Illustration: Rosie Carmichael
An extraordinary meeting of full council has been forced by opposition councillors on Tuesday, 26 May, to debate the future of Bristol Energy, attacking the secrecy surrounding the council-owned energy company and its ever-increasing losses.
“ …Proper scrutiny of, and accountability for, this – at best – speculative venture is being limited and Members unreasonably constrained from expressing concerns… The use of secrecy is acting as an oppressive gag on Members from airing their views.”
This motion is one of only a handful of instances where widespread frustration at Bristol Energy’s financial poor performance has entered the public domain. Seemingly out of control, and shedding its second Chief Executive in as many years, Bristol Energy has been calling on huge council resources to keep it afloat.
In March, a troubleshooter was brought in to oversee the sale of Bristol Energy, and Allan Booth was appointed its managing director. Booth has a history of entering businesses on the verge of bankruptcy and restructuring them, local democracy journalist Adam Postans reports.
Opposition councillors are meanwhile in full cry, demanding an inquiry. For an enterprise that promised to be “transparent”, “commercially sound” and quickly profitable, it was never meant to be like this.
The history of municipal energy companies is long and varied. In most countries, the first generation of firms producing and distributing “town gas” and later electricity were localised urban enterprises, sometimes privately owned, sometimes municipal. In the UK these firms became consolidated to achieve the necessary scale, and then nationalised (the National Grid, the Central Electricity Generating Board and British Gas, which converted the fragmented town gas system to a nationwide natural gas grid) or regionalised under state ownership (the electricity boards).
A key feature of these entities was that they enjoyed statutory monopolies: No customer (except a tiny number of the very largest industrial users) had any choice of energy supplier whatsoever. When in the 1980s, it was decided politically to introduce competition to the sector, some aspects of the system – the pipes and cables used to transport and distribute the energy – remained monopolies: it is hard to conceive of an alternative. But “supply”, i.e. the wholesale buying and retail selling of electricity and gas became competitive: every gas and electricity buyer has the right to choose their supplier. For several years, however, supply to residential customers was mostly in the hands of the unloved ‘Big 6’ companies, descendants of the supply arms of the old nationalised entities. Would-be new entrants into this market found barriers to entry that defeated most attempts.
For reasons set out in an earlier Cable article, a few years ago this situation changed dramatically and some of the barriers to setting up a residential supply company became a lot less daunting. This resulted in a striking number of relatively small organisations entering the market: entities that, viewed objectively, were deeply unsuited to being energy suppliers. This is not a statement made purely with the benefit of hindsight: at Private Eye we have been pointing out the dangers of this trend since 2015.
As well as entrepreneurial businesses, dozens of local authorities contemplated joining the fray. In most instances they cited a desire to offer “fairer deals” to their residents, sometimes in tandem with other social objectives, such as providing green energy, local jobs, greater accountability and transparency, and sometimes profits to be recycled back into other council projects. Local people, they assumed, would quickly switch to their trusted local council when it was making such an attractive offer.
Finally, most of them assumed that if they didn’t need to pay dividends or “director bonuses”, they’d be making such big savings that it would be easy to pass these through in the form of cheaper energy deals. Some even believed it would be possible to guarantee always being cheaper than the Big 6.
These assumptions proved to be naïve. It turns out that relatively few residents switch their accounts to a council supplier as a matter of local pride or loyalty – switching mostly happens via price comparison websites, so all suppliers need to chase prices downwards. In highly competitive market conditions like these, very few companies are paying dividends anyway, so a vow not to do so doesn’t represent a saving. Savings on “director bonuses” are small beer compared to the un-businesslike inefficiencies commonplace in most council-based organisations (much though they might resent that suggestion); and in any case a supplier will always need to offer competitive salaries and bonus schemes to essential specialist energy staff, who can readily get work elsewhere.
As for “always being cheaper than the Big 6”; how can any firm in any market ever guarantee to beat another company’s prices, during (for example) a price war? What if they are able and willing to make bigger losses than you are?
