Energy companies bust: Government not ‘complacent’, Kwarteng insists amid claims Ofgem warned of crisis

With Ofgem’s chief warning that many more people could be affected by collapsing firms, my colleague Conrad Duncan has this explainer on what to do if your energy supplier goes bust.

The government has been warned repeatedly of how fragile the energy market is, the chief of trade association Energy UK has said.

In a letter to The Independent, Robert Boston from Kent writes:

At the outset of the First World War, the foreign secretary, Sir Edward Grey, presciently said: “The lamps are going out all over Europe, we shall not see them lit again in our lifetime.”

More than 100 years later I am certain that if Sir Edward was alive now he would be making an equally erudite point, but with one major difference: "The lamps most assuredly will not be going out all over Europe, only here in the UK."

And given that I am older than he was then, I fear the second part of his wise words coming to pass, literally and metaphorically, unless our politicians cease this destructive populism.

The current surge in prices should spark a rethink of the UK’s approach to gas procurement, BP’s former gas chief has suggested.

“The level of gas prices in the UK right now are eye-wateringly high. I don’t recall seeing prices at this sort of level since the Fukushima crisis pulled a lot gas out away from Europe and into Asia,” said David Knipe, now a partner in Oliver Wyman’s energy and natural resources practice.

“The surge in prices should give us pause to consider the UK’s overall approach to gas procurement.”

“As a country we choose to effectively buy our gas largely at spot prices, which has benefited us over many years as spot gas prices have been relatively cheap,” Mr Knipe said. “However, when worldwide gas shortages occur, we are exposed to the resulting price spike.

“Japan takes an alternative approach, choosing to buy much of their gas on long-term oil linked contacts with price caps to limit the upside, but also compensating price floors to protect the producers. As a consequence, their consumers are seeing very little impact from the worldwide price spike. However, the quid pro quo of this is that they did not benefit from the periods of cheap gas.”

My colleague Adam Forrest has more details from junior minister Paul Scully’s media round this morning, notably his comments about government officials having “lots of conversations” about a possible energy cap increase with Ofgem and energy companies.

The energy price cap imposes limits on costs for 11 million people on default tariffs – but struggling energy firms want it scrapped so they can pass on higher gas prices to customers.

Ed Miliband has brandished a letter he claims Ofgem wrote to then energy minister Kwasi Kwarteng last year “warning about systemic risk to the energy supply sector as a whole”, which could place “significant burden and costs” on the public purse.

Labour’s shadow secretary for energy accused the government of leaving the UK “dangerously exposed”.

Responding in the Commons to Ed Miliband, who produced a letter sent last year by Ofgem which warned of a “systemic risk” to the UK’s energy market, Kwasi Kwarteng insisted the government had “not been complacent”.

The business secretary said: “The whole point about the supplier of last resort process which was interrogated last year is that it is an organised process, well established, which can allow existing strong companies to absorb customers in failure.

“I remember the [Ofgem] letter last year. We interrogated all through the Covid process the systems that we had in place and during that period the supplier of last resort was found to work. So far this year it has been found to work.”

He added that the “special administration regime” the government had prepared for energy crises was in place if needed.

Here’s footage of small business minister Paul Scully defending the government’s decision not to bail out energy companies.

Kwasi Kwarteng has dismissed the claims the UK’s limited gas storage capacity is causing prices to soar, arguing it is actually a “strength” rather than a weakness.

Labour’s Matt Western told MPs: “Why is it that the storage capacity of the UK is just 2 per cent annual demand versus 25 per cent in Europe as an average. Is that part of the reason we don't have energy price resilience?"

Mr Kwarteng replied: “Only yesterday, there was a conference of EU energy ministers to discuss this very problem.

“It is not a function of storage to be able to mitigate a quadrupling of the gas price. This is a complete red herring. And one of the reasons why we have less storage is because we have a greater diversity of energy supply. That is a strength, not a weakness.”

London’s mayor has lent his voice to warnings of a “perfect storm” for residents facing cuts to universal credit and rising energy bills.

Sadiq Khan alleged that the crisis “is a consequence of government’s shambolic policy over the years”, adding: “We should be diversifying our fuel supply” to include more renewable energy.