The collapse of the small energy firm casts a shadow over the Scottish Government’s plans, writes Martyn McLaughlin.
It has been 33 months since the SNP first unveiled the idea of a publicly owned energy company, and yet there remain more questions than answers over its scope, purpose and business model.
The initiative was unveiled with little fanfare, buried in the foothills of page 30 of the party’s 2016 manifesto. Other than drawing the occasional comment from seasoned Holyrood watchers, it fizzled out fairly quickly.
It was only the following October, with First Minister Nicola Sturgeon’s speech to the party conference, that the policy gained traction.
She explained how under the state-owned vehicle, energy would be bought wholesale or generated in Scotland before being sold to customers as close to cost price as possible.
There would be no shareholders to worry about, and no corporate bonuses to consider. “The idea, at its heart, is simple,” Ms Sturgeon said.
But ideas, especially in politics, are easy. It is the execution that counts.
It is interesting to recall the significant early shift in the Government’s vision for the company. The 2016 manifesto promised to “explore the potential” to set up a such firm, but said its remit would be to “help the growth of local and community energy projects”.
That is quite a leap from the revised blueprint envisaging a firm which generates its own energy to sell on to ordinary consumers.
The Government is quite entitled to move the goalposts, especially when one of its overarching aims is to tackle to blight of fuel poverty. But it is important for it to show its workings.
In an already crowded market where the margins are tight, how can a Government-owned supplier make the kind of lasting difference that the 60 or so existing suppliers can not?
The answer, if there is one, remains up in the air. A strategic outline case and a scoping paper have been produced, but other than promising to work alongside local authorities in putting flesh on the proposal’s bones, Paul Whitehouse, the energy minister, is keeping his cards close to his chest.
In a fast-moving and volatile arena such as the energy market, prudence and patience are useful qualities, but the Government has been given a great deal to consider of late.
If the collapse of the Edinburgh-based supplier Our Power came as a shock to its 38,000 customers last week, you can be sure the aftershocks went all the way to the bottom of the Royal Mile.
The Scottish Government not only lost the £9.5 million it gave Our Power in the form of three commercial rate loans; the firm’s demise dealt a major blow to the very idea of a Government-backed energy supplier.
Any analysis of why Our Power went to the wall must acknowledge the misfortune it endured when its billing system provider pulled out of the market. but it suffered too from the rise in wholesale prices which took a considerable amount of money out of the business. Such trends have contributed to the collapse of nine other small energy providers in the past year alone.
As Alister Steele, the chairman of Our Power, pointed out after the company ceased trading: “It is now generally accepted that it is unclear what the level of financial backing is required for a new entrant to cope with market volatility and regulatory change.”
Such a sombre observation cannot be ignored by the Scottish Government, especially if the new firm is to rely on wholesale markets.
It is telling that, only last October, when Holyrood’s economy, energy, and fair work committee gathered to consider the plans for the publicly owned supplier, one of those industry figures to sound a cautionary note was Mr Steele.
He pointed out that while an active swath of consumers manage their energy online and regularly switch suppliers, the same is not necessarily true of the demographic targeted by Our Power and, in time, by Scotland’s national public energy firm.
“We entered the market with one tariff for all customers no matter whether they were paying by prepayment, by direct debit or on receipt of a bill, and we embraced the warm home discount from day one,” Mr Steele told MSPs. “Although we took on all those things, it is difficult to get people who are not engaged in the energy sector to switch.
“I do not see evidence from the work that has been done to date for the idea that a new company could come into the market and begin to make a big impact on fuel poverty, because accessing that body of consumers who are disengaged is very difficult.”
That warning tallies with research carried out by Citizens Advice Scotland which shows an alarming disparity in switching among different socio-economic groups. While the average rate stands at 25 per cent, it falls to 19 per cent among those living in social housing, and a mere 10 per cent among the unemployed.
Would a new entrant with the marketing expertise of a devolved government succeed where Our Power failed? It stands a better chance, for sure, but with state aid rules to bear in mind, the challenge remains formidable. Such are the low margins in electricity and gas markets, ensuring the firm can deliver some of the lowest prices will depend largely on its ability to build up a large customer base.
It may be the Government has a novel solution to bolster renewables, address decarbonisation, and help tackle fuel poverty in one fell swoop, but 33 months on, the odds are increasingly stacked against it.