Realist, not conformist analysis of the latest financial, business and political news

Shoddy Firms Going Bust – Britain’s Gloriously Competitive Electricity Market

There seems to be a little misunderstanding of how markets work here – which is a pity as Ofgem is supposed to be the organisation that regulates Britain’s electricity market. The admission is that this market appears now to be finally working – this being thought of as a mistake which must be rectified. The problem identified being that at the bottom end of this market there is a plethora of shoddy fly by nights who are going bust in droves.

Err, yes, that’s the point. We positively desire this outcome.

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] The energy industry regulator has admitted that there are too many unsustainable energy suppliers providing gas and electricity to British homes after it encouraged a stampede of startups into the market. The chairman of Ofgem, Martin Cave, said customers had faced a string of energy company failures, “unacceptable” pricing tactics and “shoddy customer service” as the market has grown to more than 80 suppliers. The “downsides” of the market’s growth meant that “arguably too many suppliers have come into the market with unsustainable business models”, he told an industry conference. [/perfectpullquote]

So, someone sets up who arguably should not have done. This is how we do find out whether a business model works or not. Most don’t, the vast majority don’t. But this is how we advance, that small percentage which do succeed. This is how market based systems work, they chew through the varied alternatives to find those few which do add value.

But what about those failures? Should we not try to limit the number of them? Nope, not at all.

Think through what happens. Some likely types gain access to some capital – their own, that of investors, a few loans etc maybe – and they spend that on setting up and then trying to cover their initial losses. That runs out, they go bust. So, what has happened to that capital? It’s gone from the capitalists into the pockets of the consumers. For those consumers have been gaining their ‘leccie cheaper than they would have done through a business model that wasn’t a loss making crock.

And why would we want to limit this process? A new supplier that works, in a competitive market, must be doing so by being more efficient. Great, so, we’ve increased the efficiency of supply, we’re collectively richer. And the failures? They’re transferring money from the capitalists to the consumers. Our problem here is what?

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Dodgy Geezer
Dodgy Geezer
2 years ago

“…The “downsides” of the market’s growth meant that “arguably too many suppliers have come into the market with unsustainable business models”….But what about those failures? Should we not try to limit the number of them? Nope, not at all…..” Um. Businessmen are rarely stupid. These business models were not unsustainable in the sense of being poorly costed. What happened was that the Government decided to throw lots of taxpayer money into supporting uneconomic energy supply plans because activists believed in them. The money was made available, and entrepreneurs came and took it. Now the money tap is being turned off,… Read more »

Matt Ryan
Matt Ryan
2 years ago
Reply to  Dodgy Geezer

That money the government has taken by menaces from the tax payer is being wasted is in no way a surprise.That people will take advantages is also not a surprise. However, this isn’t one of those cases. These companies had to buy capacity on the wholesale market and sell it to customers. They probably assumed that if they priced low they could build a decent market share then shaft their customers with price rises. They failed before getting to that critical mass (unlike the big 6 suppliers). and that there is a large scandal there waiting to be uncovered….. Unlikely… Read more »

Dodgy Geezer
Dodgy Geezer
2 years ago
Reply to  Matt Ryan

“…They probably assumed that if they priced low they could build a decent market share then shaft their customers with price rises…”

Without looking at the details it’s hard to be sure, but my expectation is that the companies noted that the government were forcing ‘renewable’ energy to be bought, at a premium, in defiance of proper market competition, and expected that they would be provided with guaranteed profit as a result. For as long as the Government kept this up, the companies would profit – the minute the Government looked like cutting the guarantee they would scarper….

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