The media realised the scale of the costs of the failure of Bulb Energy yesterday when the administrators who have been appointed to run the company were granted a £1.69 billion (£1,690 million) loan by the government to see the company through to the end of April 2022. Depending on the way the administrators' report is read they expect to lose between £500 and more than £1,000 per customer that Bulb has over the next six months, which is a staggering sum.
In all this, the two blogs I had written on Bulb got noticed by journalists, with the accounting analysis attracting special attention. The result was that I ended up on ITN's News at Ten last night, and am discussing two more stories with other journalists.
The concern is fourfold. The first is that Bulb, and the two other energy companies that failed yesterday, are not the last of the UK's domestic energy suppliers to fail. There are quite a number more to go as yet: most of the rest have simply yet to admit it.
Second, at the end of this process there are only going to be a handful or so domestic energy suppliers left in the market, many of whom will also be generators.
Third, what this means is the whole market-based approach to regulation of the UK domestic energy market has, in effect, failed. The new market entrants who were meant to ensure that the prices offered to consumers were kept low have very largely proved themselves unable to take on the task, and have themselves become victims of the market.
Fourth, after the dust has settled it is likely that we will be left with domestic energy suppliers who, with one or two exceptions, are also generators. The threats that such suppliers pose, because they can control every stage of the market, was one reason for regulation in the first place. This was because those suppliers can very easily claim that they make little or nothing from domestic energy supplies whilst making considerable profits in their generation, trading and distribution activities, leaving the consumer open to exploitation. The attempt at diversification to tackle this has clearly failed.
This failure was, always, inevitable. I noted years ago when working on trade union related reports on this issue that the disparity between profits in the domestic energy supply market and those in the generation and trading markets were so significant that it was apparent that the focus of regulation was in the wrong place. It was also apparent that competition in the domestic market could not solve this. The big six energy suppliers, as they were at the time, were always capable of making their margins in the domestic sector look modest whilst making overall significant profits. It is now apparent that nothing that has happened since then has changed this.
So, what now for the domestic energy market when multiple companies, multiple tariffs, vast amounts of quite literally wasted energy in switching suppliers to reduce cost, and significant numbers of lost jobs have proven that the imposition of an artificial market into the sector has delivered no real consumer benefits whilst leading the real risk of consumer exploitation in place? My suggestion is a simple one. It is to suggest that this is the time for a national energy company. Other countries do, of course, have these. We did. And only by taking control of energy source, and by running it in the public interest with the intention of preventing monopoly exploitation can any government now really deliver for the UK public.
The problem with this suggestion is a straightforward one. It involves the N word, where N stands for nationalisation, about which there is a UK national political phobia. But, the reality is that Bulb has been nationalised and its losses are being accepted by the public sector. We can either be horrified by this or accept that the public regulation of such an essential product is so important that control is a necessary part of protecting the UK public, most especially when climate change is a matter of such enormous significance in the years to come.
But will politicians rise to this challenge, or fudge it as they are on railways?
Putting gas to one side (which in any case should be end to end nationalised) the elec system has: a number of companies with generators selling into a “wholesale market” based on marginal pricing. Retailers then interact with this wholesale market. Some retailers have/own generation, some/many don’t.
Adding complication to the above, some generators (the big boys) contract with other generators (small ones) to buy elec directly (usually at some sort of discount) roll this into their generation portfolio and then sell onto the market.
When marginal pricing emerged the generation fleet was a mix of fossil and nukes – some variation in price but not massive. Enter renewables and the market becomes much more heterogeneous in terms of generation cost. Marginal pricing can be demonstrated to work poorly in such a system.
The “solution” is to have a wholesale “market” based on a basket approach. We know more or less exactly the costs associated with a given generator (fossil, nuke or renewable). Given we know that, payments to them are based on what they generate. The “merit order”, who gets to generate first, is based on two things: Co2 footprint and cost. The basket approach means that generators are only paid based on their costs + margin.
Keep in mind, when marginal pricing was dreamt up, data comms was still in its infancy (in the 1990s 64kbps was cutting edge stuff). This is not the case now, and real-time comms showing the status of all UK generation (& its cost & its CO2 footprint) is trivial.
The buyer (of all this elec) could be a BoE off-shoot or an agency of Nat Grid, or … take your pick. It then sells @ the basket price applicable at any given moment to retailers. Analysis of Denmark & Germany shows that the basket approach has minimal volatility either over 24hrs or seasonally. This approach would strip out the nonsense of price caps and address the core problem: marginal pricing.
