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What do we predict for Domestic Energy Supply in 2022?

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2021 represented, in many ways, a mixed year for the UK energy market. On the one hand, it saw further significant progress on the transition towards net zero, with close to 50% of...

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Date: 08/03/2022

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2021 represented, in many ways, a mixed year for the UK energy market. On the one hand, it saw further significant progress on the transition towards net zero, with close to 50% of the UK’s electricity now being generated from renewable sources. However, consumers also experienced a period of acute market distress due to spiralling wholesale energy prices and the knock-on impact this has had on domestic supply business in the UK.

A large number of the smaller suppliers failed and one significant supplier (Bulb Energy) was deemed to be too big to be absorbed by the market through OFGEM’s SoLR programme and was placed in the government’s energy supply company administration regime, in a market first for a domestic energy supply company.

The disruption and subsequent retrenchment in the domestic supply market represents a setback, given OFGEM’s stated goal of broadening the supply options for domestic energy customers away from the largest incumbent suppliers.

Continuing geopolitical tensions, especially those arising from Russia’s invasion of Ukraine also represent a significant volatility factor for wholesale gas prices and the market more generally.

These recent price shocks, particularly in the wholesale gas market and the risk of additional supply disruption are factors which may provide additional political impetus for the government to seek to accelerate the UK’s supply rebalance away from gas in favour of intermittent renewables, however, in the shorter to medium term, it is quite possible that we will see the UK, along with other Western governments, falling back on traditional energy sources as they seek to lessen their dependence on Russian supplies.

A significant factor in the failure of a number of the smaller energy firms was their lack of hedging protection against adverse movements in wholesale pricing, coupled with an inability to pass the related cost increases on to customers. In light of this experience, we may see the government considering steps to enhance the regulation of suppliers and imposing requirements for the smaller suppliers to engage in hedging against wholesale energy costs.

We believe that the trend towards consolidation in the UK domestic supply market will continue and, quite possibly, accelerate this year, with larger suppliers continuing to acquire customer books from the smaller competitors within the space on an opportunistic basis.

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