Source · Select Committees · Public Accounts Committee
Recommendation 15
15
Accepted
Inadequate hedging strategies or collateral funding contributed to energy supplier failures.
Conclusion
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.27 Ofgem and HM Treasury told us that energy suppliers that failed were found to have hedged insufficiently or lacked access to funding for the collateral needed to provide a letter of credit to their creditors or wholesale energy providers to maintain the contracts for the advance purchase of energy.28 We asked Ofgem about the advice it provided to the Department and Teneo on adopting a partial hedging strategy when purchasing wholesale energy for Bulb’s customers. Ofgem explained that it would expect a “normal, prudently run” energy company to be using hedging as part of its energy purchasing. Ofgem explained that the advice it issued was from a commercial perspective and within its remit as the regulator for the energy sector.29
Government Response Summary
The government agrees with the committee's observation and clarifies that, for future reclassified public sector companies, existing Managing Public Money guidance on hedging will apply. For public corporations, hedging will be considered case-by-case, but the guidance will continue to suggest it usually does not represent best value for money for the public purse.
Government Response
Accepted
HM Government
Accepted
6.1 The government agrees with the Committee’s recommendation. Target implementation date: November 2024 6.2 When companies are reclassified to the public sector from the private sector, and if classified to central government, they will be bound by existing guidance as set out in Managing Public Money including guidance on the use of hedging. Where bodies are classified as public corporations the use of hedging or forward purchasing agreements will be considered by Accounting Officers on a case-by-case basis. 6.3 The guidance will continue to suggest that the use of such instruments by government as a way of minimising future risk does not usually represent the best value for money for the public purse. In the private sector, companies typically hedge by insuring the financial risk of potential price fluctuations via a financing agreement with a private sector counterparty. This comes at a cost via a premium charged on the insurance at rates available to private companies. Where that private company has been transferred to the public sector, the government becomes responsible for that entity’s balance sheet. Although the government could continue the practice of hedging by paying a third party to take on this risk, in aggregate it is more likely to cost the public purse less to finance materialised risk with funds raised via the (more advantageous) state-level borrowing rates.