Two business models heavily pursued by energy suppliers exposed them to supply or demand shocks and led to market instability.
That’s one of the findings of a new independent review on the causes behind the failures of 30 energy suppliers in recent months.
Ofgem had appointed consultants from the economics and finance consultancy Oxera to explore what caused these collapses and the lessons from them.
Firstly, the report identified a ‘growth model’ under which companies relied on receiving customer balances before delivering services.
This structure saw businesses use customers’ prepayments to fund their ongoing costs.
Secondly, the consultancy found that some energy suppliers followed a ‘timing model’, under which suppliers “undercut hedged rivals by entering at favourable moments in the market, entering into a long-term supply agreement with customers based on prevailing low spot rates and reducing costs by reducing the coverage or duration of hedging arrangements”.
A few days ago, the boss of a fintech startup told ELN that fragile financial foundations were a “major catalyst” for failed UK energy firms in 2021.
The authors of the report concluded that a number of suppliers that would go on to fail shared some financial characteristics.
They identified negative equity balances in the years leading up to suppliers’ failure, poor liquidity and an over-reliance on their customers’ credit balances to finance their operations.