Government was warned energy firms could collapse 18 months ago, Ofgem letter reveals

The government was warned 18 months ago that some of the UK’s struggling energy companies faced possible collapse, a newly-released letter has revealed.

Regulator Ofgem wrote to business secretary Kwasi Kwarteng last March to warn him of the “systemic risk” faced by energy suppliers, urging the government to consider action to help stabilise the market.

Shared by Labour on Thursday, the Ofgem letter warned that many firms had only “thin cash reserves” – telling the minister that any shocks could mean “significant numbers of suppliers who have otherwise good business models may fail”.

It follows the collapse of two more energy suppliers, as the deepening gas supply crisis has now impacted 1.5 million customers.

Labour’s shadow business and energy secretary Ed Miliband quoted from the regulator’s warning letter in parliament – challenging Mr Kwarteng to explain “what planning was done for this eventuality following the letter”.

Mr Miliband added: “Surely the government should have been in a position to know exactly what need to be done … Haven’t they left the country dangerously exposed, with [the government] scrabbling around for solutions?”

Although the March 2020 Ofgem letter was written in the aftermath of the first coronavirus lockdown – warning of the financial difficulties companies faced as customers saw their incomes hit – it also warned of “systemic risk to the energy supply sector as a whole”.

It stated that any shocks to the market “could mean that significant numbers of suppliers who have otherwise good business models may fail”, adding: “We are concerned that this may be significantly bigger in scale than recent failures and could involve larger, as well as small, suppliers.”

The letter also warned that the usual Ofgem mechanism, known as “the supplier of last resort” – which sees the regulator switch customers to a new supplier – may not be possible.

The regulator stated that the failure of medium and large suppliers in the UK may need to be handled with a “special administration regime”, in which the government would have to step in to prop up failing firms.

Responding to Mr Miliband’s questions in the Commons, Mr Kwarteng said he remembered the 2020 Ofgem letter and denied the government had been “complacent” over the energy crisis.

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.”

Although the government has thus far refused to bail out any struggling firms, Mr Kwarteng said the “special administration regime” the government had prepared for energy crises was still in place if needed.

At least 1.5 million customers have seen their suppliers go to the wall following the collapse of nine firms this year. Ofgem has warned that more firms would go bust following the sharp rise in gas prices.

Avro Energy and Green became the latest casualties of a huge spike in the wholesale cost of natural gas when they announced they had ceased trading on Wednesday. Another medium-sized supplier, Igloo, is reportedly on the verge of collapse, with administrators said to be assessing the options for insolvency.

Peter McGirr, chief executive of Green, suggested it was unfair that the government had been willing to bailout a US-based company CF Fertilisers to restart CO2 produced but not his firm. “Why do they get a bailout and we don’t?” he told BBC Radio 4’s Today programme.

Junior business minister Paul Scully said on Thursday it was “not possible” to guarantee that affected customers would not see their bills rise – contradicting claims by Mr Kwarteng days earlier that customers being transferred to other firms should “be expected to pay the same amount”.

Mr Scully also said the government has been holding talks with Ofgem about whether a cap on gas and electricity prices for consumers may have to go up.

The minister told Sky News there had been “lots of conversations” about “reviewing” the price cap, which imposes limits on costs for 11 million people on default tariffs. Firms want it scrapped so they can pass on higher gas prices to customers.

Meanwhile, Mr Kwarteng said that people living in the north of the country will be hit hardest by soaring energy prices this winter.

Responding to MPs questions in the Commons, the minister acknowledged “the single most important determinant” of gas prices would be the cold weather – but said schemes like the Warm Home Discount would help protect the most vulnerable people.