With the medical aspect of COVID19 more or less under control, it’s time to deal with the economic ones. Not to put too fine a point on the matter, there are four pressing questions which need to be resolved. Who needs help? How much help do they need? How is this help going to be provided? Who is going to pay for it?
Who needs help?
It might be tempting to answer “everybody” but that isn’t actually true. Some companies have managed to “keep calm and carry on” through the lockdown. Some companies have even thrived. Even those which have suffered have suffered to varying degrees. What’s more, these differences aren’t just reflections of different industries. They can apply to different companies within the same industry.
In the energy sector, for example, suppliers who focussed on the core domestic market have a relatively high chance of having survived, possibly even thrived. Domestic suppliers who targeted vulnerable markets, however, have been hit by a wave of requests for payment holidays and straightforward defaults. Suppliers which targeted commercial markets basically saw their demand evaporate overnight.
As is generally the case in these situations, larger suppliers are more likely to be in a better position than smaller ones. Firstly, the fact that they’re bigger means that their risk is spread over a wider customer base. Secondly, bigger companies are more likely to have bigger cash reserves. If nothing else, their size can give them more negotiating power.
How much help do they need?
According to Ofgem electricity supply groups need up to £1.6 million and gas shippers need up to £1.2 million each. Putting all that together, Ofgem estimates that a total of about £350 million of support will be required.
How will this help be provided?
Essentially it will be given in the form of credit notes. In simple terms, qualifying suppliers will be able to defer their mandatory payments to maintain electricity and gas grids. At present, it is being proposed that the deferment period extends to March 2021 and that an interest rate of 8% be charged on the credit balance. It should, however, be noted, that the proposed scheme is still in the consultation stage. This means that both the date and the figures involved could change, possibly significantly.
Who will pay for this help?
This is a more interesting question than it might initially sound. On the one hand, you could argue that the suppliers are effectively picking up the bill themselves. After all, they will still have to pay their dues and they will have interest added on top. In fact, you could make a case for arguing that they will have a very high rate of interest added on top.
On the other hand, you could argue that this money will only be paid if the supplier stays in business. That means, effectively, it will be paid by their customers. If the supplier does not stay in business, then the UK taxpayer will pick up the tab. In fact, whatever way you look at it, the costs of this deal will be passed onto the public.
This raises the question of whether it makes sense to charge any interest on the late payment, let alone 8%. Admittedly, this could raise the issue of “moral hazard”. In other words, it could be seen as showing favouritism to certain companies.
On the other hand, you could also argue that these companies suffered the most because of the specific niches in which they operated. If a lack of support means that companies pull back from these niches, there will be less competition and that is generally bad news for customers. It may, therefore, be in the public interest to extend targeted support to the companies which need it the most, even if that seems unfair to the others.