It also means that as more renewables connect to the system (usually with contract for difference pricing) massive falls in wholesale prices (because of lots of renewables) does not occur which in turn mean minimal subsidies. Keep in mind, under CfD the renewable concerned gets awarded the auction price, regardless of what the wholesale price is doing. The basket approach avoids all this since the generator is always paid the auction price which in turn modulates the basket price.
In summary, I am in favour of nationalising networks (natural monopolies) I am not in favour of nationalising generators. There needs to be competition in new-build generation – auctions & CfD delivers that quite nicely. We need price stability and we need wholesale market to reflect the real cost of generation: the basket approach does that quite nicely.
None of the above will be implemented in the Uk for the simple reason that the politicos constituting the body politic are too thick to understand, or just don’t care.
Thanks Mike
I swill definitely reflect on that
That we are dealing with a basket case is, I think, agreed
Interesting.
I have just been typing furiously on the subject and Richard will post it up…… but I think your ideas might have already overtaken my thoughts. “Experts” who would have thought we needed them?
Thanks to Mike Parr for that fascinating analysis. Lots to think about, and good ideas.
My less informed thoughts have been that for electricity there is such a diversity of generation types – and the prospect for innovation in the renewables field – that there might be a real benefit in a multiplicity of providers. It certainly needs managing better than simple free market competition, but established conglomerates don’t always have an incentive to innovate. Governments will still need to provide investment though, for example in companies trying to make tidal turbine power a reality, or green hydrogen production sufficiently efficient.
Mr Parr,
Thank you, but I remain uneasy when you refer to CFDs. These are derivatives used by financial investors and intermediaries that are pure financial speculations in which (as I understand them), there is no participation in the ownership of the underlying asset. Like all such transactions I would have preferred if you had listed and discussed the general risk downsides of CFDs in something as basic as utility provision, for example: account close-out in a price volatility envronment (presumably a liquidity issue); ‘gapping’, when prices move and skip levels; holding costs (costs applied to the position taken over a period); and the relationship between the the downsides for the generator (as owner of the asset) and user (consumer) of the energy when the losses from CFD are substantial. There presumably must be some adverse impact on the industry and market in which the CFD has been used and the losses are large.
I am seeking clarification, not attempting to score a point.
Mr Parr,
In case my query seems unclear, I was referring to your obervation that: “There needs to be competition in new-build generation – auctions & CfD delivers that quite nicely. We need price stability and we need wholesale market to reflect the real cost of generation: the basket approach does that quite nicely.”
I am not sure how you can be so sure CFDs deliver the new-build generation at at best price, given the risks?
Perhaps I am wrong, but I think Mike is referring to this: https://www.gov.uk/government/publications/contracts-for-difference/contract-for-difference
Essentially the government guarantees the price, whatever the market does.
“Successful developers of renewable projects enter into a private law contract with the Low Carbon Contracts Company (LCCC), a government-owned company. Developers are paid a flat (indexed) rate for the electricity they produce over a 15-year period; the difference between the ‘strike price’ (a price for electricity reflecting the cost of investing in a particular low carbon technology) and the ‘reference price’ (a measure of the average market price for electricity in the GB market).”
If I may I will deal with the various comments concerning CfDs = contracts for difference (as several commentators have observed). At least in Germany, Spain, Portugal and other countries, the combination of auctions and CfDs is the route taken to build medium to large-scale renewables. UK does CfDs for off-shore wind.
Typically, separate auctions will be held for PV & wind. Usually, a fixed amount of generation is auctioned, e.g. 500MW for wind and 400MW for PV.
Having looked at the results from a significant number of auctions a number of conclusions can be drawn. First: the auction process cause significant “pencil sharpening” amongst bidders with respect to bid-price. Second, most bid prices reflect quite closely the levelised cost of electricity, for a given renewable at the time of the auction. The final point is crucial (at the time of auction) since PV is still seeing a quite sharp increase in efficiency (CAPEX declines seem to have halted for the moment).
Adding to the above, it is quite straightforward to calculated the levelised cost of electricity for a given renewable in a given location. We do this all the time (ditto energy agencies and regulators). Thus it is easy to see if an auction delivers an anomalous result in terms of price (i.e. too high). Auctions mostly deliver surprises with prices lower than expected (usually those with respect to PV). (I hope this answers Mr Warrens point).
