The U.K. has one of the most deregulated energy markets in the world. Customers can buy natural gas for their homes directly from large suppliers or smaller ones who purchase gas from the wholesale market and sell it on. The system works fine in normal conditions but was breaking down in September under pressure from record prices caused by supply disruptions in Europe and surging post-pandemic global demand. One big question is who ends up footing the bill.

1. In what way are things breaking down?

Two U.K. energy suppliers with more than half a million customers went out of business in mid-September, part of a series of companies failing this year. The largest U.K. energy suppliers are seeking a multibillion-pound emergency support package from the government to help, including the creation of a so-called bad bank to absorb potentially unprofitable customers.

2. Why can’t the suppliers just raise prices?

The U.K. regulator, Ofgem, sets a cap for energy prices for consumers on default tariffs and reviews it twice a year. Bills were already set to go up for households from Oct. 1 after Ofgem’s most recent cap increase. (Rising bills were likely to put upward pressure on inflation in the U.K., which unexpectedly leaped above the Bank of England’s 2% target in the past few months.) The smaller suppliers can profit by undercutting their larger rivals when prices in the wholesale market are lower than those locked in by suppliers to long-term contracts. When wholesale prices soar, as they have recently, the smaller companies are squeezed. 

3. What happens when a gas supplier goes bust?

In theory, Ofgem simply assigns customers of a failing supplier to another company. The solution works when those customers are profitable for a rival to take on but is tougher to impose when they bring losses. That’s why larger suppliers were seeking financial support from the government to ease the hit they were being asked to absorb. There were parallels to the global financial crisis a decade ago, when healthy banks were asked to help rescue failing rivals and separate institutions had to be set up to handle bad loans.

4. Why does the U.K. market work this way?

Deregulation of the market dates back to the Conservative government of Prime Minister Margaret Thatcher in the 1980s, part of a drive to reduce the role of government in the economy. The aim was to cut costs for consumers and give them more choice in their source of supply. During the past decade, the government has encouraged a large number of suppliers to enter the market, contributing to the current high level of competition.

5. Which gas suppliers are affected?

Utility Point, which sells gas and electricity to around 220,000 domestic customers, and People’s Energy, with about 350,000 domestic customers, announced they would stop operating, according to Ofgem. Utility Point’s customers were assigned to Electricite de France SA. Pfp Energy and Moneyplus Energy with a combined 94,000 customers both went out of business earlier in the month and Ofgem transferred their customers to Centrica Plc’s British Gas unit, which also took on customers of People’s Energy. The industry warned that of more than 50 companies in the sector, fewer than 20% could be in business by the end of 2021.

6. Is this just a U.K. issue?

No. Natural gas prices have surged in Europe as well, due in part to Russia, a key supplier, capping additional flows to the continent. With just a few weeks to go before the start of the heating season, storage sites in Europe were less than 72% filled, the lowest level for this time of year in more than a decade. European countries have stepped in to help consumers, with Spain easing the cost of energy bills and Greece announcing a subsidy for all households.

7. What are the possible solutions?

Other than the “bad bank” sought by energy suppliers, possible steps include the government underwriting debt for the largest suppliers if they incur losses from new customers, or for Ofgem itself to step in and run failing suppliers. The government could also shoulder some of the cost of taking on new households. It could also defer companies’ contributions toward renewables subsidies and security-of-supply measures. 

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