Reed Smith Client Alerts

In this alert, we consider prevailing volatility in the UK energy supply market, Ofgem’s supplier of last resort regime, and the regulator’s recent move to tighten rules for energy suppliers.

Authors: Prajakt Samant Mandip Englund Simone Goligorsky Harry Rudkin Conor Shevlin

Following the introduction of stricter entry requirements for new energy suppliers in July 2019 (as considered in a previous client alert), Ofgem recently announced proposals aimed at reducing the risk of insolvency among suppliers and, in turn, strengthening the protections afforded to consumers.

Ofgem plans to issue the statutory consultation for its proposals in early 2020. Implementation of the new measures will likely follow in late summer 2020.

Background

The proposals mark the second stage of Ofgem’s Supplier Licensing Review. Supplementing the new conditions for obtaining a supplier licence introduced in July 2019, the new proposals are designed to improve the financial stability of market participants and, at the same time, continue to promote innovation and competition within the industry.

A low bar to entry into the energy supply market has caused the number of energy suppliers to proliferate in recent years. While the influx of new suppliers has increased competition and exerted downward pressure on energy prices, there has been an attendant rise in energy supplier insolvency.

The effects of an energy supplier’s insolvency are often felt across the energy supply market. In accordance with a process of mutualisation, a failed supplier’s consumer credit balances and unpaid contributions toward government schemes are spread across the remaining active energy suppliers. Those remaining suppliers are left with an additional costs burden which they will inevitably endeavour to recoup from consumers. It is estimated that supplier failure added £172 million to energy bills between January 2018 and October 2019.1

The most recent example of supplier failure came in December 2019 with Breeze Energy ceasing trading and Ofgem appointing British Gas as the supplier of last resort (‘SoLR’) for Breeze Energy’s 18,000 domestic customers.2