£1.7bn Bulb Bailout - Privatise Profits and Socialise the costs

[SirGalahad]

https://www.ft.com/content/49168b53-83f0-4a85-bca9-589c69ef1d02

Not pretty reading.

British taxpayers will be left exposed to any future rises in wholesale gas prices, potentially adding hundreds of millions of pounds to the £1.7bn already committed to propping up Bulb Energy by the government. The once-feted group this week became by far the largest company to succumb to the wholesale gas price crisis engulfing British energy suppliers — and the subject of one of Britain’s biggest bailouts since the financial crisis more than a decade ago. After Bulb on Monday revealed it would enter “special administration”, the government confirmed the exchequer is providing £1.7bn in working capital to support the company until next April so it can continue providing electricity and gas to its 1.6m customers. The state would “seek to recover some of that money”, said one government official. “It is a loan. It will not be paid in one go, it’s an envelope that can be drawn down as and when it is needed.” The official said that if wholesale energy prices went up, “then yes it would be fair to say the cost would rise even further”. While the government considers this unlikely, it acknowledges the extra expenditure in this scenario would run into the hundreds of millions of pounds.

 

[SirGalahad]

This is about as succinct as you can get.

Issue licenses for new market participants who have absolutely NOTHING to do with energy, are pure traders in front of computer screens in an office,

Allow them to acquire clients by promising capped prices on the sell-side

But don’t ask for any collateral to protect the buy-side exposure.


So it was a one way bet for these companies, any buy side exposure was met by the Government. Any upside they could bank.

Again this hits at the heart of the Government not understanding what markets are and economics.

These companies did not hedge their positions and de-risk because there was no incentive to do so as the regulator was light touch.

 

[sxturbo]

I'm not really sure there is an alternative. I'm with bulb and thankful that there was enough regulation to allow this to happen, and protect consumers.

The gas prices shouldn't have been able to expand to where they have, with something so essential, there should be things in place so as not to have such a huge effect.

Selling off and slashing the gas storage didn't help

The only companies winning are the gas owners, shell, centrica, harbour energy etc the ones who own the assets extracting the gas.

 

[SirGalahad]

I'm not really sure there is an alternative.

The gas prices shouldn't have been able to expand to where they have, with something so essential, there should be things in place so as not to have such a huge effect.

Selling off and slashing the gas storage didn't help

The only companies winning are the gas owners, shell, centrica, harbour energy etc the ones who own the assets extracting the gas.

The market was set up for traders - these guys were not producers or involved in the distribution of gas or energy.

The Government just has no clue whatsoever.

Yes you could deal with the massive price rises by having a hedge in place or the regulator actually focusing on risk mitigation. They left everything to the open market and got burned but its the taxpayer who is picking up the tab.

Moral Hazard 101

 

[sxturbo]

This is about as succinct as you can get.

Issue licenses for new market participants who have absolutely NOTHING to do with energy, are pure traders in front of computer screens in an office,

Allow them to acquire clients by promising capped prices on the sell-side

But don’t ask for any collateral to protect the buy-side exposure.


So it was a one way bet for these companies, any buy side exposure was met by the Government. Any upside they could bank.

Again this hits at the heart of the Government not understanding what markets are and economics.

These companies did not hedge their positions and de-risk because there was no incentive to do so as the regulator was light touch.

With gas prices being so stable for so many year's this wasn't expected and was never expected to happen, with the idea that any price fluctuations can be passed on to the consumer, and wholesalers buying gas in advance.

The world's gas requirements didn't suddenly explode over night, no denying there was an increase, but I don't believe it's to the extent that there is a world wide shortage.

It seems to be in "vogue" at the minute to say there is a shortage and shoot the prices up tenfold, then there suddenly isn't a shortage but the prices remain high..

 

[sxturbo]

The market was set up for traders - these guys were not producers or involved in the distribution of gas or energy.

The Government just has no clue whatsoever.

Yes you could deal with the massive price rises by having a hedge in place or the regulator actually focusing on risk mitigation. They left everything to the open market and got burned but its the taxpayer who is picking up the tab.

Moral Hazard 101

That's a rubbish argument, even if there were mitigation rules in practice the taxpayer would still be paying for it with high energy bills.

Either way the taxpayer would be paying for it.

So in effect consumers/tax payers have got away with cheap energy for years as it should have been dearer to set hedge funds aside for when the unexpected happens.

 

[SirGalahad]

That's a rubbish argument, even if there were mitigation rules in practice the taxpayer would still be paying for it with high energy bills.

Either way the taxpayer would be paying for it.

So in effect consumers/tax payers have got away with cheap energy for years as it should have been dearer to set hedge funds aside for when the unexpected happens.

I dont think you understand hedging. To make an analogy.

If the companies had to price risk properly and hedge, prices would have been higher to the consumer as it would act like an insurance policy. Now you have had your car crash and are scrambling around trying to figure out what to do and prices are unstable - its inefficient and more resources will be wasted managing it then if we had slightly higher prices in the beginning.

You are falling into the fallacy that we would be paying higher prices no matter what - so what does it matter. The risk has been borne totally by the consumer and the traders and other market operators have walked away - taken the profits off the table and walked away when its gone t its up.

That's not an efficient way to run a market. As now you are going through expensive administration for suppliers like Bulb.

 

[SirGalahad]

That's a rubbish argument, even if there were mitigation rules in practice the taxpayer would still be paying for it with high energy bills.

Either way the taxpayer would be paying for it.

So in effect consumers/tax payers have got away with cheap energy for years as it should have been dearer to set hedge funds aside for when the unexpected happens.

Just explain to me how were these suppliers able to offer fixed term contracts without having to hedge those contracts?

