Government mulls curb on failed suppliers selling hedges

The government is examining moves to prevent failed suppliers’ hedges being sold off during the insolvency process.

Giving evidence to the House of Commons Public Accounts Committee today (25 May), Ofgem chief executive Jonathan Brearley said it was “not acceptable” that hedges can be sold to benefit companies’ creditors rather than offsetting the costs of their failure.

Hedges, which may be sold at a hefty profit because they are worth more than when they were taken out, should be used to offset liabilities to the public purse created through SoLR (Supplier of Last Resort), he said.

Brearley, who was speaking at a hearing into Bulb’s disposal following its 2021 collapse, added: “If you are costing customers hundreds of millions of pounds that asset should offset that cost. I accept there are complexities working through relations with creditors but it’s important that we do.”

Brearley, who told the committee that requisitioning hedges is beyond Ofgem’s powers, was backed up later during the session by Phil Duffy, the Treasury’s director-general of growth and productivity.

He said: “We can’t have consumers’ hedges being snaffled as part of an insolvency process and sold on.”

Jeremy Pocklington, permanent secretary at the recently established Department for Energy Security & Net Zero, said the issue of dealing with failed suppliers’ hedges will be looked at as part of a wider call for evidence into the future regulation of the retail market, which will be held later this year.

But he added that the issue gets into “quite complicated insolvency law”.

Stuart Jackson, chief financial officer and co-founder at Octopus Energy that took over Bulb after it had gone into the government’s special administration regime (SAR), expressed concern that barring the sale of hedges could disrupt the disposal process.

He said: “The question of residual assets is complex and can interrupt normal creditor relations. If they are not able to access assets under a normal administration process, that can have material consequences on the well-functioning of the supplier market.”

Jackson also said the SAR, which was used for the first time to handle Bulb’s collapse, had proved good value.

He said the estimated £240 million cost of the process translates into the “comparatively small amount” of 75 pence per month per bill payer, which compares well with the costs of suppliers that been transferred via the more established SoLR process.

However Pocklington cautioned against this rosy interpretation because falling wholesale market costs meant Bulb’s special administration had proved less expensive than previously estimated.

He said: “SAR looks attractive superficially but that is ultimately because of the movements in wholesale markets. It leaves the taxpayer exposed in the administration process.

“SoLR is a quicker and more efficient process, where at its best you can act compete so loss to consumer is minimised as much as it possibly can be because there is value in customers books.

“This could have ended up with much larger impact on bills than it did: ultimately the bigger challenge is how to create a retail market that is more resilient.”

Both Brearley and the government officials told the committee that Bulb’s special administration costs are likely to be recovered through customers’ bills.

And James Bowler, permanent secretary of the Treasury, defended the government’s decision not to take out hedges for the energy supplied by Bulb when it was in special administration, which was widely criticised when wholesale  costs were spiralling in early 2022.

He said: “Given government financing is cheaper than the private sector, going into a commercial insurance arrangement doesn’t make value for money.”