The Energy Supplier Crisis and Special Administration

Blog
Published: 7th October 2021
Area: Energy

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COP 26

With COP26 very nearly upon us - we’ve taken the opportunity to republish some of the content we produced earlier this year.

Climate change and the UK, and the world’s response to it, is one of the most pressing issues of our time. Bringing together global powerhouses to agree to collaborate on the four main goals of COP26 has never been more important.

Our content provides food for thought, challenges the government’s rhetoric and provides opportunities for practical action.

Members of our energy team will be at COP26 and we look forward to catching up with clients and contacts who also plan to be there. Drop us a line and let’s see if we can connect.

The Energy Supplier Crisis continues

The ongoing wholesale gas market crisis continues to cripple suppliers. Igloo and Symbio Energy, supplying nearly 250,000 customers across the UK, became the latest casualties to cease trading over the last week, taking the total UK customers needing new suppliers to 2.2 million.   The crisis is fast moving and the outlook changes on a daily basis.  

Over the last couple of weeks the Government and Ofgem seemed content to allow the smaller suppliers to cease trading, pointing to the process in place to deal with this scenario.  That process is the appointment of a Supplier of Last Resort (“SoLR”) to take over supply to the customers of the failed supplier.  This has happened 10 times in the last two months.  However, this process has its limits, particularly due to the strain it places on the SoLR and the potentially adverse effect it will have on its existing customers.   

According to The Guardian newspaper, a leading supplier could be the next victim of the crisis [1].  If this were to occur, the appointment of a SoLR is unlikely to be appropriate.  The Guardian has reported that Ofgem is in talks with a leading firm of accountants to act as a special administrator as part of an emergency contingency measure where appointing a SoLR is not possible.  This would be an unprecedented step but one that may be necessary in the current crisis. 

So what is a special administration, and what prospects does this regime offer to ensure compliance with suppliers’ duties to treat consumers fairly?

The process of the appointment of a SoLR is the tried and tested method that has worked in the past.  It results in all of the customers of the supplier being transferred to the SoLR.  Historically it has been seen as an opportunity for a SoLR to increase their market share of customers.  While this is still the case now, it is not as attractive where these customers are loss making due to the imposition of the price cap, which is lower than the wholesale cost of gas.   

On the other hand, the objective of an energy administration is either to rescue the business as a going concern or to transfer different parts of the business to other companies.  This means, unlike a SoLR, the business can be broken up and transferred to different entities, which is more appropriate for larger suppliers and can be done in a timely manner without the pressure of the SoLR appointment.    

The role and duties of a special energy administrator differ from those of the usual company administrator appointed under Schedule B1 Insolvency Act 1986. Unlike an administrator appointed under the Insolvency Act - whose role is to act in the interest of the creditors as a collective - a special administrator over an energy supplier has an obligation to consider customers’ interests, as well as creditors.   

The collapse of so many suppliers and the appointment of the SoLRs in such a short period of time has put a strain on the market, has adversely affected the employees of these businesses and has raised questions as to Ofgem’s handling of this crisis.  

Following the numerous SoLR appointments this year, it is  expected there to be numerous claims over the next year by SoLRs on the industry levy, and while this will be covered by the industry, ultimately it will be the customer that pays.   

If a large supplier is next then the appointment of a special administrator seems likely.  With the benefit of hindsight, could Ofgem and the Government looked to have appointed a special administrator earlier on in the crisis?  Arguably, this may have resulted in a more orderly transfer of customers and less of a perceived panic within the market.  However, we will never know. 

What we do know is that this crisis is far from over and the effects of so many SoLRs being appointed will be felt for some time yet. 

If you are an energy supplier or are advising an energy supplier, get in touch to discuss available options. Contact Tim Speed or Joseph Beat or a member of the energy team in your local office.
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Tim is a litigator who adopts a robust and practical approach to claims and is valued as a trusted advisor to his clients.

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Our 50+ energy and water team is made up of lawyers from multiple disciplines across the firm, all of whom act for clients active, or with an interest, in the sectors. These include our specialists in utility regulation and industry codes, as well as experts across real estate, corporate finance, commercial contracts, retail and consumer debt, litigation and, uniquely for a law firm, our in house planning consultants.

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