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Supplier of Last Resort

Supplier of Last Resort

In competitive market arenas, such as the gas and electricity markets, it is not uncommon for a company to fail. But since the beginning of January 2021, the risk of financial failure due to rising wholesale energy costs has resulted in a staggering 29 energy suppliers failing, affecting nearly four million domestic customers in the process.

But what happens to the customer base of a supplier who has faced financial difficulty and eventually gone bust?

It is the role of Ofgem - the independent energy regulator - to ensure that these customers are not left without continuity of supply. This is where the Suppliers of Last Resort (SoLR) process comes in.

What is the Supplier of Last Resort (SoLR) process?

The Supplier of Last Resort (SoLR) process is when Ofgem appoints a new energy provider to take on the customers from a failed supplier.

Ofgem appoints this new supplier from a pool of energy companies who have put themselves forward for the role, typically one of the "Big Six". Ofgem's selection criteria includes whether the new company can adequately supply additional customers with gas and electricity without jeopardising supply to its existing customers.

Why was the SoLR process established?

The SoLR procedure was established by Ofgem in 2003. It is designed to act as a safety net, ensuring that, in the event supplier failure occurs, affected customers are guaranteed continuity of supply.

Not all failures will require regulatory intervention – the business may be sold in a trade sale – Ofgem’s preferred outcome. But when a trade sale cannot be secured, Ofgem is able to step in, revoke the failed supplier’s license within 24 hours’ notice and appoint a Supplier of Last Resort (SoLR).

Are there times when the SoLR process fails?

In the event a large energy supplier (e.g., one of the “Big Six” such as British Gas, Octopus, or Shell Energy) goes into administration, the SoLR process may not be feasible, such as where it has too many customers to transfer at one time.

In this instance, Ofgem can seek consent from the Secretary of State to apply for use of an Energy Supply Special Administration order from the courts. This order , known as the Special Administration Regime (SAR), acts as a stopgap to the SoLR, allowing a special administrator to be appointed to temporarily take over the failed energy company until it is sold, or the customers have been transferred to an alternative supplier.

Has the Special Administration Regime (SAR) ever been used?

From mid 2021 to spring 2022, prices on the wholesale energy market increased to unprecedented levels, leading in large part to 29 energy suppliers failing. Of these failed suppliers, 28 went through the Supplier of Last Resort (SoLR) process. However, one – Bulb Energy – which fell into insolvency in November 2021, was taken into SAR. It was the seventh largest energy supplier in the UK and with its 1.6 million customers, was deemed too large a supplier to go through the SoLR regime. Through SAR, Bulb was taken over by the Government for a full year until December 2022, when Octopus Energy announced it had acquired Bulb and would be taking on its entire customer base, becoming the second largest energy supplier in the UK in the process.

Why does the Supplier of Last Resort process happen?

Ofgem licenses new suppliers wishing to enter the retail energy market. These suppliers, although smaller in size, act as disruptors to the large and already well-established energy providers.

Both these large and small providers employ the strategy of hedging as a means of protection against volatility in the market. However, extreme price fluctuations driven by non-everyday events – such as a decreased demand for energy from workplaces during the Coronavirus pandemic and the ongoing conflict in Ukraine – can greatly disrupt the market.

Such disruptions often disproportionately impact smaller suppliers as they become unable to absorb increased costs and can no longer hedge as effectively when compared with large suppliers like the “Big Six”.

What are the risks involved for a SoLR taking on new customers?

Energy providers who do become an SoLR are sometimes required to take on large amounts of new customers in a very short space of time. This can place pressure on the scaling systems and operations of the company, leading to a decreased focus in maintaining the quality of service to existing customers.

For example, EDF, one of the "Big Six" energy companies, acted as the SoLR when Utility Point ceased trading on 14 September 2021, taking on 220,000 new customer accounts. Although these customers may ultimately choose to switch to a different supplier, they must first be onboarded, which was estimated to have cost EDF £600 per customer. Due to the costs of onboarding such a large number of customers in so small a timeframe, EDF have had to temporarily withdraw themselves from becoming a future SoLR.

With a SoLR, will the prices I pay for my energy change?

After being assigned a SoLR, failed supplier's customers will be placed on what is known as a “deemed contract.” A deemed contract is a temporary rate you will be charged by your new supplier for your gas and electricity, with prices usually the same as the Standard Variable tariff (also known as default energy tariffs) offered by that supplier. These prices cannot be above the energy price cap.

Once the move to the SoLR has been completed, customers will remain on the deemed contract rate for a maximum period of six months, or until they either agree a new fixed rate tariff with the SoLR or switch to a new energy provider, whichever is earlier.

Will it cost me to switch from the SoLR to a new supplier?

No. Because you will be placed on a deemed contract under the SoLR, you are free to switch to a new supplier at any time without incurring any exit fees.

Does the Supplier of Last Resort process impact my bills?

In short, yes. The SoLR is allowed to claim on certain costs it incurs when taking on customers of a failed supplier. These costs are recovered through the standing charge (the daily rate you pay to your supplier to stay connected to the grid).

According to a report released by the Business, Energy, and Industrial Strategy Committee branch of the UK parliament in October 2022, of the 29 suppliers that exited the market from mid-2021 to Spring 2022, the cost to customers had come to approximately £2.7 billion, equating to a fixed charge of around £94 per household. 

My energy supplier has gone bust. What should I do?

Within a few days of your existing supplier going bust, Ofgem will announce who the SoLR will be, and will switch you over to them automatically.

After the announcement from Ofgem, your new supplier will be in touch regarding your account. While waiting to be contacted, it is a good idea to take a photo of your meter so that the SoLR can validate your readings.

During this process, your supply of energy will not be disrupted, and you can continue using your gas and electricity as normal.

What happens if I am in credit with my old supplier?

If you are in credit when your old supplier goes into administration your funds are protected. Your new supplier will let you know how and when your credit balance will be repaid.

I am in debt to my old supplier. Do I still have to pay?

If you are in debt to your old supplier when they are declared insolvent, this will still need to be repaid.

Your new supplier may have agreed with your old supplier to take on any outstanding customer debts. Your new supplier will let you know if this is the case.

If your new supplier is not taking on your debt, your old supplier will appoint administrators – an external organisation that takes over once a company goes bust – who will contact you to arrange repayment of the outstanding debt.

Repaying your debt via an administrator

If an administrator has been assigned to collect debts on behalf of your old supplier, the request for payment you receive may come from the administrator themselves rather than your old energy provider.

In some cases, the administrator may request for you to pay your debt back in a single lump-sum payment. This is because administrators do not have to follow the same payment rules as energy companies.

However, if you are struggling to pay, you should try and negotiate a payment plan. You can also speak with your new supplier to let them know that your debt means you are struggling to pay your current energy bills.

If you do receive a bill from an administrator, it is worth checking the requested amount against your old energy bills and bank statements. If you find any discrepancies or are unsure about why you have received the bill, contact the administrators as soon as possible.

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