Future of UK Energy suppliers as the furlough scheme ends, Focus on Centrica

Summary

• Utility bills might get deferred or delayed if unemployment numbers rise post October 2020, when the coronavirus job retention scheme comes to an end
• Debts and system costs of energy suppliers are being feared to rise as a result of this fallout
• Centric undertaking company restructuring to contain debt and emerge stronger from the coronavirus crisis

Large energy supplier organisations such as Centrica and Bulb fear a rise in their debt levels, in case consumers are unable to pay their electricity bills. With the government job retention scheme drawing close to an end in October 2020, unemployment levels are expected to rise across the UK. As a result of this, households might find it difficult to pay their electricity, gas, and water bills.

Many energy suppliers have already turned bankrupt, given the testing times the country is subject to, due to the coronavirus pandemic. The sector is characterized by low profit margins and cut-throat competition.

At the beginning of the UK lockdown in March-end 2020, the government had promised that it will not disconnect the power connection for any family under financial distress as an aftermath of the pandemic.

Hayden Wood, chief executive, Bulb said that we are aware of the higher risk of customers defaulting in paying their power bills since March this year.

Bulb Energy is a green energy supplying company in the UK, serving individual and industrial customers. Its revenue rose by 350 per cent during 2019. It was founded in the year 2014 and is based out of London. In 2019, it reported a turnover of £823 million. It supplies energy to close to 1.5 million British homes. It recently acquired 9000 customers from Gnergy in March 2020, thanks to its affordable tariff rates.

Utility firms are rightly concerned as water and power bills are often the first things to get affected in case people go jobless.

Johnathan Ford, chief financial officer, Centrica also said that bad debts could rise in the second half of 2020, given the fact that the furlough scheme is drawing to an end during this period. In such a scenario, the customers might defer or delay their utility bills, he emphasised.

Ofgem’s £350 million support scheme

Ofgem (The Office of Gas and Electricity Markets), the government regulatory body for electricity across the UK, had recently launched a £350 million support scheme to provide financial aid to ailing energy firms, who do not qualify for the public Covid-loan programs. However, this scheme is small in comparison to the amount of support being provided to the larger industry players, opined Wood.

The scheme aims to support a struggling small sized energy supplier company, hit by a rising number of energy billing defaults, with an aid capped at £1.6 million. The eligible energy supplier will be able to defer paying charges for electricity maintenance for an extended period of time till March end 2021.

A closer look at Centrica

Centrica, is an energy supplying company and owns British Gas. It also provides contract energy services and is operating out of Ireland, North America, and the UK. The company was a part of the sough-after FTSE 100 index since its inception. However, in June 2020, it fell to into the category of FTSE 250.

According to reports, the company shares worth around £100,000 have been purchased by Centrica’s management in a bid to re-structure the company.

As a part of the overall restructuring plan, the company plans to concentrate more on its domestic markets of the UK and Ireland. The energy company is currently sitting on a debt pile of £2.8 billion. To cover its bad debts, the company had to adjusted operating profits by £60 million in the first half of 2020.

It’s operating profits for H1 2020 totaled up to £343 million, less by 14 per cent as compared to H1 2019. However, the company’s liquidity position is strong and it plans to prune its workforce by 5000 in the next few months.

The company suspended payment of any dividends for the time being.

Centrica (LON:CNA) stock was trading at GBX 47.20 on 18 August 2020 at 9.44 am, up by 0.9 per cent from the previous day’s close. Its 52-week low / high range was recorded at GBX 30.21 / 93.50. The stock delivered a negative year-to-date (YTD) return of 48.11. It had a market capitalization of £ 2,731.36 million. He volume of shares traded was 1,920,818.

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Impact of lowering the price cap by Ofgem

Ofgem recently announced that the energy price cap is being lowered to £1,042 from October 2020. This has come about due to an overall reduction in the wholesale energy costs post the spread of the coronavirus pandemic. If Ofgem’s recommendations are accepted, the price cap will continue till 2021, giving relief to 15 million customers.

The cap could rise in April 2021, if the energy demand improves, which could result in higher wholesale energy prices.

Energy suppliers will not be able to charge above the set price cap, but are allowed to offer cheaper deals.

Energy UK has responded to the announcement as a welcome step in the right direction. Its spokesperson said that much of the average energy bill is composed of costs that are outside the direct control of an energy supplier.

From their side, the energy suppliers have also raised their support to vulnerable customers in these challenging times, and will continue to do the same, added Energy UK.

Finally, as the UK government’s furlough scheme draws to a closure in October 2020, energy supplying firms are fearing that unemployment might rise across the nation. As a result of this, customer might default in paying their utility bills as water and energy payments are often the first things to get impacted. The energy companies are already struggling with bad debts and thin margins, and any forthcoming government support would be welcomed by the industry. Many of the medium and small sized firms are unable to get any loan support from the government and are seeking the requisite support in this direction.