These are tough times for gas and electricity retailers. In the past seven months alone, we have seen the corporate failures of OneSelect, Our Power, Economy Energy, Brilliant Energy, Extra Energy and Spark Energy. Ofgem has appointed companies such as OVO, Scottish Power and SSE to take on a combined total of approximately 630,000 domestic customers through its Supplier of Last Resort process. Ofgem says that this is a competitive process during which it asks suppliers to bid to become the new supplier to get the best possible deal for customers in the circumstances. Many customers have reported a smooth handover. Others have reported increased prices and missing refunds to Which? (since retailers have exited the market owing the Energy Ombudsman money). More about that is here. Spark Energy was reportedly subject to more than 800 investigations into customer complaints by the Ombudsman in the 12 months prior to it failing in November 2018.
Supplier defaults under the Renewables Obligation are mutualised across other suppliers. This ultimately leads to higher prices for consumers. In June 2018, Ofgem launched a Supplier Licensing Review. It published its final decision document on market entry requirements on 11 April 2019. This will include new tests for energy suppliers from June 2019. They will have to demonstrate sufficient funding, provide a customer service plan and pass a "fit and proper" test. Ofgem will also be launching a consultation on ongoing requirements in the market in the summer.
There are huge implications for any businesses connected to these failed retailers making it crucial that early warning signs of insolvency aren't missed. Many businesses will have time and money invested in contracts with energy suppliers. By the time the supplier is near to insolvency they may well have limited options. Acting early can lead to better outcomes such as saving significant time and cost, helping preserve relationships and protecting your brand. How do you stay ahead of the game? Effective internal communication within your business is an important part of the answer. History is littered with numerous examples of poor communication leading to disastrous results.
The "left hand right not talking to the right hand problem" happens in all sorts of organisations.
Your business may have many touchpoints with the energy supplier. These may include any procurement team, those in the business that negotiated the original contract, an in-house lawyer, the contract or relationship manager, those who deliver (or receive) goods or services, your finance team etc. Sometimes the volume of information can be difficult for businesses to assimilate into one place, especially in a larger organisation. The starting point to identifying and managing the risk of a failing supplier is to:
- Identify the touchpoints with the supplier; and
- Have clear and tested internal communication lines so that information can be shared swiftly and effectively.
A joined up decision can then be taken as to the best way forward.
When gathering information, some of it will be hard data, other will be soft. The most effective organisations use both. Here are our top tips:
- Poor customer (service) reviews. Poor reviews can indicate that there are issues with staffing levels or low morale at the suppliers business.
- Check the Ofgem website. If Ofgem has prohibited the supplier from taking on new customers, it's a sign that there are problems at the supplier. Similarly, there might be notices of other enforcement actions which Ofgem has taken (ie penalties or final order notices for missing their Renewables Obligation).
- Online, you can freely obtain a company's accounts filed at Companies House. Compare the last few years accounts:
- The balance sheet will give a snapshot of the company's assets and liabilities. The key metric is total assets less current liabilities. This is one of the tests of solvency.
- In terms of fixed assets, check whether the company has disposed of any property in the previous 12 months and if it has whether it uses the proceeds to reduce trade creditors. That could imply cash flow difficulties.
- In terms of the company's current asset position, if stock levels have risen year on year, it may be a sign of declining sales.
- Check if the debtor level has risen. If it has, there is a higher chance that the company has bad debts which it cannot recover.
- Check whether the overdraft liability has risen. This may indicate that insufficient cash is being generated from regular trading.
- The profit and loss account will show the company's gross and net profit. Has gross profit or operating profits fallen? (A reduction in operating profit will mean that the company has less cash available and may therefore be less resilient).
The late filing of accounts might be a sign of financial difficulties. There is a limit to how valuable accounts are. They may be out of date. If they are abbreviated accounts, they are unlikely to contain much useful information.
- At Companies House, check whether there is a recently registered charge. If there is, the charge may have eroded the equity on the charged assets. (Unless perhaps the company has also released any prior security which will be shown as satisfied on the mortgage register).
- Check to see if any Directors have recently resigned or been appointed. This information will be contained in the Directors' Report together with any subsequent resignations showing on the Companies House Register. Sometimes Directors desert what they perceive to be a sinking ship.
- You can check with the Companies Court whether a winding-up petition has been presented in England and Wales (telephone number 0906 754 0043). In addition, the London Gazette publishes all public notices relating to corporate and personal insolvency in England and Wales (eg Notices of the appointment of Administrators or advertisements of winding up petitions).
- Check whether there are any unsatisfied county court judgments (CCJs). Sometimes this can be an organisational problem, especially in a larger business (eg the claim form was served at an outpost and didn’t come to the relevant person's attention until too late). An unsatisfied CCJ can however be a sign that something more serious is amiss.
- Is the energy retailer missing any Key Performance Indicators? Eg is delivery of goods or services irregular?
- Has the retailer rebranded recently? If it has, is the rebranding cosmetic (designed to mask more serious problems) or is it genuinely raising financial performance?
- Is the retailer taking longer to pay you or exceeding credit terms? Calls going unanswered, or concerns being raised about invoices or delivery that don't seem to be genuine can sometimes be a sign that the company has cash flow problems.
- You should keep in touch with the company's employees. Has there been any detectable fall in staff morale? Sometimes employees at the coal face have a reasonable insight into the state of their business.
- Are you aware of any other suppliers to the retailer in question who have switched off their supply? Word of that tends to spread.
- Are there any articles in the press about the performance, re-financing or poor trading? Trade press can be a useful source of information.
Spotting the warning signs and sharing that effectively within your organisation are the first important steps to identifying and managing risk.
If you would like to discuss any of the points above please get in touch with us using the contact form on the right, or directly with Stephen Dilley.