Bulb’s collapse is a direct consequence of bad government policy

Andy Mayer

November 23, 2021

The latest retail energy company to go out of the business, Bulb Energy, is also the largest. With over 1.7m customers, they are the 7th largest in the UK. While they are the 20th or 21st failure this year, they are the first to require the ‘Special Administration Regime’, or direct government ownership, while alternatives are sought.

A Conservative government has nationalised an energy company and put the cost of their failure on the taxpayer. The others meanwhile remain in private hands, for now, through an alternative mechanism ‘supplier of last resort’ that puts the costs on all bill payers through a levy – a superficial difference.

The trigger for all these collapses, now covering around 15 per cent of UK energy customers, is the return to normal as pandemic restrictions ease. Global demand has greatly exceeded global supply leading to spikes in wholesale gas prices which remain two to three times higher than prices in the spring. We would, however, expect this to ease as more supply comes on stream, reacting to demand. This is not otherwise a problem to which there is a fast glib solution involving nuclear or renewables. The former takes ten years to plan and deliver, and may be uneconomic, the latter is faster but still more expensive than gas.

Other factors include the UK’s curious failure to prepare for such shocks. We never needed to do so in the past, we had the North Sea, which could be tapped as required. But it’s now a declining set of assets, hidebound by regulatory red tape and political decisions, such as the mindless refusal to grant Shell licence to develop the Jackdaw gas field in October, even as the crisis was starting, lest it be seen as inconsistent with the Prime Minister’s ambitions for COP26 in Glasgow.

The UK also failed to do what the US did and prepare to make use of our vast natural reserves of onshore gas, by putting fracking into a moratorium in 2019, based on safety fears so extreme, that tremors akin to a ladder falling over were sufficient to shut down operations. The Rough storage facility was closed in 2017, again over ‘safety fears’, and no other projects have been deemed economic.

But these are side shows to the central issue, which is the energy price cap. This 2015 Labour manifesto pledge became Conservative policy in 2019 and implies that there is a maximum price that consumers should pay for energy. The price in turn is second guessed by the regulator, twice a year, rather than constantly in reaction to market forces. This removes from the retail companies the ability to pass on cost rises from wholesalers, in full, to their customers, and is particularly dangerous to their bottom lines during a sudden shock, as has happened this year. The gap between the two is now around £400 a customer, implying that any company unable to secure a forward contract hedge, or that was heavily leveraged, was haemorrhaging cash, with no prospect of paying it back. Many went bust.

The government meanwhile has done nothing to pressure the regulator to ease the pressure by lifting the cap or abolishing it. Likely they intend to keep the cap higher for longer to pay back the debts that are mounting, but this doesn’t help those bleeding now. The government are not doing this because the cap, like any political drug, is very hard to quit. To admit that the UK government cannot control global gas prices, that when demand exceeds supply prices rise, and that markets work to correct this, requires them first taking the hit on being responsible for the temporary hit to the cost of living, and second ditching the socialist dogma they only recently adopted for reasons of tactical advantage.

What we end up with then is longer-term higher prices, through an extended cap, hidden in higher taxes, and finally in higher margins for surviving retailers, and through the reduction in competition. Worse, while the cap is in place no one sensible can invest in UK retail energy markets, as their business plans rest on the wisdom of regulators, not markets. The survivors then become lazier, less innovative, and less efficient, in turn again contributing to higher prices.

The government then has destroyed a large part of Britain’s competitive consumer energy market, for the cheap pleasure of avoiding a few bad headlines this year, to the expense of all of us tomorrow. Will the last energy investor leaving Britain please return the Bulbs?

Author

Written by Andy Mayer

Andy Mayer is Chief Operating Officer at the Institute of Economic Affairs.

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