UK energy supplier Bulb’s hedging strategy led to collapse, report shows


Bulb Energy, the failed UK supplier propped up by the biggest state bailout since Royal Bank of Scotland more than a decade ago, collapsed because it had a risky hedging strategy to manage wholesale energy market volatility and ran out of credit lines as prices surged, new documents show.

A report prepared by the administrators for Bulb’s parent Simple Energy, seen by the Financial Times, also shows they have started talking to potential advisers about a combined sales process for the two companies.

The documents reveal crucial details about the events leading to the collapse of Britain’s seventh-biggest energy supplier in November last year. With 1.6m customers, Bulb was considered too big to rescue via normal energy industry processes and is being supported in a “special administration” process on behalf of the UK government with a taxpayer loan, initially of £1.7bn.

Bulb had a six-month “rolling hedging policy” to manage against wholesale price volatility, the report states, but as gas and electricity prices soared in the summer and autumn of last year, it had insufficient credit lines to hedge into 2022.

Martin Young, analyst at Investec, said the documents showed Bulb had taken a “late” approach to hedging. Bulb had one tariff that raised eyebrows among rivals because it was often considerably cheaper than Britain’s energy price cap, which is reviewed every six months.

The report says Bulb began hedging its exposure for the fourth quarter of last year in May but Young said a more prudent approach would have been to start hedging for that period from February.

He said taxpayers could end up paying “for the fact Bulb took risk on board when they didn’t have the financial wherewithal to tough that risk out”.

The company, founded in 2015 by former management consultant Hayden Wood and ex-Barclays energy trader Amit Gudka, sought to raise additional funds as early as May last year. In September, its advisers at Lazard tried to find a buyer for the supplier.

But by mid-November all potential bidders had indicated they were no longer willing to invest in or acquire Bulb “on a solvent basis”, the report says. Rivals including Centrica, Ovo Energy and Octopus are known to have looked at Bulb during the sales process although they are not mentioned in the documents.

Interpath Advisory, the administrator for Simple Energy, and Bulb’s special administrator Teneo have started talking to potential third-party advisers to run a joint sales process for both companies because they see “significant advantages to a combined sale approach”, the documents show.

Simple Energy employs the 855 staff required to run Bulb and also owns its IT software and intellectual property, although Interpath states in the report that it also has the right to sell its assets via a standalone process.

Bulb’s Spanish arm, which was launched in July 2020, was sold to local group Holaluz-Clidom at the end of December. A sales process was also launched for Bulb’s French business in December but no bids have been received.

Simple Energy went into administration in November with £9.9m of cash available in bank accounts, most of which was to meet employee costs.

It is owed £9.7m by HM Revenue & Customs for VAT refunds and is claiming another £3.9m for other tax payments, although part of this is disputed by authorities, the documents show.

Bulb owed investment company Sequoia Economic Infrastructure Income Fund about £55m when it was placed into administration under loans guaranteed by Simple, said Interpath. Sequoia has security over some of Simple’s assets but the administrators said they did not know yet whether there would be a shortfall in the amount returned to the company.

By the end of December, administrators from Interpath had racked up more than £1m in fees — almost £36,000 per day since their appointment on November 24, the report shows.

The company, sold by KPMG last year, did not provide an estimate of its total fees for running the administration.

Law firm Freshfields was owed almost £500,000 at the time Simple Energy was placed into administration, according to the documents. The firm is also in line to be paid the bulk of an estimated £1.5m to be spent on lawyers during the administration.

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