Failed energy retailers would be forced to pay up costs incurred during the Supplier of Last Resort (SoLR) process, under new rules being considered by Ofgem.
Current rules stipulate that SoLRs can claim for costs they incurred during the process of taking on the customers of a failed retailer, including wholesale energy and administrative costs, via the SoLR levy process. These costs are ultimately paid for by consumer bills.
A total of 30 energy suppliers have failed since the start of the energy crisis in 2021, 29 of which went through the SoLR process with one, Bulb, entering the Special Administration Regime (SAR).
The failures have led to soaring costs, with Ofgem’s current estimate at £2.35 billion so far – a figure that is yet to be finalised. The net cost of the Bulb Special Administration meanwhile is currently estimated by the Public Accounts Committee to be £246 million.
While the failed supplier does not directly contribute to meeting SoLR levy costs, the SoLR can claim the costs of honouring customer credit balances from the failed supplier, including in any insolvency process as an unsecured creditor.
“Nonetheless, shareholders of a failed supplier may receive a cash distribution from surplus assets in the company. This gives rise to a clear fairness issue of shareholders benefitting while consumers pay for the costs of transferring the customers of the failed supplier,” Ofgem explained.
As such the regulator is proposing to introduce a SoLR Levy Offset which would aim to recover from failed suppliers, including through the insolvency process, some of the costs that they cause.
In a policy consultation, the regulator explained further: “We would create licence and contractual arrangements such that another party would have a legitimate claim for SoLR Levy costs against a failed supplier.
“The debt would rank as an unsecured claim in supplier insolvencies. If funds are available to pay the claim, it could provide significant benefit to consumers by enabling any recovered funds to flow back to consumers through lower network charges, and therefore lower bills.
“If adopted, this change would only apply to future supplier failures and could not be applied retrospectively to the failures of 2021.”
Ofgem’s preferred approach would see the introduction of new supplier licence conditions requiring all suppliers to agree that in the event of their failure, they would pay the network the costs which are being claimed from the network by the SoLR (excluding customer credit balances).
Commenting on the proposals Tim Jarvis, director general for markets at Ofgem, said: “Protecting customers is our top priority and we want to ensure that when companies go bust they are first in line to pay for their failure, not consumers.
“We’ve already brought in tough new rules to make suppliers more financially stable, which includes requiring suppliers to have their own capital at risk so that they can better withstand shocks.
“If implemented, these new rules would go further towards shielding consumers from the impact of failures in the future and mean that shareholders would not be able to see any return from an insolvency process until the costs of keeping their customers on supply had been met.”