What happens when an energy supplier becomes insolvent?

13 October 2021

Warnings of an ‘energy crisis’ have dominated media headlines recently, with surging wholesale energy prices leading to the failure of nearly ten energy providers in September, and others reporting signs of serious financial distress.

Given that loss of access to gas and electricity could obviously have a significant impact on individuals, regulatory processes exist to ensure that provision of supply continues when energy firms fail.

When a supplier does fail, the energy regulator Ofgem has two routes available to ensure the continued provision of supply for affected customers. The first is its ability to appoint a new supplier, through its Supplier of Last Resort (SoLR) power.

Alternatively, where a SoLR may not be feasible or appropriate, Ofgem can seek consent from the Secretary of State to place the failed firm in to administration under a special administration regime known as the Energy Supply Company Administration.

This blog post looks at these differing routes, the role that the insolvency profession plays in them, and some of the practical challenges affecting the profession’s work when appointed as office holders in these cases.

Supplier of Last Resort

When an energy supplier becomes insolvent, Ofgem will attempt to ensure the supplier’s customers still have access to essential services by appointing a new supplier for the affected customers – in other words, to be a Supplier of Last Resort.

Under the SoLR process, Ofgem will usually ask suppliers to notify it of their willingness to be considered as a SoLR. Ofgem also has the power, if necessary, to direct a specific supplier to take over responsibility for supplying energy to the failed company’s customers.

Once Ofgem has assessed the various suppliers against specific criteria, and a SoLR has been identified and put in place, the failed company’s gas and electricity supply licences will be revoked. At this stage, the company is no longer a regulated company, and can be placed into an ordinary administration or any other insolvency process.

Energy Supply Company Administration (special administration regime)

Where Ofgem considers that the use of its SoLR powers would not be feasible, for example, where the failing energy supplier is an extremely large company whose customers cannot easily be transferred to another single supplier, Ofgem can seek to place the company into an Energy Supply Company Administration – a type of special administration regime.

Special administration regimes alter the administration process set out in the Insolvency Act 1986, and are found in sectors where it is in the public interest for administrators to have specific objectives and powers over and above the duty to seek to maximise returns to creditors.

A special administration regime for energy supply companies was established through the Energy Act 2011. At the time, the Government said that it was introducing the regime to ensure that if a large energy supply company was in financial difficulty, it could “continue trading normally, potentially with financial assistance from the Government if the company is unable to secure funding from commercial sources, until it is either rescued, sold or its customers transferred to other suppliers”. The Government noted that “experience of small suppliers’ insolvency has shown there is a significant risk the [SoLR] arrangements would not be effective in dealing with the insolvency of large suppliers because of the large volume of customers involved”.

It’s important to note that the Government emphasised that this special regime is intended as a “contingency” to the SoLR process, to “deal with a low probability, but high impact event”, and it has not, as yet, been used in the energy sector.

Challenges insolvency practitioners face

In 2019, Ofgem began a consultation on a series of changes to their Supplier Licensing framework, including the arrangements around the SoLR power. In R3’s response to this consultation, we highlighted concerns about the criticisms Ofgem made in respect of the approach some office holders had taken to finalising customer bills and collecting debt – criticisms that did not take account of the many practical difficulties faced by insolvency practitioners appointed to these cases, the different regulatory framework within which they operate, as well as their statutory duties when acting as office holders.

From a practical perspective, when an insolvency practitioner is appointed as an office holder (either as an administrator or liquidator) for an insolvent energy supplier, they face unique and challenging circumstances. They may be appointed to this role with little prior notice, and they may inherit systems and processes which are not fit for purpose, including patchy or incomplete customer and financial records, constrained staff levels, and a need to balance every outlay against their statutory duty to maximise returns to creditors.

Some specific challenges faced by office holders in energy supplier insolvencies include:

• Poor quality of data held by the insolvent energy supplier and across the wider sector, leading office holders to take additional time to obtain accurate and reliable information regarding customer billing positions;
• Delays in the SoLR providing meter readings which must take place before office holders can begin to create and issue final bills, which are in turn heavily reliant on the insolvent company’s billing systems to produce;
• Difficulties in processing and managing the release of such a high number of bills and customer queries and disputes with what is left of the company's staff.

As well as practical issues, office holders’ regulatory framework and statutory duties are crucial factors in how they approach their roles in these cases. For example, one key point is the regulatory frameworks that apply to the collection of debts from customers pre- and post-insolvency. When a supplier enters an insolvency procedure, it ceases to be a regulated utility provider and other regulatory frameworks come into play. When a supplier enters an insolvency procedure, an insolvency practitioner will be appointed as an office holder and will operate under a different set of statutory and regulatory requirements to those of the energy supply sector.

Indeed, as an ‘office holder’, insolvency practitioners have a duty to maximise returns to the company’s whole body of creditors. In these situations, an insolvency practitioner’s primary duty is to the creditors of the insolvent company as a whole, and every decision taken about an insolvent company is made with the ultimate benefit of creditors in mind.

Previous criticisms of office holders’ approach to collecting debts have ignored the statutory and regulatory framework in place that they must adhere to. Failure to adhere to these duties – unless alternative duties are in place as part of a Special Administration Regime – would lead to regulatory penalties for an insolvency practitioner, potentially including the loss of their licence to practice.

That said, insolvency practitioners are aware of the stresses of the insolvency process and will seek to work with all stakeholders to manage the process sensitively and effectively. They are also mindful of the need to treat customers in a fair and sensitive way, and office holders will usually have a policy (on a firm or practice basis) relating to the way that they will collect debt.  This policy will outline the steps they will take to understand why a customer may struggle to pay a debt, as well as how they will manage these situations.

Watch and wait

The full impact of the series of recent energy insolvencies remains to be seen, but regulatory processes are in place to ensure that customers still have access to essential services when an energy company fails. And in these instances, members of the insolvency and restructuring profession work hard to ensure the transition for customers is as smooth as possible.