(Bloomberg) — The owners of some UK energy suppliers that collapsed within the past year are set to walk away with payouts reaching tens of millions of pounds at the same time every household in the country is footing the bill for those failures.
The People’s Energy Company Ltd. came into being with crowdfunded cash and a pledge to tackle fuel poverty in Britain. Four years later, it failed. Even so, founders David Pike and Karin Sode may receive about £50 million once company creditors are satisfied. In addition, they won’t be on the hook for the £283 million cost of shifting their customers to Centrica Plc’s British Gas.
It’s all legal, and shareholders of other bust utilities may be compensated, as well. Around 30 energy suppliers in the UK have disintegrated since August because they couldn’t afford electricity or natural gas, which shot to record wholesale prices when Russian supplies to Europe were curtailed. Efforts to pass those higher costs to customers were limited by a price cap set by regulator Ofgem.
Some defunct companies, such as People’s Energy and BP Plc-backed Pure Planet Ltd., still hold value after selling the contracts for energy they bought in advance — known as hedges — but never delivered. At least £820 million in assets have been recovered from the firms being wound up, according to calculations by Bloomberg. About £315 million of that is in People’s Energy, according to administrators’ reports.
“You’ve got a large part of the country worrying about how they’ll pay their bills this winter, while a handful of executives are sitting on potential windfalls,” said Tony Jordan, an energy industry consultant at Auxilione. “It’s unjust.”
UK insolvency law says shareholders are due any money left after a business’ creditors are paid off. In the energy arena, those arrears don’t include the costs of transferring customers. That tab is spread across every household.
Ofgem estimates the costs from suppliers exiting the market to be about £2.7 billion, or about £94 per customer.
“It’s bad management, bad regulation and bad insolvency laws,” said Prem Sikka, an accounting professor and member of UK Parliament.
Ofgem is trying to claw back as much as half-a-billion pounds of the remaining assets in a court case to reduce the burden on customers. Resolution may take years, and any money Ofgem recovers will be at the expense of creditors or shareholders. Other failed energy suppliers may return money to shareholders, depending on the outcome of this effort.
The regulator’s also proposing licensing changes “to ensure that owners of failed energy supply companies cannot extract value from such assets at the expense of future bill payers.” Those revisions wouldn’t apply to the current liquidations. Ofgem declined to comment.
“It seems a bizarre situation that a company can go bust and then subsequently make these sorts of gains,” said accountant Sid Harding, founder of SRH Forensics LLP.
The cases are at the heart of accusations that Ofgem mismanaged the UK’s energy market. The costs for Britons to heat their homes this winter is set to hit record highs, potentially forcing millions into fuel poverty.
“This will send a cold shiver down people’s backs,” said Peter Smith, director of policy and advocacy for the National Energy Action charity.
The government opened up the industry to more competition with the intention of getting customers a better deal, and entrepreneurs – many with no industry experience – flooded in.
Pike was managing director at a company that made forklifts, and Sode was a consultant with a doctorate in communication and decision making in businesses, according to their LinkedIn pages.
The married couple owns 25% of People’s Energy’s holding company, with the rest held in a nonprofit structure called a community interest company. Through that structure, they promised to return 75% of profits to customers, garnering fawning media coverage for their social enterprise.
People’s Energy eventually served about 350,000 households and 500 businesses, and employed 450 people.
Wholesale gas and electricity prices started rising fast last year as demand outstripped supply with nations emerging from Covid-19 lockdowns. Many suppliers that went bust hadn’t hedged against price fluctuations. People’s Energy did, but only enough for its customers at that time.
However, it struggled to attract new customers after raising tariffs to pay even higher wholesale prices and then didn’t have enough cash to pay a trading partner, Pike said in an email. The company shut down in September.
“It was absolutely heart-breaking seeing PEC go into administration,” Pike said.
The group’s operating company is sitting on more than £285 million from the administrator’s sale of its hedged energy, an enormous sum for a company that made £1.9 million in pretax profits the year before it went under.
When a company goes bust, its assets are sold for cash and that money is distributed to anyone it owes. Most of the time, the payments come to pennies on the pound. But if enough can be recovered from the deceased company to pay all creditors in full, money may be returned to the company’s owners.
“We believe this is a potential outcome for a small number of the supplier insolvencies that occurred in 2021,” Ofgem said.
People’s is the most dramatic example, as the value left in it far outweighs what it owes. There are about £315 million worth of assets in the group, compared with liabilities of about half that. It’s never certain what will come out of an administration or the court case, but payouts could range from £144 million to £235 million, according to conservative calculations by Bloomberg.
Three-quarters of any payout will go to fuel poverty causes through the community interest company, Pike said. The remaining quarter – potentially as much as £58 million – is set to go to Pike and Sode.
“Many people in fuel poverty in the UK are likely to benefit from cash potentially left over once the administration process has been completed,” Pike said.
But it’s not just People’s Energy. Shareholders of Pure Planet’s owner, Blue Marble Holdings Ltd., may be in line to get £46 million, according to filings with Companies House, the UK’s national registrar. Recipients may include BP, the London-based oil-and-gas major with almost $158 billion in revenue last year.
Pure Planet was forced into insolvency by BP, which wouldn’t provide any funding to help the firm ride out whipsawing energy prices. Still, Pure Planet was well-hedged, according to an administrator’s report, leaving plenty of value within the company.
Twisting the knife for bill payers, Blue Marble isn’t overseen by Ofgem because it’s the holding company and not the operating company, making it difficult for the regulator to claim back the value of those hedges.
“We do not intend to profit from Pure Planet’s insolvency and will give any money that comes back to us to charity,” said Rita Brown, a spokeswoman for BP.
Steven Day, a co-founder of Pure Planet, declined to comment.
The first court hearing of the case to determine where much of People’s Energy’s and other firms’ cash will go is scheduled for October. In the meantime, Pike is starting an “ethical” shopping site called Ethibuy.com that will raise capital by crowdfunding and by using proceeds from the hedge process.
Sode now is a managing director of UK and Europe for YSC Consulting, according to her LinkedIn page. She touts her work as chief executive officer of People’s Energy without mentioning its failure.