British energy groups ask government for “bad bank” to overcome gas crisis

The UK’s biggest energy groups are calling on the government for a multibillion pound emergency program to help them survive the crisis triggered by high gas prices, including the creation of a ‘bad bank’ for help absorb potentially unprofitable clients from the bankruptcy of smaller rivals.

UK Business and Energy Secretary Kwasi Kwarteng held emergency talks with regulator Ofgem on Sunday and is due to meet energy suppliers face-to-face on Monday, amid fears that dozens of small businesses challenger will not go bankrupt in the coming weeks due to a record wholesale sale. natural gas and electricity costs.

People familiar with the weekend talks say that the largest energy providers are asking the government for substantial support to potentially absorb millions of customers of bankrupt companies given the scale of the crisis, and may require the creation of a “bad bank type Northern Rock ”to accommodate loss-making customers they cannot absorb.

While no decision has yet been made, proposals to government reveal the extent of support the industry believes is necessary to avoid causing long-term damage to the sector in the event of a large number of suppliers failing. energy in the coming weeks.

Kwarteng is reportedly reviewing the proposals and has accepted that meaningful intervention may be required, fearing existing contingency plans are not sufficient, with allies saying he is considering “C, D and other plans.” .

“We need a lot of contingency plans in place,” said an ally for the business secretary.

Most household bills are not enough to cover the cost of supplying new customers, making large energy companies extremely reluctant to accept them without government support, possibly including loans guaranteed by the state or government. other measures.

Discussions with the government had focused on three different approaches, confirmed four people familiar with the situation, while stressing that the ministers were “anxious not to reward failure”.

One suggestion concerns the formation of a “bad bank” that would accept loss-making customers from failing suppliers, in an approach reminiscent of the peak of the financial crisis in 2008, and which would be designed to avoid weakening otherwise strong companies. .

“It could get the industry through the current crisis period,” said a person familiar with the talks.

“By guaranteeing the problem at a bad bank, it would make it easier to resolve the immediate crisis and then take stock in the longer term. This would allow the government to deal with multiple failed vendors at the same time. “

A second person warned, however, that such an approach might be difficult to manage in practice, especially since the vendors all run on different operating systems. The question would also arise as to whether Ofgem would take responsibility for customer service and handling complaints.

Another option would be for the government to take on the debt of the larger suppliers, if they were to incur losses by accepting customers.

A third route would see Ofgem step in and, instead of transferring customers from failing suppliers to another supplier, it would run the business during the immediate crisis, effectively leading to its nationalization, with the government responsible for any losses.

Two people familiar with the talks said the cost of the eventual package could run into billions of pounds to the government given the number of businesses that are expected to close in the coming weeks.

Five small suppliers have already gone out of business since early August, as soaring wholesale prices left companies with insufficient hedging strategies or weak balance sheets unable to cover the cost of the energy they had committed to. to supply.

CEOs of the largest suppliers are increasingly concerned that the five, including People’s Energy and Utility Point, with 570,000 domestic customers alone, are just the tip of the iceberg. Further failures over the next seven to 10 days could require the transfer of a million customers to new suppliers.

The business secretary has been warned by the industry that out of 55 companies in the sector, only between six and ten could remain standing by the end of the year.

Energy executives say every customer they take on under Ofgem’s “supplier of last resort” system could lose hundreds of pounds a year, making it impossible to service millions of customers if the worst fears about the number of failures in the industry were to materialize. .

The cost of purchasing enough wholesale gas and electricity on the spot market to supply an average household is estimated to be around £ 1,600 per year, while the price cap set by Ofgem on utility bills. energy is currently £ 1,277, having already been increased by £ 139. last month.

Octopus Energy, one of the fastest growing energy providers in the UK – which is now considered a large supplier – said earlier this month that it “now subsidizes our customers to the tune of over £ 5million per month ”.

The company said on Sunday that a number of “less carefully managed or less well supported suppliers have pulled back as gas prices rise and more are expected to follow.” He joined with other companies, including Eon, in calling on the government to remove environmental taxes from electricity bills to reduce customer bills.

While the energy supplies of existing customers have been largely hedged in the futures market by the largest energy companies, which allows them to remain profitable, this is not possible for new customers because they have not been in. able to predict in advance the amount of gas and electricity they will consume. need to buy from the wholesale market.

“Energy suppliers have already provided hundreds of millions of pounds in financial aid since the start of the pandemic,” said Emma Pinchbeck, chief executive of industry body Energy UK.

“The industry will continue this support this winter, during an extremely difficult time for the sector itself, as more and more suppliers exiting the market have shown this week.”

The gas crisis has impacted British industry, threatening the food supply in particular. The meat industry is facing a acute shortage of carbon dioxide after soaring gas prices prompted CF Industries to halt production at two large fertilizer plants in the UK last week.

Kwarteng is meeting with CF Industries on Sunday to discuss options to restart production at factories in Cheshire and Teesside, allies of the business secretary said.

Gas prices in Britain and Europe have hit repeated highs in recent weeks as traders fear the continent is heading into winter with low stocks following declining supplies of Russia as well as national sources, as gas field operators undertook delayed maintenance work compared to last year.

Kwarteng said in a series of tweets on Saturday that he was calling a roundtable with the industry on Monday “to plan a way forward.” He said officials assured him that the security of the UK’s gas supplies was “not a cause for immediate concern”.

But his colleagues say they are worried about the impact of the crisis on consumers and also on future competition, if the fallout from the shock sees a return to a more concentrated market, again dominated by the big players.

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