LONDON: The war in Ukraine has exposed the vulnerability of the energy industry across Europe, but the United Kingdom market is looking increasingly perilous for suppliers and consumers for reasons closer to home. High cost: A cyclist passes by the headquarters of Centrica Plc at Windsor. Britain’s biggest energy supplier says 10% of its 7.2 million customers are already behind with payments.  

Utilities are now on the hook for billions of pounds of unpaid bills after the prices of gas and electricity soared as households already struggling with the cost of living go into debt.

It’s also becoming clear that what people pay is unlikely to fall even if wholesale prices do because of the costs associated with rescuing the customers of more than two dozen smaller suppliers that failed when prices surged last year.

It’s too early to put an overall figure on what customers owe, but the picture is bleak based on recent estimates. Companies such as Iberdrola SA’s Scottish Power are warning the market is no longer sustainable.

Money owed by EON SE’s customers is expected to increase by 50% to £2.4bil (US$3bil or RM13.19bil) by the end of the year, Michael Lewis, who runs the German company’s UK business, told a parliamentary committee last month.

Centrica Plc, Britain’s biggest supplier, meanwhile says 10% of its 7.2 million customers are already behind with payments.

The issue, companies and energy analysts say, is that the structure of the UK’s energy market means it’s trapped in a vicious cycle just as the Bank of England warns of recession and double-digit inflation.

Suppliers are charging more while households have less ability to pay because of a squeeze on incomes driven by food, a payroll tax increase and now rising interest rates.

“It is slowly dawning that the cost of living crisis is not going away,” said Dieter Helm, professor of economic policy at Oxford University and a former energy policy adviser to the government.

“And that of all the bills which citizens face, the energy bills are the ones that really stick out.”

The UK’s cap on energy prices, originally designed to protect consumers from sharp increases, surged 54% to a record on April 1, affecting 22 million people.

It’s predicted to jump again at the next adjustment in October. That could put 40% of the population in fuel poverty and likely lead to more unpaid bills, according to supply companies.

While some politicians are calling for a tax on companies to subsidise consumers, the industry says it no longer has the financial cushion it once had.

Profit margins for selling power and natural gas to households have been negative on average since 2019 as competition between suppliers and the price cap kept a lid on how much they could charge, according to a report by Oxera Consulting LLP.

Scottish Power recorded a loss of about £250mil selling energy to households last year. EDF Energy said it also lost money. Centrica’s British Gas showed a more mixed picture, losing out from selling electricity but making £222mil supplying gas.

“The problem is going to get more severe, and for suppliers it’s not a high-margin business anymore so a rise in bad debt could be quite detrimental,” said Josh Buckland, a partner at Flint Global and a former government energy adviser.

“There is no immediate quick fix.”

The Bank of England is assuming energy prices will stay high after what it called the biggest shock since the 1970s crisis.

That will continue to drive inflation, curb economic growth and hit households for years. The price cap protects households not on a fixed-term tariff from being put on the most expensive deal. The level is adjusted twice yearly based on prices in the previous six months.

It stops companies having to absorb higher wholesale costs indefinitely, but defers how quickly they can pass on lower prices - essentially just postponing the day of reckoning.

Chancellor of the Exchequer Rishi Sunak laid out a £9bil package that includes a £200 upfront discount on energy from October for households.

While he’s said it’s possible the government could increase aid before next winter, it’s unlikely to expand measures before then. Oxford’s Helm referred to the Chancellor’s plan, unveiled in February, as “moving the deckchairs on the Titanic.”

The scale of the problem has gone beyond what the industry can deal with, Keith Anderson, CEO of Scottish Power told BBC radio on May 9. He called for a “massive, significant shift in government policy.”

 - Bloomberg