We discussed the announcement that Bulb Energy Ltd (“Bulb”) was due to be placed into special administration in our previous blog outlining how the rules for energy supply companies work, the supplier of last resort (“SoLR”) regime and what energy supply company special administration entails.

In this blog we look at why it was necessary for Bulb to enter special administration, and what will happen next to Bulb and its customers.

Why was Bulb different to other energy companies?

As mentioned in our previous blog, a SoLR is Ofgem’s preferred course of action, but Ofgem will utilise its special administration powers if a SOLR is not practicable. A SOLR was not practicable in the case of Bulb for a number of reasons:

1. Scale – Bulb has approximately 1.6 million domestic customers and c.15,000 SME customers. This is substantially higher than any other insolvent energy supply company and would have created a heavy burden on any subsequently appointed SoLR.

2. Customer transfer capacity – the market can only transfer approximately 100,000 customers a day. With the high volume of SoLR transfers currently taking place, as well as the “business as usual” customer transfers, a bulk transfer of Bulk customers would have stretched this resource too thinly.

3. Risk to consumers – slow transfer times could risk a loss of supply for those on prepayment meters, trigger customers to transfer early (and lose credit balances) and create uncertainty leading to cancellation of direct debits.

4. Competition in the market – any SoLR taking on Bulb customers would need to be a large supplier to cope with the increased costs. In addition, as there is such a large number of customers, a SoLR process would hugely inflate customer numbers of a supplier, thereby decreasing the competition Ofgem is supposed to promote.

5. Substantial mutualisation costs to the market – the SoLR process gives rise to a number of charges, which are mutualised across the market. Bulb’s mutualisation costs would have likely been substantial and have added increased costs to the market and created a heavier burden for existing suppliers/ consumers (when the price cap is increased).

The appointment of the special administrators

In light of those practicalities, Ofgem therefore wrote to the Secretary of State requesting consent to make an application for an energy company special administration order in respect of Bulb. The Secretary of State provided that consent, citing that:

1. customers (especially the most vulnerable) must be protected;

2. the government is not prepared use taxpayer money to “bail out” energy suppliers or reward “poor planning”; and

3. the government is committed to ensuring the longevitiy of a competitive energy market.

Ofgem subsequently applied to court to appoint special administrators with the consent of the Secretary of State. Daniel Butters and Matthew Smith of Teneo Restructuring were subsequently appointed as special administrators of bulb on 24 November 2021 (the “Special Administrators”). At the same time, (ordinary) administrators were appointed over Bulb’s parent company, Simple Energy Limited.

What will happen next?

The government have provided a funding package to Bulb (without which Bulb would not have been able to continue trading), but it is not clear what this package looks like. Pursuant to the energy rules, this may be through grants, loans or a guarantee (or a mixture of all of these). It is likely that this package includes a guarantee in respect of Bulb’s hedged supply with Bulb’s hedge counterparty.

The government news alert states that these costs can be recouped at a later date (in priority to unsecured and expense creditors) and will do so in a way that ensures that:

“[the Government] get[s] the best outcome for Bulb’s customers and the British taxpayer. This will be done in a way that minimises the impact on consumers and takes into account the solvency of industry participants, like transmission operators and shippers.”

The government announcements make it clear that the special administration will be “temporary” and Bulb should not be in special administration for longer than is “absolutely necessary”. It is likely that the Special Administrators will be searching for a buyer and if that is unsuccessful, seeking to transfer customers to a new supplier in a more orderly manner than would have been possible through a SoLR.

We will know more when the Special Administrators proposals are published (which should be before the end of January 2022 and will be available on the Bulb portal). The proposals should contain more detail regarding the funding package and how the Special Administrators intend to achieve the objective of the special administration.