 

[SirGalahad]

That's a rubbish argument, even if there were mitigation rules in practice the taxpayer would still be paying for it with high energy bills.

Either way the taxpayer would be paying for it.

So in effect consumers/tax payers have got away with cheap energy for years as it should have been dearer to set hedge funds aside for when the unexpected happens.

Also this is a prime example of what a cluster f ck this is and why your reading of the situation is wrong.

https://news.sky.com/story/bulb-cre...insolvency-row-over-55m-secured-loan-12477581

 

[sxturbo]

Just explain to me how were these suppliers able to offer fixed term contracts without having to hedge those contracts?

Bulb didn't offer fixed price...

 

[JP_]

Bulb phoned me again yesterday. They still want me to increase my monthly payments from £141 to £254, even though last month I used £147 and this month should be the same. They told me I had to "pay off my debt" even though I have £70 credit on my account, told me if I don't pay extra, they will report me for poor credit. They are bastards.

I am looking forward to being able to use energy, and then pay for the energy I used. Not too much to ask, is it?

 

[blup]

Leaving aside the immediate subject matter of the thread has anyone done the FT 4 week trial and do they make it easy to cancel at the end of it?

Is it worth subscribing and are the articles informative and objective? Cos it's pretty expensive.

Blup

 

[Brigade77]

Leaving aside the immediate subject matter of the thread has anyone done the FT 4 week trial and do they make it easy to cancel at the end of it?

Is it worth subscribing and are the articles informative and objective? Cos it's pretty expensive.

Blup

Show me a 10ft paywall, I’ll show you a 12ft ladder.

https://12ft.io/

If you have a problem with denying the FT their dues, then you have other problems which are well beyond the realms of known psychiatry.

 

[sxturbo]

I dont think you understand hedging. To make an analogy.

If the companies had to price risk properly and hedge, prices would have been higher to the consumer as it would act like an insurance policy. Now you have had your car crash and are scrambling around trying to figure out what to do and prices are unstable - its inefficient and more resources will be wasted managing it then if we had slightly higher prices in the beginning.

You are falling into the fallacy that we would be paying higher prices no matter what - so what does it matter. The risk has been borne totally by the consumer and the traders and other market operators have walked away - taken the profits off the table and walked away when its gone t its up.

That's not an efficient way to run a market. As now you are going through expensive administration for suppliers like Bulb.

You are correct, I will admit I didn't look at it that way.

 

[SirGalahad]

You are correct, I will admit I didn't look at it that way.

To carry on the analogy - I am concerned why they were bailed out in the way they were. Something does not add up. Whose interest are Ofgem trying to protect?

https://www.ft.com/content/768cca61-d8c8-4231-9a30-7cc2c0864698

Two energy suppliers offered rival plans to Bulb’s government bailout

At least two energy suppliers pitched plans that would have allowed the customers of the collapsed group Bulb to be transferred to alternative providers at less cost to consumers and taxpayers, according to people familiar with the plans. Bulb has been bailed out by UK taxpayers to the tune of £1.7bn after Britain’s seventh biggest energy supplier admitted on Monday that it would no longer be able to withstand the high wholesale gas and electricity prices that have triggered the worst crisis in the sector for 20 years. The failed energy supplier, which was founded by former Bain management consultant Hayden Wood and ex-Barclays trader Amit Gudka in 2015, represents the biggest taxpayer bailout since the rescue of Royal Bank of Scotland HBOS in 2008.

Senior industry executives told the Financial Times that several suppliers had approached the regulator Ofgem with plans that would have allowed Bulb’s customers to be dealt with via the usual safety net for failed energy companies rather than a “special administration”. Bulb was placed into special administration on Wednesday, marking the first time the mechanism, effectively a quasi-nationalisation, has been used for an energy company. Under Ofgem’s normal safety net, known as the “supplier of last resort”, customers are quickly transferred to an alternative provider so as to ensure the least disruption. It is being used for the 24 other energy suppliers that have collapsed since the beginning of August as high wholesale prices have exposed deep vulnerabilities in many suppliers’ business models and hedging strategies. Processing Bulb’s 1.6m customers via this route would have cost considerably less than a special administration, according to several people familiar with the process. One senior industry executive told the FT it was a “fundamental lie” that it was “impossible” for any other supplier to take on Bulb’s customers.

UK business secretary Kwasi Kwarteng told the House of Commons on Wednesday that Ofgem had advised him that using the supplier of last resort mechanism was “not viable . . . because of the size of its customer book”. Ofgem declined to comment directly on the rival plans, insisting that “protecting the consumer is always our first priority and we have robust systems in place to make sure every feasible avenue is explored”. “As the taxpayer would expect, this was a thorough process and the ‘supplier of last resort’ option was considered but was not feasible,” the energy regulator added. In a letter to Kwarteng justifying the decision to pursue a special administration for Bulb, published on Wednesday, Ofgem’s chief executive Jonathan Brearley said the supplier of last resort mechanism was already “under considerable” strain from managing the failure of 20-plus other energy companies in recent months. Brearley also warned that some customers who pay for their electricity via prepayment meters, who are often from low income households, risked losing the “ability to top up” their meter via a supplier of last resort process.

However, Brearley also admitted that Ofgem was trying to avoid further costs being heaped on consumer energy bills next year. Energy suppliers that rescue customers via the supplier of last resort can recoup their costs through an industry levy that is funded by bills. Martin Young, analyst at Investec, has estimated the cost of rescuing the two million-plus customers who have gone through the mechanism since the start of August would add at least £75 to each dual fuel household energy bill. In a special administration, the recovery of costs “could be spread across multiple years”, Brearley said in the letter.