Bulb Energy: Will billpayers remain on the hook for multi-billion pound bail-out?
1 November 2023
- PAC concerned that not all of those who need energy bill support are yet accessing it
- Calls for Govt and regulator to strike the right balance between competition and market resilience following ‘low bar’ approach taken to licensing energy suppliers
Risks remain around the potential cost to the taxpayer following the collapse of Bulb Energy. In a report published today, the Public Accounts Committee (PAC) warns of uncertainties around the recovery of the £3.02 billion of taxpayer funds currently committed to funding Bulb, with concerns that extra costs could be added to customers’ bills at a time when many are already struggling with energy prices. The report also raises the alarm that not all of those who need support with high energy bills may yet be accessing it.
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While the Government expects to recover most of the investment insulating 1.5 million customers from Bulb’s failure, consumers may ultimately be left to foot the bill if this funding is not fully recovered. An estimated £2.96 billion of taxpayer funds could be recovered from Octopus Energy Group which acquired Bulb, leaving an estimated shortfall of £246 million to be borne by billpayers.
But this shortfall is in addition to the estimated £2.7 billion incurred for the 28 energy suppliers which failed before Bulb. The recovery of funding is also dependent on the continued commercial success of Octopus Energy, and could be deferred to September 2025 if wholesale energy market conditions worsen. The PAC is calling for details of the final cost to the taxpayer, including how much has been repaid by Octopus and any shortfall that Government plans to recover from consumers.
While commending the Government and regulator Ofgem for taking action to help protect customers after energy suppliers failed, the PAC remains concerned that not all of those who need support are yet accessing it. The inquiry heard that some 76% of vouchers issued to households to support them with their energy bills have been redeemed, leaving a significant portion of eligible households who have yet to claim the vital support.
The PAC’s report also highlights the ‘low bar’ approach taken by Ofgem to licensing energy suppliers. At least 73 new energy suppliers entered the market between 2010 and May 2022, but at least 65 suppliers exited the market over the same period. Ofgem’s failure to ensure suppliers’ financial resilience resulted in costs to the public when companies failed. The PAC recommends Ofgem and government ensure only suppliers with the necessary financial resilience to survive challenging market conditions are granted licences, at the same time as promoting healthy competition in the energy market.
Dame Meg Hillier MP, Chair of the Committee, said: “Our report is a sobering reminder that we are still living with the fallout of the failure of so many energy suppliers in 2021-22. While the Government and regulators did the right thing in moving swiftly to protect consumers, the uncomfortable truth remains that the recovery of that investment hangs on the commercial success of one company. The public can ill afford such uncertainty, particularly in challenging economic times.
“It is now increasingly urgent that those who have yet to access government support are helped to do so. The wider question now for Ofgem and government is how to strike the right balance between resilience and competition in the energy market. The ‘low bar’ approach to licensing new suppliers in the hope that competition and innovation would follow resulted in a market built on sand. This underlying fragility must now be firmly consigned to the past to ensure consumers are protected in the future.”
PAC report conclusions and recommendations
We commend HM Treasury, the Department and Ofgem for taking action to help protect customers after energy suppliers failed but remain concerned that not all of those who need support are yet accessing it. High energy bills have caused serious difficulties and hardship for energy customers and businesses across the UK. Wholesale energy prices have increased significantly, from £1,200 per year for a typical household in 2021, to £3,300 as of May 2023. To support households and businesses, the government and the energy regulator have introduced energy bill support schemes. We recommended in November 2022 that the Department needed to ensure that support to vulnerable households was provided in a timely manner. But, as we reported in June 2023, some of the most vulnerable and hard to reach customers have yet to benefit from the government support. Some 76% of vouchers issued to households to support them with their energy bills have been redeemed. This still leaves a significant portion of eligible households who have yet to claim the vital support. Government has also provided support to Energy and Trade Intensive Industries, but not for other sectors that can have high energy usage, such as the hospitality sector.
