November 5, 2008

UK Energy: Troubled Times As Two Suppliers Collapse

Electricity4Business and BizzEnergy have gone into administration, illustrating the impact that the current economic climate is having on the smaller business to business power suppliers. With unstable wholesale prices and the increased cost of credit making it ever more difficult for these suppliers to operate, there are fears that similar power suppliers could suffer the same fate.

In recent times, UK energy wholesale costs have risen dramatically, and now are fluctuating considerably. Vertically integrated energy companies are able to offset their customers' demand with their power generation or gas production capacity and - in some headline grabbing instances - such companies have been able to benefit considerably from the high wholesale prices. Conversely, however, suppliers without upstream assets are more exposed to the whims of the fickle market.

Furthermore, as the credit crunch tightens its grip on the world's finance markets, companies are finding that it is potentially far more expensive than before to obtain letters of credit to cover their activities in the market.

In the world of business to business (B2B) power supply, price competition is one of the foremost methods to establish differentiation. Small niche suppliers have evolved, taking advantage of the high turnover contract-based market and, until recently, these companies have been very successful.

Electricity4Business (E4B), the first of two B2B suppliers recently to go into administration, was a small, independent energy supplier with a reputation for excellent data and, to all intents and purposes, was seen as a shining example of the new wave of competition in the UK energy markets. However, E4B went into administration on October 31, 2008 citing rising costs. British Gas Business, the business retail arm of British Gas, has stepped in as the supplier of last resort and has taken on these customers.

BizzEnergy quickly followed, selling its 40,000 small and medium sized business customers on to British Gas Business. There are now concerns in the market that other independent power suppliers could suffer the same fate.

Welsh Power is reportedly looking to sell its business in its entirety, despite having an attractive biomass generation plant and other renewable options in the pipeline. Welsh Power sees the problem as being exacerbated by EDF's acquisition of British Energy, which has effectively removed a significant percentage of the independently generated output from the wholesale market, adding a further element of competition to the already burdened smaller suppliers.

As recession looms, and wholesale costs increase, the situation may only get worse for the smaller suppliers in the UK and, as smaller suppliers disappear and competition declines, it is the customer that will suffer.