The energy supply market in Great Britain was thrown into turmoil in 2021, with 28 suppliers, serving circa 4.4 million customers, ceasing trading and others falling into financial difficulties. The issues, caused by unprecedented increases in natural gas and electricity prices, have put the spotlight on aspects of the regulatory oversight, the sustainability of suppliers' business models and their wholesale procurement strategies.
Following an economic contraction in 2020, prices for many commodities – including natural gas in Europe and Asia - rallied in 2021. In Britain, the steep increase in gas prices directly translated into an increase in electricity prices, as a significant portion of electricity was generated through gas power plants as wind farms underperformed in the same period.
Britain's energy suppliers faced a steep increase in wholesale procurement costs, but found themselves unable to fully pass this cost increase to their customers as some energy tariffs are capped by the regulator's - Ofgem's - Default Tariff Cap. This effectively forced them to sell at a loss to part of their customers.
Ofgem has taken steps to consult on a reform of the Default Tariff Cap and market participants are discussing additional regulatory measures, such as liquidity and capital adequacy requirements, similar to those applicable to the banking sector.
We anticipate a need to reform the sector, to ensure that customers are protected, whilst forcing energy companies to implement robust risk management and hedging processes and concomitantly allowing them to earn a fair reward for the risks they are managing.
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