OPINION: Energy supply company insolvencies – a concern or an opportunity?

Clare King and Matt Hill of Osborne Clarke examine the applications of Ofgem’s ‘supplier of last resort’ process so far, and consider the implications for challenger companies and those taking on customers 

Last winter we saw Ofgem using its Supplier of Last Resort (SoLR) powers for the first time in eight years, when GB Energy Supply ran into financial difficulties. Last month we saw Ofgem use those powers once again when Future Energy collapsed and Green Star Energy was appointed as the replacement supplier.

The failures of these two suppliers, and of Brighter World Energy in December 2017, have again raised arguments in favour of more rigorous testing of suppliers at the licensing stage, and subsequent monitoring of their financial viability.

Ofgem’s objective is to protect the interests of consumers and promote competition in the energy supply markets.  The deterioration in the financial condition of an energy supplier and its ultimate collapse could have a significant impact on other market participants (for example, through having to meet unpaid balancing costs of the failing supplier) and on consumers (for example, through lower confidence and reduced competition), as well as on its creditors, so it’s an area in which Ofgem has a variety of powers to act.

Preference for a trade sale of a failing energy supplier

Ofgem’s general approach in the event that an energy supplier gets into financial difficulties is set out in guidance. Its preference is for a trade sale of the business without the need for regulatory intervention. In distressed situations, however, valuation issues and other factors (such as protection for the directors or the certainty required by a purchaser) can often mean that a trade sale outside of an insolvency process is not possible.

Where a trade sale is not feasible, Ofgem may seek to exercise its powers to revoke the supplier’s licence and appoint a SoLR or, where that is not practicable, seek the secretary of state’s consent to apply for an energy supply company administration order.

In order to decide how best to exercise its powers, Ofgem may seek information about the failing supplier’s portfolio from gas transporters, network operators, the DCC and/or the failing supplier itself.  It may also seek information from potential SoLRs.

Revocation of the supplier’s licence and appointment of a SoLR

Ofgem has the power to revoke a licence in specified circumstances, normally upon 30 days’ notice to the licensee. In certain insolvency-related circumstances, it is possible for Ofgem to revoke on 24 hours’ notice. For the most part, the insolvency-related triggers bite quite late (eg once a resolution for winding-up has been passed or an order for compulsory winding-up granted). Importantly, however, Ofgem may be able to intervene earlier if the licensee is unable to pay its debts within the meaning set out in the Insolvency Act.

While Ofgem has the power to appoint any supply licensee as a SoLR, it will generally seek to appoint a volunteer SoLR. The process of selecting a SoLR is likely to be a competitive one in which Ofgem will consider various factors, including:

  • The ability of the SoLR to supply the additional customers without significantly prejudicing its ability to continue supplying its existing customers;
  • Its proposals for providing information to customers;
  • The proposed rates under the “deemed contract” between the SoLR and the failed supplier’s customers;
  • Its proposed treatment of customer credit balances;
  • Any likely claims the SoLR will make for a ‘last resort supply payment’ under the industry levy for otherwise unrecoverable costs incurred in being a SoLR.

Special energy administration regime

We are yet to see an energy supply company administration. However, if one of the big six were to get into trouble we may well see it in action. In contrast to the objectives in an ‘ordinary’ administration, the energy supply company administration regime is primarily concerned with protecting consumers’ interests. The objective is to ensure the continuation of energy supplies at the lowest practicable cost until the supply company is either rescued as a going concern or its business is transferred to another supplier. The secretary of state may even decide to provide financial support to help the administrators achieve the purpose.

Energy supply company failure in practice

In the cases of both GB Energy and Future Energy, Ofgem considered it necessary to seek a court declaration that the relevant company was unable to pay its debts before exercising its right to revoke the supplier’s licence and appoint a SoLR.

In the case of GB Energy, the company had given notice to Ofgem that it intended to pass a resolution for its (insolvent) winding-up. In the case of Future Energy, the company had already ceased trading when the court order confirming its inability to pay its debts was made.

While Ofgem moved quickly to secure the necessary court rulings, it would appear cumbersome to require a court order where the supplier’s insolvency is not in contention. These supplier failures may represent an opportunity for the interaction between the 14-day notice period in the legislation and the insolvency triggers in supply licences to be considered more carefully, and for consideration to be given to broadening the circumstances in which a licence may be revoked on 24 hours’ notice (for example, to cover cases where the supplier ceases to trade, has given notice that it intends to commence insolvency proceedings, otherwise admits its inability to pay its debts, or simply agrees to the revocation on short notice).

An area to watch

For challenger suppliers in the market, the failure of another small or medium energy supply company could represent an opportunity to be appointed as SoLR and broaden their customer base. However, they should be aware of the costs involved.

Last month Ofgem published its decision on the ‘last resort supply payment’ claim by Co-operative Energy (which was appointed as the SoLR following GB Energy Supply’s collapse). While Ofgem consented to most of the claim for payment under the industry levy, Co-op excluded a number of costs from its claim (for example, it agreed not to claim for 30% of the costs of honouring GB Energy Supply’s customers’ credit balance). Ofgem refused to consent to it claiming certain IT migration costs.

Going forward, it is likely that prospective SoLRs will be required to specify in greater detail the costs they will seek to recover and this is something that Ofgem will take into account, alongside other factors in making its decision. The costs can, however, be significant; the Co-op’s approved claim being in excess of £14 million.

First published in the March 2017 issue of New Power Report

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