In an attempt to increase competition (and therefore lower retail energy prices) in the retail consumer energy market, multiple new supplier entrants have been licensed by Ofgem. These tend to be smaller providers representing disruptive competition to the larger, established players. Like the larger providers, the smaller supply companies use hedging and forward trading to mitigate against price fluctuations and consumer revenue.
In the period since November of 2020 wholesale energy prices have almost doubled as a result of a number of factors including a marked COVID driven decrease in demand from office and other large premises. This has disproportionately impacted the smaller suppliers who are less able to absorb the increased costs, and consequent impact on hedging, of this price shock when compared with the “big six.”
Insolvencies in the energy supply industry fall under a special administration regime known as the Energy Supply Company Administration. This special administration regime 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.” Essentially, this means that Ofgem attempts to replace a failing supplier with an alternative supplier rather than place the failing supplier into “Energy Supply Company Administration.”
Since the beginning of January 2021, at least three energy supply companies have run into distress including Green Network Energy which, according to Ofgem, is the largest energy supply company to date to have gone through the Supplier of Last Resort process. To find out more about what happens during this process, visit the Utility Bidder website.
What is a special administration regime?
There are a number of special administration regimes in England and Wales which amend the general administration process set out in the Insolvency Act. These special administration regimes were introduced in respect of industries where there are wider public interests, or in which statutory functions of a public nature are carried out,like the supply of gas and electricity, or the ownership and operation of electricity transmission, or distribution networks or gas pipelines, or the supply of water.
These regimes, including the regime introduced for energy supply companies, tend to follow the form set out in the Insolvency Act, but the nature of the industry means that it is appropriate to have modified objectives and accompanying powers to achieve those objectives.
Energy Supply Company Administration
The Energy Act introduced the “Energy Supply Company Administration” which is a special insolvency regime specifically created for companies that supply gas and electricity in England and Wales pursuant to specific supply licences granted by Ofgem. In addition to creating a special administration regime for energy supply companies, there are also restrictions on the use of insolvency processes that would ordinarily be available under the Insolvency Act, such as the ordinary out-of-court administration.
Under the Energy Act, a failing energy supply company is under an obligation to notify Ofgem that it is unable to pay its debts as they fall due.
