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ALTIF Transcripts: Bulb Failure

It’s not often when a start-up fails that taxpayers end up getting a bill for £6.5bn – equivalent to a penny on income tax. But that’s what happened with Bulb, a venture that tried to bring the economics of Deliveroo and Uber to the staid business of selling power to domestic customers. Energy expert Nick Butler helps us unpick the Bulb shaped mess that ensued, how it happened and what should happen now.

Presented by Jonathan Ford and Neil Collins.

With Nick Butler.

Produced and edited by Nick Hilton for Podot.

Sponsored by Briefcase.News

Hosted on Acast. See acast.com/privacy for more information.

Jonathan Ford 00:05

Thanks for listening to a long time in finance with Jonathan Ford and Neil Collins in partnership with briefcase.news, the service that brings intelligent curation and analysis to your media model. Today we’re going to talk about Bulb energy. Until recently, a company most people had never heard of unless it supplied their energy. Many more have heard of it now. It failed last November and was put into a special administration regime by OFGEM to ensure supplies of energy to its 1.7 million customers. Astonishingly, that support which is being supplied, by the way by you and me, Neil, not just us, of course.

Neil Collins 00:49

Yeah, about to about 200 pounds per head.

Jonathan Ford 00:53

And may end up costing the taxpayer an amazing 6.5 billion according to the Office of Budget Responsibility. It’s not often that they comment on corporate failures, or they’re big enough to actually merit  a mention in the national accounts. Thanks, Vladimir Putin. The government’s now trying to sell Bulb off to another company, octopus energy, but the sale is being challenged by a number of other energy companies including Centrica.

Neil Collins 01:20

I think the position is that the judge decided it wasn’t for him to decide. But if they wanted to challenge the government’s decision, they needed a judicial review in a different court.

Jonathan Ford 01:31

Okay, that’s been part for now. But here to discuss how all this happened, and what it says about the state of Britain’s energy system. We have Nick Butler, energy expert advisor to governments and a great friend of the show. Welcome, Nick.

Nick Butler 1:40


Jonathan Ford 1:42

I suppose we ought to just quickly fill in for listeners who don’t know the kind of whole backstory about this, what is Bulb? Why was it created? And why did it end up being such a big part of the energy system?

Nick Butler 01:57

Well, Bulb was a new company created a few years ago, in response to the change in government policy, which allowed independent suppliers to come into the retail market. It was designed as a measure to increase competition, to give customers more choice, and to respond to the deep distrust that existed of the existing retailers who were thought to be milking the market. So Bulb was a new creation by a couple of young lads from the city, who had done some energy trading and thought they knew the electricity market, and it was very easy to set up companies like this, there was no real check on capital adequacy that you would normally expect a regulated (inaudible) in place. There was no real check on the individuals involved. They follow a standard but slightly disreputable business model, which is that you sell low tried to get a lot of customers, live off the money that those customers are putting in. And they failed, because the prices didn’t keep falling, as they have done in previous years. Therefore, they were caught with obligations to customers, which they couldn’t match. And they’re one of I think it’s 28 companies now that have failed. You said, Jonathan, in your introduction, thanks to Vladimir Putin for this bill of 200 pounds. But that’s not quite correct. This problem began well before Mr. Putin invaded Ukraine. He hasn’t helped. But the real thing should go to the so-called Business department and to the regulator who should have left

Jonathan Ford 3:39

That is the government.

Nick Butler 3:42

Yes, it’s our old friend, Mr. Kwarteng, who was in charge at the time. And they should have checked that these companies could operate and had enough financial flexibility to cope with the ups and downs of what has always been a volatile energy market. They didn’t, and therefore the costs fall on the customer.

Neil Collins 03:57

Could I just go back a step? Why did the government decide that six competitors, none of whom was making a lot of money was too few. So they opened it up in the first place. Seems to me that six competitors in a market like this is a perfectly reasonable total. What do you think that the thinking behind that was?

Nick Butler 04:21

Well, you’re a reasonable man, and that I don’t think that’s the criteria on which to judge this. This was a political judgement, designed to open up more competition. There was a sense never proved, and I think quite wrong, that those six companies were in cahoots and fixing the market. I don’t think that was true, and that they wanted to bring in more competition. It was part of a rather ideological approach, but it was done in such a slapdash way! Competition is fine. But you do have to make sure in an area like energy which is really important to every user, that the company is involved are sound and can cope with volatility.

