Scottish Power, owned by Spain’s Iberdrola, is calling for a portion of bad household energy debts to be pooled and sold to banks as part of a radical plan to deal with £4.8 billion of debt in the sector.
That’s according to a story in The Financial Times, a London newspaper.
Andrew Ward, chief executive of Scottish Power’s retail energy division, told the newspaper that securitising debts that less wealthy customers are deemed unable to pay would reduce pressure on suppliers, as well as the associated costs that are passed on to households each year.
Consultancy Baringa has warned that the amount households owe to their energy suppliers is on course to reach £7 billion by the end of 2027, which it argues would “deepen financial strain” across the UK.
“We need to stop going round in circles,” Ward said in an interview with the newspaper. “We are going to have to grasp this now. It has reached a point where it’s totally out of control.”
Scottish Power supplies gas and electricity to around five million homes and businesses.
Household energy debt, defined as debt and arrears more than 91 days old, has climbed to £4.8 billion across the UK as of the first quarter of this year, up from £1.1 billion at the start of 2018, according to Ofgem figures.
Under Ofgem rules, suppliers are allowed to charge all customers more to recoup the costs of bad debt from other households, which currently adds around £55 per year to the typical annual bill.
Baringa says that could rise to £100 per household if debts reach £7 billion as predicted.
Ward said suppliers were working to recover debts and stop the pile from increasing. But he said that a portion of households, accounting for an estimated one-third of the £4.8 billion, were simply unable to pay.
He argued that this portion of roughly £1.6 billion should be securitised and sold to banks, who would then be paid back over around 10 years at a cost of under £10 per household each year, according to the company’s analysis.
Households would still face costs connected to the wider debt pile, but overall they should pay less than without securitisation.
“We can look for support from the financial sector and we can ringfence off this debt; we can take that financial support and spread it over a much longer period,” he said. “We need to step in, it’s got too big.”
Ward said he had raised the idea with Ofgem, the UK energy regulator, and the UK government’s energy department. It is unclear how much support Scottish Power’s proposal has across the industry.
Ward stressed that suppliers would need to show they had followed up on unpaid bills and knew which households genuinely could not afford to pay.
Scottish Power parent firm Iberdrola has previously used securitisation to help finance its Spanish electricity network after the government fixed revenues from households lower than network costs, and in the US to help repair networks after a storm.