Avro is the acid test for SoLR

The collapse of Avro Energy, affecting 580,000 customers, presents a significant test for Ofgem’s Supplier of Last Resort mechanism. Experts tell David Blackman that it’s a "flip of a coin” as to whether the process will cope.

The cream of trans-Atlantic golfing talent will be teeing off in Wisconsin this weekend for the biennial Ryder Cup.

Back in the UK though, energy companies will be playing poker with the government this weekend as they haggle over the best ways to mitigate the latest spate of supplier failures.

This week’s collapse of Avro Energy and Green means that an estimated 835,000 customers, equating to three per cent of the UK domestic account, must be found a new supplier.

Avro’s failure is the biggest so far to be handled under Ofgem’s supplier of last resort (SoLR) process, which switches customers to new suppliers. Industry watchers strongly suspect that it will not be the last and may not even be the biggest, given the pressure supplier balance sheets are under.

Kwasi Kwarteng has been playing with a defiantly straight bat all week, insisting that the government’s regime for dealing with supply failures, is robust enough to cope with the biggest crisis to have hit the UK energy supply market since privatisation.

SoLR has dealt with the serial failures of suppliers over recent years, giving Kwarteng cause for the sang froid he has been seeking to project this week.

However, the secretary of state’s attempts to play down the crisis, designed to reassure the public that they will not see their gas and electricity cut off, has attracted accusations of complacency from the opposition.

Now the fate of Avro’s 550,000 supplier-less customers is being seen as the acid test of whether Kwarteng’s confidence is justified.

Josh Buckland, former Number 10 advisor on energy, believes it is a “flip of a coin” whether the SoLR will hold.

The government’s main fallback option is the Special Administration Regime (SAR), which keeps the show on the road at failing companies while options for rescuing or restructuring are pursued.

However Avro, as a relative minnow, is seen as too small-scale to justify the extra costs that going through the SAR regime would entail.

Any fall in the price of gas meanwhile is unlikely to arrive soon enough to get the government out of its current energy bind.

Utility Week has heard bullish noises about the capability of the larger retailers to absorb fresh waves of customers, while acknowledging that multiple failures will pose challenges.

But others wonder how long suppliers will be able to on-board customers in a fickle market where all bar the thinnest of margins are prohibited by the price cap.

If the SoLR cannot furnish a rescue boat for Avro’s customers, the government is expected to tweak the rules of the process as soon as next week.

This could involve speedier payments by the regulator to cover the costs of transferring customers, the vast majority will now be on loss-making tariffs. Cash flow is a bigger issue now that the process is being expected to deal with hundreds of thousands of customers rather than the much smaller numbers it was originally envisaged for.  “There is so much turbulence that the timescale is not working,” says Dr Jonathan Marshall of the Resolution Foundation.

Buckland suspects that the government will only do a major intervention when “absolutely necessary”.

The Treasury is understood to have baulked at the idea of setting up a so called ‘bad bank’ to help suppliers with the costs.

Rishi Sunak no doubt has a good poker-face when haggling with his Cabinet colleagues. However, the chancellor should probably be thinking now about finding some cash to help struggling suppliers in next month’s Budget.

Utility Week has launched the Energy Reset campaign, in a bid to ensure the current crisis results in real reform of the energy retail market.