After conducting due diligence, by far the greater number of councils concluded – correctly, in this writer’s opinion – that becoming a fully licensed energy supplier was too demanding for an organisation such as a local authority that had no experience of, or feel for, the significant commercial and administrative challenges implementing this vision would present, nor the risks they would need to bear. Even such major bodies as the Scottish Government and the Greater London Authority reached this sober conclusion. They have mostly settled on less demanding ways of engaging with the energy sector on behalf of residents via partnerships with existing, fully-fledged energy companies.
However, two local authorities decided to go the whole hog, becoming fully licensed energy suppliers serving residential customers, the most demanding energy business model of all. They are Nottingham’s Robin Hood Energy, and Bristol Energy, which was instigated in 2014 under the previous Mayor George Ferguson and started selling gas and electricity in 2016. Both had a range of “social” objectives; both are now in deep, probably terminal trouble.
Losses and lessons
Of the two, Bristol Energy seemed the more promising. From the start its declared aims included being commercially sound and, in due course, profitable. Bristol took advice from a mainstream London headhunter in finding a CEO (Peter Haigh, a veteran of German energy giant E.on and electricity market operator Elexon) and non-executive Chair (Nick Jordan, longtime energy banker and energy risk specialist), two experienced and relatively senior individuals with genuine energy industry credentials (and who, incidentally, already knew each other well and operated effectively together). Whether a different management team or a different strategy could have succeeded where they failed remains moot. Certainly, no other local authority has succeeded.
But these two professionals were at least in a position to inject a note of realism to the Mayor and senior councillors who, as with well-meaning elected officials everywhere it’s been tried, went into the energy business thinking “how hard can it be?” The answer is: extremely hard – why did they ever think otherwise? And layering on “social objectives” just makes it harder, since the municipal supplier must compete in a cut-throat market where most of their competitors take on no more social obligations than regulations and basic corporate responsibility norms dictate. Extra obligations equate directly to extra costs.
The basic business model for a supplier that is not part of a wider energy concern (and of course, the Big 6 and others are), is to buy gas and electricity in the wholesale markets and build a customer base for what’s being bought. Sounds simple? It isn’t.
The energy markets, whilst being liquid and transparent, are extremely volatile (for the very good reason that gas and electricity are exceptionally difficult to store, and demand varies widely hour to hour, day to day, season to season). The supplier must continuously balance its entire portfolio for every half hour of the 24 hours ahead – thousands of customers and hundreds of wholesale energy deals – to a very tight tolerance, or face penal “imbalance charges” from the Grid. Demand can only be estimated in advance, and can vary wildly: for example, at 6 in the evening on the coldest day of the year an individual resident might have all their gas and electricity turned right up – or they may have gone out for the evening and use no energy at home whatsoever. This real-time balancing trick, and many other complex commercial and operational tasks, must not only be performed without fail – they must be conducted profitably. For these and a dozen other reasons, being an independent supplier is highly challenging.
In any event, Bristol Energy set out purposefully on its mission to build a “social” energy supply business. In four years, its growth has been real and organic (i.e. not via acquisition of other companies’ portfolios). It claims to have returned some “social value” to Bristol. But it quickly became evident that the company was buying this growth using ever-increasing amounts of Bristol taxpayers’ money, in amounts far greater than even the most generous assessment of that social return – around £40m of finance required in various forms, for only £12m of social value when last reported (and in financial terms, £35m of losses).
Meaningful details of what was going on, however, were hard for councillors to obtain: the “accountability”, “governance” and “transparency” parts of Bristol Energy’s mission were never much in evidence. Not even the council’s Scrutiny Commissions ever got to see the full Bristol Energy management reports. But insiders point to salient aspects of the three years of published annual accounts, which tell a clear enough story for those able to read a balance sheet and a profit and loss statement.
