Household bills could soar by £60-a-year to pay for failure of energy supplier Bulb as government covers £1.7billion cost to keep lights on for its customers
- Household bills could rise £60 a year to pay for fallout of energy supplier Bulb
- The firm is the first to use Special Adminstration Scheme to help 1.6m customers
- Under scheme, Government to spend £1.7bn to supply Bulb customers in winter
- Goverment will try to reclaim costs from suppliers, meaning household bills could rise
Household bills could rise by as much as £60 to pay for the fallout of energy supplier Bulb as UK gas prices continue to skyrocket over winter.
The company was placed into administration yesterday and the government has pledged to set aside £1.7billion to keep Bulb’s 1.6million customers warm over winter.
Bulb will be the first company to use the Special Administration Scheme – a contigency system that was designed to temporarily support energy suppliers deemed too big to fail.
Under the rules of of the scheme, Bulb will receive Government money to continue supplying gas and electricity to its customers during the administration period.
The system was devised in 2013, with the intention that the Government would later place the costs back on to the energy suppliers.
This in turn, means the price will be passed on to households through their energy bills.
Struggling energy supplier Bulb (pictured) has been placed into special administration, it has today been announced.
The firm (pictured: A Bulb logo from the website), which launched in 2015 and has amassed 1.7million customers, faced collapsing within days after crunch talks between the Government and the company’s biggest secured creditor collapsed
‘The intention is to recover the Government funding from the insolvent company if it were rescued or from the proceeds of its sale if it were sold. If all or part of the funding could not be recovered from the company or its successor(s), the intention is to recover it through network charges,’ an official paper said.
One industry source said that the Government will be able to recoup some of the money from Bulb or from selling parts of the business.
But those in the industry believe the Government will either have to absorb around £1 billion, or charge consumers for it.
Bulb’s future was deemed unviable after it began selling gas and electricity for less than it costs to buy. This is because the Government’s price cap limits what suppliers can charge to under the current wholesale price of energy.
The firm’s investors and lenders refused to continue supporting these losses, forcing it to shut down. The cap offers some protection for householders when wholesale prices surge, but it means that energy firms are running up massive losses.
Industry regulator Ofgem would normally appoint a rival energy firm to take on Bulb’s 1.7million customers under a regime known as the Supplier of Last Resort. In this case, there is no chance of doing so, at least in the short term, because no other firm is prepared to take on the costs and huge losses involved.
Under the Special Administration Scheme, a team of administrators will run the company and buy and sell energy until another firm in the sector is willing to take on the customers.
Government ministers will be able to decide when to push up bills to recoup their money.
By waiting until gas prices are less severe, they could spread out the immediate hit to households. Bills are already expected to shoot up by hundreds of pounds next year.
The 2013 paper also revealed that the Government believed suppliers as big as Bulb were highly unlikely to collapse. Officials estimated there was just a 0.12% chance of using the Special Administration Regime in any given year.
Normally energy regulator Ofgem uses a different process, called the Supplier of Last Resort, which moves the customers of a failed supplier to one of its rivals.
This ensures that consumers are protected, while allowing the failed business to close down.
However transferring all of Bulb’s 1.7 million customers to a different supplier could risk putting the new supplier at risk of collapse because of the high costs it would face.
‘For a supplier to take on the customers of one of the six largest supply companies may mean doubling the size of their customer base. A transfer of this size could not take place in an orderly manner in a short timescale,’ the 2013 paper said.
What is a special administration scheme and what does it mean?
Energy supply company administration is essentially a contingency measure to deal with a high impact event in the UK’s energy market.
It allows the company to continue trading normally, potentially with financial assistance from the Government, if the company is unable to secure funding from commercial sources.
This lasts until the firm is either rescued, sold or its customers transferred to other suppliers.
Bulb is the first UK firm to be placed into energy supply company administration.
Energy supply company administration is intended as a backstop to the Supplier of Last Resort arrangements.
These arrangements allow Ofgem to revoke a supplier’s licence if it becomes insolvent and appoint another supplier to take over its customer accounts.
The purpose of energy supply company administration is to protect the market from the sudden impact of the failed supplier’s debt.
This is essentially to stop a domino effect, where the collapse of smaller energy firms mounts to put pressure on larger energy suppliers.
Unlike 22 of the previous UK energy firms which have seen their customers shifted on to bigger suppliers, Bulb the biggest firm to run into trouble yet.
With 1.7million customer Bulb is almost as big as all of the other firms to have gone bust combined.
And so it seems – like the banking crisis of 2008 which saw the Government spend billions bailing out failing banks – that Bulb is too big to fail.