In this alert, we consider the ongoing impact of rising wholesale gas prices on UK retail gas suppliers, and key developments in the energy supply market since our last client alert on this topic in September 2021.
In particular, we consider features of the energy supply company special administration regime, which has come into sharper focus since the insolvency in November 2021 of Bulb, the UK’s seventh-largest energy supplier. We also discuss some of the new measures introduced by the Office of Gas and Electricity Markets (Ofgem) in response to recent failures in the energy supply market.
Wholesale gas prices in the UK remain at unprecedented highs, trading at more than three and a half times the level where they were at the start of 2021. The wholesale markets also have experienced continued volatility, with month-ahead gas prices at the UK’s National Balancing Point hitting a new record high of 450p per therm,1 before dipping to a two-month low at the end of December 2021.
Record wholesale gas prices have created a difficult operating environment for energy suppliers. A total of 28 energy suppliers ceased to trade in the UK in the past year, with more than 20 of those 28 becoming insolvent since August 2021.2
The energy supply company special administration regime
The majority of energy suppliers that ceased trading in 2021 have been subject to Ofgem’s Supplier of Last Resort (SoLR) regime, whereby Ofgem revokes the supplier’s licence and appoints an alternative supplier to take over the customers of the failing energy supplier in order to ensure continuity of energy supply.
However, in response to Bulb’s insolvency, in November 2021, Ofgem and the Secretary of State turned to the previously unused energy supply company special administration (the Special Administration) regime, under the Energy Act 2004 (as modified by the Energy Act 2011). Special Administration is intended to be a backstop to the SoLR regime in situations where it is not feasible for Ofgem to appoint an SoLR – in particular, where a larger supplier becomes financially distressed and there is a risk of financial failure creating a systemic risk which spreads across the market.
Ofgem and/or the Secretary of State may apply to the court for a special administration order and appoint a special administrator to an energy supply company. The special administrator is required to manage the energy supplier in order to achieve the objectives set out in the Energy Act 2011, namely: (i) to continue to supply gas at the lowest cost which it is reasonably practicable to incur; and (ii) to secure the rescue of the supplier as a going concern and, where that is not possible, to transfer the supplier as a going concern to another company or companies.3 In light of those objectives, the special administrator also must consider consumers’ interests in addition to those of the company’s creditors.
Unlike under the SoLR regime, the Secretary of State may provide financial support, guarantees, or indemnities to an energy supplier in Special Administration to enable the administrator to finance the company’s activities. The Secretary of State has broad powers to define the terms and conditions of any such support. If the company in Special Administration is unable to repay some or all of the financial assistance provided by the government, the Secretary of State has the power to modify gas or electricity licences to allow for the recovery of the amount of any shortfall by increasing charges from industry participants through the licence mechanism.4
Another point of difference between the SoLR framework and the Special Administration process is that, while Ofgem can direct a new supplier to take on an exiting supplier’s customers under the SoLR regime, transfers of customers to a new supplier under a Special Administration requires the transferee’s consent. In the ordinary course of business, suppliers would tend to welcome taking on new customers, but in an unsettled market with difficult economics, it may prove more difficult for a supplier in Special Administration to find willing transferees.