Energy start-up claims its losses are part of its plans, but critics are unconvinced
For Bulb, the self-styled east London energy start-up, the aim was to “disrupt” the UK’s stale gas and electricity market. What is has so far found, however, is that like most technology start-ups, aggressively stealing market share whilst haemorrhaging money only works if you have very deep pockets.
Just three years ago, the company had 30,000 customers, and lost £1.9m. By the end of the financial year that ended in 2018, it had increased that to 220,000 accounts, and racked up losses of £28m. For its most recent financial year, the company acquired a further 580,000 customers, and again plunged to losses of £129m.
At the start of 2020, Bulb had more than 1.6 million customers. “Are we staring down the barrel of a £250m loss for this financial year?” asked an energy source. “Their most recent accounts are to March of last year, so in the following nine months, are we to assume they’ve lost another £100m? I can’t see how they haven’t. What have they done differently?”
Countering this, Bulb said in a statement that “like many other innovators, we’re choosing to reinvest [our profits] in growth and new product development.”
The economics of the energy business are simple. The energy which you buy to sell on to your customers is a commodity, and therefore has a cost determined by the market. The price you can charge your customers for that energy is capped by the industry regulator Ofgem. The network cost of transmitting gas and electricity around the country is also set by Ofgem. Because of these fixed costs, there are few economies of scale in the industry.
Ultimately, the only areas where companies can make improvements to try to drive profit margins higher are its back office software systems and its customer services.
Elchin Mammadov, a senior utilities analyst at Bloomberg Intelligence, said: “Bulb is an energy supplier, not a tech company. It has to show that it can be profitable, or it could become another WeWork.”
In order to grab customers from its competitors, Bulb has deliberately set its prices nearly £300 lower than the price cap. Energy experts say that in order to make money in the gas and electricity sector, companies need to set their price close to the cap.
“Undercutting rivals on price so aggressively is an unsustainable business model,” Mr Mammadov said.
To make matters worse, Bulb offers a £50 joining fee for all new customers, and a £50 referral fee for existing ones. How Bulb is paying to acquire these customers is unclear.
In 2018, the company raised £60m from a pair of private equity backers – DST Global, run by Yuri Milner, and New York-based Magnetar.
Industry analysts say that money would not have lasted long, given the rate of the company’s growth.
Since then, the company has had to borrow an additional £55m. Bulb says it is “well-funded” and has the money it needs to continue operating.
A number of accounting issues have also muddied the firm’s outlook: it blamed its late accounts last week on its auditor “falling behind over Christmas”, and quietly had to revise its losses for its 2018 financial year up from £24m to £28m.
According to Ofgem data, Bulb has contributed the least towards making its customers’ homes more energy efficient. The only other energy company to have contributed as little as Bulb is Economy Energy, which went bust over a year ago.
Before Bulb reported its losses for the last financial year, the company had a negative net worth of £20m. That is expected to have increased substantially with the latest announcement.
And yet, on the same day that the company published its accounts, the firm’s co-founder Hayden Wood announced that Bulb would have 100 million customers by the end of the decade. Currently, the largest European utility – which is backed by the Italian government – has about 70 million customers.
One industry insider said that the number was simply a smokescreen to distract from the company’s huge losses – and no matter how many customers Bulb added, with its current business model the company would never turn a profit.
“They aim for the skies, but their goal is unrealistic. Usually, the end game is to rapidly grow your customer portfolio to a large-enough size so that it can be sold to an energy major or to another utility,” Mr Mammadov said.
In a statement, Bulb denied having any intention to sell the company, saying “selling isn’t part of our plan”.
Bulb’s financial statements says that their losses last year were part of the company’s growth strategy. But as the energy source pointed out, the “bigger Bulb get, the more money they lose. It’s just not sustainable.”