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New year, same trend: Economy Energy exits the market - tmrw. test

New year, same trend: Economy Energy exits the market

Economy Energy exiting the market on 8 January marked the first supplier failure of 2019 and the 12th domestic supplier exit over the last 12 months. The departure of Economy Energy follows continued speculation around the supplier’s financial health. Media coverage since December 2018 reported the supplier was working with KPMG to secure £5mn of inward investment before the end of January, alongside a £5m injection from Chief Executive Lubna Khilji. As with IRESA, which failed in July 2018, Economy Energy leaves the market under a provisional order from Ofgem, banning the supplier from taking on new customers, requesting one-off payments, or increasing direct debits until it resolves customer service and credit balance issues.

With 235,000 customers, this is the second-largest domestic supplier to go through the Supplier of Last Resort (SoLR) mechanism, behind Spark that exited in November 2018. Taken together, our Domestic Market Share Survey shows the 12 domestic market exits since January 2018 represent more than 1.5mn energy accounts, with 1mn of these processed through the Supplier of Last Resort mechanism in the last three months alone (see Figure 1). The larger customer books of some recent exits – including IRESA and Spark – have been taken on by fellow challenger brands. The inorganic growth from the Spark customer base cements Ovo’s position as the largest challenger brand in the domestic market. For Economy Energy, the large number of customers and high proportion of prepayment meters seem to make this SoLR an interesting proposition for acquisitive suppliers.  

Ultimately, the costs of this process are distributed across the market. Green Energy UK Chief Executive Doug Stewart criticised the process in the media on 7 January, stating it faces £21,000 costs associated with the “unpaid debts” of failed suppliers – equivalent to 7% of the supplier’s annual profits. Ofgem published its report on the SoLR process for IRESA, which implied the costs associated with its unpaid credit balances amounted to £70 per account for its ~175,000 energy accounts. As Stewart notes, the costs of this process can present a cashflow challenge for smaller suppliers – some of whom have already shown signs of potential financial pressures. This comes alongside upcoming payments under the mutualisation process expected for the 2017-18 and 2018-19 Renewables Obligation (RO) compliance period and the Q3 and Q4 2018-19 Feed-in-Tariff period.

Continued market exits – particularly of a supplier that has faced previous compliance investigations by Ofgem – and the growing focus on the costs of these exits, will only increase attention on the regulator’s ongoing supplier licensing review. Our Domestic Supplier Insight Service tracks developments in the domestic market, providing monthly updates on key regulatory and competitive activities. For more information, contact Jacob Briggs at j.briggs@cornwall-insight.com

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