Wed. Dec 1st, 2021

On a windy summer day in July when Boris Johnson sat on the terrace of Bulb’s headquarters in Bishopsgate, London, he was full of praise for Britain’s seventh largest energy supplier and described it as a “wonderful company” which offered customers 100 percent renewable energy.

“Looks incredible to me,” the British prime minister said as he visited the premises of the company that first entered the market in 2015. And so it proved on Monday, when Bulb became the 23rd victim of the sharp rise in energy prices since the summer, affecting a total of 3.7 million customers.

Until now, affected households have been quickly transferred to competitors under an industrial rescue scheme, funded by a levy on accounts. But Bulb’s size – with 1.7 million customers being the largest supplier to fail in 20 years – means it will enter ‘special administration’, the first use of the mechanism since its launch in 2011.

Bulb will be managed by administrators on behalf of the government until it either sells, restructures or transfers its customers to its other suppliers. The taxpayer will pay the bill, which is expected to amount to hundreds of millions of pounds.

But with more failures expected this winter, analysts have warned that the total cost to the treasury and energy bill payers will amount to billions of pounds.

A flow chart showing how more than 3 million customers have been affected by the UK retail energy crisis since August.

The crisis has prompted consumer groups, politicians and industry executives to call for urgent action in a sector that 50 domestic suppliers at the end of June.

“When the country’s seventh largest supplier fails, serious questions need to be asked about the state of the market and how it is regulated,” said Gillian Cooper, head of energy policy for Citizens Advice.

Operations managers have long argued that the regime is too light-hearted to not adequately assess the liquidity of new entrants and whether their financial model can withstand price shocks. Suppliers are bound by a price limit that covers about 15 million households that are reviewed twice a year, which has limited their ability to pass on the rising wholesale energy costs to customers.

The limit was only introduced in 2019 by Theresa May’s government after years of pressure on “waste” energy bills. The regulator Ofgem reviews the cap twice a year, with the next change only in April.

Meanwhile, ministers have made it clear that they do not intend to intervene. “Later we will have to look at regulatory reform, but the priority now is to protect consumers, not companies,” an Energy Department official said.

The CEO of one major supplier said action should have been taken sooner, pointing to the “screaming obvious” holes in the sector’s oversight as far back as 2016, when a rise in wholesale prices led to the collapse of the first new entrant GB Energy. “This is a spectacular failure of regulation,” he added.

A graph of pre-tax domestic supply EBIT margins of large suppliers, combined gas and electricity (%) showing that industrial margins are small

Larger suppliers in particular have long complained that regulators and politicians have encouraged a “race to the bottom” over energy prices. Amid shouts from politicians to cut energy bills, the regulator has been urging new entrants since early in the past decade to break the power of what were then known as the “Big Six” suppliers: British Gas, EDF, Eon, ScottishPower, Npower and SSE – the latter two have since left the market.

But the newcomers often took on customers at a loss to gain market share. Many gambled that wholesale energy prices would not rise and have insufficient hedging strategies to protect themselves.

Andrew Lindsay, co-CEO of Telecom Plus, which owns Utility Warehouse, the 10th largest energy provider, said the failures came as no surprise. “All that has happened in the last 10 weeks is what I call the final blow, which has been an existing inevitable trend.”

Some providers insist on much stricter regulation similar to the financial services sector. This will include stricter control of financial models and protection of customer credits.

“We should not accept providers who are not properly capitalized and who gamble effectively with customers’ money rather than investing their own shares,” says Michael Lewis, UK CEO of Eon, the second largest provider.

But industry executives also want ministers and the watchdog to recognize that they need to be able to make a sustainable profit and complain that the price limit is too inflexible. Figures from Ofgem data show that the largest suppliers in total were unprofitable last year.

John Penrose, a Conservative backbench MP who was one of the leading campaigners for a price cap before its launch, admitted on Tuesday that politicians misunderstood it.

“We are where we are today because of mistakes made by parliament – it was the wrong type of price limit,” he told a podcast run by energy provider Utilita.

Last week, Ofgem put forward proposals to allow it to price cap more often in the case of “unprecedented market changes”. But it must follow the regulatory process and consult on any changes that will last until February.

It also said it would look at stricter company screening by “examining a shift to prudential regulation, recognizing that energy suppliers manage complex financial risks”.

Meanwhile, politicians are increasingly turning the turmoil in the sector into a political blame game, as it plays out against a broader cost of living crisis following recent tax increases, and with energy costs only one driving factor inflation whore.

Labor’s shadow secretary Ed Miliband blamed the collapse of suppliers for “a decade of conservative lack of action in government that left us as a country exposed and vulnerable”.

But one government official said Miliband himself was partly to blame as energy secretary before the 2010 election, saying he had “90 percent of the country. . . caught on Big Six contracts ”.

It was the Conservatives who “introduced much more competition into the market that reduced costs,” he said, insisting that the price limit did its job. “It was mainly private companies that have suffered losses in recent months rather than taxpayers.”

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