One can think of auctions & CfDs as bringing in the element of competition at the only point where it matters for renewables: at the project stage. Competition after that point is irrelevant since how can you have competition if the fuel cost (& the possibilities for improving fuel efficiency) is zero. One does not get a bill from the sun or wind. Yes one can get some marginal gains in a wind farm through optimisation: operative word: marginal.
In terms of the risks mentioned by Mr Warren, the main problem to date has been in Spain, where various political flavours of Spanish gov’ have attempted to retroactively change remuneration (2013) or tax “windfall profits” (2021). However, these are, for the most part exceptions. Which only leaves the weather risk (not much wind or sun). Over a period of 20 years (typical for many CfDs) this risk smooth’s out.
Chaps, I hope this has answered some of the questions & points.
Thank you
Ah, thank you – very helpful. I was labouring under a misapprehension. It seems a CfD is not a CFD. A CFD is explained by Thomson.Reuters Practical Law as follows:
“Similar to a forward or futures contract that is cash settled. The amount of the cash settlement will represent the difference between the underlying asset’s price agreed at the outset of the contract and its market price at the date of the settlement of the contract. CFDs can be long (that is, where the holder gains from a rise in the price of the underlying asset) or short (that, is where the holder gains from a fall in the price of the underlying asset).
However, unlike forwards and futures, CFDs are open-ended contracts with no fixed settlement date and can be closed out by the holder on demand. CFDs can offer exposure to a variety of financial assets, including single or multiple share indices, debt securities, commodities and currencies. When applied to shares, a CFD is an equity derivative under which the holder generally does not have voting rights or a call option over the underlying shares.”
Thank you Mr Parr,
My previous reply was to Andrew I think, so it becomes confusing to follow the order of discussion. I feel much clearer about the issues. How good it is to be able to tap quickly into informed comment on Richard’s Blog. Apologies it has taken me some time to return and respond to your careful explanation. I was tardy, but your efforts are much appreciated.
I think we know the answer to that one. Sadly, it will not be the right answer (in my opinion).
Craig
The Bulb Energy failure certainly has, or should have, put nationalisation back on the political agenda. Probably the only positive aspect of the creation of a domestic energy market was the emergence of a small number of firms (Good Energy, Ecotricity, and GEUK) who involved their customers in promoting renewable energy, without the greenwashing that Bulb exemplified. I hope that renationalisation would draw on some of their initiatives, and have decarbonisation as a central objective, rather than focus exclusively on keeping consumer prices down.
I have heard it said…
“The market has not failed! It is market intervention that is the problem. Abolish the retail price cap and let the price reach a clearing level. Yes, there will firms that go bust for mis-management and people will have to pay more for gas (and electricity) but it will be a huge boost for green electricity generation and we will, in the long run, reach a new equilibrium that is better.”
Yes, this really is a line of argument I hear and, to be fair, it has a certain appeal if you worship at the altar of Ayn Rand (although the true disciple would probably ditch the green bit with a shrug and “apres moi, le deluge”)
Meanwhile, in the real world ordinary folk just want to stay warm this winter and preserve our planet for the next 100 summers and winters. Are markets there to serve people or are people merely collateral damage of market fundamentalism? Are we really still having this debate? REALLY??
The “free market” has failed…. indeed the “regulated market” has failed, too. Now, where is the detailed plan to bring the assets under National Control? I have little expertise in this area but here is a thought.
(1) Make Bulb the National Energy Company. It will offer gas and electricity to everyone in the UK with a pricing policy that encourages energy conservation (progressive pricing with consumption) and a switch to electricity (gradually rising gas prices relative to Electricity). Its purchasing policy will favour green generation.
(2) Make pricing sufficiently attractive so that all the other suppliers choose to shut down (without compensation).
(3) Deal with generators as follows….
(a) Set up a National Generation Company
(b) put a bid on all generation capacity (£X per MW adjusted for the type of generation).
(c) sit back and wait for the complaints “£X ? You’re having a laugh!”
(d) squeeze them by regulation
(i) Financial – no dividends, limits on interest payments and manager renumeration (cf. banks)
(ii) Price caps
(e) Smile nicely as they soon hit the bid for their assets.
(4) Deal with wholesale gas suppliers with price controls and taxes and they will soon be happy to sell their assets at a fair price.
