A challenger supplier in Cardiff signs its ninety thousandth customer in the spring. The tariff is the cheapest in the country, the comparison sites put it at the top of every table, and the direct debits land on the first of the month from households who will not burn much gas until October.
The bank balance looks superb. That is the problem. It is April, the customers are paying in advance for a winter they have not had yet, and most of the money in the account belongs to them rather than to the supplier.
The hedge runs eight months forward. The winter that has just been sold is twelve months away.
That gap is the entire business.
A few pence in the pound, and two rates of VAT
An energy supplier buys energy wholesale and sells it retail. Everything else is administration. Gross margin runs at about fourteen pence in the pound before a single overhead is paid, and the average domestic account is a little over a hundred pounds a month, so the whole return on a household sits inside a few pounds that the wholesale market can take away overnight.
Retail spending on gas and electricity in Britain runs to tens of billions of pounds a year, and it is served by a small number of firms. Counting suppliers is not an exact science, and the figures here are estimates of scale rather than an official series. Getting in costs between £3,000,000 and £30,000,000, most of it working capital, trading collateral and billing systems rather than anything you could sell afterwards.
The tax treatment splits the book in two. Domestic fuel and power is reduced rated at 5%, and has been since 1 September 1997; it was 8% from 1 April 1994. The relief sits in Schedule 7A, Group 1 of the VAT Act 1994. Supplies to business customers are standard rated in the ordinary way. A supplier with a quarter of its book in commercial contracts is therefore running two rates through one billing system, and which rate applies is decided by what the premises are, not by what the supplier would prefer.
Everything turns on the hedge
Nothing else in British trade has a year this sharp. Demand in December runs at roughly three times demand in July. A supplier selling a fixed tariff in May is promising a price for units that will mostly be burned between November and February, and it either buys those units in advance or gambles on what they will cost when they are needed.
So the trade is hedging. You buy forward, in tranches, months or years ahead, for a book of customers who can give you thirty days' notice and leave. Buy too little and a cold winter in a tight market ruins you. Buy too much and the customers switch to somebody cheaper while you are still holding energy you bought on their behalf.
Growth makes this worse rather than better. Every customer added after the hedge was placed is a customer you are supplying out of the spot market. A supplier that doubles its book in a quarter has not doubled its profit. It has doubled its exposure.
The margin is the gap between the hedge and the cap
One figure decides whether the business lives: the difference between the hedged wholesale cost per unit and the capped retail price per unit.
The price cap arrived in January 2019. It sets a ceiling on what a supplier may charge a domestic customer on a default tariff, expressed as a maximum unit rate and standing charge, and Ofgem resets it at intervals. It is a ceiling on the selling price. There is no matching ceiling on the buying price.
That is what makes the trade unlike any other. Most businesses meeting a cost shock put their prices up and lose some customers. A capped supplier cannot. When wholesale moves above the capped retail price it sells at a loss to every customer it has, it cannot refuse to supply them, and the more customers it has the faster it bleeds.
Business supply is the exception, which is why some suppliers stay out of the domestic market entirely. Commercial contracts are negotiated one at a time, usually for a year or longer, and nothing caps them. A business book behaves quite differently from a domestic one: fewer customers, larger volumes, negotiated prices and no cap over any of it.
Ofgem holds the licence, and can give the customers away
You cannot supply electricity or gas without a supply licence, granted and enforced by Ofgem. The licence carries conditions on how customers are treated, how debt and arrears are handled, how prepayment works and, since the run of supplier failures in the early 2020s, on whether the company holds enough capital to survive a bad month.
Ofgem's powers are unusually direct. It can issue a provisional order requiring a supplier to do something immediately. It can stop a supplier taking on new customers, which for a business that lives on switching is close to a death sentence. It can revoke the licence altogether. And it can run the supplier of last resort process, in which the customer book is transferred to another supplier, the outgoing company is finished, and the credit balances customers had built up are honoured by the incoming supplier, which recovers the cost through the industry and so through everybody's bills.
Around the licence sit the ordinary duties of any consumer-facing firm, including the data protection fee payable to the Information Commissioner's Office and the information and cancellation rights owed under the consumer contracts regulations. That is housekeeping. The licence is the business.
It dies of growing
The failure has a standard shape and it arrives quickly.
The book grows faster than the hedge, because growth is visible and the hedge costs money today. Wholesale prices move. The cap prevents any recovery of the higher cost. The customer credit balances that made the bank statement look healthy turn out to be other people's money, already spent on energy delivered last winter. Ofgem asks about financial resilience, does not like the answer, and the customer book goes to somebody else on a Friday.
A supplier can be growing at its fastest and be closest to death in the same month. That is not true of a café.
Where this shows up in the game
Run an energy supplier in Business Baron and the monthly decision is the hedge: how far forward to buy next winter's energy, and for how much of a book whose customers can all leave inside thirty days. You watch one number, the gap between your hedged cost per unit and the capped price you are permitted to charge, and you watch it through a demand curve that triples between midsummer and midwinter.
Ofgem is not decoration here. Take customers on faster than you can cover them and the resilience questions start. The ending, if you get it wrong, is the one the real trade has: a provisional order, a ban on new customers, and the whole book transferred to a rival while the credit balances you were sitting on turn out to have been a liability all along. The Energy Supplier page sets out the capital, the margin and the seasonality behind all of that.
It is one of the specialist trades, built to sit on top of the full game rather than to replace it. It exists separately because nothing else in the catalogue works like it: a selling price with a statutory ceiling, a buying price with none, and growth as the direct cause of failure.