Economy Energy fuels sector fears with dash for funds

A gas and electricity supplier to nearly 250,000 homes is seeking a rescue fundraising to avoid becoming the tenth company to collapse amid the crisis which has engulfed the sector this year.

Sky News has learnt that Economy Energy, which is based in Coventry, has drafted in KPMG to undertake a review of its "strategic options", which are said to include a capital injection or outright sale of the business.

According to a document headed "Project Wattley", the accountancy firm is advising an unnamed utility which "has a number of offerings including pre-pay tariffs, direct debit tariffs" and which boasts a "significant customer base at 244,000 customers".

Energy sector insiders confirmed that the company referred to in the document was Economy Energy.

The document, a copy of which has been seen by Sky News, does not include details of the company's ongoing financing requirements, although sources suggested that it would need access to new funding in the coming weeks.

Economy Energy's hunt for new backers comes amid a flurry of collapses of smaller suppliers, such as Spark Energy (Frankfurt: SLE.F - news) , which saw its 290,000 customer accounts acquired by rival Ovo Energy late last month.

Others to have ceased trading include Extra Energy, Future Energy and Iresa.

Flow Energy, another independent player, left the UK market after its customer base was sold to Co-op Energy.

The crisis among smaller suppliers has been triggered in part by rising wholesale prices and the intense competition among new entrants to build scale by offering heavily discounted tariffs to attract customers.

They have also been impacted by the demands of green levies called Renewable Obligations, with the failure of collapsed suppliers to pay them leaving an £80m shortfall that may have to be met by UK households.

Last month, Ofgem, the industry regulator, said it had opened an investigation into whether Economy Energy complied with the requirements to pay the levy, with data showing that it owed £15m at the end of October.

The company issued a statement earlier this month in response to suggestions that it was about to collapse, having failed to meet its regulatory payment obligations.

"In response to the recent speculation and circulating misinformation, we would like to provide assurance that we at Economy Energy have no intention of closing our doors," it said.

"We will pay our outstanding ROCs obligation in full, business will continue as usual for our customers.

"We would like to thank customers for their loyalty and continued support."

A spokeswoman for Economy Energy declined to comment on the appointment of KPMG.

According to the document circulated to potential investors, more than 80% of the company's customer base have been on supply with it for at least a year, with turnover said to have increased by 135% in the year to 31 March.

The troubles afflicting independent suppliers come as bigger players in the UK energy retail industry prepare for the introduction of a price cap next month.

Ofgem has said the cap will save customers on default tariffs £76 on average each year, and benefit 11 million customers.

On Monday, SSE (LSE: SSE.L - news) and Npower announced that their plans to merge had been abandoned, citing the proposed terms of the price cap and changes to market conditions.