Why energy firm Bulb’s collapse may cost you £200

Energy company Octopus Energy is on track to buy collapsed rival Bulb, run by administrators, after it was bailed out by taxpayers.

You may not be one of Bulb’s 1.6 million customers, but if you pay taxes, you’re funding its rescue.

The estimated total bill is more than £200 for every UK taxpayer.

So how did a company that was seen as a poster child for the benefits of new competition in the energy market become the biggest government bailout since the 2008 financial crisis?

There are four main reasons: bad regulation, bad luck, bad government policy, and most likely some bad math.

For the past two decades, energy regulator Ofgem, with the support of the Conservative and Labor governments, has made promoting competition in the energy market a priority as the best way to reduce energy costs. British Gas’s former monopoly seemed a distant memory given the proliferation of dozens of new entrants competing via comparison websites and enabled by simple switching.

However, many of these companies had little or no shock-absorbing financial reserves. That was fine as long as they could pass any increases in wholesale costs on to their customers.

The landscape changed when a politically popular energy price cap was introduced in early 2019. There was a risk that energy companies might have to buy energy at a higher cost than they could sell it.

Well run companies managed this risk by buying their energy well in advance so they could survive under a cap set and monitored by Ofgem.

But some didn’t.

As energy prices began to skyrocket as global demand for oil and gas surged post-Covid, the difference between the wholesale price at which companies were buying energy and the lower price at which they were allowed to sell it was tens of thousands Companies went bankrupt that did not have the financial reserves to absorb these losses.

This exposed the regulator’s failure to pay due – or any – attention to the financial resilience of the companies it regulates.

Ofgem had a system whereby the customers of these small, failed companies were taken over by the larger, surviving companies. The additional costs that these companies incurred because they had to buy more energy at high prices for new customers were passed on to all consumer bills over time.

But Bulb was deemed too big for other companies to absorb and see another big spike in consumer bills at a time when energy costs were skyrocketing.

So in November 2021, Bulb was nationalized and special managers appointed to run it. The Government hoped to sell the business by the following spring and set aside £1.7bn to buy the energy to supply Bulb’s customers by then.

2. bad luck

But worse was to come and energy prices shot up again when Russia invaded Ukraine in February 2022, sending all potential buyers fleeing.

The government found itself owned by an energy company at its worst time in living memory.

Prices surged five and then ten times their pre-pandemic prices off Ukraine at the same time as the six-monthly energy price cap, meaning they were sorely exposed to the extreme volatility of wholesale energy prices.

The reason more energy companies didn’t go bust was because the well-run, financially resilient companies had hedged (“hedged”) themselves against that volatility by buying the gas they needed for their customers well in advance.

But the Treasury has long hesitated to do so. The government prefers to insure itself against financial risks rather than paying a fee to third party profiteers. “We don’t pay Aviva to insure battleships — so we don’t pay financial institutions to insure financial risks,” a Treasury Department official said.

But that’s a preference, not a rule.

A former senior Treasury official told the BBC that “Treasury theology would not rule that out”.

So the government could have insured against skyrocketing prices, but decided against it.

But even that isn’t the main reason behind Bulb’s whopping £6.5billion bill. It turns out that to date, Bulb’s admins have spent less energy on the purchase than the government initially forecast. Although the counter is still ticking, they have currently spent less than £1.2billion. It appears that the vast majority of the estimated bill comes from Treasury Department assumptions about a complex set of moving parts.

In order to bring Bulb back into private ownership, the government must set aside money to protect the potential buyer from taking risks that could ruin the company (Octopus) acquiring it.

Estimating the cost of this post-sale support depends on consideration of future wholesale energy prices, the level of future retail caps, the level of ongoing government support for bills, and assumptions about how much money the purchaser will repay the government from additional Gain through their new customers over time.

Industry sources have told the BBC that the government appears to take the most conservative/pessimistic view on all of these factors. Even some at the Treasury Department seem unsure how the number came about, while sources close to the current administrators have used words like “toppy” and “staggering.”

Some energy companies argue that this means Octopus received an unreasonable and unfair level of government support to take it out of public ownership.

Lawyers in court argued it was a massive sweetener – or a “money dowry” for octopus.

Octopus hit back, saying other companies were offered an equal chance to take on Bulb, but they walked away.

But crucially, opponents of the Bulb/Octopus deal say that by the time they were asked to consider acquiring Bulb, the government had not yet announced its energy price guarantee, which the government used to subsidize household bills, costing millions meaning of customers who wouldn’t be able to pay could now. This fundamentally reduced the risk of acquiring additional customers.

The agreement that Octopus is currently in court to take control of Bulb includes a profit-sharing arrangement that would result in Bulb repaying some government support over time if Octopus made a profit supplying customers from Bulb scored.

Estimates of the final likely bill range from “just” £3bn to £4bn, rather than the current estimate of £6.5bn.

Sources close to Octopus insist the government must act quickly as Bulb’s consumer satisfaction scores plummet, leaving the government and taxpayer with an asset that is depreciating in value.

The great energy crisis of 2021 and 2022 may not be over yet. Business Secretary Grant Shapps recently wrote to the remaining suppliers, urging them to reduce customer debits if they use less energy, leading some, including Centrica boss Chris O’Shea, to imply that some companies are essentially taking money from lent to their customers to fund their operations.

Some have called the energy bloodbath the biggest regulatory failure since the financial crisis. While it’s probably fair to say that few could have predicted a 10-fold increase in gas prices, regulators are there to imagine the “what ifs”.

Ofgem has promised a new regime that will focus on the financial resilience of market participants rather than their sheer numbers.

Many will say that this is something a regulator should have done anyway.