Weak business models are more harmful than price rises for UK energy sector

Wiserfunding, the leading provider of credit risk assessment for SME finance, today revealed the results of a recent study highlighting systemic shortcomings in the assessment of dozens of UK energy providers.

The vast majority of defaulted energy companies Wiserfunding analysed, including Bulb and Orbit, provided clear evidence of financial distress long before becoming insolvent. Energy shocks, including wholesale price increases, simply exposed the vulnerabilities that were hiding in plain sight for many years.

With the war in Ukraine triggering another significant shock to the industry, the findings raise fresh concerns about the underlying health of the sector. They also highlight competent risk management, effective due diligence and sound regulation as the critical factors in future-proofing UK energy providers. Those with stronger risk profiles have mitigated the impact of macroeconomic and geopolitical stress through more resilient balance sheets and business strategies.

While the UK government reconsiders how to meet demand for energy in the long-term, following a move to phase out Russian hydrocarbons, Wiserfunding is calling for domestic suppliers to ensure their business fundamentals are sound to avoid future financial distress and more defaults.

Gabriele Sabato, CEO, Wiserfunding said, “While macroeconomics are a substantial trigger, the truth is that many energy companies have been financially fragile for a while and propped up by large, speculative investments. Russia’s horrific invasion of Ukraine is having a further knock-on effect as a macro risk, but won’t lead to the default of UK energy providers on its own,”

“Our analysis shows that before other recent crises, the regulatory set-up for energy companies failed to identify speculative behaviours and was fundamentally inadequate. These weak foundations were a major catalyst for defaulting UK energy providers in 2021. Identifying risk at a company level will improve the resilience of business models and financial performance, ensuring providers can weather future macroeconomic and geopolitical storms. Consumers cannot continue to pay the price for failings in the ability of regulators and investors to correctly assess and manage risk.”