Trouble on the horizon – a tough few months ahead for energy suppliers

In the last few years there have been a number of small to medium sized gas and electricity supplier entrants into the UK market. Though this has had the positive consequence of increasing competition in the market, these energy suppliers are facing a particularly difficult few months ahead given the steep increase in gas prices over the past year which disproportionately affects smaller sized suppliers who are less able to absorb the increased costs of gas (together with the increased cost of hedging). Couple this with the end of August deadline for suppliers to present their renewables obligation certificates (ROCs) or make buy-out payments into a buy-out fund (or a combination of the two) to satisfy their renewable obligations means that we could see several suppliers fail over the coming months.

Renewables Obligation scheme[1]

A ROC is a green energy certificate that was introduced in England, Wales and Scotland in 2002 (and in Northern Ireland in 2005) by the Renewables Obligation scheme that places an obligation on UK electricity suppliers to source an increasing proportion of electricity from renewable sources. The obligation is set annually by the Department of Business, Energy and Industrial Strategy and is based on the predicted amount of electricity that will be supplied in the UK and the number of ROCs that will be issued to eligible renewable generators.

ROCs are issued by the Office of Gas and Electricity Markets (Ofgem) to eligible renewable generators and every MWh generated creates one ROC. If a supplier fails to meet its annual obligation by purchasing sufficient ROCs from renewable generators, the supplier is required to make a buy-out payment into a buy-out fund. The buy-out price is published on Ofgem’s website and is linked to the retail price index. Funds remaining in the buy-out fund (once the scheme administration costs are deducted) are redistributed to suppliers in proportion to the number of ROCs presented.

It is expected that suppliers will need to make millions in buy-out payments to Ofgem by the end of August and it is almost certain that a number of suppliers will not be able to do so. If suppliers fail to make payment by 31 August, they have until the end of October to make the late payment.

Ofgem is clear that a trade sale of a failing supplier is its strong preference, although if that is not possible, it has the power (i) to revoke the supplier’s license and appoint a Supplier of Last Resort (SoLR); or if that is not feasible (ii) to apply, with the consent of the Secretary of State, for an Energy Supply Company Administration order.

Supplier of Last Resort

SoLR is a process whereby Ofgem appoints a new supplier who takes over the supply of gas and electricity to the failed supplier’s customers. Ofgem’s preference is to appoint another supplier who has volunteered for the role so long as they meet Ofgem’s requirements. However, if no suitable supplier volunteers Ofgem has the power to appoint a SoLR so long as it thinks the new supplier could carry out the role without significantly prejudicing its ability to continue to service its own customers.

Once the SoLR has been nominated, Ofgem will revoke the failing supplier’s license which will allow the company to enter an ordinary administration process.

Energy Supply Company Administration

The Energy Supply Company Administration is a special administration regime[2] and was introduced to cater specifically for companies that supply gas and electricity in England and Wales. There are restrictions on the rights of energy suppliers and their creditors to enter an insolvency process without either the supplier or creditor giving the Secretary of State and Ofgem 14 days written notice of its intention to do so. The rights which are restricted include applying for a winding up order, enforcing security, administrator appointments and applying for a moratorium. During the notice period, Ofgem will decide whether, with the consent of the Secretary of State, to apply to court for an Energy Supply Company Administration order. The Secretary of State also has the power to make such an application. According to Ofgem’s guidance they will only seek the Secretary of State’s consent to such an application where it considers that the use of its SoLR will not be feasible. In practice, it is envisaged that Energy Supply Company Administration will only be used for large companies and has not been used to date.

What next?

Energy suppliers are facing a difficult few months ahead and, where directors are concerned about the supplier’s ability to continue to trade as a going concern, they should be seeking legal advice to explore potential restructuring options or sales bearing in mind the regulatory obligations of the company and their own directors’ duties.

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[1] The Renewables Obligation scheme closed to all new generating capacity on 31 March 2017. This closure does not affect accreditation received prior to the closure date and these remain valid for ROCs until the end of 2037.

[2] The Energy Supply Company Administration was introduced by the Energy Act 2004 as it applies by virtue of the Energy Act 2011.

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