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Government Hands £450 Million Bailout to Energy Suppliers

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Ofgem has thrown a £450 million lifeline to energy suppliers struggling to stay afloat during the coronavirus crisis—and energy customers will see their bills rise next year to pay for it.

Under the proposals, energy companies with lack an investment-grade credit rating and find it difficult to raise funds will be allowed to defer payments to energy network companies like SSE, Scottish Power and Northern Powergrid.

The £350 million relief package is intended to help suppliers whose finances have been battered by households defaulting on energy bills. Energy suppliers have committed to not switching off the power for struggling households, but companies as heavyweight at Centrica have cautioned that suppliers may consequently be saddled with millions of pounds of bad debts.

Business energy customers are also consuming less energy, and thus paying lower bills, or being forced into bankruptcy, further imperilling suppliers' cash flow.

The deferrals are targeted at small suppliers. However, Bulb, a quickly growing renewable supplier with 1.6 million customers, will qualify.

The deferred payments to the network operators will be due in March 2021—and customers can expect their energy bills to rise then. Typically, network costs account for around a fifth of an energy bill.

Suppliers will be able to defer up to £1.6 million of payments. But Jonathan Brearley, the new chief executive of Ofgem, said he expected to deferral scheme would only be tapped any suppliers as “last resort.”

Juliet Davenport, founder and chief executive of small supplier Good Energy, welcomed the relief package. “It’s important that sustainable and well-run businesses aren’t forced into failure by this crisis,” she said.

“We don’t believe this new scheme directly impacts Good Energy, but it will allow some companies the breathing space to adapt to the ongoing upheaval and ensure a level playing field.”

Davenport had previously been critical of a government loan scheme advocated by trade body Energy UK in April, warning that proposed bailout—valued at £100 million a month—could be used to prop up struggling suppliers.

“There will be some businesses that were not doing well already and coronavirus is just giving them an opportunity to get some free cash. That’s probably a little bit harsh but I would say there would be some unscrupulous businesses out there definitely,” she said in April.

That criticism has been echoed for the deferral scheme. A supplier which wished to remain anonymous characterised the network payment deferments as a “backdoor bailout” and an “astonishing” and “astonishing handout to the worst run companies” in a conversation with the Financial Times.

Doug Stewart, chief executive of Green Energy UK, was also critical of the scheme, calling it a “sticking plaster for an open wound.”

“It’s just going to put off the fateful day that lossmaking suppliers are going to hit the buffers,” he added.

The regulator will also extend suppliers a £100 million loan to help cover the costs they owe to generators for switching off during periods of low demand. Ofgem expects to hand out tens of millions of pounds of “constraint payments” to generators this summer as coronavirus restrictions dampen the UK’s power consumption, to ensure supply doesn’t outstrip demand and cause blackouts. These payments passed onto energy suppliers and thus ultimately to customers.

Ofgem hopes the rescue package will prevent a further wave of bankruptcies in the cut-throat energy sector. 18 suppliers have collapsed since the beginning of 2018, toppled by fierce competition, price wars, volatile wholesale markets and the pinching of their margins by the energy price cap.

Lauren Smith
Lauren Smith

Lauren Smith has worked as a journalist and copywriter for most of the last decade, covering technology, energy, and consumer rights, in the US and UK.

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