I was struck, while compiling the series on corporate factors that affect profitability, with the contrast between my thesis and what has been going on in the energy sector. As gas prices have risen rapidly in August and September of 2021 due to a post(ish)-COVID resurgence in demand a number of retail energy suppliers in the UK have folded and many more are facing the same fate.

I wondered why they hadn’t been able to survive longer presuming they had made significantly higher than expected profits during the pandemic. After all prices fell during 2020 and for most of these suppliers, demand would have been as high, if not higher, as they mainly supply domestic customers.

Had all these profits from 2020 been taken in large dividends, I wondered to myself (naively as it turns out), leaving these companies without the reserves to trade through the surge in prices?

But before we come to that, let’s just address the scale of the price shift over the last two years. Pre-pandemic, the wholesale price of gas was approximately 70p per therm. During the pandemic, the price fell to around 10p per therm, thats an 86% decrease. Right now they area at 160p per therm.

Now, maybe I’m in a minority, but I don’t remember my energy bills being reduced during 2020. And I’m fine with that. There is huge volatility in wholesale price of energy, particularly gas, and as consumers we are protected from that by retail tariffs. When the wholesale price goes down, the energy companies can earn more, allowing them to shoulder the burden when the wholesale price goes up. And hopefully we all come out about even. So how is it that 9 months of wholesale prices lower than pre-pandemic levels did not allow energy companies to absorb a steep, but so far short-term, increase in wholesale prices?

What were the profits from 2020 used for?

Well it wasn’t used to pay large dividends to shareholders, at least not in the case of the companies that have already gone bust.

They didn’t pay any dividends.

Because they have never been profitable, not in the whole existence of these companies. That is pretty much the case for People’s Energy, Utility Point, Bulb and even some of those companies still trading and expressing their viability.

That’s why a sudden uptick in wholesale prices has been so damaging, so quickly – they just didn’t have the reserves to weather the storm. And, those that have gone to the wall already clearly didn’t have investors prepared to pump in even more cash.

These are companies that have been growing rapidly and haven’t turned a profit in nearly ten years. Take Bulb, for example. Bulb was incorporated in 2013, so they have been trading in one guise or another for at least 8 years. In 2016 their revenue was around £800K and they spent twice as much.

They increased their revenues from £10M in 2017 to £183M in 2018 and to £1.5B in 2020. This might be seen as an incredible success story except for the fact that in the same years, they made pre-tax losses of £1.9M, £24M and £63M, respectively.

The race to achieve market share appears to have overtaken the need to achieve profitability.

I don’t know what this means for consumers. Does it mean that we have been getting cheap energy because many of the 70+ retail energy providers are prepared to sell energy at an unsustainably low price under-cutting those providers trying to sell energy at a sustainably profitable price? If this is the case, as the number of providers shrinks we can expect energy prices to increase. But this is not a story of market competition benefiting consumers by keeping prices down. It is a story of a market seriously skewed by investors propping up unsustainable companies. We consumers have no doubt benefited in the short term, but we are probably in for some mid-term pain.

And who are these investors that are prepared to keep pumping money into companies that have long-term plans to be unprofitable? And not just unprofitable, but increasing unprofitable year on year. What evidence do they have that these companies will tip over the edge into profitability at some point in their future? Have any retail energy providers done so? Please, let me know if you are aware of one. Or more.

If I was a conspiratorialist, I might wonder if these investors are intent on keeping us hooked hydrocarbon fuels. Because low energy prices from gas, oil and coal reduces the public desire to switch to renewables. But in a world in which public opinion is swinging, or has swung, towards greener energy solutions, can this continue? In which case, is this the real pressure causing retail energy providers to fold. In other words, the energy price rise may have been the bullet, but it is the investors that eventually pulled the trigger and killed their long-sickening calves.

On an unrelated point, many of these companies appear to have sold energy contracts based on green credentials and renewable sources. Why is it then that the gas price has been so catastrophic for them? I realise there are good explanations based on the structure of the national grid supply, but this must further bring into question the viability of some of these companies.

It seems the sector is looking for government bailouts. I have my opinion on that. What’s yours?