 2013 which dropped to around 75% in 2018. This monopolisation clearly shows how the key principles of competition law are not easily reconciled. 

Further, a number of small suppliers are late paying their renewable energy subsidies (due on October 31st) and as such there may be more bankruptcies before the year is out. Renewable energy firms who are relying upon subsidies from Ofgem will also find themselves in a tricky position. Ofgem has announced a significant deficit of £102.9 million. Most of the missing funds were due to be paid by small suppliers. Renewable energy projects will be endangered and firms will be searching for alternative sources of funding.

Report written by Harry B.

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