Octopus Energy is set to provide the next UK government with an early £3 billion windfall by repaying all the state support it received for taking over the collapsed energy supplier, Bulb.
This means the government will recoup nearly all the cost of temporarily nationalizing Bulb in 2021.
Bulb Bailout: From Costliest to Almost Fully Recovered
The bailout was initially estimated to be the UK’s most expensive since the financial crisis, potentially reaching £6 billion.
However, falling energy prices have significantly reduced the final bill. Octopus, which became the UK’s largest electricity supplier with 6.9 million customers after the state-backed takeover of Bulb, confirmed to the Financial Times that it would reimburse the Treasury by September.
Octopus’s pledge is a positive development for the incoming government and the UK’s special administration regime (SAR) process, of which Bulb was a test case.
The government has drafted contingency plans to place debt-laden Thames Water into a SAR, although the utility differs significantly in scale and importance compared to Bulb.
Despite the differences between energy and water SARs, Adam Bell of Stonehaven consultancy believes the Bulb case demonstrates the potential for such structures without jeopardizing customers.
Bulb’s Collapse and the SAR Process
Bulb, a major UK energy supplier, collapsed due to soaring energy prices ahead of Russia’s invasion of Ukraine.
It was placed into the SAR in November 2021 to prevent its 1.5 million customers from facing power cuts before Christmas.
After nearly a year, the government sold Bulb to Octopus, a deal that involved temporary taxpayer-funded measures to purchase energy for Bulb’s customers and faced legal challenges from rivals.
The Office for Budget Responsibility initially estimated the SAR cost at £6.5 billion in November 2022.
However, the drastic drop in energy prices since then has reduced the estimate to £3.02 billion, aligning with the forecast by Bulb’s administrators, Teneo, 18 months ago.
Even with Octopus repaying £3 billion, £6.1 million in other costs related to the SAR remain, down from a February forecast of £19.6 million.
Government to Recover Most of the Bailout Costs
According to a letter to the Public Accounts parliamentary committee, the government expects to recover approximately 99% of the amounts owed by the end of September 2024.
The cross-party committee had previously raised concerns about consumers potentially bearing the financial burden of the bailout, as the government had intended to pass on the costs through energy bills.
However, the deal’s structure ensured the government would benefit from falling prices, offsetting potential losses if prices continued to rise.
Although the government incurred losses during Bulb’s nationalization, the strategy ultimately proved advantageous when energy prices plummeted after their peak in mid-2022.
As a result, despite the energy for Bulb customers costing the Treasury £1.63 billion, the government is projected to recover that amount and generate a profit of nearly £1.3 billion through the deal with Octopus, covering most of the SAR costs. The SAR regime will be gradually wound down over the next year, concluding by the end of 2025.