Energy bailout? Scottish Power says not so fast

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With households struggling to pay their energy bills in response to the coronavirus lockdown, suppliers are asking for an energy bailout to help them support their most vulnerable customers. Find out why some experts say this is a bad idea.

For up-to-date information regarding the development of the coronavirus (COVID-19) pandemic, consult official sources like the World Health Organization and the UK government.

Energy leader Scottish Power has advised against an energy bailout for UK gas and electricity providers as companies brace to take a financial hit in response to the coronavirus pandemic.

Energy UK, the trade body for UK energy suppliers, has asked the Department of Business, Energy and Industrial Strategy (BEIS) to create a loan scheme worth £100 million per month to help suppliers support customers struggling to pay their gas and electricity bills during this difficult time.

Since BEIS will likely want to know the precise financial impact of the coronavirus pandemic on each supplier before providing assistance, a response is not likely to happen anytime soon. However, the possibility of an energy bailout is already facing a backlash.

Why are executives against an energy bailout?

Keith Anderson, chief executive of Scottish Power, expressed concerns to the Financial Times about energy companies “screaming for a bailout” so early on in the coronavirus pandemic.

“We need to wait and see what is happening, wait and see what comes through the system, wait and see how customers react,” said Mr Anderson. “There’s been a few panic calls for action and immediate response . . . and I think we need to take our time and reflect,” he continued.

Mr Anderson pointed out that when comparing the energy sector to other industries that are suffering far worse, gas and electricity suppliers “should be at the back of the queue” for help.

The UK Government has already guaranteed a £330 billion loan package to help the nation’s businesses, including energy providers, survive during this crisis. So why do some energy suppliers think they should receive additional funding?

Octopus Energy chief executive Greg Jackson proposed that instead of the government bailing out energy companies, the money should go directly to consumers.

He expressed concern that if “government money goes to suppliers instead of directly to customers, those companies can choose what they want to do with it. Some will decide to help out customers, but some will spend it on other things.”

Good Energy CEO Juliet Davenport also expressed disapproval of an energy bailout. “There will be some businesses that were not doing well already and coronavirus is just giving them an opportunity to get some free cash. That’s probably a little bit harsh but I would say there would be some unscrupulous businesses out there definitely,” she told Utility Week.

It is important to keep in mind that these executives may be against an energy bailout because they see an opportunity for their companies to increase in market share. Companies that are financially weak may go bust without additional government support, thus consolidating the market and leaving thousands of customers to then be taken on by their own companies.

Will some providers abuse an energy bailout?

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While the majority of energy providers would likely use this government loan responsibly, these concerns are not unfounded. Over 20 energy suppliers in the UK have closed in the past three years. There is a fair amount of providers that are financially unstable and are not in a position to support their customers during this difficult time.

Since the market is privatised, Ofgem and BEIS have limited means to hold suppliers accountable with an emergency energy bailout. Instead of supporting their vulnerable customers who need it most, suppliers that had problems before the lockdown may be tempted to misuse the energy bailout funds.

Let’s have a look at just some of the suppliers that have recently had liquidity problems:

  1. Gnergy was the first supplier in 2020 to cease trading after failing to pay over £670,000 plus interest into Ofgem’s Renewables Obligation (RO) buy-out fund that supports sustainable energy generation. Its nearly 9,000 customers were taken on by Bulb Energy in March.
  2. Nabuh Energy almost had its license revoked last year after, like Gnergy, it failed to come up with the money to pay its RO commitment to Ofgem on time. The company was able to scrape by after it finally paid almost £900,000 to the energy regulator. Last year, the provider ranked dead last in Citizens Advice’s ranking of 40 energy suppliers.
  3. Robin Hood Energy had to borrow over £9 million to stabilize its finances last year. The supplier failed to make its renewable power payments on time to Ofgem and almost had its license revoked. Notice a pattern here? Luckily for the provider, it was saved with a bailout from Nottingham City Council.
  4. Spark Energy's supply license was revoked in 2018 after it also failed to pay several million pounds to the RO buy-out fund. The provider owed around £22 million to its customers in credit at the time of closing. For a company that claimed to have a turnover of £140 million, what was it doing with all that cash?
  5. Toto Energy is yet another company that went bust after failing to make its RO payments because it was in over £4.5 million of debt. Ofgem also reported receiving a significant amount of complaints from Toto Energy customers. Before closing, the company had recently taken on customers from Solarplicity after it ceased trading. Those customers had to again go through getting switched over to another provider.

What is the Renewables Obligation (RO)? UK energy providers must provide evidence that they source a required proportion of energy from renewable sources, like wind and solar power, through a Renewables Obligation Certificate (ROC) to Ofgem. If they can not provide the certificate, they must pay into a renewable buy-out fund.

Authorities are not currently equipped to make sure suppliers use the best practices with the money from an energy bailout. Customers need a supplier they can trust to keep the lights on during this time of uncertainty instead of using the funds to potentially cover their green energy tax to Ofgem.

The energy sector already has a bad reputation across the nation, with many UK residents feeling they are taken advantage of financially. The Labour Party even deemed it part of “rip-off Britain” and announced its plans to nationalise the energy industry.

With nearly 60 energy suppliers across the nation, you should not have to tolerate being with a provider that can’t support you during this crisis. Give us a call at Selectra on 0203 936 0059, and one of our energy advisors will make sure that you’re with the best provider to suit your needs.

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