The most startling number in the Office for Budget Responsibility’s economic outlook last week – aside from the gloomy big-picture forecasts – was found in a one-sentence footnote on page nine. “The total cost of the Bulb Energy bailout has reached £6.5bn, with £4.6bn of that in 2022-23 included in the autumn statement,” it stated baldly.
Let those figures sink in. Since March, when the OBR forecast that nationalisation of the bust energy supplier would cost £2.2bn, the figure has increased by the equivalent of almost £3,000 for each of Bulb’s 1.5m customers. As one energy trader puts it, even under the April-to-September price cap of £1,971 and even with high wholesale prices, it ought it be almost impossible for Bulb to clock up losses of that size during the low seasonal period for consumption.
What happened? What explains the £6.5bn figure? How has the government, via its special administrator Teneo, managed Bulb?
We have half an answer to the last question: at administration in November 2021, the government did not put hedging contracts in place at Bulb to cover its purchase of energy for customers. The company was left to buy on the spot market. Kwasi Kwarteng, then business secretary, told the business select committee in May that hedging is “very risky”, that “you’re taking a bet” and “the Treasury rightly doesn’t think that’s the business of what the taxpayer should be doing”.
Kwarteng’s logic was bizarre in many ways. First, hedging isn’t like taking a bet – it’s about obtaining certainty over prices. Second, Bulb failed in part because its hedges were inadequate. Third, Ofgem, the regulator, requires regular non-nationalised companies to hedge. Fourth, as the select committee pointed out in its final report, the Treasury document cited by Kwarteng, called Managing Public Money, allows public-sector bodies to use hedging instruments provided they give value for money.
But Kwarteng’s testimony still doesn’t explain how £2.2bn in March could become £6.5bn by November. In recent weeks, as near-term gas prices have fallen with a warm European autumn, an unhedged operation might even be making a profit, think traders.
There are two main theories. First, a benign one: there’s something odd in the OBR’s calculations. Could the watchdog be using out-of-date data on gas prices? Or, more plausibly, does the key to the mystery lie within the sale agreement with Octopus? If the government has agreed to lend, say, £2bn to allow the pending new owner to make energy purchases, perhaps that is classed as a full liability even when there is a reasonable prospect that the whole sum will be recovered. The business department has partly encouraged that thought by telling the FT that the OBR does not have full visibility on the Octopus deal.
But there is also a more alarming theory. Is it possible that the government, in preparation for a sale of Bulb, performed a policy U-turn and started to put hedging contracts in place in July and August? If so, its timing would have been terrible – it would have been locking in expensive purchases.
Both explanations are speculative, it should be stressed, because the OBR hasn’t broken down its £6.5bn calculation, merely saying the cost of the intervention has increased “essentially because it lasted for more months than was factored into the March forecast”. But the onus is really on the government to explain. Instead, we have a bizarre situation where the business department disputes the £6.5bn figure but refuses to reveal the terms of the Octopus deal, despite ongoing legal attempts by rival suppliers to force disclosure.
A fortnight ago, this column argued that there was no excuse for the secrecy around the terms of the Octopus transfer. That view is only reinforced by the OBR’s number, which is way beyond analysts’ previous estimates. If it describes a likely cash cost, the full story of the government’s approach to managing Bulb should be disclosed. Nationalisation was never going to be cost-free, but did the business department under Kwarteng, for example, at any point request approval from the Treasury, under the chancellorship of Rishi Sunak at the time, to adopt a hedging strategy? And was Ofgem ever asked for advice on hedging?
Instead of facts, we have had only unsupported boasts from Grant Shapps, today’s business secretary, about how the sale to Octopus represents value for money for the public purse. Come on: the loss from Bulb is due to be shoved on to consumers’ energy bills eventually. If £6.5bn is correct, that’s more than £200 per household. These sums are too big to be dismissed without explanation in a footnote. Transparency is long overdue.