Recommendation 1a: Within six months, the Department should provide a review of the effectiveness of the range of support mechanisms that it has introduced and their impact on the energy market and customers and specifically look at the impact of the way energy companies supply businesses.
- b) As we recommended in November 2022, the Department should continue to update the Committee on how it is ensuring that government interventions to support people and businesses with their energy bills are accessible by those most in need, including: vulnerable people; the remaining household customers who have yet to claim their energy vouchers; and businesses not included in the Energy and Trade Intensive Industries scheme.
Ofgem’s failure to ensure that energy suppliers were financially resilient resulted in costs to energy consumers and taxpayers when these energy companies failed. To encourage new suppliers into the market and encourage price competition and innovation, Ofgem took a ‘low bar’ approach to licencing new retail energy suppliers. Between 2010 and May 2022, at least 73 new energy suppliers entered the market. However, over the same period, at least 65 suppliers exited the market. Between July 2021 and May 2022, 29 energy suppliers (including Bulb) failed, affecting nearly four million households. This has resulted in an estimated cost of £2.7 billion to use the SoLR process to transfer customers over to new energy suppliers, in addition to the estimated cost of £3.02 billion of taxpayer funding for placing Bulb in SAR and supporting its wholesale energy requirements up until 31 March 2023. Government expects to recover £2.96 billion of the taxpayer funding for the Bulb process from Octopus in September 2024. If Octopus repays the £2.96 billion in full, the government will be left with an estimated shortfall of £246 million (including a charge for accrued interest) which the government expects to recover from energy consumers. Ofgem asserts that it has introduced measures to test the financial resilience of energy suppliers and the standard of service they provide more effectively, and that these will apply to all suppliers in future. Ofgem considers that monitoring and assessing the financial and operational resilience of suppliers is the best means to address the risk of supplier failure and hence reduce the burden on taxpayers and energy consumers. But this needs to be balanced with the need to promote healthy competition between suppliers.
Recommendation 2: By the end of the year, Ofgem and the Department should write to the Committee, setting out the steps they are taking to promote healthy competition in the energy market while only granting licences to suppliers with the necessary financial resilience to survive challenging market conditions. It should also consider the market for business customers.
We are concerned that substantive risks and uncertainties remain to the recovery of the £3.02 billion of taxpayer funds currently committed to the funding of Bulb Energy. The government provided a package of temporary taxpayer funding to enable Octopus to complete the acquisition of Bulb via the Energy Transfer Scheme. Octopus is required to repay the taxpayer funding along with the accompanying interest applied to it. Teneo’s most recent estimate is that Octopus is expected to repay £2.8 billion to the government by September 2024. But this could be deferred to September 2025 if wholesale energy market conditions worsen. Prior to the government’s approval of the Energy Transfer Scheme, Ofgem identified risks around Octopus’s low levels of investor support and its over-reliance on customer credit balances for cash to fund its businesses activities. Octopus’s financial risks were difficult to assess as a result of its rapid growth which had left the business in a weaker financial position compared to other large suppliers. To mitigate these risks and to protect the taxpayer from potential loss of value from its investment, Bulb has been placed in a legal ringfence within the Octopus group until taxpayer funding is repaid. The final amount to be repaid, and therefore, the final cost to the taxpayer, will not be known until the SAR ends.
Recommendation 3a: Within 12 months, the Department should write to the Committee with details of what lessons it has learnt from the SAR and how it is using these to monitor and ensure the successful recovery of temporary taxpayer funding.
- b) At the conclusion of the Bulb SAR, the Department should write to the Committee with details of the final cost to the taxpayer, including how much has been repaid by Octopus and any shortfall that it plans to recover from consumers.
