The UK government has begun to count the cost of Bulb Energy’s collapse as many begin to wonder whether it is a fair price to pay for policymakers’ failure to spot a looming market breakdown.
The life-support scheme set up to allow Bulb to keep supplying gas and electricity to its 1.7 million customers through the winter months could cost taxpayers up to £1.7bn, or £1,000 a customer, according to a court application to hand the company to a special administrator.
Officials are understood to be focused on finding a quick exit strategy from the arrangement as early in the new year as possible to help limit the eye-watering costs, as signs of the supplier’s “unsustainable” business model grow clearer.
Accounts for the collapsed supplier show a clear trend of growing losses and spiralling debts as it paid heavily to build its book of customers. In 2018, the company was believed to have around 300,000 customers and accounts showed debts of £26m. But by March 2020 Bulb’s dash for growth meant about 1.6 million customers and liabilities of £223m – with debt repayments due by the end of this year.
“It looks like Bulb didn’t buy their energy far enough in advance and were surviving hand to mouth on borrowed money. That’s irresponsible, really,” said one source close to the government.
There were other signs of trouble for Britain’s fastest-growing energy company, founded in east London in 2015 by entrepreneurs Amit Gudka and Hayden Wood. An industry source pointed to Bulb’s habit of buying energy from the market three months in advance as a large part of its downfall. Bulb was able to benefit from this strategy between late 2018 and last summer as market prices drifted downwards, but the recent hike in markets meant it was paying record-breaking prices to secure winter energy supplies.
“Pretty much all the suppliers still able to operate had sourced gas and electricity from the wholesale markets at least a year ahead of time to hedge against a major market shock,” another industry source said.
“In short, Bulb came undone because it hadn’t bought its energy in advance, it didn’t have enough investment to cover the costs and the government’s price cap meant it couldn’t push bills higher either,” the source added.
The collapse of a company in precarious financial standing is likely to raise broader questions over how the regulator could overlook Bulb’s financial situation and the regulation of the market in the future.
Ed Miliband, the Labour party’s shadow business minister, blamed a “failure of regulation” for the spiralling costs of Britain’s energy market, which allowed firms to take “risky bets” to bolster competition in a campaign of deregulation from 2016.
Dermot Nolan, the chief executive of Ofgem between 2014 and 2020, told the Guardian it was “clear that energy regulation needs to change” and that Ofgem “needs to go further down the road towards more intervention where the financial stability of energy suppliers is concerned”.
Nolan began taking steps to toughen the financial standards for energy suppliers following a flurry of supplier failures in 2018, but there was some debate within the regulator over whether to accept the fall and failure of some companies as an inevitable part of a free market – particularly because the costs of these failures were negligible at the time.
“The degree to which things change would bring its own costs and would be far from perfect. But this would be something for Ofgem to consider,” Nolan added.
Greg Jackson, the chief executive of Octopus Energy, said: “It’s an interesting regulatory question; how long should you leave a company to sort out its own issues before you take action? I don’t think Bulb was doomed to fail, even at the start of the energy crisis, but by the time higher prices took hold it was too late.”
For Bulb, fresh investment and perpetual growth had become necessary for its survival. The company had no shortage of interested suitors, according to sources, but as the energy market crisis deepened the options quickly dwindled.
“They were determined to raise money at higher valuations than they were being offered by investors,” said an industry source who asked not to be named. “It was a strategy driven by confidence and maybe even a little greed. Either way, they definitely thought they were worth more than investors did, so instead of raising money prudently they held out. The fallback plan was always a sale. But eventually this was off the table, too.”
These same investors may have a chance for a second look at Bulb – at a cheaper rate – in the new year as the government prepares to sell off the company or its customers to new firms.
It was “the right outcome” according to Jackson because it would “reduce the cost for bill payers and help to preserve jobs. It should be a smoother process for customers overall”.
An Ofgem spokesperson said the regulator has already started to make the market more resilient, but the unprecedented gas prices “show us we need to go further to build an energy market that is more resilient to shocks like this, while continuing to offer dynamism, innovation and choice”.
