Scottish Power wants a bailout, but they are calling it engineering.
The energy giant has quietly lobbied the regulator to allow them to securitize bad domestic energy debt. The plan sounds sophisticated on paper. Gather up billions in unpaid household utility bills, pack them into bonds, and sell them off or have a state-backed vehicle absorb them. They pitch it as a stabilizing mechanism for the market, an elegant solution to protect vulnerable customers while keeping retail suppliers from going under.
It is an absolute racket.
Securitization is not a magic wand that makes toxic debt disappear. It is a financial shell game designed to shift private corporate risk onto the British public. When an energy supplier asks to securitize bad debt, they are admitting they cannot manage their basic credit functions. They want you, the billpayer or the taxpayer, to guarantee their cash flow while they keep collecting their margins.
The Illusion of Financial Innovation
Securitization works well for mortgages or auto loans because there is a physical asset backing the debt. If a borrower defaults on a house, the bank repossesses the brick and mortar.
What is the underlying asset in a bundle of unpaid gas bills? Expired BTUs. You cannot repossess electricity that has already been consumed to heat a flat three winters ago.
When you securitize asset-backed loans, investors buy the cash flows because they understand the risk-reward profile of the asset class. Energy debt is fundamentally different. It is uncollateralized, highly volatile, and deeply tied to macroeconomics and political interventions. By proposing to turn this into a financial instrument, energy companies want to manufacture a synthetic asset class out of thin air.
If these bonds are sold to the private market, investors will demand massive yields to cover the eye-watering risk of default. Who pays that yield? It gets baked right back into the standing charges of every compliant household in the country. If the government steps in to backstop the facility, it becomes a sovereign liability. Either way, the consumer loses.
Privatizing Margin, Socializing Mismanagement
Energy supply companies like to pretend they are complex infrastructure operators. They are not. In the modern retail market, a supplier is essentially a billing and risk-management company. They buy wholesale power, manage price hedging, and collect money from the public.
If a supplier cannot accurately assess credit risk or manage bad debt, they are failing at half of their actual job description.
- The Lazy Consensus: "External macroeconomic shocks caused the bad debt crisis, so the industry needs system-level relief."
- The Reality: Energy suppliers enjoyed decades of stable margins without offering rebates when wholesale costs were rock-bottom. They failed to invest in modern billing infrastructure, relied on clunky legacy systems, and treated bad debt as a regulatory afterthought until it blew up in their faces.
Imagine a supermarket chain demanding that the government securitize unpaid grocery bills because inflation made food too expensive. The public would laugh them out of the room. Yet, because energy is heavily regulated, utility companies view the state as an unpaid insurance policy.
The Subprime Comparison Everyone Is Ignoring
We have seen this playbook before. In the mid-2000s, Wall Street argued that subprime mortgages could be safely bundled because "people always pay their mortgages." The energy sector is using the exact same logic. They argue that because energy is a vital utility, historic payment rates will eventually normalize, making the underlying debt predictable.
This is a dangerous miscalculation. When household budgets stretch past the breaking point, structural defaults happen. Forcing these defaults into structured financial products does not dilute the risk; it concentrates it. It creates systemic financial fragility where a sudden spike in energy costs could trigger a collapse not just of individual retail suppliers, but of the entire securitized fund.
Fixing the Real Problem
If the industry truly wants to fix the bad debt crisis, they need to stop looking for financial engineering loopholes and address operational reality.
First, fix the billing. Regulators have repeatedly caught major suppliers overcharging customers, issuing uncashable cheques to deceased estates, and failing to manage basic direct debit systems. Clean up the data before trying to financialize it.
Second, equity holders must take the first loss. If an energy company suffers from bad debt, that loss should eat into corporate dividends and executive bonuses, not get transformed into a structural levy on future generation bills. Risk capital exists to absorb risk. If a company cannot handle the downside, it should go through the standard Supplier of Last Resort process or special administration, allowing healthier, better-managed capital to take over the customers.
Stop treating corporate balance sheets as public charities. If you cannot run a retail utility business without turning your unpaid bills into synthetic bonds, hand over the keys to someone who can.
