New territory in supplier failures: how Bulb’s exit impacts us all

New territory in supplier failures: how Bulb’s exit impacts us all

As you’ll no doubt have seen, Bulb Energy is the latest casualty to go under.

As the UK’s eighth largest supplier with 1.7 million customers (and 3 million accounts), Bulb is equivalent size-wise to all nine of the suppliers who failed during September – and three times larger than Avro, the largest prior to Bulb.

But unlike the others, Bulb has been put into ‘special administration’ by Ofgem, who will oversee the process of winding the company down over the coming months.

This is the first time Ofgem has used this option. But with a company the size of Bulb, the usual ‘Supplier of Last Resort’ (SoLR) protocols are not so easy to enact.

Bulb will be kept operational until a resolution is found – which could take some months – and this will have to be funded by the Treasury (which, of course, ultimately means taxpayers).

Unchartered territory

The most likely outcome is that Bulb’s customers are batched up and auctioned off in separate ‘SoLR lots to larger suppliers. Or Ofgem could choose to manage the process differently, for example by selling off parts of the company.

But as this is new territory, Ofgem is probably not yet clear on the best route to take.

This means we are unlikely to see the usual Last Resort Supplier Payment (LRSP) claiming process. (For more information on how LRSP claims work, please see our recent blog on failing suppliers).

Consequently, Distribution Use of System (DUoS) and Local Distribution Zone (LDZ) charges are not likely to increase on energy invoices in the medium term.

Impact on Renewables Obligation charges

The big commercial question for the energy industry right now is how much in Renewables Obligation (RO) charges has Bulb already paid – and how much is still outstanding?

Any unpaid charges for 2020-21 and 2021-22 could be ‘mutualised’ – meaning they will be smeared across remaining energy suppliers, adding additional cost to this element of customer bills.

20/21 shortfall could be £25 million

Bulb’s RO bill for April 2020 to March 2021 (the ‘CP19’ period) is estimated to be somewhere near the £150 million mark. However, a report last month suggested that Bulb has submitted Renewables Obligation Certificates (ROCs) worth about 80% of this, leaving a bill of around £25 million due to Ofgem.

On 29 October, Ofgem issued final orders for seven companies to pay their CP19 RO bill – and this didn’t include Bulb. Ofgem stated that any other CP19 non-payers at that point had given them sufficient assurance that their RO dues would be paid.

So, Bulb has either paid its 2020-21 RO bill in full, given sufficient assurances to Ofgem that it will pay, or the shortfall is being hidden by Ofgem from the market.

If the £25 million is still outstanding, it’s safe to assume this will be mutualised. Although compared to Bulb’s 2021/22 RO bill, this is small fry…

21/22 RO bill keeps getting bigger

When it comes to 2021-22 (the ‘CP20’ period), there is already £80 million in unpaid RO costs from the 22 supplies who’ve gone bust since April 2021. Bulb’s RO liability for CP20 is a further £80 million.

Suppliers are not yet able to submit ROCs for CP20, meaning Bulb will not have done so. So how will Bulb’s £80 million CP20 RO obligation be paid?

The three most likely options are that this £80 million will be met by other suppliers, the Treasury, or via mutualisation – although none of these is straightforward.

If other suppliers purchase either customers of Bulb or part of the Bulb company itself, they are then obliged to pick up Bulb’s RO liabilities since April 21. In this case, they will collectively pay Bulb’s £80 million liability.

However, large energy suppliers with the ability to pick up 3 million accounts between them do not currently seem eager to pay a lot of money for new customers in today’s market. So Ofgem is unlikely to successfully broker such an arrangement when the transaction will be accompanied by a cost this large.

Alternatively, as part of the wind down of Bulb, Ofgem could arrange for the Treasury to pay this liability. But as the UK government is not awash with money at present, this won’t be easy.

The third option is that Bulb’s CP20 RO bill is mutualised. While extremely unpopular with the industry, this appears to be the most likely scenario, albeit far from certain.

The other issue is the Bulb’s RO costs are increasing – potentially by around £10 million per month. So as the process of finding new energy suppliers for Bulb’s customers may take some time – say three months or more – we could be looking at overall CP20 RO costs of around £110 million or more for Bulb.

Currently there are £80 million of RO costs to mutualise from previous supplier failures – the potential extra £110 million from Bulb brings this total to £190 million.

This will increase RO costs for both business and domestic customers. And these could rise higher still if the £25 million of Bulb’s CP19 RO costs turn out not to have been paid either.

What’s more, the exit of such a large player from the market will have an impact on all remaining suppliers – and as is clear, their customers too.

Truly uncertain times for energy suppliers – and energy consumers...

Related Content