By Nicholas Earl
Ofgem was preparing for the potential nationalisation of Ovo Energy (Ovo) this summer, with the renewables-only supplier considered at risk of failure.
Plans were drawn up by the watchdog for its potential administration in July earlier this year, according to The Financial Times, with the company deemed both financially vulnerable but also “too big to fail.”
This follows Ovo’s filings to Companies House in September, where the firm revealed its long-term fears for its viability prior to the Government’s unveiling of rescue package for households and businesses.
The country’s third biggest supplier, which is home to 4.5m customers, warned there was “a material uncertainty that may cast significant doubt on the group’s and company’s ability to continue as a going concern”.
It even expected to breach banking covenants during 2022 because of soaring prices, and feared a sharp rise in bad debt if households were unable to afford record electricity and gas bills.
If Ovo had collapsed this year, it would have been the second supplier to enter special administration following Bulb Energy’s (Bulb) fall from grace last November.
It has been placed on life support ever since, propped up by regular transfusions of public cash, reportedly costing British bill-payers as much as £4bn.
Ofgem has estimated the cost of the nationalising Ovo would have also reached £4bn, according to The Financial Times.
Ovo has since confirmed it no longer has financial concerns over its future, and that recent interventions by the Government and the regulator had improved certainty.
Ovo recovers and makes play for Bulb
Nevertheless, its recent play for Bulb Energy (Bulb) this week reflect a seemingly Lazarus-like turnaround for the supplier and has surprised people across the industry.
Ovo is attempting to gazump rival Octopus Energy (Ovo) with an eleventh hour bid for the fallen firm.
The group’s chief executive Stephen Fitzpatrick has written to Bulb’s administrators to confirm its interest, as first reported by Sky News.
City A.M. understands the Government has been closing in on a deal with Octopus for Bulb over the past few weeks.
The terms include a nine-figure lump sum (between £100-200m) and a long-term revenue share agreement in return for £1bn in public funds to set up a hedging programme for Bulb’s customers – which Octopus would repay over time.
By contrast, Ovo is not currently seeking hedging support to take on Bulb’s 1.6m customers, however the specifics of any bid remain unclear.
It is not even clear if Ovo’s renewed attempt to takeover Bulb could be accepted, with Octopus remaining at the last supplier standing from the bidding process, after British Gas owner Centrica and Masdar Energy pulled out of the running.
The bid has surprised other suppliers in the energy sector, especially after Ovo reportedly withdrew their own interest in Bulb last year.
Around 30 suppliers have collapsed over the past 15 months, directly affecting over four million customers – with the rest going through Ofgem’s supplier of last resort process.
Energy firms were exposed by a lethal combination of poor hedging strategies and inexperienced management alongside soaring wholesale costs and the constraints of a price cap that meant households were unable to pass high costs onto customers.
When Bulb sank into special administration, it explained the cap constrained its charges to customers to 70p per therm, even with wholesale costs above £4 per therm.
Households are currently paying an additional £94 a year to reimburse suppliers such as British Gas-owner Centrica for taking on loss-making customers from failed rivals.
Ovo and Ofgem have both been approached for comment.
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