Just a preliminary thought….please feel free to rubbish it…. but we DO need more than just a slogan of “Nationalize it!”
I wholly agree
Nationalisation in itself is a solution to nothing (m I totally fail as a Marxist and have read Marx)
It’s what you do with it, as you say, that is the real issue
So yes, in other words, slogans will not do
I am all for public ownership but that does not have to be nationalisation and ownership by the state – what about community ownership? Local authority/municipal ownership? Mike Parr is more expert on energy markets than me but what my personal experience in the community ownership space tells me is that price stability is key to the viability of community owned energy projects. I don’t understand how CfD auctions help here.
There is also the issue of community energy generators being enabled to supply to a local customer base without having some middleman “energy supplier” taking a cut for doing not much – that is just another form of rentier-ism
Response to Jim Osborne’s post at 7:46pm on the 26th:
I came across this short film about Orkney’s green energy initiatives, which exemplifies Jim’s thoughts on local energy provision for local consumption and feeding into the local and national grids:
https://www.msn.com/en-gb/video/news/wind-and-water-orkney-s-island-powerhouse/vi-AAR9Mvj?ocid=msedgdhp&pc=U531
Of particular interest is the opening sequence covering just one aspect of tidal power generation there (the other being arrays of tidal turbines already fixed to the sea-bed). Earlier this week the UK Gov performed yet another policy U-turn and announced, sotto voce, it’s new funding of £20m p.a for 15 years for the development of tidal energy. This reverses a Tory Gov decision a number of years ago to withdraw funding for tidal power R&D which set back progress massively and specifically resulted in the abandonment of the tidal project at Swansea Bay. Fears have been voiced by SNP ministers and MPs that £20m p.a. is grossly insufficient in light of the Climate Crisis and the need to have a reliable 24/7 source of renewable energy ASAP.
The problem is we have an academic economics discipline that has peddled and oversold a market theory that works in only a narrow range of circumstances (a hothouse plant that survives few adverse climatic events outside a protective neoliberal hothouse); but has done so for so long and so well that it has seduced most of the world; which now seems to believe that the terms ‘markets’ and ‘economics’ are a tautology.
Well put…
Hmmmm…………..it’s correct to point the finger at economists but we must also accept that they are not the sole issue – as seen in the financial support for the Mont Pelerin Society by the The Volker Fund that helped give birth to a fully realised Neo-lib narrative – that money from rich vested interests is also one of the big maintainers and sponsors of the lies peddled by these economists. The Volker Fund actually did more than issue money – it also went out of its way to modify and shape Neo-lib narrative to create it seems to me more atavistic versions among the MPS if they wanted to remain funded.
And, in accepting that, we must also realise that even though language like ‘thought collective’ actually de-weaponizes the threat of bad economics we ARE in my opinion anyway in the grip of a well funded and organised conspiracy by the extreme rich to obfuscate, undermine and take over national governments to render them less effective and useless in protecting their citizens. The rich have gone beyond thinking – they have been in ‘action mode’ for a long time.
This is money versus democracy in my view.
The economists are merely minions – key parts of machinery most definitely – but perhaps as Richard would say as an accountant – ‘follow the money’ and all will be revealed.
And what the rich know is that if you create more rich, (as the Reagan/Thatcherite nexus knew) then you can only increase your power of influence and the self perpetuation and resilience of that influence. Look at someone like Aaron Banks who it seems help to fund the BREXIT hoax – someone who was able to make his fortune from a business world stripped of ethics and oversight, purpose built by Tories to create get rich quick schemes to swell the ranks of their support and their bank account – just like the Kings of old stole and bequeathed lands to those they could rely on (some things never change do they?).
In this country we were told that Jeremy Corbyn and Momentum were a threat; but there were other kinds of figures and ‘Momentums’ working in the shadows to shape what happens – and they still are.
The fundamental issue is not solely economics therefore – it is politics – the vulnerability of our politics in particular has been brutally exposed hasn’t it by BREXIT and Covid and this rampant far right ‘anything rich goes’ Government?
And politics is under threat from excessive wealth that as been enabled by that wealth investing in politics.
We now seem to be reaching ‘peak’ influence’ of the rich. It is they who will break the planet and break us. But they forget so easily what happens when they get too greedy (the tumescence of power created by money tends to do this to human beings). They are literally bringing about their own downfall. And ours. Whether revolution or environmental catastrophe – a great leveller will happen.
