What credit challenges has the COVID-19 lockdown presented for a business to business energy supplier?

The first challenge has been getting meter readings – with businesses closed and their staff furloughed, meter readers furloughed, and restricted access to shopping malls, physically getting someone to access a meter and provide a meter reading has been a rarity.  If ever there was an excellent reason for businesses to embrace automated meter readings with Smart meters, this is surely it!

Without a meter reading, bills would not reflect a customer’s reduced or minimal consumption during lockdown, leading to overstated bills that customers do not want to pay, particularly when they are closely guarding their cash.  And for the supply business’s financial position, an inflation of the debt position, pending actual meter reads and rebilling activity later in the year.

So a proactive approach was necessary, contacting customers to ascertain whether they were still open (if there were even staff available to answer the phone), as well as reviewing the customer portfolio by business sector, and applying an appropriately reduced estimate of consumption during the lockdown period.  This was also important to factor into the forecast for electricity purchases to minimise imbalance charges.

Electricity supply and bad debtors are a challenging combination – we cannot just ‘turn off the tap’ and refuse to supply anything more to them.  To isolate supply, we need to obtain a court order, and then send out a meter operative to carry out a physical disconnection.

During lockdown, the courts have been shut, and the meter operatives furloughed.  Aside from the ethical dilemma and potential reputational damage of moving to disconnect a struggling business during the pandemic, it has not been an option. 

The courts are now back and working through backlogs.  The meter operatives are returning from furlough and are working out what acceptable PPE looks like.  So even now, we are looking at a lead-time of several weeks before we can disconnect a supply and limit our debt exposure.  An increased bad debt write-off is inevitable, our challenge is to limit that increase as far as possible.

What about credit insurance?  Firstly, there are thresholds to meet before an insurance claim can be made, so debt from smaller businesses will not be covered.  Secondly insurance only covers a few months of billing, the assumption being that we will move to disconnect a bad payer as soon as possible to limit our exposure.  If processes are slick, the insurance should cover the period that it takes to disconnect, but this only works in a normal world where disconnection is actually possible!

For larger consumers, insurers can withdraw or reduce cover if they consider the risk exposure is getting too high.  The government has worked with credit insurers to put in place a Covid19 ‘guarantee’, (a reinsurance contract that the insurers are paying for), to help keep credit insurance cover in place.  This applies from 1 April until 31 December, and there is opportunity to appeal cover already removed and get it reinstated with effect from 1 April. 

It seems that this will eliminate a sector-wide reduction for the business areas most impacted by Covid19, such as retail, leisure and hospitality.  However cover can still be withdrawn on an individual customer basis as the insurers will only apply the guarantee where the risk has increased solely due to Covid19, and therein lies the rub – how can you extricate the Covid19 impact from a financial position that was already a little precarious?  Has the business only become high risk since the lockdown or did Covid19 expose underlying weaknesses?  As Warren Buffett so eloquently put it: “Only when the tide goes out do you discover who's been swimming naked”.