16 February 2023
Supporting the industry during the gas crisis
The achievements of the vital but understated Credit & Risk team at Xoserve during that period won them a finalist nomination in the– recognising their hard work, agility and effectiveness in responding to the ever-changing situation.
Dave Turpin, Head of External Affairs, explains how the team facilitated the migration of millions of supply points in record time, minimising market risks and ensuring consumers received an uninterrupted service.
The perfect storm
Rising inflation, combined with Russia’s invasion of Ukraine, has impacted the energy markets in new and exceptional ways. According to Ofgem, between October 2021 and October 2022 the wholesale price of gas increased by 404%, causing a ripple effect that led to skyrocketing energy bills.
To protect domestic consumers, on January 1st, 2019, Ofgem introduced a price cap that would limit the amount households would be required to pay for gas, and that would be revised every six months to ensure sufficient relief to consumers. Consequently, after this date some gas suppliers were already struggling to operate with smaller revenue margins.
However, Russia’s invasion of Ukraine quickly exacerbated the situation. Although only about 5% of UK gas was imported from Russia, the sudden unavailability of Russian gas to other countries triggered a huge price increase on the international market.
This meant that in some cases, the wholesale price of gas for suppliers was much higher than the established price cap to which gas could be resold to the domestic market. On the other hand, while industrial and commercial (I&C) consumers did not have a price cap at the time, their fixed contracts meant that suppliers could not pass on the extra costs to them either.
Things were further complicated by the upcoming winter and the associated increased demand for gas for domestic heating. The inability to meet this demand and to absorb ever-increasing costs caused a record number of suppliers to go into administration – 21 in just three months – impacting 3.8 million energy consumers.
A quick reaction when time is of the essence
When suppliers fail, the gas supply doesn’t just stop. To allow consumers to experience an uninterrupted service, supply continues as usual. However, the money paid by consumers is no longer passed on to all parties involved in the production and distribution of gas.
At this point, National Gas Transmission is forced to buy the required gas to keep the system in balance. This is because an imbalance between gas coming in and out of the pipes would result in a drop in pressure, meaning that air could infiltrate the pipes and combine with gas, creating an explosive mix.
Capital expenditure for gas to supply to the domestic market is hundreds of millions of pounds per week. Therefore, if a supplier that holds a considerable share of the market fails, the financial consequences for National Gas Transmission and the entire energy market can be very serious, as every day could mean tens of millions of pounds of lost revenue across the industry.
Speed is of the essence and the ability to react quickly is crucial. So, when this happens, Ofgem quickly terminates the supplier from participating in the market and appoints a Supplier of Last Resort (SOLR) to take over.
It is at this point that Xoserve’s help becomes vital. Through its credit risk processes, Xoserve can help Ofgem in two critical ways: rapidly identifying suppliers who are failing to pay, and providing SOLRs with the information and tools they need to successfully start to deliver their services.
Between September and November 2021, when 21 suppliers went into administration,
Xoserve’s capabilities to support the market proved to be invaluable. Xoserve was able to identify suppliers who weren’t meeting their obligations within a couple of days, allowing regulatory bodies to react extremely fast to protect the market.
Xoserve was then quick to help in the transition process, providing SOLRs with the information they needed to buy gas and migrate a large portfolio of accounts.
A successful collaboration
A more complicated situation presented itself when a shipper that served more than 20 suppliers was on the verge of failure. When this happens, or when shipper and supplier are the same entity, it is not possible to appoint a SOLR, but a Last Resort User (LRU) will be nominated to take ownership of the account. In some cases, National Gas Transmission will also temporarily manage all processes until the majority of the shipper’s portfolio is migrated.
However, given the size of the shipper in question, National Gas Transmission was faced with a difficult proposition. The shipper’s failure meant that approximately 2 millions of therms per day of gas would have been unsupported, at a cost of millions of pounds per day. The energy balancing account of National Gas Transmission is designed for small imbalances, not to access funds of this magnitude, meaning that the risk for the industry was huge.
At this point, Xoserve, in collaboration with the Government and the Energy Balancing Credit Committee, worked with the shipper in question to quickly migrate its suppliers to other shipping arrangements ahead of its failure. This involved switching a huge number of supply points in record time, on top of managing regular traffic.
Xoserve facilitated communication between a large number of parties, and held daily calls with Ofgem and the shipper to coordinate the whole process, mitigate risks, and allow the shipper to exit the market as quickly as possible. The constraints of the system also needed to be taken into consideration, since only a limited number of supply point switches per day can take place.
Despite these challenges, the transition process was successful and concluded quickly. During October and November over a million supply points were switched to new shippers. This meant that the risk for National Gas Transmission and for the entire energy market was significantly reduced.
Ready for the future
The experience accumulated while assisting the industry as so many shippers and suppliers exited the market has left Xoserve in a stronger position to help in the future.
Although it is unlikely that a similar scenario will present itself again, it is possible that one of the largest shippers or suppliers might fail, and that an administrator will have to be appointed. If this happens, Xoserve will again be able to fully support the Government, while ensuring that its usual business activities run smoothly.
Last year’s situation allowed Xoserve to have a better understanding of some of the system’s constraints, and to proactively work to improve them. Despite the fluctuations and complexities of a challenging market, Xoserve has demonstrated once again its commitment to supporting the gas industry and engaging a wide variety of stakeholders, quickly and reliably.
Although our Credit & Risk team didn’t win the ultimate accolade on the night of the British Credit Awards – losing to Weightmans LLP – we are all incredibly proud of them and their nomination.
Share this news article