It seems a special kind of genius to take on a corporate collapse caused by failure to hedge out commodity price risk — only to fail to hedge out commodity price risk, sending the bill for your bailout soaring.
That’s what the government is charged with doing in the case of Bulb, the failed energy supplier. Bulb went pop last November owing to rising wholesale gas and power prices and inadequate hedging, with 1.5mn customers taken over by the special administrator.
There is mounting concern about the cost of this regime, which could ultimately find its way on to household bills. Under Treasury rules, as then-business secretary Kwasi Kwarteng explained in May, Bulb couldn’t hedge by buying power ahead in the market. The consequences of that have been under scrutiny for months. Then last week, the Office for Budget Responsibility put the total cost of Bulb’s bailout at £6.5bn — sparking alarm at the soaring tab.
The decision not to hedge the cost of providing power to Bulb’s customers wasn’t entirely dumb. Buying ahead in the market smooths costs to suppliers, whose balance sheets can’t sustain the risk of buying in spot markets, and aligns the bill for buying power with what they’re allowed to charge by regulators.
The government doesn’t need to do that. Ultimately, the person selling the hedges makes money and the buyer pays for the protection. It is only with hindsight, or perfect knowledge about Russia’s invasion of Ukraine and the ensuing chaos, that hedging in November 2021 was obviously the right call.
The figure reported by the OBR actually came from the Treasury, according to the watchdog. Even in a world inured to big numbers, it looks bizarrely high. It is about £4,300 per Bulb customer, or more than £200 per UK household. The estimated cost has tripled since the last figure given in March.
Yes, the government has been stuck with Bulb for longer than expected; energy prices have soared this year. But even the most dedicated of energy boffins struggle to explain losses on that scale over the low usage summer months (unless Bulb just stopped collecting revenues). A warm autumn means that recently you’d have done much better buying in spot markets than hedging: gas prices, say, have been a third or less than that suggested by forward curves over the summer.
The lack of information about the £6.5bn figure — and the lack of transparency more generally, including on the terms of Bulb’s sale to Octopus — has prompted a rash of unsatisfactory theories.
The cost for Bulb to buy energy this winter is unknown and hugely variable. That is a roulette wheel on which the government could win or lose, and perhaps the £6.5bn is based on bearish assumptions. Also unclear is the amount going to Octopus when the deal closes to fund the hedging of Bulb’s customer book, although that is a figure that should eventually be repaid.
General bewilderment over the possible costs of the biggest public bailout since Royal Bank of Scotland and Lloyds Banking Group is hardly ideal. Nor is the secrecy around the whole subject.
Whatever the tab, it is more reason to overhaul a system that allowed inadequately-regulated suppliers to run risky business models before smearing the costs of their failure across the entire market.
It isn’t a matter of whether costs fall to general taxation or, regressively, on consumer bills. That, given government guarantees, amounts to much the same thing.
The issue is more generally a retail energy market where the “customer is the victim at the end of the line for everything,” says Laura Sandys, the author of Recosting Energy. She has long advocated an insurance system, where suppliers are forced to bear the costs of their own risk taking.
This isn’t a new problem. In 2018, regulator Ofgem concluded that the current market model was “not going to be fit for purpose for energy consumers over the longer term”, points out Adam Bell at consultancy Stonehaven, before essentially nothing happened. That concerned both delivering the innovation and technology needed in energy transition and also protecting customers.
The prospect of a £6.5bn bill might focus minds on ensuring that this time something fundamentally changes.