On Tuesday 18th January 2022, the energy market supplier Together Energy became the 27th such company in recent times to cease trading. The reason stated by the company was that “the sustained increase in wholesale prices, and the securities required to continue to forward purchase the energy, have meant that it is untenable for us to continue”.
This collapse has far reaching consequences for the people of Warrington as Warrington Borough Council (WBC) owned 50% of Together Energy shares. WBC now stands to lose tens of millions of pounds through loss of their investment, loans to the company, and other guarantees. A political storm has broken out, with predictable accusations of careless and inappropriate use of Council resources being met with claims of unfair treatment of the Council by central Government during the years of austerity since 2010.
Many people will be surprised by these events. What facts do we have to hand today and what lessons can be drawn from this disaster?
Why did WBC choose to invest in Together Energy?
In 2019, WBC published its Green Energy Strategy, which laid out several objectives that clearly underpinned their subsequent actions. These objectives included reducing fuel poverty, and the intention to “achieve social, economic and financial benefits in the delivery of this Energy Strategy.” In its analysis of the energy market in the UK, the Green Energy Strategy identifies the three main components of the market to be “Generation, Distribution and Supply”. WBC had already invested in renewable energy Generation projects in the form of solar farms in the UK, but in their strategy document they declared an intention to move into the Supply market:
The council strategy document states that:
“The Council intends to intervene in this area of the energy market, either by establishing an ESCO or acquiring an existing company, provided that the costs and benefits are proportionate …. The major aim of this would be to reduce fuel poverty in Warrington and deliver the Council’s Emergency Climate change declaration.“
What is intriguing is that elsewhere in the strategy document, WBC recognises that “the supply option offers little financial gain and a higher degree of risk”
What makes the energy market so risky?
The energy market brings together energy generators and consumers via suppliers such as Together Energy. The supplier offers a contract to supply electricity at a fixed price for 1 or 2 years – and of course consumers look for the lowest price contract, thereby keeping margins low for the many competing suppliers.
Energy prices can rise or fall during the period of the contract, but the consumer pays the same. So, the supplier must make a prediction of what will happen and purchase energy in advance to mitigate against a rise in price. To be completely secure in the market requires a lot of money, which smaller companies often don’t have, leaving themselves vulnerable when prices rise more than expected.
This year has been particularly difficult for small energy suppliers because the government has capped the price that can be charged while the price of energy has shot up. When contracts are renewed, suppliers cannot charge the consumer enough to cover the cost of energy, until the price cap catches up. Only those energy suppliers with deep financial resources have survived; nearly 30 smaller companies have collapsed. Until now, the Energy Supply regulator, Ofgem, has prioritised having a large number of suppliers in order to create a competitive market, but it recently recognised the need to also ensure financial stability.
These three factors of tight margins, price volatility and government regulation make this a risky market for all but the biggest companies.
Timeline of the Together Energy collapse
What do we know about the collapse of Together Energy? Accounts for Together Energy up to Oct 2020 are available at Companies House and for WBC up to March 2021 on their website. The following are extracts from these accounts:
- 2018 – Together Energy Auditors noted that additional funding was needed to allow the business to continue as a going concern. (This means the auditors believed the company was likely to run out of money in the near future.)
- 2019 – Together Energy received a loan of £4m from a shareholder (WBC, who had paid £18m for a 50% stake).
- 2020 – Together Energy was advanced an additional loan of £240K. Together Energy also entered a revolving credit facility (for £16m) with WBC and drew down £9.6m. (The credit facility allowed them to take loans up to £16m; they actually borrowed £9.6m at this point.)
- 2021 – WBC guaranteed a payment of £7.3m owed by Together Energy to an energy supplier, bringing reported current exposure (March 2021) to £41.3m.
It is likely that since March 2021, further loans and/or financial guarantees have been made by WBC in a fruitless attempt to keep Together Energy afloat. A figure of up to £50m exposure is quoted by Andy Carter MP for Warrington South.
What lessons can we learn?
The investment by WBC in Together Energy has cost tens of millions and will have serious consequences for the future of the town. You don’t have to be a financial wizard to appreciate that investing in a business such as Together Energy is much riskier than having a stake in a physical asset, such as a building or even a solar farm. Together Energy was a small company trading in a fiercely competitive market; its demise makes WBC look like a naïve investor forced to stump up ever increasing amounts of money in order to protect their position. In this light, WBCs stated strategy of tackling fuel poverty through owning a supply company did not seem to have much logic behind it and was certainly badly timed. The Labour dominated Council that led this initiative may, in time, be punished at the ballot box for their mistakes, which is how democracy works.
However, while WBC clearly made mistakes, they were at the same time attempting to contribute to the Government’s Net Zero strategy, which demands new and innovative approaches to tackle the climate emergency. Moreover, the concept of Levelling Up requires local authorities to have more independence and resources to tackle long standing problems in the communities they know best.
One solution is that rather than gathering more and more control to itself, the London Government should be developing ways to support regional and local authorities to develop and execute plans to drive change. The Warrington experience shows that this will involve providing more expert help and support to make complex investment decisions.