All eyes are on the latest energy supplier insolvency

When Preston-based GB Energy Supply Limited (GB Energy) announced it was going into administration – the first of its kind in the sector for eight years – it was bound to attract considerable scrutiny.

Ofgem is keen to see whether procedures put in place recently to protect customers are effective. And energy suppliers will be hoping that events in the coming weeks and months will help to identify opportunities to make the system fairer for all.

Immediately following the announcement, Ofgem has stepped in to reassure GB Energy’s 160,000 customers that their accounts will be transferred to a new supplier, known legally as a ‘Supplier of Last Resort’ (SoLR), which in this case is Co-operative Energy.

However, customers’ pricing arrangements and other terms and conditions of their supply contracts, will not necessarily continue. While any existing credit balances will transfer across for domestic consumers, the same does not apply for business customers. However, the latter will be free to shop around for a better deal without being caught by exit fees.

A number of factors have led to GB Energy’s administration. In particular, the government’s push to drive competition in the sector has encouraged an increasing number of ‘challenger’ suppliers to enter the market. Some of these new entrants – those with fewer than 250,000 customers – have benefited by being free of the administrative hassle associated with delivering some of the government’s social and environmental policies. However, without easy access to the wholesale markets to forward buy their customers’ consumption profiles, some smaller players have been hit by half-hourly imbalance charges administered by the central wholesale trading market. These charges, combined with the increasing volatility affecting wholesale prices, has put pressure on suppliers offering fixed-price deals.

In October 2016, Ofgem beefed up its procedures for dealing with insolvent energy suppliers. Each electricity supplier must agree as part of its licence conditions to take over responsibility for a failed supplier’s customers (by acting as SoLR) if asked by the regulator to do so. Suppliers also have an opportunity to volunteer their services too. Before taking any action, Ofgem carries out checks to ensure that the chosen supplier is able to fulfil the contracts in question.

Suppliers who take on responsibility for supply gas or electricity to the failed suppliers’ customers can make claims for otherwise unrecoverable costs in some circumstances. However, Ofgem will favour those who waive their right to bring such claims and claims are considered on a case-by-case basis.

While these new procedures have not been fully tested until now, many believe they are structurally flawed. Taking into account rising Distribution Use of System (DUoS) charges, the Big Six are understandably reluctant to help bail out smaller competitors who have been eroding their market share. They are even less happy with the situation when these new customers decide to leave them and sign up with another smaller supplier who is willing to chance its arm in a volatile market.

A recent report on the state of the retail energy market by the Competition and Markets Authority has suggested a solution, whereby Ofgem will publish an annual State of the Market Report that uses analysis to provide an effective assessment of the cumulative impacts of policy on UK energy markets. The intention is to inform public debate and improve future policymaking.

However, it is not clear whether Ofgem will want to use this public platform to get involved in regulating the wholesale trading positions of suppliers. In any event, it is surely appropriate that suppliers – big or small – who make poor trading decisions should suffer the consequences.

It is more likely that Ofgem will take the view that when it comes to supplier insolvencies its role is limited to ensuring there is protection in place to protect consumers – a step it has taken by implementing the SoLR regime.

In today’s challenging trading conditions, this is unlikely to be the last small energy supplier to experience financial difficulties and enter administration. The fate of GB Energy’s customers will be watched closely to see how they fare through the SoLR process and Ofgem is likely to come under further pressure to help level the playing field for all suppliers, regardless of size.