politics

Uncertainty over if government is in Bulb Energy for the long haul


Place your bets: how long do you think the government will be in the business of running a retail energy supply company? Put another way, is the “special administration” of Bulb Energy likely to be a quick fix or a long haul?

Kwasi Kwarteng, the business secretary, was careful not to answer that question in the Commons this week. “The house should understand that we do not want this company to be in this temporary state longer than is absolutely necessary,” he said, offering no hint of what he would consider a reasonable timetable.

Six months? That is the period covered by the government’s advance of £1.7bn of public money to be used as working capital by the administrators – consultancy firm Teneo – to ensure Bulb’s 1.7 million customers receive gas and electricity. But, of course, a second advance is always possible if flipping the business proves trickier than assumed.

Complexity is indeed the way to bet, says one senior industry executive. A key point about the “special administration” process, he says, is that Ofgem has surrendered an element of control. All the other 23 company failures have been handled under the “Supplier of Last Resort”, or SoLR, system, that allows the regulator to force a transfer of customers if necessary. Under administration, companies are not obliged to accept customers. And, since the government is supporting Bulb, there is less sense of urgency: operations continue and customers will still be supplied.

Then there’s the fact that Ofgem itself seems to have no clear plan, or at least not one it is advertising. Chief executive Jonathan Brearley’s letter to Kwarteng requesting an administration for Bulb offered three arguments in favour. None suggested a speedy resolution.

First, there was the fact that “industry systems are already under considerable strain” from managing the transfer of customers of smaller companies that have gone bust. That burden is unlikely to ease soon: another two firms failed on Thursday.

Second, Ofgem was worried about the competition issues if one large supplier was given Bulb’s customers as a job lot. Administration “will provide time to consider these issues”, wrote Brearley.

His third point was that use of SoLR “would be likely to give rise to a claim on the industry levy which would be passed on to the market in the next regulatory year”. That levy allows new suppliers to recoup the costs of supplying new customers and is added to the bills of every household. At current wholesale prices, a Bulb premium, if taken in one hit, might mean £90 on bills, say analysts. Administration allows “discretion on timing”, wrote Brearley.

We’ll see. A rapid auction of Bulb is obviously possible, and Sky reported this week that City firm Lazards will be hired for that purpose. But, given the critical interplay between Ofgem’s price cap, wholesale prices and the levy, one has to assume that any acquirer of 1.7m accounts would want a cast-iron guarantee that it won’t lose money on the deal. Temporary nationalisations are easy to do; exits can be harder.

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Cost inflation could be story of 2022 for hospitality, despite Mitchells and Butlers’ resilience

Mitchells & Butlers, with 1,600 pubs under brands such as Harvester, All Bar One and Nicholson’s, is clearly one of the industry’s survivors. Indeed, despite a pre-tax loss of £42m for the last financial year, chief executive Phil Urban managed to sound mildly cheery. Trade is now back above pre-pandemic levels, punters are booking Christmas parties and, at an operating level, M&B recorded a profit of £81m.

Urban’s parallel warning of cost inflation, however, is the bit to focus on. For the hospitality industry as a whole, it looks likely to be the story of 2022. Aside from energy bills, which will inevitably be sharply up, M&B puts food and drink price inflation at 7% while labour costs are predicted to be 6.6% higher when the national living wage rises next April. Only property costs offer any relief.

In a normal year the company expects an overall inflationary increase in its cost base of 3.5%. This time it is braced for 6%, a figure the Bank of England should probably note. It spells price rises coming down the track, even before VAT returns to its pre-Covid level of 20% next April for big pub operators.

To repeat, M&B is well placed to overcome what it calls “major challenges” on costs. But the wider picture is an 8.6% fall in the number of licensed premises in the UK since the start of the pandemic in March 2020. The worst may be over, but life doesn’t look easy in pub game.



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