What happens when an energy supplier becomes insolvent?
23 November 2021
What happens when an energy supplier becomes insolvent?
When an energy supplier fails, the energy regulator Ofgem has two options to ensure customers’ supply isn’t affected:
- Appointing a Supplier of Last Resort (SoLR) or
- Seeking consent from the Secretary of State to place the insolvent firm into administration under a special administration regime.
What’s a 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 (SoLR).
Under the SoLR process, Ofgem will usually ask suppliers to notify it if they are willing to be considered as a SoLR. If necessary, Ofgem has the power 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 appointed, the insolvent 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.
How does the Energy Supply Company Administration (special administration regime) work?
If Ofgem considers that the use of its SoLR powers would not be feasible, it will place the energy company into a special administration regime known as The Energy Supply Company Administration.
This process, which was introduced through the Energy Act 2011, aims to ensure that a large energy supply company in financial difficulty 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”.
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 only once been used in the energy sector.
The purpose of energy supply company administration is to protect the market from the sudden impact of the failed supplier’s debt, which under the market trading arrangements could be smeared across other market participants, increasing the risk of financial failure spreading across the market.
What happens to customers’ accounts when a Supplier of Last Resort is appointed?
When a SoLR is appointed, they take over as the energy supplier from the firm which has entered an insolvency process. The new firm will continue to supply energy to customers, and take over responsibility for providing them with their bills.
What is the role of an insolvency practitioner in either of these processes?
When appointed as an ‘office holder’ in a formal insolvency procedure, such as administration, insolvency practitioners have a duty to maximise returns to the company’s whole body of creditors. This means their 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.
However, 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.
In energy insolvencies, they are especially 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, usually a bill, as well as how they will manage these situations.
What challenges do insolvency practitioners face in energy supplier insolvencies?
Energy insolvencies are quite unique, and present a range of challenging circumstances for an insolvency practitioner who is appointed as an office holder (either as an administrator or liquidator) for an insolvent energy supplier.
The insolvency practitioner may be appointed to this role with little prior notice, and they may inherit systems and processes which are far from ideal, while needing to balance every expense against their statutory duty to maximise returns to the company’s 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, 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. This is because the insolvent supplier is no longer a regulated business and is no longer bound by the requirements a solvent energy supplier would be.
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