Soaring gas prices hit struggling energy suppliers

Ofgem has this month warned of very high gas prices and have said that this “will feed into all customer energy bills in the UK”.  According to the BBC[1], Ofgem has also at the same time said that they “have put tough rules in place to ensure energy suppliers treat customers who are struggling with bills fairly”.

So what support and options are there for struggling energy suppliers who have to purchase energy and gas at high wholesale prices and are supplying it to their customers at very low margins?

The failure of energy suppliers in recent years has been well documented.  Many of these failures have resulted in Ofgem appointing a Supplier of Last Resort (SoLR).  A SoLR is a supplier appointed by Ofgem to take all the customers of the failed supplier in order to ensure there is a continuity of supply.

However, despite the number of SoLRs appointed over the last four years, this is not the only option.

From a purely commercial point of view, the main assets of an energy supplier are its customer contracts.  The appointment of a SoLR will result in these assets being taken away for free.  There is no reason, if the supplier receives the correct advice, has sufficient time and capital and Ofgem is on board, for the supplier not to be able to sell these assets for value prior to entering into an insolvency process.

There is a fine line to be taken in managing directors’ duties to the creditors and the company’s duties to their customers and to Ofgem.  The situation is complicated further in that the Insolvency Act 1986 and the Energy Act 2004 are not compatible in relation to the appointment of an administrator or a liquidator, effectively ruling out the option of an out of court appointment.

Last year we acted for Robin Hood Energy (RHE) who earlier this year entered into administration.  Prior to that we worked with the management team of RHE, their major stakeholders and energy specialist accountants to devise and implement a strategy to sell the assets of RHE to Centrica and to avoid the appointment of a SoLR.  A fundamental part of the strategy was the early engagement of Ofgem and ensuring their continual awareness of the process.

Whilst the terms of the sale are confidential, it can be seen from the statement of affairs which has recently been filed by the joint administrators that the strategy resulted in payments of over £7 million being made to RHE.  This will benefit the creditors and is a sum that RHE would not have been received if it had simply handed the reins over to Ofgem to appoint a SoLR.

Whilst the insolvency of any company is unfortunate, this approach has resulted in a significant benefit to all involved.  Not only was it consistent with the duties of the directors of distressed companies and will result in a better result for creditors, but it also ensured compliance with RHE’s duties to treat customers fairly.

If you are an energy supplier or are advising an energy supplier we would be more than happy to talk to you in order to discuss available options.

[1] Ofgem warns soaring gas prices will feed into customer bills - BBC News