Energy suppliers and Government eye ‘bad bank’ or loans as solution to collapses

Energy suppliers are privately talking to the Government about backing loans or a “bad bank”’ style solution to a potential collapse in dozens of energy companies.

Industry sources told the PA news agency that stable suppliers are concerned the current system for dealing with the customers left behind when a supplier goes bust will struggle to keep up with a series of failures set to come following a spike in energy prices.

Business Secretary Kwasi Kwarteng held talks with 26 suppliers on Monday as the Government and regulator Ofgem tries to figure out how to deal with a flood of likely failures.

Many energy companies have promised to sell gas to households at a fixed rate for a year or more.

Larger suppliers tend to “hedge” by buying enough gas for future delivery to supply their customers.

This insulates them from swings in the cost of gas.

But many smaller suppliers, who compete by cutting costs to the bone, do not hedge, or only hedge for days or weeks ahead.

They signed deals with many of their customers months ago, when gas prices were lower.

But now to honour those contracts the suppliers will have to buy gas for a higher cost than they sell it for.

This is likely to lead to dozens of failures before the end of the year, industry insiders believe.

Failures in the energy supply sector are not uncommon, they often happen in September and October as the sector pays its renewable dues and prepares for the winter months.

When this happens Ofgem’s Supplier of Last Resort (SoLR) process can transfer households to a new supplier, mostly without major hiccoughs.

But with millions of households potentially needing to be switched when their suppliers fail this autumn, the system could struggle.

Even at the best of times, suppliers can spend months trying to move customers from their old supplier to their new one as computer systems are often incompatible.

It is a process which sources said was doable, but tough.

It can also be expensive.

Suppliers of Last Resort can claim some of their costs back from the market but it can be months until they get their money.

Those that have hedged for the customers they already have will have to spend even more to hedge if they take on new customers at today’s high gas prices.

Some in the industry are pushing for the Government to back loans that they can use to cover their costs up front.

This would allow the SoLR process to run its course with more stable energy suppliers absorbing customers from those that failed.

The other option mooted by some is a “bad bank” solution.

This would see the Government set up a supplier that would take on the customers from all the failed companies.

Proponents say this solution would take pressure off the established energy suppliers and off Ofgem, who would not have to seek bids from suppliers who want to take over the failed companies’ customers.

It could also be cheaper, one source said.

All costs associated with the collapses will be passed onto either the taxpayer or onto energy bills.