Recommendation 15

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