LONDON (Reuters) - Britain’s Big Six energy suppliers are starting to claw back customers from their smaller, independent rivals which are struggling to cope with more than 20 per cent recovery in prices for winter since April.
The percentage of switchers moving from a large to a small supplier fell in June to the lowest since March 2015, according to industry group EnergyUK.
Several small suppliers, including Ovo Energy and Co-operative Energy, have now hiked their tarrifs to cover their wholesale costs.
“Now that commodity prices have bounced back, the discount small suppliers can offer versus the Big Six has been shrinking,” said Roland Vetter, head of research at commodity investment firm CF Partners.
As energy prices tumbled by 20-30 percent in 2015, small energy suppliers which buy most of their customers’ energy needs for a shorter period, were able to slash tariffs.
Large suppliers typically hedge a few years ahead, locking in prices over a longer period, meaning they can’t cut average prices as quickly.
As a result, customers rushed to find better-priced deals. In March 2016 a record 206,419 customers switched from a large to a small supplier, EnergyUK data showed.
That trend has started to reverse.
RWE in July won more than 200,000 new British customers, returning its customer base to end-2015 levels. SSE, the UK’s second-biggest supplier reduced customers to 50,000 between March and June, from 90,000 lost over the same period last year.
By contrast, smaller supplier Ovo Energy has increased its fixed-term tariff by 3.6 percent and Co-operative Energy has lifted one its 2-year fixed tariff by as much as 103 pounds, according to uswitch, a site that compares energy tariffs and takes a commission payment from suppliers when energy users switch.
The weak hedging position of some small suppliers, which may not have sufficient financial means to buy further ahead than a few months, has worried other players in the market.
“If one small supplier goes belly up then it will affect all small suppliers,” said Simon Oscroft, a former energy trader at Macquarie, who set up supplier SO Energy in late 2015.
“Everyone would lose faith in some of those newer, more innovative and better managed suppliers. It would set the energy industry back a few years,” Mr Oscroft said, adding that SO Energy customers sign up on 12-month contracts which his trading team can fully hedge in the forward market.
Darren Braham, chief finance officer and co-founder of First Utility, said a weak hedging strategy was a “very, very risky proposition”.
“They have got this constant tension between ‘how much can I afford to hedge and suck up working capital’ against the risk of wholesale prices moving against them.”
Some smaller energy suppliers are already moving to strengthen their balance sheets to cope with the market price rise.
Good Energy, which specialises in providing energy from renewable sources, raised 3.1 million pounds in a share offer in June, while some of the biggest independent energy suppliers, including First Utility and Utility Warehouse, have hired established trading businesses, in these cases Shell and npower, to carry out trading and hedging.
Opus Energy, a business energy supplier in which Telecom Plus holds a 20 percent equity stake, is considering putting itself up for sale, the investor said last week.
Ovo Energy and Affect Energy, declined to comment on their hedging strategies due to commercial sensitivity. Other independents contacted by Reuters did not respond to requests for comment.
Additional reporting by Susanna Twidale; Editing by Susan Fenton and Lina Saigol