It’s only a matter of time. It might not be in our time (agnotology and the internet will delay the epiphany) but it is only a matter of time.
Gas prices are certainly critical, especially as millions of UK housing either lack or have very poor insulation and the government has done absolutely nothing to honour their election promise to have a major project of retro-fitting existing housing. Also, they need to guarantee maximum insulation standards for new build regulations. We get 40% of gas from the North Sea and the other 60% from Russia, Algeria and other sources so we are in a very vulnerable position. The rush to gas and nuclear was very unwise and solar and wind cannot deal with supplying baseload requirements. Playing about with different market solutions is really a deck chair moving exercise. Energy storage systems need to be developed.
Bulb is just another example of the awful infrastructure decisions surrounding the supply and cost of electricity to domestic consumers. Whilst we leave it to the market, entrepreneurs will always attempt to make the most of an inadequately worked out and poorly regulated market for their own benefit.
Readers may be surprised that in the UK, about 75% of our total energy requirements comes from fossil fuels. That figure covers heat, light, power and transport for industry, administration and domestic sectors. Also of note is the fact that we import a huge quantity of energy in the form of coal, primary oil, petroleum products and gas. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1023276/DUKES_2021_Chapters_1_to_7.pdf .
Against this background, electricity requirements fluctuate throughout the day. https://www.energydashboard.co.uk/fourtyeight. So, in addition to the massive conversion from fossil fuels to electricity, we will need forms of storage to minimise the peaks and troughs of demand. Storage in form of batteries (in homes, districts and transport), hydroelectric and hot water will become essential as we drive to eliminate fossil fuels from all form of energy production.
The role of the state in achieving decarbonisation should be paramount as energy is our most important infrastructure requirement. Nothing happens without energy, so who pays (and how) for all these local and national infrastructure changes is the key question.
Whilst I accept that there will be a huge increase in energy cost per capita, if we leave this to the market, huge parts of our population will continue to sink towards abject poverty and de-carbonisation will be too slow.
I agree with that
I always wondered how the market could possibly provide more “efficient” retail electricity. I mean, if you have a market in buying and reselling electricity, then every supplier has to pay for sales and marketing, account management, systems to purchase electricity and gas at their own negotiated rates. On top of that, they have to all generate a margin of profit to be viable companies.
It’s impossible to make that more efficient as a system – it just can’t be mathematically, seeing as it requires far more resources in the way of labour and capital than it did previously.
You could argue about innovation and efficiency all you like, but local optimisation is not the same as global optimisation – the system as a whole is not cheaper to run.
I watched you on ITV Hubb. I guess you were on all of 15 seconds. Pity you didn’t mention nationalisation, though maybe you did and they edited it out.
We recorded for 10 minutes….
I did talk about nationalisation….
In answer to your question: Will the government fudge it? The answer is of course yes.
The history of British energy policy since the political smashing of coal has been one of chaos, so it will continue in a similar vein.
I would argue that the complexities of the Green transition cannot be left to the market, with generation and storage decisions properly planned for, with sufficient spare capacity installed (not something the free market is keen on).
What sense is there is making energy companies sell at a loss which is what the cap does. Would they do it for the supermarkets?
They are trying to protect consumers
Ultimately they just reveal their own confusion on how to do so
Am I right in saying that it is not Bulb nor its customers who are being bailed out, rather it is Bulbs *creditors* who are being bailed out. I.e. the people *stupid* enough to read their business plan & think, yes, that’s genius! Let’s lose a ton of money chasing a break even market share that will vaporise if prices rise.
Is this capitalism? It sounds like state socialism. Heads we win, tails you lose.
most of the creditors will not gain from this, so you are not right, IMO
Have you seen Arvo energy and it’s blatant setting up of shell companies to siphon money out of the energy sector?
This linked article explains it well but the links to the accounts are dead. Can you look at companies house?
https://anotherangryvoice.blogspot.com/2021/09/the-collapse-of-avro-energy-and.html?m=1
If I have time – but it is in very short supply right now
I think the taking over of Bulb is due to it having too many customers, each one is currently loosing money for any Energy company so the act of getting a supplier of last resort to take them over might be the straw that pushes them into administration also.
I have a degree of sympathy though, the small companies have been making hay and pushing down energy costs as they have not been buying ahead and there has been a long period of dropping prices meaning they could undercut the incumbent’s. However, now the pendulum has swung back (COVID, BREXT?) that very business plan is their undoing.