Bulb’s collapse highlights the failures of the UK’s retail energy sector

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On a fresh summer day in July, when Boris Johnson sat on the balcony of Bulb’s headquarters in Bishopsgate, London, he was full of praise for Britain’s seventh-largest energy supplier, calling it a “fantastic company” offering customers 100-percent renewable electricity.

“It looks amazing to me,” the UK Prime Minister commented, as he toured the headquarters of the company that first entered the market in 2015. That was proven on Monday, when Pulp became the 23rd victim of the sharp rise in energy prices since the summer. , affecting a total of 3.7 million customers.

So far, the affected households have been quickly transferred to competitors under the industry bailout, funded by a tax on bills. But Bulb’s size – with 1.7 million customers, the largest supplier to fail in 20 years – means it will enter “special management,” the first use of the mechanism since it was introduced in 2011.

Bulb will be run by officials on behalf of the government until it is sold, restructured, or its customers transferred to its other suppliers. The taxpayer will pay the bill which is expected to run into hundreds of millions of pounds.

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

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

“When the nation’s seventh-largest resource fails, serious questions must be asked about the state of the market and how to regulate it,” said Gillian Cooper, head of energy policy for Citizen Advice.

Industry executives have long argued that the system is too light a touch to fail to adequately assess the liquidity of the new entrants and whether their financial model can withstand price shocks. Suppliers adhere to a price ceiling covering approximately 15 million households that is reviewed twice annually, which has limited their ability to pass on increasing wholesale energy costs to customers.

The cap was only introduced in 2019 by Theresa May’s government after years of lobbying over “fake” energy bills. The regulator Ofgem reviews the cover twice a year, with the next change not due until April.

In the meantime, the ministers made it clear that they had no intention of interfering. “Later, we’ll have to look at regulatory reform, but the priority now is to protect consumers, not businesses,” an Energy Department official said.

The chief executive of one of the major suppliers said urgent action should have been taken, citing “glaringly obvious” gaps in the sector’s oversight since 2016, when soaring wholesale prices triggered the collapse of first newcomer Gigabyte Energy. “This is a catastrophic failure of the organization,” he added.

Major suppliers in particular have long complained that regulators and politicians have encouraged a “race to the bottom” over energy prices. Amid a cry from politicians to lower energy bills, the regulator since the early 2000s has encouraged new entrants to break the power of what were then Big Six’s suppliers: British Gas, EDF, Eon, ScottishPower, Npower and SSE. The latter two have since been out of the market.

But new entrants often faced customers at a loss to gain market share. Many have bet that wholesale energy prices will not rise and that they have insufficient hedging strategies to protect themselves.

The failures were not surprising, said Andrew Lindsey, co-CEO of Telecom Plus, which owns Utility Warehouse, the tenth largest energy supplier. “Everything that’s happened in the last 10 weeks is what I call the final blow, for what has been an inevitable trend that’s in place.”

Some suppliers are pushing for similar regulation of the financial services sector. This will include stricter checks of financial models and protection of customer credits.

“We should not accept suppliers whose money has not been properly drawn and who are actually gambling with customers’ money rather than investing their equity,” said Michael Lewis, chief executive of Eon, the UK’s second-largest supplier.

But industry executives also want ministers and the regulator to realize they need to be able to generate a sustainable profit and complain that the price ceiling is too inflexible. Figures from Ofgem data show that the largest suppliers overall were unprofitable last year.

Conservative MP John Penrose, who was one of the main advocates for setting the price cap before it was introduced, admitted on Tuesday that politicians got the matter wrong.

“We’re where we are today because of mistakes made by Parliament – it was the wrong kind of price cap,” he said in a podcast run by energy supplier Utilita.

Last week, Ofgem made proposals to allow it to raise the price cap more often in the event of “unprecedented market changes”. But you must follow the regulatory process and consult on any changes, which will take until February.

It also said it would consider tougher scrutiny of companies by “exploring a move toward prudential regulation, recognizing that energy suppliers are managing complex financial risks.”

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Meanwhile, politicians are turning the sector’s turmoil into a political blame game as it plays against the broader cost-of-living crisis after recent tax increases, and with energy costs just one factor driving inflation higher.

Ed Miliband, the shadow business secretary, blamed the suppliers’ collapse on “a decade of conservative inaction in government, which has left us exposed and vulnerable as a country”.

But one government official said Miliband himself was partly to blame, because before the 2010 elections he left 90 percent of the country as energy minister. . . Trapped on Big Six contracts.”

It was conservatives, he said, who had “introduced more competition into the market which brought costs down,” insisting that the price cap had done its job. It has been largely private companies that have suffered losses in recent months, not the taxpayers.

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