In each year of trading Bristol Energy made a positive “gross margin”: that is, revenues from sales exceeded the total cost of the energy it bought. But only just: there was never remotely enough surplus to cover its substantial and fast-growing staffing and office costs. Over the three years, staff numbers rose from 23 to 200; admin costs from £3m to £16m per annum; and annual losses from £3m to £12m.
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On the one hand, the fact that Bristol Energy management ensured a consistent positive gross margin from the start is evidence of at least some commercial discipline: they have, as a matter of policy, only made sales that were profitable – at the margin. Privately, Bristol Energy management past and present remain proud of this achievement, in a market where many players chase customers at almost any cost. In this respect they did better than, for example, Robin Hood which has not even achieved that basic level of self-restraint, frequently selling energy for less than it costs. But perversely the company’s prudence also caused fury amongst councillors when Bristol Energy wasn’t willing to relax its modest financial disciplines in order to win Bristol Council’s own energy business when that was put out to tender – “Members expressed a high level of disappointment”, as the sanitised formal minutes of a Scrutiny meeting expressed it.
Small wonder that its management tore their hair in frustration: they’d explained time and time again to their political masters the importance of maintaining this discipline, and the likely consequences. As one executive said to me: “We told them: they can have growth, they can have quite good prices for customers, and they can just about have positive gross margin – but they can’t have all that and bottom-line profitability, too.”
And that’s the other side of the coin. The approach of only insisting on marginal profitability alone can never be sustainable in the long run: the gross margin must be enough to cover all costs and overheads, not just the cost of the energy being bought. It seems clear that Bristol Energy was under political instructions to maximise growth in the shortest possible time – most of its customers (over 80%) do not hail from Bristol, for example, so clearly Bristol Energy was seeking to expand willy nilly – and they carried out their instructions with only the minimum level of commercial prudence. Staff costs grew almost as fast as customer numbers and the promised profitability has always been out of Bristol Energy’s reach. The ever-increasing cost of four years of expansion has never been met from within the business; and so nearly £40m has had to be found from Bristol taxpayers.
Pouring good money after bad
In our earlier article on Bristol Energy, we identified a structural problem for local authority enterprises: it’s all too easy for them to keep going back to their parent council for more money. Where there is political enthusiasm for, and commitment to, an idealistic concept of “our” energy company, it is tempting to support pouring good money after bad, in a manner that few genuinely commercial firms can expect from their shareholders. There are good reasons why the basic rules governing local authorities in the UK are designed to discourage engaging in commercial ventures.
Compounding this serious “moral hazard” for councils, and corresponding risk for council tax payers, is the defensiveness and secrecy with which senior councillors react when their favoured projects are going wrong – a basic human failing no doubt, but one which scrutiny provisions are designed to mitigate, and promises of “transparency” should reinforce. Unfortunately, defensiveness as regards some types of failure finds a ready tool for hiding uncomfortable truths: “commercial confidentiality”.
In Bristol, as elsewhere, the ruling regime has effectively put up the shutters on open debate; and such reports that have ever been given to councillors have always been behind closed doors. As the Council’s Scrutiny Commission minutes stated in September 2018, they had received “no presentation as to the likely pressures on borrowing, nor any presentation of the latest management accounts … insufficient time to scrutinise … insufficient information … received no comments from the Independent Shareholders Advisors who were so important to the governance process, a serious omission … the situation was sufficiently serious that there was a need for regular briefings on the position of the Energy Company”.
Eventually, it always boils down to hard cash, and there comes a point when the demands made on the City budget become too large to gloss over.
And so it is with Bristol Energy: keeping it afloat has now required a series of cash injections and other forms of direct financial support that, at around £40m, have become material, even by the standards of a large authority such as Bristol. In early 2019, council minutes record a frustrated Scrutiny Commission member (unnamed) asserting “the BE business plan was unjustifiably optimistic”. At that time, Bristol Council’s “risk register” entry for Bristol Energy read as follows:
The energy market is extremely complex with strong competition from new and existing energy retailers with high volatility in wholesale prices and the industry is currently subject to price scrutiny from Industry regulators. Risk rating – RED.Bristol City Council – Corporate Risk Report (register of risk summary) Q1 2019/20
What actions followed these grim assessments? To those without privileged information, the only obvious steps being taken were to fire the senior Bristol Energy executives.
