Testing times for the "Supplier of Last Resort" regime as UK gas prices continue to rise

Kwasi Kwarteng, UK Business and Energy Secretary is reported to have said on 20 September that “My task is to ensure that any energy supplier failures cause the least amount of disruption to consumers”.

Wholesale day-ahead gas prices in the UK are reported to have jumped some 9% on 20 September alone. The rise is as a result of a number of factors including increased demand in Asia, lower supplies of gas from Russia and increase in demand as countries emerge from lockdown restrictions and economies start to pick up once more.

Such rapid and significant price increases typically disproportionately impact smaller suppliers and indeed it is widely anticipated that a number of the smaller suppliers will fall into insolvency over the coming weeks and months. The specific process is unique to the energy industry.

Insolvencies in the licensed energy supply industry fall under a special administration regime known as the Energy Supply Company Administration. This special administration regime (which applies by virtue of both the Insolvency Act 1986 and the Energy Act 2004 (as it applies by virtue of the Energy Act 2011) is intended to provide for the uninterrupted supply of energy to consumers by means of a “Supplier of Last Resort” alternative to the appointment of an “Energy Administrator”. In addition to the creation of a special administration regime, there are also restrictions on the use of insolvency processes that would ordinarily be available under the Insolvency Act 1986.

The words of the UK Business and Energy Secretary, however, reflect the approach adopted to date by Ofgem in the Supplier of Last Resort (“SoLR”) process. By using the SoLR process, Ofgem will typically attempt to replace a failing supplier with an alternative supplier rather than watch the failing supplier enter into “Energy Supply Company Administration”.

Both the Energy Supply Company Administration Regime and the SoLR process equip Ofgem with the powers necessary to enable it to protect the interests of customers and ensure that customers continue to receive gas and electricity suppliers at a time of supplier failure.

Mayer Brown’s experience of the SoLR process and Energy Supply Company Administration Regime is that each process works effectively provided appropriately experienced advisers are involved at an early stage. There is no doubt however that the regime will be put to the test once again over the coming weeks and months.

Further detailed discussion regarding the SoLR process and the Energy Supply Company Administration is set out in this article authored by Michael Fiddy, Kirsti Massie and Fatema Begum in February 2021.