Opinion Piece - will Bulb Energy's demise hasten the upward revision of Ofgem Price-Cap?

Matrica believes that Ofgem’s Price-Cap will be revised upwards further and a lot sooner than the energy pundits believe, now that taxpayer funds have been dragged in.

Bulb Energy’s descent into ‘Special Administration’ raises the possibility of a fascinating three-way spat between BEIS Secretary Kwarteng, Chancellor Sunak, and Prime Minister Johnson over the immediate future of the Ofgem Price-Cap and the long-term future of the UK energy supply industry. It will also be interesting to see how much political capital the UK energy industry has left, now that it can no longer play the ‘must comply with EU energy law’ card.

‘Special Administration’ has to be one of the worst euphemisms in UK energy politics of 2021, because it really means ‘too big to fail’, or, more accurately, ‘the taxpayer is right on the hook for this one’. As you read this, Sunak’s Treasury bean-counters are frantically trying to digest the implications of their £1.7bn loan to Bulb Energy, rightly terrified at the prospect of Kwarteng’s return with an even deeper begging-bowl as more suppliers fail.

Sources close to the autumn series of discussions between Kwarteng and representatives from the UK energy industry told Matrica that the BEIS Secretary’s performance was embarrassing to the point of shocking. By the third meeting, it became clear that Kwarteng had an almost zero grasp of the Cap’s workings and its consequences, and had to be quietly sat down off-line to have it explained to him before further discussions could proceed. Hopefully, Kwarteng will be more on-form in his forthcoming meetings with HM Treasury. He will need to be, because right now he and Ofgem are about as popular with Sunak as the ghosts of Jacob Marley and Christmas were with Scrooge.

Sunak’s bean-counters may not have any firmer grasp of the travails of the UK energy industry than the Secretary of BEIS, but there are four things they certainly do understand :

£1.7bn has just gone out the door that hadn’t been foreseen at the time of the Autumn Budget forecasts;
A whole lot more could be heading out, especially if one or more of the Big Six start to wobble;
There is no guarantee that any of this money will ever be paid back;
Kwarteng's’ begging-bowl approach suggests there is a serious structural flaw in the workings of the UK gas and electricity market, in that the Cap doesn’t solve the problem, but merely delays its inevitable resolution.

Traditionally, HM Treasury has been very reluctant to use taxpayer funds to cushion groups of end-consumers of minority services. Rail-commuters as an example, who, as a group, are left to fend for themselves in their annual conflict with rail companies over season-ticket price rises. HM Treasury believes that rail-users should bear rail-costs, not the public purse. Until now, ditto for energy consumers. Unfortunately, energy supply is not a ‘minority service’; even worse, the involvement of HM Treasury in bailout deals like Bulb Energy risks taxpayers forking out twice, firstly through their tax, and secondly through their energy bills, paying whatever extra levy Ofgem introduces to shore-up the creaking SOLR scheme.

The impact on the public purse of Bulb Energy customers remaining under their existing fixed-price contracts remains to be seen. Under SOLR, customers of failed suppliers get shunted into the new supplier’s contract at a price set by that supplier, which in current times means the Price Cap. Under ‘Special Administration’, it appears that Bulb Energy is being lent the money to maintain it as a going concern, involving no automatic transfer-out of its customers to other suppliers. Presumably, ‘going concern’ means honouring whatever pre-crisis fixed-price deals Bulb Energy has in place with its customer-base. If there is a large rump of customers on fixed-price deals extending through the winter and well into 2022, Bulb Energy will continue to haemorrhage money as long as wholesale prices remain high above the Cap. One can only hope that HM Treasury is fully aware of the problem, and can budget accordingly. If not, Matrica would love to be a fly on the wall when Kwarteng explains it to Sunak.

This issue forms the basis of the three-way spat mentioned above. In the cold light of day, Sunak, needing to balance public finances, will push hard for an early upward revision to the Ofgem Cap to minimise outflows present and future, even if this means that energy consumers, like rail commuters, will get caught in the crossfire. Sunak has enough to worry about regarding the impact of energy price-induced inflation on public finances without funding bailouts. Kwarteng needs to buy enough time to work out a deal with Ofgem that somehow balance the needs of the energy industry with those of the consumers, taking into account the realities of the global energy markets. ‘Dear Leader’, freshly back in Number 10 from Peppa Pig, has a fine political balancing act to make. Will he side with Sunak over public finances, or side with Kwarteng over the short-term survival of the UK energy industry? Independent of the energy crisis is an apparent discord between Sunak and ‘Dear Leader’, so a fallout over energy policy may be the final straw that breaks the back of the relationship.

Questions will be asked about how the UK energy market got into this mess in the first place, and Matrica’s money remains on a full public enquiry. Some are blaming the crisis on a failure of energy regulation. Matrica agrees this up to the point that Ofgem may not have gone far enough in terms of dictating the terms of prudent conduct governing the operations of small suppliers, and not policing them more effectively. However, that view plays down the role of some market participants who were supposed to underwrite the market risk of small suppliers, but defaulted when the going got too tough. Matrica believes the current crisis is more the adverse consequence of the operation of a global free market in energy, and less the failure of local energy regulation.

Matrica’s hypothetical public enquiry would have to recommend some market reform, even if the current crisis miraculously evaporated before Christmas. So how much political capital does the deregulated UK energy market have left? Advocates of the free-market maintain that the current crisis is a temporary aberration of the geopolitical tail wagging the free market dog. Matica believes the opposite, in that at best on a good day, the free-market tail may wag the geopolitical dog, but only when the dog feels that it is in its own best interests to be wagged. The situation will only get worse as COP26 has sounded the death-knell for fossil-fuels. Producers only have a decade or so to wring as much out as they can out of their natural resources before their value falls off a cliff.

For all its obvious failings, Ofgem could not reasonably be expected to be fully prepared for global upheavals on this scale. The reality remains that HM Treasury may have to finance more loans, with huge uncertainty regarding payback. They will argue firmly for measures to be put in place to maximise the chances of debt repayment, maintaining that the best way to do this is reduce the gap between market and Cap prices as quickly as possible, as politically unpalatable this may be.

A smell of compromise is in the air, in which Matrica believes that the Cap will rise sooner and higher in response to Sunak and HM Treasury pressure on BEIS and the energy consumer. The direct involvement of public funds is a game-changer. ‘Dear Leader’ has yet to declare for either side, but as with all compromises between diametrically opposed forces, this one in energy is likely to please neither side, least of all the tax-paying consumer.