The energy crisis brought on by the Ukraine war led to a high number of supplier failures, as providers struggled to cope with the spiralling costs and inflated capital requirements brought on by the record wholesale energy market prices. In cases where a supplier fails, there has long been a system whereby a Supplier of Last Resort (SoLR) is appointed to take on the stranded customers of the exiting provider. However, any costs incurred by the appointed supplier to taking on these customers has always in the past been borne by consumers across the whole market, leading to higher costs for end users. In a bid to reduce the burden on energy consumers, Ofgem has today announced an offset to the costs, meaning those costs are now borne elsewhere.
The record-high wholesale prices witnessed during the energy crisis saw many energy suppliers face unprecedented financial pressure. The capital required to trade the energy required to meet customer demand, plus the rise of prices way beyond the Ofgem-imposed price cap, forced many smaller suppliers, particularly those without generation assets as back up, into administration. In total, some 29 suppliers failed including Bulb Energy, the UK’s seventh largest supplier at the time.
Ofgem itself came under fierce criticism as a result, with many consumer bodies pointing at a lack of consumer protection and highlighting that suppliers were allowed to trade without adequate financial provisions in place to protect them from insolvency. Over the three years since the energy crisis, Ofgem has implemented several measures to protect consumers from the financial failure of their energy supplier.
Suppliers must now prove to Ofgem that they have sufficient capital reserves in place to cover their market exposure, whilst finances must also be ring-fenced to cover off meeting the costs of their environmental commitments. Failure of a supplier has often left schemes such as the Feed In Tariff scheme or the Renewables Obligation, short of the funds needed to meet their cost. The shortfall has always been passed on to the consumer, with subsequent costs inflated to help meet the deficit. A report from the Public Accounts Committee of the UK government calculates the cost of the supplier failures at £2.7 billion.
These measures previously implemented have seen suppliers build up net asset reserves of £7.5bn since the energy crisis. It is this money that Ofgem will be ring fencing to further protect the customer.
As of now, the cost of supplier failure will no longer be carried by the energy consumer. Instead, through the introduction of the Supplier of Last Resort Levy Offset rule, it will be incumbent on the failing supplier to pay any costs that result from the need to appoint a default supplier. The cost will be recovered through the insolvency process where the supplier has residual assets available to pay creditors.
Some would argue that this move has come a little too late and that customers should have been shielded from the adverse impact of the energy crisis, but it should be welcomed as a further move to provide the market with financial stability. Supplier failures have dropped off since the peak of the energy crisis, but Ofgem is at pains to point out that they can still happen from time to time and that this measure is needed to further protect consumers from adverse costs. Clearly anything that prevents price shocks to the end user is very welcome, and it should be seen as a positive that Ofgem continues to work to meet its overall commitment to protect the interests of energy consumers and ensure a secure, sustainable and affordable energy supply.
For more information, or to discuss your energy costs in more detail, please contact your dedicated Client Manager.
