The cost to UK households of bailing out nationalised energy retailer Bulb is expected to soar to more than £4bn by the spring unless the government achieves a sale, saddling every home with an additional £150 or more on its bills next year.
The new forecast from energy consultancy Auxilione illustrates the spiralling costs of supporting Bulb’s 1.4mn customers as wholesale gas and electricity prices surge. The company’s administrators are hamstrung by government rules that restrict hedging against rising energy prices.
The bailout of Bulb, which collapsed in November last year, is expected to be the most expensive since the rescue of RBS during the financial crisis. Unlike 2008, the government plans to make households absorb the cost through higher energy bills rather than funding the rescue through general taxation as it is doing currently.
The decision is politically charged as households are already braced for much higher energy bills because of the record price of gas and electricity, with forecasts they could reach £5,000 for the typical home by the spring — more than four times the level a year ago.
Although most customers of failed suppliers have been transferred to larger competitors, Bulb was considered too big so it was instead nationalised. Households are already paying about £94 a year to cover the lossmaking customers transferred to other suppliers, but the total could be far higher once Bulb is included.
The government’s failure to agree a deal with potential buyers has caused costs to mount as Bulb’s administrators have not been able to hedge the rising price of wholesale energy.
Auxilione’s estimate is based on forecasts for losses made under the price cap, chiefly the rising wholesale price of gas and greater use by customers over the winter.
In March the Office for Budget Responsibility estimated that the Bulb bailout would cost £2.2bn over two years, but wholesale gas prices have more than doubled since June after Russia slashed supplies to Europe. Auxilione expects additional losses under the price cap will be about £420mn between March and October when energy use is lower, and more than £1.6bn over the winter months.
Gas prices are now more than 10 times the level they averaged over the past decade, and could increase further if Russia severs supplies or it is a particularly cold winter. In August alone UK wholesale gas prices have risen 35 per cent.
Energy retailers normally buy wholesale gas and electricity in advance to protect against changes in prices, particularly as the UK price cap stops them passing on the full cost to consumers.
But government rules restrict state-owned companies from hedging, leaving Bulb’s administrators — and ultimately UK households — hugely exposed as prices have marched higher.
MPs on the business, energy and industry strategy committee have criticised the government’s decision to prevent Bulb from buying energy in advance.
Tony Jordan, director at Auxilione, said the government “was paying a high price for the lack of hedging, and costs could rise even higher if gas prices continue to soar”.
Octopus Energy, the UK’s fourth-biggest supplier, has offered to take over Bulb’s customers on the condition that the government starts buying the gas and electricity for them in advance at a cost of about £1bn, according to two people familiar with the matter. It has also offered a profit share arrangement should the customers turn profitable in the future.
Bulb, which was established in 2015 and never made a profit, collapsed with £326mn debt as a result of soaring natural gas prices and a failure to raise new money.
Hayden Wood, who founded the company in 2015, continued to receive a taxpayer-funded salary of £250,000 until he left at the end of last month. Wood and co-founder Amit Gudka had together earned more than £8mn from a share sale in 2018.
The government said: “The special administrator of Bulb is required by law to keep costs as low as possible. We continue to engage closely with them to ensure maximum value for money for taxpayers.”
Bulb and Teneo, the administrator, declined to comment.