Neil Collins 05:02

Yes, I think the sort of volatility that was injected into the market by the opening up of it was terrible thing. Centrica was making so much money that the share price went from four pounds to one pound.

Jonathan Ford 05:15

But that was partly when the competition came in. Because the losses that all the existing players toook became enormous. You can’t just blame Kwasi because it was pre him, it was sort of 2015, wasn’t it? So it would have been whoever was in, God, Amber Rudd, or somebody like that?

Nick Butler 05:31

Well, you can have a long list, I don’t think we’ve got time to know that a list of the guilty men and women. What happened was, of course, these players who came in promising long-term cheap deals to customers, won a lot of customers and Bulb was very successful in doing that, not the only one, they were one of the biggest. They did so by promising people a deal that they couldn’t actually deliver. Because with the end of the pandemic world gas prices, even before Ukraine, rose quite a lot last year. And they were contracted to sell at a price below the price at which they were having to buy the gas.

Jonathan Ford 06:08

That’s a very interesting point. Because I mean, the model you describe it’s very much the sort of business model of a sort of Deliveroo, or a Just Eat or one of these companies that were set up, which is to use venture capital money, make lots of losses, get a huge customer base and hope you survive.

Nick Butler 06:25

And Jonathan, take out a lot of cash on the way.

Neil Collins 06:29

I have a really serious beef with the with the setup, which is not confined to the ones that failed. This idea that the customer provides all the working capital, which allowed these businesses to continue, but it’s not just them, the whole industry now expects you to pay in advance for your energy, your balance might get down towards zero in the middle of the summer. But at no point do get to the point where you actually owe them money. So they use your capital to run the business. And this is true of the survivors as well as the, as well as the failures.

Nick Butler 07:09

That’s right. And I think the failure of these 28 companies is going to lead to quite a lot of scrutiny on how the whole market works. And how the regulator works. The principal blame for this, to me, rests with OFGEM, who should have seen the problem coming, who should have intervened and set real standards for these companies to work, including limiting the amount of money they take from customers in advance in order to run their own business.

Neil Collins 07:36

Yeah, so but they’ve just produced some new guidelines and have specifically not included guidelines

Jonathan Ford 7:40

What new guidelines

Neil Collins 7:42

New rules for the, for the industry. The rules do not include any need to ring-fence customers’ money or anything about using the customer’s capital as their working capital.

Nick Butler 07:58

Yes, those changes are completely inadequate.

Jonathan Ford 08:00

Can I just ask at the risk of sounding like a shill for the industry? Was this… Are we talking about segregating customers money and the use of customers balances? Was that not just something that all the utilities did in the past? Is it a new thing? The idea that you don’t segregate customer funds?

Nick Butler 08:18

I think it is something that the people who came into the market who were not traditional suppliers, they weren’t British Gas, the gas man coming to help you and provide all the services, they were essentially short-term in and out financial traders finding a market that was thought to be captive and open to these cheap offers, which were better than they could deliver. And I think they used every loophole.

Jonathan Ford 08:48

Okay, so they just exploited an existing vulnerability. But one thing I want to do, do want to get on to is can you explain to us, I mean, this OPR number of 6.5 billion pounds, you know, the cost of this loss falling on the taxpayer, it’s not really explained, do you think it’s realistic? And can you just sort of outline for us how we got to a situation with a company with 1.7 million customers could possibly ever cost this much to unwind?

Nick Butler 09:14

It comes down to the fact that what their obligations are to buy, against their obligations to the consumer. And I assume with a lot of customers, the per capita obligation was quite high. There doesn’t seem to be a question mark over the figure. I think the OPR are usually very reliable.

But there’s a suggestion here that they didn’t have all the data, and that now with the volatility of the market, the company has not lost quite so much as that. But we don’t know. And I think the other problem in this is the total lack of transparency. I think when there’s taxpayers money on this scale, being spent, and consumers money rather than taxpayer, everything ought to be put on the table. I think there ought to be a forensic audit of these companies to show who did what, who took money out and when, and why you get to any figure at the end of the day. I think also as in reallocating these companies. And this is the legal challenge that you refer to. It’s not very clear to me and reading all the reports of this, why Octopus was chosen, what the deal is with them how much they have been given to take on this burden, how much has been written off by the government in some way, on the way through this? And I think the other companies who I believe are very respectable suppliers were not given a chance to bid.

