The energy market has been volatile and unpredictable, leaving energy suppliers dealing with significant challenges, including adjusting to the constant change in regulations. With wholesale energy prices soaring and fluctuating, it became impossible for energy providers to predict and manage their operational costs. This ultimately impacted their ability to remain competitive and sustainable as energy suppliers.
The energy regulator, Ofgem, introduced new rules to prevent energy suppliers from going bust. These new rules call for financial resilience from energy suppliers, with the expectation of putting their capital at risk, making them more resilient to any sudden changes in market conditions.
Even with this level of protection, many energy suppliers face the challenge of regulatory obstacles, financing issues, and customer acquisition. What are the main reasons energy suppliers are going out of business, and what should you do if your provider goes bust?
Increase in Wholesale Energy Costs
The massive increase and fluctuations in wholesale energy costs caused significant trading challenges for many energy suppliers. This especially impacted smaller, independent energy suppliers. It meant that energy suppliers were paying dramatically higher costs that could not be passed on to consumers due to fixed-price energy contracts and domestic price caps.
For smaller energy suppliers with reduced profit margins, the increased price of wholesale energy costs impacted their operational costs. This left many energy suppliers that are no longer in business with less capital to hedge their wholesale energy purchases against the much higher wholesale prices.
Retail Price Cap Oversight
Ofgem and the government introduced the energy price cap to protect domestic consumers from unpredictable price hikes. The implementation of the energy price cap meant that there was a maximum price that energy suppliers could charge households. However, after Ofgem set the price cap in October 2021, the wholesale costs increased drastically.
This caused financial strain for energy suppliers who failed to buy energy for that period. They were not only faced with purchasing gas at much higher costs, but it also meant that they could not sell at a higher price due to the price cap.
Additionally, the price cap limited energy suppliers’ revenue, forcing them to sell at a loss. As a result of increased wholesale costs and the price cap, over 12 energy suppliers closed their doors at the end of 2021. This ultimately led Ofgem to review and adjust the price cap every three months to avoid energy suppliers from going bust.
The government has charges to support consumers and promote using renewable energy sources, such as the Renewables Obligation (RO). Failure to comply with energy regulations can result in fines and hefty legal penalties. This knocked the wind out of some energy suppliers’ financial health, impacting their profitability and forcing them to cease trading or close their doors.
Stricter Financial Checks by Ofgem
Ofgem introduced strict measures to prevent energy suppliers from going out of business. The regulator aims to ensure that energy suppliers are financially stable should the energy market face disruption. Stricter financial checks were also included to prevent energy suppliers from increasing direct debits to recuperate losses.
While increasing direct debits are allowed, Ofgem’s stricter rules curbed the amount suppliers can charge customers. This measure prevents credit balances from becoming too high. As a result of the more stringent measures in place, at least 30 energy suppliers closed their doors in 2021 and 2022.
What To Do If Your Energy Supplier Goes Out of Business
Ofgem has put a safety net in place to protect consumers if their energy supplier ceases trading or closes its doors for good. This will ensure that consumers experience no disruption to their gas and electricity supply while ensuring you are switched to a new supplier. Rest assured, you will be notified if your energy supplier goes bust.
However, Ofgem suggests doing the following:
- Take a meter reading to ensure your final energy bill is accurate.
- Wait on Ofgem: As tempting as it is to switch to a new supplier, It will automatically appoint a new energy supplier within 72 hours of your supplier going out of business. This will prevent a disruption in your supply.
- Avoid cancelling direct debits: Your new energy supplier will explain how they will work with your account, including direct debit arrangements.
- Negotiate a new contract: Once your new supplier has contacted you, negotiate a new contract plan that works for your budget and needs. If you are unhappy with the energy provider, you can switch to a new one. Use comparison sites or work with reputable energy brokers like Utility Bidder that can negotiate better rates for your business energy.
The energy market is complex, interconnected, and unpredictable. For various reasons, many energy suppliers have closed their doors. However, Ofgem has set rules to protect consumers against price hikes and stricture measures to prevent energy suppliers from going out of business. If you find your energy supplier has gone out of business, don’t panic. Ofgem will contact you and provide you with a new supplier.
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