The government’s decision not to implement a hedging strategy for Bulb may have “significantly increased costs to taxpayers”, whilst making the supplier “less desirable” to potential buyers, the Business, Energy and Industry Strategy (BEIS) Committee has stated.
In its report following its inquiry into the energy retail market, the committee urged ministers to now implement a hedging strategy for the retailer, which was effectively nationalised last November when it entered the Special Administration Regime (SAR).
The report, released on Tuesday (26 July), made a string of recommendations to improve the sector including a call for changes to the way the costs of supplier failures are recovered.
During the course of its inquiry, Kwasi Kwarteng confirmed to the committee that no hedging had been implemented for Bulb whilst under the the SAR. The business and energy secretary described hedging as “very risky,” explaining that “essentially, you’re taking a bet or you’re trying to insure yourself against price movements”. He said the Treasury “rightly doesn’t think that that’s the business of what the taxpayer should be doing”.
In its report, the BEIS committee highlighted how in the six months since Bulb entered the SAR, administrators have spent £329 million more on purchasing unhedged wholesale energy than they have generated through sales to customers.
“We cannot scrutinise the full extent of the impact of the decision not to hedge as there is a lack of transparency over how the government is purchasing energy on the wholesale market,” the report said.
As such, the committee recommended the government implements a hedging strategy at Bulb, and in the meantime, called on ministers to provide detailed analysis of the cost implications for BEIS and the taxpayer of its decision not to purchase hedges to date.
Furthermore, the committee recommended that given the size of Bulb, the costs of the SAR should be paid through general taxation as opposed to recouping the costs from energy bills.
It said review of SAR should be undertaken by the government to consider how to reduce the cost exposure to the taxpayer in future. This should be reported back to the committee within the next six months with details on the lessons learned and any required reforms.
“We suggest, as a minimum, that the Treasury guidance is amended to make it clear that energy suppliers in the Special Administration Regime are presumed to be permitted to hedge,” the report added.
Responding to the report, a BEIS spokesperson said: “We will consider the committee’s recommendations as we continue to work with Ofgem to ensure we have a fair and robust energy retail market.
“The Special Administrator of Bulb is obligated to keep costs of the administration process as low as possible, and we continue to engage closely with them throughout to ensure maximum value for money for taxpayers.”
SoLR
The BEIS committee likewise made several recommendations concerning the Supplier of Last Resort (SoLR) process and how the costs of the process are recovered.
It raised concerns that these costs, which have been added to “regressive standing charges on electricity bills”, have “increased affordability challenges for the most vulnerable customers, at the most difficult time”.
The committee said the government and Ofgem should reform the SoLR process so that the costs are “more fairly recouped” whether through general taxation or energy bills.
Ofgem is currently consulting on whether the portion of costs relating to electricity supply should be recovered through a flat charge per customer or volumetric charges based on consumption.
However, whilst welcoming the consultation, the BEIS committee said that “even if these costs are recouped on a usage basis, fuel poor, low income, and vulnerable customers with high energy demand, will still be hit hard.”
Commenting on the SoLR process more generally, the committee said the current arrangements left customers carrying the risk of failure, while “suppliers exited facing minimal costs, and in some cases, even made a financial return.”
Noting concerns from SoLRs about administrators of failed energy companies not acting in the best interest of customers, specifically around delays in sharing customer information that delayed the transferal of credit balances, the committee backed a National Audit Office recommendation that the process is reviewed and updated to reflect the issues that have arisen over the past year.