Jonathan Ford 10:36

Important question, but let’s just quickly unpack that. Octopus energy, which is the company that has bid for, and I understood that it was pretty much the only company that did end up bidding for Bulb.

Nick Butler 10:46

I believe, yes. And that is because the full details of this were not available to all those other companies to bid. One of them has said that there’s so much redacted in the offered contracts that their lawyers couldn’t understand the deal that they were being invited into. So they didn’t bid. That will go through the courts as to whether it was legal or not. But I think government and OFGEM have a responsibility to make this a transparent process. If we’re paying. I want to know why I’m paying, I can’t really answer your question about why it’s 6.5 billion, it’s a hell of a lot of money. I think the National Audit Office said the first 27 that went broke added up to 2.7 billion. That was a report a few weeks ago. Now, that’s quite a lot of money. It obviously, if the OPR, as you said, are now putting out these numbers, that shows it has a material influence on public finances,

Neil Collins 11:45

it is equivalent to a penny on income tax roughly. It is extraordinary that the only thing we know about it is the single line in the OBR’s commentary on the last budget, the government has given us no information at all. And it seems to me to be absolutely extraordinary that it can maintain this, this stance for a sum of this size. Barely a week went by, during the heyday of these, were the weren’t league tables in the press, explaining which supplier was the cheapest. So these mini suppliers, some of them run from a back room with a laptop could easily get…

Nick Butler 12:30

You two could be energy suppliers!

Neil Collins 12:36

Next week… But you know, the since there was no moral hazard here, the press I think do bear some share of the blame for essentially giving these people constant free publicity.

Jonathan Ford 12:57

Isn’t it a bit reminiscent of you know, the kind of the, the people who put all their money into Iceland just before, in the banks in Iceland, just before the financial crisis? Because they thought, oh, I can get 3% rather than one and a half.

Nick Butler 13:11

Yeah. So I think it plays off people’s desire for a quick win. And people’s belief that these deals are available, and somebody’s ripping them off somewhere else. So here’s somebody offering a cheap deal, that must be better. That’s just not true. I mean, because of the nature of the business. I mean, this is essentially a utility business. I think all the companies involved should show their workings and what they’re paying, what profit, they’re taking, reasonable profit, and what they’re charging to customers. And I think that is the nature of this business. It’s not Deliveroo… it matters so much to everybody. And the costs when it goes wrong, are so considerable that I think we need a different standard of transparency.

Jonathan Ford 13:55

Yeah. Then you mentioned the characters involved. We haven’t really talked very much about them. Hayden Wood, who was a management consultant, who obviously did some project on the energy sector and a man called Goodcare who was a, as you say, an energy trader at Barclays.

Nick Butler 14:11

Jonathan, is there anybody who isn’t a management consultant?

Jonathan Ford 14:14

I’ve never been one. Probably a good thing for all of us. But basically, so Goodcare left towards the end before the company collapse. But amazingly, I mean, first of all, Hayden would carried on working until very recently for this business, being paid, I think, a quarter of a million pounds a year and he’s made quite a lot of money as has Goodcare by selling shares to various people on the way up. Does seem the most astonishing thing that could they can receive what I used to refer to as rewards for failure.

Nick Butler 14:47

It is disgraceful, really. But it is how this market has worked. You see, as you’ve mentioned, some of the other scams and scandals we’ve had. People can put money in their pocket and then walk away and leave the rest of us to pick up the bill.

Neil Collins 15:03

Do you think that OFGEM has got the power if it chose to exercise it? Or do you think that actually the regime under which they operate is inadequate to stop this sort of thing.

Nick Butler 15:17

Bit of both that they do have more powers than they’ve used, but they probably need more and certainly support from the government. They’re not really independent. They are controlled by ministers. And they were told to introduce this competition process. They were all questions about whether the companies should hedge or not. You need a regulator who is independent of government very well respected. I think OFCOM is much better than OFGEM. I think it’s had weak leadership and weak guidance from ministers and needs to be replaced.

