News earlier this week that Bulb Energy is to go into special administration is the latest episode in a period of unprecedented financial strain in the UK’s energy sector. Like the other 22 energy suppliers that have collapsed since August, Bulb has been squeezed between rising wholesale gas prices and the cap set by Ofgem – the energy regulator – on the amount it can charge consumers.
But Bulb’s failure is particularly significant because of the size of its customer base. Supplying about 1.7 million households and businesses, it is the seventh largest gas supplier in the UK. The company’s failure exposes long-running dysfunctions in the energy sector that must be addressed if the country is to build a more resilient energy system for the future.
The immediate causes of soaring wholesale gas prices are well known. Surging international demand for natural gas due to the easing of Covid-related restrictions has been a key factor. Shifts in supply dynamics have also been central. Gas supplies have been strained by Russia’s decision to withhold some of its natural gas from European markets, the depletion of the Netherlands’ natural gas fields and the shortfall of energy provided by wind power in Europe.
In the context of these developments, energy company executives have blamed the government price cap for the travails of the energy sector. However, this narrative diverts attention from the structural problems that emerged with the privatisation of the energy system that began in the late 1980s and early 1990s.
Supporters of privatisation claim that it benefits consumers, as market competition between suppliers should lead, in theory, to lower prices. In reality, the opposite has occurred. Even before the current energy crisis began, domestic energy bills steadily increased in “real” (ie inflation-adjusted) terms by 50% from 1996 to 2018. By early 2022, energy bills are expected to continue to increase by more than 30%. Over 3 million people in the UK are now estimated to live in fuel poverty.
Why has privatisation failed to deliver? A key part of the problem has to do with oligopolistic concentration in the energy sector. Though there has been an influx of smaller companies in recent years, the energy market is dominated by a handful of large companies: Centrica, the parent of British Gas, EDF Energy UK, E.ON UK, npower, Scottish Power and Ovo, which recently acquired the retail arm of SSE.
Often referred to as the big six, these companies control 77% of the UK household energy market. In addition to charging higher prices to consumers, the energy companies display many of the maligned characteristics associated with oligopolies: fat profit margins, use of outsourcing and layoffs, and the funnelling of billions of pounds to shareholders through dividend payments.
In 2013, the Office of Fair Trading aptly described the oligopoly of the big energy companies as a “confusopoly” because they deliberately make their price structures complex so that households find it difficult to evaluate whether their gas tariffs offer value relative to others. This means that the fierce cost competition that was envisaged by Thatcherite reformers in the 1980s has never come to fruition. To make matters worse, there are widespread concerns that the big suppliers are greenwashing: mis-selling some energy tariffs comprising electricity that comes from non-renewable sources as environmentally friendly.
Price limits implemented under the Tariff Cap Act in 2018 reflected a begrudging acknowledgment by the Conservative government that the market had failed to deliver value for households. But what has emerged is a regulatory system based on a hodgepodge of principles, which neither protects nor empowers consumers. It is therefore little wonder that, according to our calculations, the average Trustpilot rating of the six biggest gas suppliers is only 2.9 out of 5, with scores ranging from a creditable 4.3 to a woeful 1.1.
The stronghold that the largest gas companies have over the sector has forced many of their smaller retail competitors to run losses in a desperate bid to gain market share. This is ultimately what put companies such as Bulb in a perilous position once wholesale gas prices began to surge. Since August, 17 of the 22 collapsed energy suppliers have been bought up by either the big six or Shell Energy, a subsidiary of global oil company Royal Dutch Shell. As large companies tighten their grip over the energy sector, the problems associated with oligopolistic markets are likely to persist and even worsen.
So what is the solution? As we lay out in a recent briefing, bringing the energy sector back under public control will redress many of the failures of privatisation. Public ownership won’t solve the problem of rising wholesale gas prices, but it would bring much-needed stability to an energy market racked by the chaos of failing private suppliers. And since public suppliers are not beholden to shareholders and pressures to pay dividends, they are better positioned to provide effective subsidies to reduce household energy bills, put an end to “fire and rehire” tactics and meaningfully invest in the renewable energy infrastructure the UK urgently needs.