A recent article from the BBC illustrates that the UK government is planning on offering state-backed loans to energy companies after the recent gas and energy price hike. This is because small energy and gas suppliers have been unable to compete in the current market against much larger gas suppliers as they have been priced out by their competitors.
The BBC reports that the Industry group, Oil & Gas UK, said wholesale gas prices had increased by 250% since January.
This increase in wholesale gas prices is partly due to last years winter period as during that period, many were sat at home due to national lockdowns. This means that, because more individuals across the globe were sat at homes, which were getting colder, demand for heating began to rise. Therefore, gas supplies have not had enough time to recover, and, at the same time, Russia has been accused of sending less gas to Europe than expected, thus triggering assumptions that the nation is deliberately constraining supplies. The UK has also seen a reduction in the production of gas as output within British Sections of the North Sea has fallen due to disruptions caused by the pandemic.
Consequently, this gas price rise is likely attributed to cost-push inflation, meaning that smaller gas wholesalers and suppliers are in a weaker position relative to their larger counterparts as these bigger firms benefit from much larger economies of scale, thus helping them to minimise these rising costs as higher purchasing power lets them negotiate better deals. This means that small firms have to raise their prices higher compared to larger firms, thus making them less competitive. However, due to the maximum price cap set on gas, small firms are unable to raise their prices despite a contraction in the quantity of gas that they can supply. Consequently, as the firm’s costs rise, profit margins are squashed, and certain firms are now beginning to fall flat. People’s Energy, who supplied energy to 350,000 homes and 1000 businesses have ceased trading
At the same time, Bulb, the sixth-largest energy company is seeking a bailout while four smaller firms have been expected to go bust
So, as certain firms struggle to supply energy to their customers, these customers, who aim to maximise utility, are attempting to switch providers. This means that customers are more likely to find themselves buying gas from larger firms which are much more stable compared to smaller ones. If this trend continues, then the prediction of there only being 10 gas suppliers by the end of this year may become a very real one. Yet, if this occurs, then the customer is unlikely to benefit as a small number of firms participating within the market results in an oligopoly. This means that, because customers will have little choice, gas providers may get away with providing lower quality customer service as the lack of competition within the market will make brand loyalty a much lower priority. However, this may not be the case as one of the only ways these firms could grow in such a market structure is to take customers away from competitors through providing better quality services. At the same time, an oligopoly market will mean that the price of energy and gas could stagnate as when this occurs, all the firms participating within the market benefit massively. Because of this, the government is considering state-backed loans to surviving energy companies to ease the rising costs and to encourage these firms to take on more customers. This decision is to lower the probability of an oligopoly forming after this turbulent period of rising gas prices.
Mr Kwarteng said the government would "not be bailing out failed companies" and said the sector had seen a "regular entry and exit" over the past five to 10 years.
"The current global situation may see more suppliers than usual exiting the market but this is not something that should be any cause for alarm or panic," he said.
Written by Hubert Kucharski Research compiled by Jonas Theaker