Our recent article 'Distress in the Energy Sector' discussed the challenges facing energy suppliers and actions directors should consider in light of the challenges faced by the market. Since then, in September alone, 9 energy suppliers have failed and entered into formal insolvency processes, leaving over 1.7 million households in need of a new supplier.
In this article, we discuss the Supplier of Last Resort procedure and what this means for suppliers and their consumers.
Energy suppliers and their creditors are subject to restrictions which require that they must serve notice on both the Secretary of State and OFGEM before entering into certain insolvency processes. Once a notification has been made, OFGEM is empowered to revoke a failing supplier’s licence and appoint a supplier of last resort (an 'SOLR') to take over responsibility for a failed supplier’s customers.
Supplier of Last Resort Procedure
The SOLR procedure is implemented by OFGEM as a protective measure for consumers. Its focus is to ensure the continuity of consumers’ energy supply when their energy supplier fails. To that extent, the procedure is not focused on the failing supplier’s position, but rather outlines the procedure for the transfer of customers to a new supplier.
OFGEM’s 'Standard conditions of electricity supply license' (the 'Conditions') set out the regulations which energy providers in the UK must adhere to when supplying energy to consumers, as well as stipulating the process that must be followed by a supplier in the period leading up to and upon entering administration.
Under the terms of the Conditions, OFGEM is able to issue a Last Resort Supply Direction to a licensed energy provider, which requires that provider to take over the customers of a failed provider which has had their license revoked. Any such Last Resort Supply Direction will take effect on and from the date that the other provider’s license is revoked to ensure continuity of supply for customers.
What does this mean for failed suppliers?
Pending the company entering formal insolvency, the directors of the supplier must continue to comply with their statutory and fiduciary duties. In practice, this means taking every step with a view to minimising loss to creditors. This raises challenging issues where suppliers are continuing to extend credit to the company and monies are paid by customers in advance of the supply of services.
What does this mean for new suppliers ('SOLRs')
Pursuant to the Conditions, the new provider is able to charge customers on and from the date of the Last Resort Supply Direction and is also required to honour any credit balances the consumer had with their failed supplier. Given current market conditions, new providers will need to consider the commercial attractiveness of taking on customers on their current supply terms.
What does this mean for consumers?
The SOLR procedure means that consumers should have confidence in the continuity of their energy supply going into winter. If a consumer is owed money by their failed supplier, their new supplier will be required to honour the balance, The outcome for consumer’s energy prices is, however, uncertain and households could be subject to price increases once they have switched to their new provider.