What can Australia learn from Bulb Energy’s failure?

The collapse of Bulb Energy is only the tip of a UK iceberg, where smaller power retailers are struggling to survive a surge in wholesale energy prices.

The seventh largest power supplier in the UK, Bulb Energy went into administration in November last year. The government has now picked up the tab for supplying the company’s 1.7 million household customers with energy.

Since the start of September 2021 – when the British energy crisis really started to bite – a total of 21 energy retailers have gone to the wall, with more than 3.7 million consumers affected.

What went wrong for Bulb Energy?

A renewable energy start-up, Bulb took six years to evolve into a major player in the UK power market. It appeared to be the complete package, marketing electricity generated by wind and solar power at extremely low prices.

Yet it failed to advance-buy the electricity and gas needed to service its customers. Ambushed by rapidly spiralling global gas prices – which then fed into wholesale electricity prices as well – Bulb was unable to cover its costs. At the same time, investors bailed out on a number of planned projects.

According to Bloomberg, the UK Government body which took over Bulb’s management is now making the same mistake.* With Treasury rules preventing the government from hedging, the true cost is likely to be picked up by consumers.

The role of price caps in Bulb’s demise

Bulb Energy claims the UK’s energy price cap played a role in its downfall.

As Canstar Blue points out, the introduction of the price cap initially hit the UK’s large energy retailers. Two of the UK’s biggest suppliers, British Gas and SSE, were among the first to suffer its financial ill-effects.*

The impact then spread to smaller retailers, who found they were prohibited from passing on wholesale price increases to their growing customer bases.

With more consumers shopping the market, and switching between companies to get a better deal, retailers were increasingly unable to service their customers.

The Australian experience: will we follow suit?

In hindsight, Bulb’s aggressive marketing and unsustainably low prices pre-destined the company to failure.

Yet energy retailers across the globe now find themselves operating in this high-risk, low-margin landscape. Forced to buy wholesale energy in a constantly fluctuating market, they must then sell on to customers on fixed-rate contracts.

Retailers rely on forward hedge contracts, with major generators, to pre-buy their power at a known price. If they get this wrong, or fail to plan ahead, their costs skyrocket, as in the UK.

To stay profitable, Australian power companies will need to better manage increasing amounts of rooftop solar, maintain low cost databases, and use detailed customer information to the best effect, within privacy legislation.

On the plus side, in May last year, Australian wholesale electricity prices came in at a nine-year low.* Wholesale domestic gas prices are also largely buffered against global rises, with most gas supplied on long-term contracts and domestic users generally paying less than their overseas counterparts.*

While pricing pressure in the Australian market is less intense, we are not immune to sudden and dramatic market shifts. The pandemic also continues to pressure retailers, with customers struggling to pay their power bills.

The Australian Energy Market Commission (AEMC) is in the process of introducing new rules to help protect energy retailers whose cash flow is drying up.*

Resilient renewables forge ahead

The AGL experience shows what happens to Australian retailers who fail to transition to renewable energy.

With the cost of Australian renewables tumbling, and householders creating an abundance of rooftop solar, AGL’s ‘gigantism’ business model – heavily reliant on coal generation - is now groaning under the strain.*

Many large-scale coal-fired plants are coming to the end of their life, requiring costly maintenance and becoming increasingly inefficient.

Back in the UK, post-Bulb, New Scientist predicts that green investors will continue to sink billions of pounds into huge, off-coast wind farms, largely via power purchase agreements (PPAs).*

Whatever its failings, Bulb did put pressure on larger energy firms to ‘go green’ - a trend which now seems unstoppable.

With spiralling gas prices only making investment in renewables more attractive, it’s hoped that most Australian retailers will adapt and ride out the storm.