Helping you understand what’s happening in the energy sector right now
The energy price crisis is still causing a lot of concern for many businesses despite a pledge of action from the government to keep a price cap on unit prices for the next six months.
And while many otherwise good and solid businesses are worrying about their own survival prospects over the next few months, it’s a good time to look at the situation many energy providers find themselves in.
New analysis of financial data suggests that despite the increase in the price cap in April to £1,971, the financial status of most UK domestic energy suppliers has worsened over the past couple of months.
So much so that out of the 20 remaining domestic electricity and gas licensees registered with Ofgem (excluding the Big six and two businesses with suppressed risk scores) an estimated 12 or 60% are technically insolvent themselves.
So what does this mean for these companies and their customers as we enter the autumn?
The balance sheet position of six of those energy suppliers has worsened since January this year, while only one single business has seen its balance sheet position improve.
Businesses classed as ‘maximum risk’ find it difficult to access funding without personal guarantees from directors and are therefore more likely to be subject to winding up petitions or intention to dissolve notices in the next 12 months.
Why was the price cap introduced?
Ofgem first introduced the UK consumer energy price cap with the main focus being to encourage competition within the consumer energy market and stop the established “Big Six” energy companies that dominated the market from taking advantage of an already dominant commercial position.
This initially proved itself to be very effective with many smaller energy companies entering the market prompting more consumers to shop around annually, resulting in a “fair price for energy” which Ofgem initially hoped to encourage.
The total number of domestic suppliers had increased from 12 in December 2010 to 23 in May 2022, with a peak in mid-2018 of 70 suppliers for UK customers to choose from. By September 2021, the new entrants held around 40% of the market share.
But then from mid-2021 to spring 2022, the wholesale market price that suppliers paid for gas and electricity rose rapidly to unprecedented levels for several reasons, which we’ve documented here.
As a result, 29 energy suppliers failed during that time, affecting nearly four million households in the UK between July 2021 and May 2022.
Trading whilst insolvent
There are four main tests that will prove if a company is trading whilst insolvent. These are:
- A statutory demand is presented to a company and is outstanding for 21 days with no dispute or application for it to be set aside.
- An unsatisfied judgement execution. This is where a judgement is obtained from a court and there are insufficient assets to pay the debt.
- The Balance Sheet test, where liabilities are greater than the assets held by a business.
- The Cash Flow test, which is where the business is unable to meet its debts, including contingent and prospective debts, as and when they fall due.
A business is trading whilst insolvent when its directors know or (ought to know) their company is insolvent under the tests above and they continue to trade on when there is no reasonable prospect of avoiding insolvency with losses to creditors increasing during this period.
So although 60% of smaller energy suppliers have an insolvent balance sheet, which on its own is not necessarily a strong case for insolvency, it does not mean these companies are necessarily trading whilst insolvent.
However, it is definitely cause for concern for the sector if more than half of its members are potentially insolvent at the very time that the bills customers pay are at their highest levels ever.
The coming months are going to be tough for both customers and their energy providers alike.
And while they will be able to get help from the government and their shareholders if required – what can businesses do in the meantime if the only official help on offer is a bill staying more or less where they are for six months?
This is where getting professional advice is the best way forward for any business owner or director.
We offer a free initial consultation with an expert advisor who, once they get an understanding of the circumstances the business faces, can advise on what preventable measures need to be initiated or whether an insolvency process such as administration or a CVA needs to begin to buy a business vital time to restructure and come out stronger and more stable once essential structural changes can be made with legal protections supporting them.
If you think your business is in trouble or could be trading while insolvent then get in touch with us ASAP.
The sooner you do, the more options and choices you’ll find you have to, well, choose from!