Now, a year later and having gone through two Chief Executives and a non-executive Chair in quick succession (Jordan jumping before he was probably going to be pushed in mid 2018; Haigh given the boot at the end of that year; and his successor Marek Majewicz lasting only until March of 2020), Mayor Marvin Rees has been forced to recognise publicly that the game may be up. Saying “I do not think the energy market was a sensible one to get into”, he has engaged consultancy firm Ernst & Young with a mandate to “mitigate the extent of any additional funding requirement from the council beyond the existing agreed funding” (our emphasis). Compounding an already dire situation, the Covid-19 lockdown is having an adverse effect on suppliers’ businesses, as on so many others. A lot of people on unexpectedly reduced incomes will find their energy bills harder to pay, and that won’t help Bristol Energy at all.
The coming weeks will see E&Y make recommendations on what’s to be done. It’s hard to imagine they will be advocating business as usual at Bristol Energy for any longer than absolutely necessary to transfer the business to other owners in as much good order as can be achieved, and at the least possible further cost to Bristol taxpayers. But further costs there will be. From similar recent cases where failing “social” suppliers have exited the market – the biggest being Cooperative Energy last year – it is inevitable that offloading Bristol Energy will result in millions, perhaps tens of millions, of pounds in total write-offs for the City.
Noble aims and harsh realities
What are the lessons from Bristol Energy (and Robin Hood Energy)? The obvious conclusion is the one we have been suggesting from the outset at Private Eye: it’s a really bad idea, on many grounds, for local authorities to stumble, even if idealistically, into waters far deeper and more dangerous than they can safely navigate. Human nature being what it is, this is endlessly tempting for people with perhaps good intentions but too little experience, too much taxpayers’ money at their disposal, and a “confidentiality” excuse for hiding what they are doing.
This observation could usefully be made at any time and in any context. There is, however, a particularly acute – and potentially unwelcome – political point to be made in the context of energy projects right now. In the 2019 General Election, the Labour Party’s manifesto – never rescinded, and by many Labour politicians still strongly endorsed – was for ownership and control of the entire gas and electricity industry (not just supply, but also operation of the gas pipes and electricity wires) to be put into the hands of local authorities, right down to the level of parish councils, and indeed also some even smaller “Local Energy Communities … at the scale of 100 to 200 homes”. This is supposed to result in cheaper energy and, yes, “democratic oversight and accountability (with) complete transparency”.
The story of Bristol Energy should be borne carefully in mind when contemplating the wisdom of such a policy, in such a vital area as delivering energy to homes. Finally then, what could be the conditions under which the Big 5 (one of the ‘Big 6’ having already quit the scene) might be competed with on a sustainable basis? The regulator, Ofgem, has always encouraged greater competition. In the short term, the recent rash of small suppliers going under, soon to be exacerbated by genuine Covid-19 effects, will probably see the Big 5 regain much of their market share as the minnows depart. In the longer run, though, this will make things easier for sustainable competition to develop. It has been tiny, unviable suppliers that have driven prices below sustainable levels (how often have you seen a firm you’ve never heard of at the top of a price comparison list?), so that companies like Bristol Energy who promised to be offering “fairer prices” were forced to trade at levels below anything that could give even a modest return on the Council’s large investment.
But there is a wave of well-managed new competitors that seem to be achieving critical mass through intelligent business plans, innovative products and deep all-round competence. If they can survive the current trauma, they are well placed to revive sustainable competition. So long as the Big 5 maintain a market monopoly and can weather cost-cutting wars, there will never be a sustainable role, though, for small and unrealistic businesses in this demanding sector – however laudable their “social objectives” may be.
Bristol City Council told the Cable it would not be commenting on Bristol Energy until a Cabinet meeting on 2 June.