17 January 2019: Eight energy companies went bust in 2018. That’s around 10% of the total number of firms. Fortunately for the consumer, gas and electric supplies continue in these scenarios. The energy regulator Ofgem will usually select a competitor to transfer customers to and credit balances are also protected.
But why are these companies failing? There are probably three main reasons:-
1. Rises in wholesale costs. These are often not affordable to newer entrants in the market especially where consumers are on a fixed price tariff and working capital is limited.
2. Increased competition. There were only 11 suppliers in 2008 which has ballooned to around 80 today making it a very competitive market.
3. Government energy price caps came into force in January 2019. This restricts the amount a supplier can charge a consumer in certain circumstances e.g. if on standard variable rate and so many suppliers have decided they cannot make sufficient profits long term.
These reasons are identical to almost all businesses and industries that we deal with. Applying them across industries they are:-
1. Rises in costs of supplies. These can be caused by currency fluctuations or costs of importing, raw materials or staff, for example.
2. Competition. If there are little or no barriers to entry then competition can change quickly.
3. Whilst new Government legislation takes time to implement, laws are always being debated and tweaked in the meantime.
How might you mitigate some of those risks?
1. Agree long term contracts for supplies with fixed prices or source multiple suppliers to avert disruptions in supply.
2. Go above and beyond what your competitors do and try to differentiate your offering.
3. Monitor relevant legislation being tabled in parliament by reading news and journals; provide comments where draft legislation is being consulted upon so that you can influence the direction; prepare and adapt.
If you feel that your company is at risk or is unable to mitigate possible future risks then speak to any of the BRI Business Recovery and Insolvency management team today to plan a way forward. The earlier you take advice, the more options are likely to be available.