One of the lessons from the banking crisis is that it didn’t entirely matter who made the mess — everyone had to be seen to pay for it. Energy suppliers now face similar demands for penance as the price crisis drags on.
High prices are not the fault of UK energy providers but a function of geopolitics and global markets. However, the tactics of cowboy operators with insufficient hedging, compounded by inadequate regulation, have made matters worse. The latest estimate of the cost to the taxpayer from supplier failures is about £4.5bn. That sort of expense requires wide-ranging payback.
Top of the list of those failing to grasp the calculus is Bulb chief executive Hayden Wood, who continues to receive a £250,000 salary even after his company collapsed at an estimated cost of £2.2bn in government support.
Wood told MPs last week that “everything [Bulb] are doing right now is to try and complete a sale of the company so that we can minimise the cost to taxpayers”. That logic might justify retention bonuses for employees. But continuing to draw a substantial salary after cashing out £4mn in an earlier share sale does not exactly indicate Wood is doing everything he can to minimise the cost to taxpayers. His tin ears recall those of Fred Goodwin, the former RBS boss who fought to hang on to his bonuses and his pension at the expense of his knighthood.
The broader question is how much the rest of the sector will be forced to atone.
There is the question of why they should when those left standing are the responsible ones that got their hedging right. It was a misguided approach from an ineffectual regulator that allowed new entrants with flimsy financials, even if the liberalisation of the energy market was a response to bad practices of the Big Six in an earlier era. The current crop of large suppliers — British Gas, EDF, Eon, ScottishPower, Octopus and Ovo — have not exactly been making out like bandits since the price cap came in at the start of 2019.
But in the aftermath of 2008 it was not just those who were bailed out that ended up getting bashed. Recall Bob Diamond’s disastrous appearance before MPs when he tried to put the issue of banker bonuses behind Barclays. Sir Nigel Rudd, the bank’s former deputy chair, argued in memoirs published last week that it was “never forgiven” for the actions it took to avoid a state rescue.
That makes Centrica’s response to the current crisis all the more interesting. The British Gas owner, never likely to be loved, seems to be handling things relatively well. Boss Chris O’Shea was quick to waive his £1.1mn bonus when the company announced in February it had doubled its annual profits thanks to its upstream oil and gas operations. He delayed a decision to reinstate the dividend, too.
That could leave it paying a fairly low price for the industry’s indiscretions. Undoubtedly it will face difficult politics when it does come time to restore the shareholder payout. The cap on average consumer bills could rise to £2,700 in October, more than double the previous year’s level, according to estimates by Investec analyst Martin Young. Admitting to anything that might resemble a windfall in that environment would be a challenge.
The penance for the sector looks to be tighter regulation, something with the potential to enhance incumbency advantages for those still standing.
Switching providers at will seems likely to be out of favour. Stress tests or fit and proper person criteria for owners would raise barriers to entry. Ringfencing customer deposits — something advocated by Centrica but not others in the industry — would benefit the strongest companies most.
It may also push up costs for consumers if implemented abruptly. Centrica can ill-afford to be seen to be pressing its advantage too forcefully during a consumer crisis. Nor can it be seen as trying to pick up Bulb’s customers cheaply at taxpayers’ expense.
Stricter regulation has been a burden for the banks. Bonuses are still a lightning rod. Centrica and British Gas will remain similarly charged. But if they escape the industry crisis with a more favourable regulatory regime and a mere delay to the dividend, they will have done well indeed.
cat.rutterpooley@ft.com