HM Treasury, the Department and Ofgem’s preparedness for the failure of a major energy supplier like Bulb, did not include the full range of activities needed to oversee a Special Administration Regime (SAR). Between 2018 and 2021, HM Treasury, Ofgem and the Department tested various scenarios to understand how a SAR might work in practice if a major supplier failed. However, this scenario testing and the subsequent guidance and templates focused on starting a SAR and the immediate steps needed to appoint a special administrator. They did not extend to some of the later stages of running a SAR, such as the energy purchasing strategy or how to structure and run the sale process. The Department did not anticipate that volatile energy prices, or uncertainty arising from new regulations being proposed by the Department and Ofgem in response to supplier failures, would result in low interest from potential buyers. This led to the sale process taking 10 months to complete, longer than originally intended. The SAR achieved its primary objective of ensuring the continuity of energy supply to Bulb’s customers. However, as only the initial stages of the SAR were rehearsed, some of the risks and issues encountered during the SAR were unforeseen. The government and administrator recognise the importance of detailed planning in the event of a future SAR to enable all those involved to better understand the potential risks and how to mitigate them and allow decisions to be taken quickly.
Recommendation 4: By the end of 2023, the Department and Ofgem should update their procedures for handling a supplier failure to ensure that they cover the entirety of the SAR process. This should clearly outline the key decision points during the SAR, the energy purchasing strategy, the sale process and exiting the SAR.
The complex nature of the Special Administration Regime and sale process has required specialist skills and advice that are in limited supply within government. During the SAR and sale process for Bulb, government sought and appointed various advisers to support the Bulb process and also to advise on matters such as creditor disputes and structuring the sale deal to protect taxpayers’ money. By the end of January 2023, the Department had spent £53 million on advisers. Of this, the Department spent £2.8 million on financial and legal advice on the oversight of the SAR and sale of Bulb and £49.9 million on Teneo as of 31 January 2023. The need for commercial and corporate finance skills across government has increased. It is important that all departments have access to these skills and expertise in order to make appropriate judgements concerning complex activities that link the public and private sectors. The Department has indicated that in addition to the cost of external advisers, it also sought advice during the SAR process from UKGI, the government’s centre of expertise for corporate finance. While the Department was responsible for scrutinising, the fees charged by Teneo, the Department delegated some of the responsibilities for scrutinising these fees to professional advisers. Teneo estimates its total fee, including future work necessary until the conclusion of the SAR, will be in the region of £60 million, which will be paid by energy consumers.
Recommendation 5: Within 12 months, HM Treasury, working with UKGI, should update the Government Corporate Finance Profession’s vision and strategy to ensure that departments have access to the right skills and experience from within the civil service to handle future supplier failures and similar transactions related to corporate finance.
Government’s approach to managing financial risks posed by fluctuations in energy prices does not adequately take into account recommended practice for privately financed energy suppliers operating in the sector. Ofgem requires energy suppliers to adopt an energy forward purchasing strategy, meaning they are required to have an energy price hedge in place to reduce the risk and impact of rising energy prices. Hedging is an energy purchasing strategy where energy suppliers contractually agree with a wholesale supplier or financial institution to purchase gas or electricity from the wholesale energy market for a specified price on a fixed future date. Suppliers buy energy in advance to match the expected demand of their customers. Energy suppliers that failed were insufficiently hedged or lacked access to funding for the collateral needed by their wholesale energy providers to maintain the contracts for the advance purchase of energy. HM Treasury’s guidance on Managing Public Money advises minimal use of hedging for government. But it does not contain guidance relating to situations where the government has intervened to provide taxpayer support to a private company, where following the public sector approach to hedging would make it stand out from the practice recommended by Ofgem and applied by competitors in the same market. This could risk having a negative impact on the wider energy market. HM Treasury accepts that in such circumstances, a pragmatic approach is required, and that minimal hedging is permitted where necessary.
Recommendation 6: In the next 12 months, HM Treasury should set out what information Accounting Officers should consider in making commercial decisions about companies that have been taken into the public sector from a sector where the accepted market practice involves the use of hedging or forward purchasing agreements.
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