Four years ago, wholesale prices of gas and electricity were steadily sliding: good for consumers, and also an opening for new energy suppliers.
Established companies, the much-reviled ‘Big 6’, had bought energy on long-term contracts (to match their sales commitments), at prices that were becoming ever less competitive. A new player could use a different strategy: making sales at prices that undercut the Big 6, but buying the energy in small amounts, just a day or so ahead of making deliveries, at ever falling ‘spot’ market prices.
As prices continued to fall, a rash of new suppliers entered the market to exploit the opportunity. At Private Eye, we warned this couldn’t go on indefinitely and that when prices inevitably turned, these new players buying only short-term energy would be hammered in the market.
We’d also encountered local authorities mulling plans to become suppliers on this unrealistic basis. In 2015, for instance, we reported that Cheshire East councillors were asking consultants how a new supplier could “remain permanently below Big 6 energy prices” – a naive aspiration in a world where prices can turn in a matter of weeks, and price wars can last for months. Another council looking to get on board was Bristol.
It’s easy to understand elected members’ motivation to offer cheap energy to their residents, based on the idea that if you decide not to pay dividends, top salaries or bonuses, you can cut costs and pass them on as savings. They also assumed residents would quickly switch to ‘their’ local supplier. Unfortunately, life isn’t so simple.
Besides the certainty of price trends reversing, we warned there were other reasons for councils to think twice. For starters, they ignored how tough the energy market is (think someone with no retail experience setting up a general food store in opposition to the big supermarkets). And whereas small private players would simply go bust when costs went up, a publicly-owned supplier could keep burning through further subsidies from taxpayers.
Energy is a notoriously complex business, too, requiring a wide range of high-end technical and commercial skills. Understandably, local councillors don’t typically have these skills, or even realise what’s involved.
‘We won’t be cheapest!’
Nonetheless, plans continued to be hatched for publicly-owned local energy supply companies – notably in Nottingham, London and (at devolved government level) Scotland, as well as Bristol. We warned against them every time. Whether as a result of our comments or other advice, both London and Scotland reconsidered, and today continue to explore less ambitious energy schemes that don’t involve becoming fully-fledged, licensed energy market players.
Just two – Bristol Energy (BE) and Robin Hood Energy (RHE) in Nottingham – went the whole hog. RHE decided to offer its services to other local authorities on a ‘white label’ basis: the client council sets up a local marketing ‘brand’ (such as Ram Energy in Derby) to attract business in their area, but RHE does all the complex energy market stuff as the licensed supplier in every case.
RHE now has 10 such clients, to whom it pays commission per customer won. However, it’s unclear how financially successful or sustainable this is and RHE has been back to Nottingham council several times for additional financial support.
Bristol Energy hasn’t extended its business model in the same way. It started with a chair and CEO recruited expensively from the ranks of experienced energy industry players, and right from the offset disarmingly stated “we won’t be the cheapest!”. This was made abundantly clear when Bristol City Council tendered for its own energy requirements – and Bristol Energy did not win. For many, this rather negated the whole point of the exercise.
Money down the drain
Like all other new, small players in the sector, Bristol Energy has been hit by rising wholesale energy prices – which started to turn in 2017. The firm’s planned profits are nowhere to be seen.
BE’s 2018-19 reported turnover, £76.2m, was similar to what RHE had achieved 12 months earlier. But there the similarity ends. On headcount, wage bill and directors’ fees, numbers at BE were double that of RHE’s, and its total administrative costs even more. BE’s bloated business model has made cumulative losses of £35 million.
Market conditions have been killing off small private energy suppliers in large numbers recently. But as we warned, council-owned suppliers like Bristol Energy can, and do, simply keep tapping council tax payers for more resources.
Notwithstanding the costs and losses, during 2019 Bristol City Council has increased its ‘investment’ and funding of various kinds to Bristol Energy by more than £9 million, to a total of nearly £38m, blowing away a limit that had earlier been set at £31m.
Good money after bad? With no other obvious natural advantages in the market, when does anyone decide enough’s enough?
‘Old Sparky’ is an energy industry insider and writes a column, Keeping The Lights On, in each issue of Private Eye magazine.