Cold Weather's Next Victim Could Be Small U.K. Energy Suppliers

(Bloomberg) -- The winter chill that sent gas and power prices soaring last week could still prove lethal for Britain's smaller energy suppliers.

Market spikes are dangerous for independent providers because they typically lack large-scale hedging operations and are financed mostly by customer deposits. By contrast, the nation's biggest providers buy most of their energy in advance to reduce that risk.

Two small suppliers went bust less than a month after a December price surge triggered by a North Sea pipeline closure and an explosion at a key European gas hub. More failures may happen after last week's volatility, denting the more than 60 independent suppliers operating since the government took steps to spur competition and encourage switching from the six biggest providers. 

“I'm worried about under-hedged energy suppliers in Britain, who may face big losses and some may even go under following the recent price spikes,” Elchin Mammadov, analyst at Bloomberg Intelligence said.

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For larger utilities, an increase in demand from cold weather usually boosts profits through higher bills. The U.K.'s six biggest utilities will have generated about 19 percent more gas volume sales in February, according to Jefferies Group LLC. Suppliers with exposure to short-term gas prices will have been loss-making last week, the bank said.

“We see independent suppliers as particularly vulnerable to extreme commodity price swings,” Ahmed Farman, European equities analyst at Jefferies said.

U.K. same-day natural gas prices jumped to a record last week because of freezing weather and outages in infrastructure.

Gas price spikes may challenge smaller suppliers with little or no long-term capital, and previous price spikes have led to the failure of some suppliers, according to Moody's Investors Service.

When a supplier goes out of business, U.K. regulator Ofgem steps in to reassign the customers to a new company to avoid any power or gas cuts.

No Deterrent

Concerns about a supplier failing shouldn't deter people from using smaller companies, according to Stephen Murray, an energy expert at price comparison platform MoneySuperMarket.com Ltd.

“When the sector comes under pressure as a result of a spike in wholesale prices, a lot of attention is focused on the viability of emerging suppliers,” Murray said. “No customer will ever see an interruption to their supply of gas or electricity as a result of their provider going out of business.”

More companies are expected to fold, according to Timera Energy, a London-based energy risk consultant.

“Energy supply is a high volume, low margin business that is vulnerable to irregular market shocks,” Timera analysts wrote on its website.

--With assistance from Mathew Carr

To contact the reporter on this story: Rachel Morison in London at rmorison@bloomberg.net.

To contact the editors responsible for this story: Reed Landberg at landberg@bloomberg.net, Andrew Reierson, Jonathan Tirone

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