Recommendation 6

Government’s approach to managing financial risks posed by fluctuations in energy prices does not adequately take into account recommended practice for privately financed energy suppliers operating in the sector. Ofgem requires energy suppliers to adopt an energy forward purchasing strategy, meaning they are required to have an energy price hedge in place to reduce the risk and impact of rising energy prices. Hedging is an energy purchasing strategy where energy suppliers contractually agree with a wholesale supplier or financial institution to purchase gas or electricity from the wholesale energy market for a specified price on a fixed future date. Suppliers buy energy in advance to match the expected demand of their customers. Energy suppliers that failed were insufficiently hedged or lacked access to funding for the collateral needed by their wholesale energy providers to 8 Bulb Energy maintain the contracts for the advance purchase of energy. HM Treasury’s guidance on Managing Public Money advises minimal use of hedging for government. But it does not contain guidance relating to situations where the government has intervened to provide taxpayer support to a private company, where following the public sector approach to hedging would make it stand out from the practice recommended by Ofgem and applied by competitors in the same market. This could risk having a negative impact on the wider energy market. HM Treasury accepts that in such circumstances, a pragmatic approach is required, and that minimal hedging is permitted where necessary. Recommendation 6: In the next 12 months, HM Treasury should set out what information Accounting Officers should consider in making commercial decisions about companies that have been taken into the public sector from a sector where the accepted market practice involves the use of hedging or forward purchasing agreements. Bulb Energy 9 1 Government financial support to Bulb Energy Limited