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UK supplier Good Energy '90% hedged' but warns of heightened market risk

Highlights

Has large fraction of business clients

Kwarteng stands firm on price cap

GB 'no longer cost-reflective': VaasaETT

UK clean energy supplier Good Energy is more than 90% hedged for the next 12 months, limiting its exposure to price volatility in the UK domestic energy market, it said in a trading update Oct. 11.

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Gas prices are six times higher year on year and have doubled in a month, forcing a dozen small UK suppliers out of the market and spurring rumors that trading houses are injecting massive amounts of credit to cover positions, or closing out loss-making positions at exorbitant cost.

While Good Energy's 90% hedged position was weighted to this coming winter, "the business, like the sector at large given recent supplier exits, remains subject to a higher level of market risk."

The company, which has around 250,000 customers, had recently applied "material price increases" in both domestic and business supply segments, it said. It supplies 100% green energy, but in the gas segment this is largely offset meaning it still has to source natural gas from the wholesale market.

With 143,000 of its customers in its business segment, however, Good Energy is less exposed to the millions of loss-making domestic price cap tariff customers that other suppliers are effectively having to subsidize.

Nevertheless customer billing and collections "remain a core short-term focus to minimize working capital stress and maintain a cash buffer over the winter," Good Energy said.

Cap stays

Over the weekend Secretary of State for Business, Energy and Industrial Strategy Kwasi Kwarteng restated there would be no removal of the tariff cap, despite calls from suppliers to suspend the mechanism.

Kwarteng also stressed the government remained confident in security of gas supply this winter.

And he highlighted the GBP2 billion ($2.7 billion) package of support that has been made available to industry since 2013 to help reduce electricity costs.

Commenting on the crisis, CEO of retail market specialist consultancy VaasaETT Philip Lewis said the the GB market "is no longer a cost reflective market, apparently no longer allowed to be independently regulated -- markets with politically decided price caps never are -- and arguably no longer an attractive place to invest."

Some retailers were ill-prepared for the volatility in the market, "but it is horribly simplistic and downright wrong to claim that it was the case for all who have or will leave the market. The consumer will be the loser here in the end, sadly in the name of customer protection," he said.

Margin calls

In the markets themselves, rumors have circulated of margin calls being made on buyers by trading exchanges, whereby platform users are required to post a greater level of collateral to secure future purchases, or face credit default.

No credit defaults were recorded by exchanges or power or gas market managers, one of which noted that even if a trader was in default, they could continue trading.

"Any company that enters default of the Balancing and Settlement Code will appear [on the BSC website] within 30 minutes," power market manager Elexon told S&P Global Platts.

Suppliers and generators could then continue trading assuming they had lodged sufficient collateral to finance 29 days of unpaid charges, a spokesman said.

"As prices rise, the clearing house announces margin updates," a clearing house source told Platts. "In any market, for any commodity, as the price goes up, the clearing house will, based on its risk models, raise margins, because essentially it stands between the seller and the buyer."

"It's been a real roller-coaster week," a UK trader commented. "If [the gas market] continues to drop it will open up a fresh set of headaches."

"There'll be a lot of companies in trouble with this volatility," a German power trader told Platts. "Even with prices moving back to 'normal' there could be problems next year in the case of producers or consumers not paying."

Platts assessed front-month UK NBP natural gas at 217.10 pence/therm Oct. 8, down from a high of 298.70 p/th Oct. 5.