For Greg Jackson and his energy company Octopus, the coronavirus pandemic could prove existential.
Last week, the founder of the small energy supplier laid bare the crisis as a growing number of customers struggled to pay bills. “I’ve been asked why Octopus aren’t, for example, just giving all customers a blanket payment holiday — or even writing off bills,” he wrote in a blog. “I heard someone on the radio saying, ‘These energy companies make so much money — why can’t they help?’”
Jackson’s pockets are only so deep. He has closed his firm’s offices, given protective gear to staff and plans to pay up to 100% of their wages, topping up the government’s job-retention scheme.
Octopus, which was set up in 2016 and has 1.2 million customers, risks going bust if it has to shoulder big defaults. Waiving the bills of 15% of customers would mean losses of £14m a month, he said.
“Energy companies — at least most — don’t make shed-loads of money. Octopus lost £29m last year.
“Underlying it is a fact of the modern energy market: margins are wafer thin.”
The outbreak has heaped more pressure on utility companies’ already-stretched finances. Last week Centrica, owner of British Gas, warned of a spike in defaults from cash-strapped households and businesses. It cancelled its dividend and sent shares crashing: they ended the week at just 31.8p, one-eighth of what they were trading at five years ago, valuing the fallen giant at a mere £1.9bn.
Chris O’Shea, the former finance director who has stepped up to become interim chief executive after the departure of Iain Conn, said Centrica would slash £400m of costs.
Ovo, another energy challenger, which just paid £500m to buy SSE’s customers and become one of the big six power companies, said it would furlough 3,400 staff — a third of its workforce — because they cannot install smart meters or carry out all but essential operations.
The crisis is likely to mean more failures among power suppliers, whose numbers proliferated as an array of thinly capitalised start-ups joined the market. Last month another, Gnergy, went bust. Its 9,000 customers were taken on by rival Bulb.
There is another hit: falling demand from customers is exacerbating the squeeze on margins — particularly for companies that generate power. While many more people are working from home, this is not enough to outweigh the collapse in demand from the economy going into hibernation and businesses being mothballed.
Simon Virley, head of energy at KPMG, said: “For generators, power demand is already about 10% lower than normal at this time of year, leading to falling wholesale prices and more pressure on margins.”
The mess has prompted a request from the industry for the government to help create a fund offering payment breaks to customers struggling with bills. “We have also been having discussions with the government to explore if any additional financial support could be required to help customers over the coming months,” said Energy UK.
Juliet Davenport, boss of energy supplier Good Energy, said a bill-support package was essential — but “must not be used as a get-out-of-jail-free card for companies who had unsustainable finances in the first place”.
The cries for help pose a dilemma for regulators and the government. Energy firms have a reputation — not always justified — for profiteering. Yet with the Treasury stepping in to support an array of private industries, and ministers telling lenders and landlords to offer forbearance to customers struggling to pay mortgages and rent, the idea of supporting utility bills may have some merit.
“We are all in this together,” said Investec analyst Martin Young. “If cash collection falls, there are impacts for everyone.
“Government, regulators and industry need to work together urgently to find a solution, but also to maintain regulatory integrity.”
Water companies and energy networks, which own the lines that connect households with power stations, are thought to be making similar pleas.
Water UK, which represents the water industry, is understood to be in talks with the government and regulator Ofwat about a bailout package. It wants companies to be temporarily released from some of their obligations around upgrading pipelines and sewerage systems — which can incur big financial penalties if targets are missed. Companies also want to be recompensed for large numbers of customers failing to pay their bills, such as by allowing them a higher rate of return, and letting them recoup the cost of defaults in the years ahead.
But as with power firms, the idea of propping up an industry that has a tarnished reputation after years of taking out hefty dividends, while being responsible for scandals such as huge sewage leaks, may not pass muster with ministers.
The utilities will have a job to convince the government they warrant a bailout.