Source · Select Committees · Public Accounts Committee
Recommendation 16
16
Accepted
Government directed minimal hedging for Bulb, diverging from industry-standard practices.
Conclusion
The government directed Teneo to make minimal use of hedging when purchasing energy for Bulb’s customers, except when operational and market conditions required it. During the SAR, Teneo purchased its energy using a combination of day-ahead and week- ahead purchases. We asked HM Treasury if it would use the same approach to hedging if a SAR was needed for a failed supplier in the future or if it would look to make any changes. HM Treasury clarified that Managing Public Money did not prohibit the use of hedging and recognised that hedging may be appropriate under specific circumstances. HM Treasury 24 Q 52 25 Qq 18, 113 26 Q 115; C&AG’s Report, para 4 27 C&AG’s Report, Glossary 28 Qq 43, 95 29 Q 43 Bulb Energy 15 told us that the difference in approaches between private and public sector on hedging was based on the recognition that hedging was a form of insurance provided by a private sector provider which would need to generate a commercial return. Given that the cost of raising capital is lower for government than that of a private sector provider, it asserted that it was generally poor value for money for government to use such agreements.30 The Department told us that this strategy would be different from what other companies in the market would be doing, for example, companies would be using hedging to buy energy three months ahead or longer.31 HM Treasury recognised that a pragmatic approach was needed, and in the case of Bulb during the SAR, 50% of electricity and 70% of the gas requirement for Bulb was hedged using week-ahead agreements.32 The NAO report found that in November 2021, Ofgem advised the Department that Bulb should adopt at least a partial hedging strategy. This was based on Ofgem’s concerns that Bulb’s purchasing strategy would be considerably different from other energy firms, who would have used hedging to buy forward the majority of their energy further in advance and would only need to buy extra energy on the day-ahead market to respond to c
Government Response Summary
The government agrees with the committee's observation and states 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.