End of the road for Extra Energy 

Birmingham based small energy supplier, Extra Energy, announced it had ceased trading on 21st November 2018.Supplying around 108,000 domestic customers and 21,000 business customers, the demise of Extra Energy left a lot of people wondering what to do next.

Thankfully Ofgem’s safety net quickly came into play. Philippa Pickford, Ofgem’s interim director for future retail markets, commented,

“If you are an Extra Energy customer, under our safety net, we will make sure your energy supplies are secure. We will also ensure that domestic customers’ credit balances are protected.”

In their announcement, Extra Energy claimed it was the recent price cap introduced by Ofgem which had contributed to its failure. They said that capping customer’s bills was ‘making the market unviable’.

Their Chief Executive, Nick Read, said that the company had attempted to cut costs through restructuring, mergers and other measures, but that they could see no long term investment opportunity in the UK anymore.

Extra Energy became the sixth small energy supplier to fail in 2018 and were quickly followed by Spark Energy who brought that total to seven. It is estimated that more than half a million customers have been affected by these company collapses.

Ofgem quickly moved to appoint Scottish Power to take on the customers of Extra Energy. They have taken responsibility for these accounts from the 25th November 2018.

What’s going on with small energy firms?

It’s been the worst year in history for UK energy companies, with Extra Energy and Spark Energy becoming the sixth and seventh operators to fail in 2018. Suppliers are facing a cocktail of risks, and cracks are starting to become apparent in the business models of many firms.

A number of factors have combined to make the energy industry a challenging place to be, including:

• Wholesale prices : Going into winter, the wholesale prices of gas and power are always pretty aggressive. Delays to tariff adjustments could leave suppliers in a state of poor cashflow.
  
• The energy price cap : Ofgem themselves have admitted that the cap will probably need to be raised when they review it in the spring. With the cap in place, there is a potential three month lag between wholesale costs going up and the limit being adjusted.
  
• Tariff wars : Smaller energy suppliers know they need to stay at the top of the comparison tables in order to boost their client acquisition. This can lead to margins being made too slim to be sustainable, particularly when other issues come into play.
  
• ROCs : Both Extra Energy and Spark Energy had an issue with their RO buyout payments, and in total there is around £59m‘missing’ from the fund. No supplier would willingly fail to meet their obligations, showing just how difficult cashflow must have been. The shortfall is leading to reduced recycling of funds back to suppliers, spreading cashflow issues around the wider industry too.
  
• ECO : Currently, suppliers with over250,000 accounts have to pay into ECO, but that number is being lowered to200,000 by next April and to 150,000 by April 2020. This could see more suppliers struggling to find the cash to make their contributions.
  

It’s not just small energy suppliers who are being squeezed either. As the bottom is struggling, so is the top, and even the Big Six are being forced to revise business models to cope with the challenges.

Winter 2018 is shaping up to be a watershed moment for the UK energy industry. Suppliers large and small will need to work hard to come out of this financial year unscathed.

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