Between record high gas prices, fears of blackouts around Christmas, and the recent collapse of Britain’s largest alternative energy supplier, it’s clear the energy industry in the UK, and across Europe, is in turmoil. So, what exactly went wrong?

On the 22nd of November, 2021, Bulb announced it would be entering special administration — the 23rd energy supplier to have collapsed in the UK since August. This widespread series of failures can be attributed to issues on both a national and global scale, which will be explored in part II; most notably, a vast increase in gas prices worldwide, triggered by heightened demand following the pandemic. But, while the 22 previously unsuccessful companies signalled an industry on the brink of destruction, the demise of Bulb suggests something much worse. Those 22 companies had a cumulative customer base of two million; Bulb alone has a customer base of 1.7 million. Bulb’s downfall represents the first energy “giant” to have fallen. So, what does that mean for the energy industry? And what impact will this have?

Who is Bulb, and why did it collapse?

Bulb was founded in the UK in 2013 as a cleaner alternative to the “Big Six” energy providers, with an offering of 100% renewable energy. The firm quickly gained considerable market share, acquiring 6% of the UK energy market. As of 2020, Bulb held position as the 7th largest energy supplier in Britain, serving 1.7 million households and employing more than 1,000 people. Despite this growth, Bulb suffered back-to-back financial losses, posting an operating loss of £59 million for the year ending March 2020 — one factor that contributed to its recent collapse. 

In 2020, Bulb was the 7th largest energy supplier in Britain; by 2021, it had collapsed

Although the current industry climate is what recently triggered scepticism around Bulb’s future, its long-term viability has, in fact, been in question for longer. Bulb’s pricing strategy was aggressive, a tactic employed by many smaller energy suppliers to steal customers from incumbents. But, after a price increase in September 2020, it was clear its strategy wasn’t as sustainable as originally intended. Moreover, this came during a time when the majority of its competitors were lowering their prices. Given the competitive pricing strategies seen in the industry, Bulb’s original tactic placed it in dangerous waters. Changing tack here could have saved it from financial ruin. Though admittedly, the recent increase in the cost of gas wasn’t easy to predict.

In 2021 alone, the cost of gas quadrupled in England. The significant and sudden rise meant companies, like Bulb, that had not forward-purchased gas and electricity, and instead relied on wholesale prices, were in trouble. With contractual obligations to continue serving customers without disruption and caps on what it could charge, Bulb had to purchase gas and electricity for more than it could sell it for — an unfavourable move for a company already in hot water. 

Where Bulb went wrong

While other mistakes were made, this ultimately highlights the risk of relying on wholesale prices, in the hope of costs decreasing, instead of forward purchasing — a practice favoured by ‘Big Six’ providers with much more cash in their bank account. Buying ahead allows companies to buy and sell an asset at a pre-specified price on a pre-agreed date, and therefore average out price changes across extended periods.

Bulb’s situation also speaks to the importance of long-term strategic planning, with effective hedging a pertinent factor for successful energy industry players. While some of the company’s bigger competitors purchased energy so far in advance they could average out price changes across periods as long as ten years, Bulb’s hedging practice was near non-existent. 

Bulb’s situation speaks to the importance of long-term strategic planning; it’s hedging practice was near-non existent

Bulb purchased its energy just three months in advance. Such boldness paid off at times; for instance, between November 2018 and June 2019 when gas prices decreased by nearly 170% per therm. But the tactic’s unsustainable nature became evident when the ongoing energy crisis forced it to pay considerable prices. Instead, Bulb would have benefited from planning across longer-term horizons and altering its strategy in order to purchase gas further in advance, especially given that most industry players had purchased supplies a year (or more) in advance.

A slow crash

Bulb’s downfall didn’t happen overnight. The company had been actively seeking investors for months. However, the colossal increase in gas prices, combined with Bulb (and the industry’s) low profit margins, and its £600m of liabilities, meant the company was unfortunately an unattractive option. 

Bulb is the largest UK provider of energy to have collapsed in 19 years.  Whilst its crash is being softened by special administration laws that protect consumers, by ensuring the company can continue to temporarily serve them, the fact these have been in existence since 2011 — and are only now being used — demonstrates the severity of the situation. 

Now what?

Regardless of potential operational mistakes made by Bulb, its collapse, following those 22 smaller companies, is indicative of an industry in a state of crisis. And it foreshadows even greater ramifications. 

The UK pledged to be carbon neutral by 2035. The leading renewable energy company collapsing will undoubtedly put a delay in the journey to clean energy. In fact, whilst electricity generation from renewables is forecast to increase by 6% this year, fossil-fuel based supply is set to rise by 40% So, Bulb’s collapse is a significant blow to an already slow, yet critical, transition to green energy.

Bulb may be the first giant to have fallen, but patterns suggest it won’t be the last. What does the future hold, and why has the price increase been so “colossal?” Stay tuned for part II and III to find out.