Jonathan Ford 15:51

This to me is vaguely reminiscent of another bugbear of A Long Time In Finance, which is the water sector where the regulator disdained the idea of looking at the balance sheets of the companies that were operating in this market, and allowed them to become incredibly highly leveraged. It would be exactly the same dynamic, which is that the public interest demands people get their water. And the companies which saddled the customers with extraordinary debt have to be supported sufficiently to allow them to pay their debts, which is ridiculous. It’s a kind of the tail wagging the dog.

Nick Butler 16:23

Yes, that’s right. There is a public interest. And I think that that is what it’s going to reassert itself. Now after this problem and all the others you’re talking about. That’s not easy to define. But I think OFGEM should start by setting real boundaries and standards for the companies that are operating in the sector.

Neil Collins 16:40

I think part of the problem from OFGEM’s point of view, is that if they start putting on tough new rules, there’ll be another cascade of failures of amongst the survivors. There’s even a suggestion that Octopus itself is not exactly completely, financially sound. Although this suggestion does come from Centrica, who, of course, have a vested interest. But since we have no idea what Octopuses balance sheet looks like, they might well be right.

Nick Butler 17:18

Absolutely. And that’s why we need more transparency. And I think markets go through this sort of volatility as the financial market did in 2008. At the end of it, you have to have tighter rules. And then you have to make sure that the company is working that they get a fair return, but they don’t get more than a fair return. This is a utility business that has been lost. It’s been seen over the last decade, as an area where you can make cheap quick money.

Neil Collins 17:46

Ring-fencing of customers’ deposits, and a more equitable division of who’s providing the working capital, I think is also needed. Because in the old days, you used to get a bill and you paid it. I think it’s the rise of the direct debit is one of the things that has been the catalyst for this change.

Jonathan Ford 18:08

So let’s get back to…

Nick Butler 18:09

You’re going to go back to predecimal currency.

Jonathan Ford 18:13

Go back to coloured stones. Yeah, the interesting point about the financial crisis,  just to go back to our friends at Bulb for a second. I mean, it’s very intriguing looking at the shareholders who backed this venture. One of them was this fellow who is an Israeli Russian investor called Yuri Milner who’s better known for backing things like Facebook and various things in Silicon Valley. And Magnetar, which is, I didn’t know, for those with a long memory was an American hedge fund, which promoted CDOs in the years before the financial crisis, all of which went bust. So once again, you can see that the sort of people who were backing this venture, were not the sort of people you’d expect to turn up backing a utility investment.

Nick Butler 18:59

Well, they saw it as something that would provide something more than a utility rate of return.

Neil Collins 19:03

As indeed it has.

Nick Butler 19:07

As well as it has and ended for a while. But the art of this sort of players is to go in, build and get out.

Neil Collins 19:14

Build I’m not sure. Jerry-build.

Nick Butler 19:17

The book of customers, to 1.7 million in this case, that’s a lot of customers. And I think this is fluid capital, going to an area where they thought they could make a killing, they weren’t expecting to make a four or 5% utility rate of return. So they went in because this looked like a market that was open for a bit of manipulation.

Jonathan Ford 19:43

Let’s turn to the question of what should be done, what do you do? You’ve talked about things needing to change. What would be top of your list to put this whole thing right.

Nick Butler 19:52

I’d change the leadership of OFGEM and I would change their remit to give them more power to impose on these companies requirements, which I’m sure the Big Six can meet, of capital adequacy and business plans that were resilient to volatility, less taking of customers money as a means of funding the business. So setting new rules, which should be workable for the companies, otherwise, they’ll all get out of the market, which would be not the right answer. So you have to have an agreed but firm new settlement. I would make the companies show why their prices are as they are. In this volatile market, most of them have not exploited the situation. They work on a long-term basis. But I think you need strong new leadership with new guidelines agreed with government and parliament that will work. It works elsewhere. I don’t see why it can’t work here.

Neil Collins 20:48

And Nick, I’ve just had a message saying would you like to be the next director general of OFGEM.

Jonathan Ford 20:56

Would I…. stop sucking up to the guests, Neil.

Neil Collins 21:03

That was a long time in finance with Jonathan Ford and Neil Collins. Production and editing by Nick Hilton. And our sponsorship partner is briefcase.news. If you enjoyed the show, please rate and review it on your podcast app because that will help new listeners find us

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