What happens when an energy distribution company goes bankrupt?

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When a UK power supply company goes out of business, the Ofgem regulator has the power to appoint a supplier of last resort (SoLR) to ensure continuity of supply to customers. But what exactly does this mean for energy companies, and are there any alternatives? Lawyer Tim Speed ​​explains

The rising cost of wholesale gas has left many UK energy suppliers with customers with unprofitable supply contracts.

Cracks in the industry began to appear in late summer when the wholesale cost to suppliers purchasing gas exceeded the price many suppliers could charge their customers. It happened so quickly that many profitable businesses became unprofitable overnight.

Soon after, a number of small suppliers went out of business. Igloo and Bluegreen are among the latest casualties, bringing the total number of vendors who have entered the SoLR process since August to 20, affecting more than 2.2 million customers.

So far, the government and Ofgem appeared poised to allow a number of small vendors to go out of business, relying on the SoLR process in place to deal with these casualties.

However, there are limits to this process and with the latest news revealing that a leading energy supplier could be the next victim, Ofgem has been forced to consider an alternative approach in the form of a special administration. known as the Energy Supply Company Administration (ESCA).

Market share
Historically, the supplier of last resort process has been viewed as an opportunity for SoLRs to increase their customer market share. The process works by giving the SoLR, which has the existing infrastructure, the power to take over the supply from the failing supplier’s customers.

Tim’s Speed

Although this is a proven method that has worked before, it is now seen as less attractive as the imposition of a price cap is lower than the wholesale price of gas, leaving SoLR out of pocket. at least in the short term until it has been able to recover some or all of its losses and costs through the industry tax.

On top of that, the whole process has its limits. This puts a strain on the infrastructure of the provider designated as SoLR, which can potentially have a negative effect on its existing customers.

EDF Energy recently said it would not apply to be named SoLR for another supplier until it transfers the 220,000 customers acquired following the Utility Point collapse.

For a larger supplier, appointing an SoLR is unlikely to be appropriate. Thus, as part of its emergency measures, it is reported that Ofgem has put restructuring experts, Teneo, on hold to act as energy administrators.

Although the process has been around for some time, an ESCA has never been implemented before. The process is intended to help when a large energy supply company fails and the failing supplier’s customers cannot be transferred to another company through SoLR.

Dire situation
While the SoLR process has generally been a very reliable solution, reviewing an ESCA highlights that this is a dire situation that requires drastic action.

While the appointment of an SoLR results in the transfer of all customers from the failing supplier to the SoLR, the appointment of an energy administrator is different. The objective of an ESCA is to ensure the continuity of supplies at the lowest cost, the energy manager having the power to effectively split the existing activity by transferring it in whole or in part to two or more companies.

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Due to the number of customers and employees involved, an ESCA is considered more appropriate for large suppliers.

The role and duties of an energy administrator differ from those of the usual corporate administrator appointed under Schedule B1 of the Insolvency Act 1986. Whereas a typical administrator would be in charge to act in the interest of creditors as a collective, an energy administrator also has an obligation to also take into account the interests of customers.

Appointing an energy administrator is a pretty drastic step for Ofgem, but the pressure on the energy sector shows no signs of easing, so it can be seen as a necessity.

Strain in the market
The collapse of so many suppliers and the appointment of SoLR in such a short period of time have put a strain on the market. Not only did this raise questions around the handling of the crisis by Ofgem and the government, and in particular whether more could have been done earlier, but it also negatively affected the employees of these companies and their customers.

If a big supplier is about to fall, it is likely that an energy administrator will be appointed. Following the number of SoLR appointments this year, it is expected that there will be many complaints over the next year for costs incurred in taking on additional clients. Although this is covered by the industry, it will ultimately be the customer who pays.

The most crucial thing for energy providers and their managers to do now is to act quickly. By identifying the problem and immediately seeking professional advice, it may be possible to secure an investment or sale that could secure a future for the business.

However, this takes time, so it is important to act early as long as there is still enough cash to run the business. Time is running out and waiting too long could jeopardize the future of the company.

Even if wholesale prices decline in the near future, it will be too late for many, and the industry and its regulators will face an uphill battle to regain public trust.

Given how quickly these events have occurred, highlighting market volatility, investors may be reluctant to invest in the future, which could lead to an even slower recovery. What is clear is that the effects of the events of the past few months will be felt by everyone for a while.

Tim Speed ​​is a partner and energy specialist at the law firm Shakespeare Martineau


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