Source · Select Committees · Public Accounts Committee
Recommendation 17
17
Accepted
Bulb's unhedged position and market volatility limited bidders, delaying its sale.
Conclusion
Octopus was the only bidder for Bulb energy during the sale process. Ofgem told us that this was in part due the unhedged position of Bulb, meaning it did not have any contractual arrangements with a wholesale energy supplier to purchase energy in advance. It explained that the lack of hedging, combined with the volatile high energy prices, made Bulb unattractive to bidders especially since some suppliers were experiencing difficulties in accessing appropriate long-term arrangements to develop a full hedge for Bulb.35 These factors contributed to the sale process taking 10 months to complete.36 We asked Teneo if it thought that there would have been more bidders if Bulb’s hedging position were different. Teneo told us that all the bidders knew of Bulb’s unhedged position and that the government was open to addressing it as part of a purchase deal. Octopus told us that the transaction to purchase Bulb was difficult due to Bulb being unhedged, but that the administrators (Teneo) were open to suggestions about ways in which it could construct a transaction, that enabled it to take the business out of administration. Octopus also told us that to limit the risks posed by the unhedged Bulb, it constructed a deal that would limit the company’s exposure to the cost of buying energy as it would have been very expensive and not possible to fill a hedge in one go.37 Corporate finance and insolvency expertise in government
Government Response Summary
The government agrees with the committee's observation, highlighting that Ofgem has implemented measures since 2021 to strengthen supplier financial resilience and improve the retail energy market, including capital adequacy requirements from Q1 2025. Additionally, it states that future public sector entities will follow existing Managing Public Money guidance on hedging, which generally advises against it for value for money.
Government Response
Accepted
HM Government
Accepted
2.1 The government agrees with the Committee's recommendation. Recommendation implemented 2.2 As set out in the Energy Security Plan 2023, the government will deliver an energy retail market that works better for consumers, is more resilient and investable, and supports wider energy system transformation. This includes creating a market that is better prepared for future wholesale price volatility and better able to shield consumers from the costs of supplier failure. At the same time, a return to competition and profitability for well-run suppliers that offer value for consumers. 2.3 Since 2021 Ofgem has implemented a package of measures to strengthen the financial resilience of retail energy companies. These reforms will benefit consumers by ensuring a better balance of risks between supply licensees and consumers and, in doing so, reduce the likelihood and cost of widespread failures. A resilient, profitable, investable market is also essential for sustainable competition, where energy retailers have incentives to innovate in the pursuit of net zero and receive a reasonable profit as they drive up consumer service standards. 2.4 Ofgem has introduced: • Enhanced licence application process and milestone assessments • Rules to require licensees to have sufficient control of their assets to reduce costs for consumers in the event of insolvency. • Enhanced monitoring of supplier finances including stress testing, a proactive reporting framework of Trigger Points, and Annual Adequacy Self-Assessments. • Renewable Obligation receipts ringfencing • Licence modifications to direct Customer Credit Balance ringfencing in certain circumstances • Capital adequacy requirements, including a common minimum capital requirement, due to take effect from Q1 2025, with the Capital Floor, Target, and associated compliance framework. 2.5 Ofgem and the Department will continue to work closely to monitor the impact of these changes and identify the need for any further measures to improve the financial resilience of suppliers. 2.6 Ofgem is currently undertaking a Non-Domestic Market Review which includes the market conditions faced by business customers. Ofgem published their statutory consultation on 7 December in alignment with government’s own consultation on expanding business access to redress. Both consultations will close at the end of January 2024 and Ofgem and DESNZ are in constant communication to ensure results are shared and acted upon in a timely manner 2.7 The department and Ofgem have provided the Committee with regular updates on this work, including via Treasury minutes. 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.