UK power supplier Octopus Energy has warned it will take a £100m hit this financial year from record wholesale energy prices.
The private company, which is Britain’s fifth biggest electricity and gas supplier, has warned it is incurring losses because there is currently a £600-£700 difference between how much suppliers can charge customers under the energy price cap and wholesale market prices.
In the past six months, 27 UK energy suppliers have gone bust as wholesale prices have soared. Initially, the crisis largely affected poorly run companies that did not have the balance sheet strength to withstand price rises or had not adequately hedged their energy requirements, but the warning from Octopus, whose shareholders include Al Gore’s sustainable investment fund, shows better managed companies are also feeling the effects.
Greg Jackson, chief executive, said the company was having to absorb higher costs because more households than expected were moving from fixed-price deals when their contract expired to cheaper tariffs protected by the price cap, which was introduced in 2019.
In a normal market, most of those customers would have agreed a new fixed-price deal: these longer-term contracts used to be cheaper than the price cap but are now hundreds of pounds more expensive. Alternatively, they would have switched supplier.
Jackson insisted the £100m hit wasn’t “cataclysmic” but he and others in the industry have been pushing the UK government for ways to help them smooth out price volatility for households over a period of several years but without risking their own balance sheets.
He said the industry was already “full of mechanisms” that allow certain costs to be recouped over a long period of time — for example contracts that incentivise new low carbon power generation.
“In the same way, you could inject money into reducing bills for customers and then recoup it over a period of time,” Jackson said. “We will keep looking at solutions like that.”
Octopus warned of the £100m hit as it published its results for the last financial year ending April 30, 2021.
Its UK energy retail business made an operating loss of £84.7m during the year, compared with a £47.9m loss in the previous 12 month-period, although it blamed this on “continued re-investment in rapid growth” and insisted that if exceptional items and the costs of acquiring new customers were stripped out, operating losses would have narrowed to £1m. Revenue increased 57 per cent during the year to £1.89bn.
Despite the crisis, Octopus Energy Group, the parent company that also owns renewable energy generation assets and technology platforms, has continued to attract external investment, including from Canadian pension fund CPP Investments, pushing its valuation close to $5bn.