UK electricity market failures flash red at the wrong time


A gas cooker is seen in Boroughbridge, northern England, on November 13, 2012.

LONDON, Sept. 20 (Reuters Breakingviews) – The global gas price spike is giving Britain a particularly painful shock. The UK government could have to spend hundreds of millions of pounds to help save customers from failing electricity providers. The drama is partly self-inflicted and occurs at the worst possible time.

Higher carbon prices, weaker Russian exports and soaring Asian demand for liquefied natural gas (LNG) explain why European and UK gas prices have tripled this year. But the ensuing rise in electricity prices, which is inspired by gas, is particularly acute in Britain. While France and Germany have nuclear power and coal, the UK has prioritized a sprint towards renewables, while relying on gas to fill the gap.

This vulnerability to high electricity prices coexists with a liberalized internal market that encourages new suppliers to challenge established suppliers. Until recently, retailers were able to buy gas and electricity customers at super low prices, with minimal hedging of their wholesale price exposure. They also had limited capital reserves.

The drawbacks of this fragile structure have now been brutally exposed. Of the 55 energy providers currently operating in the UK, all but 10 could go bankrupt, according to a person familiar with the situation. Their situation is particularly difficult as the UK government currently caps the costs for an average household at £ 1,277 per year. That’s about 300 pounds less than the current market rate. If 5 million customers are affected, this represents a liability of around 1.5 billion pounds.

Shareholders and creditors of affected companies will lose their shirts, as they should. The trickier question is what happens to their customers. The biggest incumbents like Iberdrola (IBE.MC) and Centrica (CNA.L) will not want to accept onerous contracts without some form of government support. An alternative would be for the State to bear the costs of liquidating defaulting suppliers in a “bad bank” structure.

Since gasoline prices are likely to remain high for the winter at least, this leaves taxpayers at the mercy of losses until next year. The drama also weakens Boris Johnson’s position in upcoming climate change talks. As the prime minister prepares to implore world leaders at the COP26 conference in November to decarbonise their energy sectors faster, his own backyard serves less as a model than as a warning.

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– The UK’s largest energy providers have called for a multibillion pound backing plan from the government to help tackle the crisis sparked by high gas prices, the Financial Times reported on September 20.

– One suggestion concerns the formation of a “bad bank” which would accept unprofitable customers from failing suppliers. Another option would be the government taking out debt for the larger suppliers, should they incur losses by taking over customers.

– Out of 55 companies in the sector, industry players believe that there will only be six to ten left by the end of the year.

– The cost of wholesale purchasing enough 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 on energy bills set by the industry regulator Ofgem is currently 1,277 pounds, having been increased by 139 pounds. books last month.

Editing by Peter Thal Larsen and Karen Kwok. Graphic by Vincent Flasuer.

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