The energy sector is facing challenging times

The energy sector is facing unprecedented challenges driven by global gas demand. An increasing number of suppliers are failing – in this article we address some key concerns around this ongoing crisis.

The cost of gas has risen by more than 250%, which is placing immense financial pressure on the whole supply chain. This situation doesn’t only impact suppliers, but also gas shippers, and National Grid in its role as ‘residual balancer’.

Energy suppliers are struggling to stay in business

At the time of publication, 12 suppliers have already ceased trading as the cost of purchasing gas exceeds revenues from their retail consumers.

This has resulted in 1,743,036 supply points being affected.

There has also been an impact on shippers, with three shippers failing to date and exiting the market.

Why gas shippers are also affected

A gas shipper is a licenced organisation that arranges for gas to be transported to consumers. They contract with suppliers to ensure gas demand for their consumers is consistently met.

The shipper also pays to use the network of pipes that’s needed to get the gas into homes and businesses.

Suppliers pay shippers for this logistical work on their behalf and recover the costs from consumers.

If demand is significantly higher or lower than predicted, it will result in short term buying and selling to balance the volume of gas.

Short term activities are more expensive than longer term planned activities. This means that shippers are exposed to the price of the commodity before suppliers.

If suppliers are unable to recover enough costs from their consumers, shippers are faced with a financial shortfall.

What happens when a supplier fails – Supplier of Last Resort (SoLR)

The Supplier of Last Resort or SoLR is the first line of defence for the energy sector when suppliers fail.

This is a process undertaken by the energy sector regulator, Ofgem.

When a supplier fails, SoLR is designed to ensure that consumers are transferred to a new supplier.

What happens when a shipper fails

When a supplier’s shipper fails, the responsibility for finding a new shipper sits with the supplier.

The Uniform Network Code (UNC) sets out the terms for these arrangements, making provisions for a shipper failure. These terms are in place to safeguard the supply of gas and avoid cost spikes being passed onto consumers.

All suppliers sign a ‘Deed of Undertaking’ when being licenced to supply gas in Great Britain.

This triggers the temporary transfer of the shipper’s financial responsibilities over to the supplier if their shipper fails.

When invoked, the supplier will have 25 days to secure an alternative shipper.

Until the new shipper is acting for the supplier, National Grid Gas will act in lieu of the failed shipper. This ensures enough gas is in the system to meet the needs of that supplier’s customers.

What happens when a shipper and supplier fail together

In the past, a shipper and supplier failing at the same time has been considered unlikely.

These unprecedented market conditions mean that it’s now highly likely.

The SoLR process still acts as a first line of defence in this scenario.

When a consumer supply point loses its supplier, it will be transferred to a new supplier.

For this transfer to take place, the new supplier must have an existing shipper relationship.

How Correla is helping Xoserve, the gas industry’s Central Data Service Provider

Xoserve are the gas industry’s Central Data Service Provider, or CDSP.

Correla work as a key service provider to Xoserve, delivering much of the back-office functions such as invoicing and gas industry data flow management.

In response to the retail energy crisis, Correla have been taking part in workshops with Xoserve, National Grid Gas and Ofgem, the energy regulator.

The aim of this work has been to address the two key priorities of the regulator; to ensure security of supply and to minimise price shock to consumers.

The outputs from the workshops have concluded that expediting the SoLR process will reduce the cash flow risk to other industry participants.

A reduction in cash flow risk will in turn address both of Ofgem’s priorities.

We continue to work closely with Ofgem exploring what additional steps can be taken to free up more capacity to support the SoLR process.

You can find out more about the current energy crisis on Xoserve’s Supplier and Shipper failure webpage.

For any queries, please email us at press@corrella2023.co.uk.