Bulb administration could cost billpayers £400m more than alternative
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The process that the Government used to prop up failed energy supplier Bulb could be £400 million more expensive than its alternative, a newly released estimate from the energy regulator has shown.
Court documents filed last week as Bulb entered special administration show that Ofgem recommended the more expensive route as it worried about the domino effect that the supplier’s collapse could otherwise set off.
Ofgem usually deals with failed companies by moving their customers to a new supplier, something called the Supplier of Last Resort (SoLR) process.
However Bulb’s size qualified it for the Special Administration Regime (SAR), which means it will run as normal, but with an administrator in charge.
The Ofgem documents, released on Friday, show that the regulator estimates that the SoLR process would have cost the new supplier £1.28 billion.
In comparison, administrators last week estimated that it would cost around £2.1 billion to keep Bulb trading until April.
The Government has unlocked £1.7 billion for the administrators to use to cover these costs.
If Bulb is unable to repay any of this loan, ministers will hike energy bills for households across the country to recoup the Treasury’s money.
Ofgem refused to share the court documents with several publications, including the PA news agency, last week.
They were only released after the Financial Times and Bloomberg applied to the judge.
In them, Ofgem said it could not be sure that all Bulb’s 1.6 million customers could be transferred to a new supplier successfully, and could not guarantee that the new supplier would not buckle under the costs.
Moving them in this way may “precipitate another, larger … failure in due course”, the regulator said.
The company that took over Bulb’s customers would eventually have been able to claim back any costs.
The SoLR process allows Ofgem to hike bills for all the UK’s consumers in order to reimburse the new supplier for its losses.
But the supplier would have been out of pocket for many months before it was paid back, and the new costs are also applied to household bills all in one go.
Meanwhile while bills will likely go up to cover the cost of Bulb’s special administration, this can be spread out so it hits households at a time when energy prices are not as high as today.
Energy bills are already set to rise by between £80 and £85 per household in the next financial year to cover the cost of a series of failed suppliers entering the SoLR process.
Adding Bulb to this would have meant an extra £45 hike, Ofgem estimated.
It also acknowledged that the energy price cap is likely to be hiked by “several hundred pounds” next year due to rising gas prices.
Ofgem was also concerned that by shifting 1.6 million customers to a new supplier, it might face an investigation from the competition regulator.
The documents also reveal the extent of Bulb’s problems.
The company’s licence conditions means it must keep on supplying energy to its customers as long as it is a functioning business.
At the same time the price of the energy it sells to customers it capped by Ofgem at around £0.67 per therm of gas.
But with recent price spikes it now costs about £2.31 for a supplier to buy a therm of gas on the wholesale market.
This meant that the company estimated it would make losses of more than £80 per month from each of its 1.6 million customers until the price cap is changed in April.
This would cause a total loss of £782 million.