The Energy Act 2011 introduced the “special administration regime” – arrangements to ensure the energy industry is safeguarded against the impact of a major player failing financially. It is an essential protection measure but the question for all involved has now turned to who should pay. The Department of Energy and Climate Change (Decc) has set up a consultation to discuss the question.
The Energy Supply Company Administration Regime is an emergency rescue measure. The regime includes the establishment of a fund to provide financial support for a company in difficulty to enable it to continue operating normally until it is either rescued, sold or its customers transferred to other suppliers. The fund is to be managed by the secretary of state. Companies will be allocated grants, loans and guarantees in respect of sums that need to be borrowed during the administration period.
The money a company borrows from the fund will take priority over all other debts, ensuring the fund is replenished wherever possible. Inevitably, however, there is a risk that some companies will enter administration and not be in a position to repay. In this case, Section 99 of the Act provides for the modification of licences to allow the shortfall to be recovered through raising charges that industry participants are already required to pay as a condition of their licences.
The current consultation is designed to help Decc decide how the cost recovery mechanism should work. A “shortfall direction” is currently under consideration. The proposed direction will dictate: the amount to be raised; who will be controlling it (proposed to be the secretary of state); when the repayments will be made (and with what interest); and what charges will be used.
The proposal is that as soon as reasonably practicable after receiving the shortfall direction, National Grid will increase its charges and notify those to whom the charges apply. It should take into account the timeframe in which shippers and suppliers are able to pass through the additional charges. The licences that will be altered as part of the mechanism include the electricity transmissions licence; National Grid’s gas transporter licence; electricity supply licences; and gas supply licences.
Cost recovery mechanisms of this type are of not new – indeed, similar regimes are already in place in the electricity and gas industries. Currently, gas shippers pay charges to National Grid for the conveyance of gas. In practice the cost of this is passed on to the ultimate consumer. The principle is that ultimate costs for the protection of the industry should be shared across participants in the market.
Of course, this means an increase in consumer energy bills, which is never a popular step. The maximum possible increase to householders’ bills is currently estimated at £32. But the reality is that if the energy consumer does not pay, the government would need to – through a combination of debt, tax funds and expenditure reduction.
Sarah Donald is an associate at Dundas & Wilson