Cold Comfort? The Rights of Renewable Energy Customers Upon Transfer to a Supplier of Last Resort

Author(s)

Adela Jones
LLM LPC candidate, The City Law School

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4 Minutes

Renewable energy has been hugely popular in the United Kingdom over the last decade, with smaller providers often focusing on offering greener options to attract customers. However, the failure in 2021 of energy provider Bulb Energy, a provider that prioritized green electricity and offered carbon offsetting for its fossil fuel customers, demonstrated that even a resilient customer base and a mix of energy sources may not be enough to save a company if it is unable to hedge its costs and liabilities during market contractions. Bulb’s size and the difficulty of performing a quick sale led the Office of Gas and Electricity Markets (Ofgem) to recommend putting the firm into special administration rather than use its supplier of last resort rules. As administrators now prepare to sell Bulb, how can the need for continuity of supply and the wish for greener energy be reconciled? Moreover, what does that mean for the matrix of insolvency obligations and the need for net zero carbon emissions?

Insolvency law in the UK recognises special insolvency regimes for various key industries, with the supply of heat and power being a notable example. Ofgem has a special role to play in all such insolvency proceedings and in safeguarding energy supply more generally. Both the Electricity Act 1989 and the Gas Act 1986 provide that the role of Ofgem is, inter alia, to underpin deemed supply contracts, to grant licences to suppliers, and to appoint a ‘supplier of last resort’ for customers of a potentially insolvent energy supply company. Under Standard Condition 8.1 of licences issued by Ofgem to gas and electricity suppliers, Ofgem may unilaterally revoke or amend licenses, so that other suppliers are able to take over the supply of energy to affected customers. This mechanism focuses purely on securing supply rather than the sources of that energy.

In addition to these tasks, Ofgem plays a key role in deciding when a struggling provider can be treated as insolvent. Section 160 of the Energy Act 2004 prevents energy suppliers from being put into insolvency by anyone other than the Secretary of State (or Ofgem with the Secretary of State’s consent) applying to the court for an energy supply company administration order. What then applies is a modified administration regime under Schedule B1 of the Insolvency Act 1986 as supplemented by the Energy Supply Company Administration Rules 2013 (SI 2013/1046). If the Directors have already obtained a Part A1 moratorium (an innovation introduced by the Corporate Insolvency and Governance Act 2020), the Secretary of State may still have it modified as an exception under section A20 of the Insolvency Act 1986 (introduced by Regulation 8 of the Insolvency (Moratorium) (Special Administration for Energy Licensees) Regulations 2020 (SI 2020/943)). The focus of these rules is ensuring that creditor action does not disrupt the continuity of supply to end customers, but it also means—assuming the company has at least some cash on hand to meet current bills—that Ofgem can buy itself time to try and manage the national energy market as a whole.

Ofgem already wears many hats. In addition to ensuring customers’ access to gas and electricity, it must ensure fair competition and a favourable market for customers’ rates and choice of supply. There is also an additional factor: every failing supplier puts more strain on the National Grid, which has a duty to balance power usage and, if necessary, buy energy directly at spot prices to fulfil national demand. This was cited in Gas and Electricity Markets Authority v GB Energy Supply Ltd [2016] EWHC 3341 (Ch) as a reason to close a failing supplier before they expended all their reserves. A key question for Ofgem is how to manage the plurality of market actors to ensure that there is adequate supply of energy. However, customers who have been with a company supplying exclusively renewable energy may be less than pleased to end up with a traditional supplier which uses fossil fuels.

Does Ofgem have an obligation to place customers with an exclusively renewable energy supplier, or should customers be allocated to any regulated electricity provider regardless of the makeup of their energy portfolio? Focusing on continuity of supply to a household at the expense of supplier plurality would quickly skew the market towards entrenched suppliers and reduce competition. The six largest providers in the UK (colloquially referred to as ‘the Big Six’) all provide some renewable energy as a part of their portfolio, and recent events in both the fossil fuel and renewable sectors have illustrated how vulnerable the entire energy market is to market forces beyond their control, so that Ofgem may face a conundrum if there are more failures of renewable energy suppliers. Ofgem’s letter published when putting Bulb Energy Ltd into special administration suggested that a customer base of 1.6 million households and a position as Britain’s seventh largest energy supplier meant Bulb was simply too large to transfer. However, by overlooking the importance of renewable-focused providers, Ofgem risks wasting its opportunity as ‘supplier of last resort’ not only to safeguard the wider renewable market, but also to make an effective contribution against climate change.

Ultimately, the problem is how to transition from polluting to renewable and alternative energy sources without compromising the security of supply. While it is encouraging that roughly half of the energy generated in the UK comes from renewable sources, there is still a large risk that unprecedented changes affecting global weather patterns and temperatures will lead to never-seen-before severe and prolonged periods of drought affecting hydroelectricity, and wind droughts leading to a decrease in wind generation in the North Sea affecting large portions of the country’s renewable energy mix. Given the UK’s pledge to reach net zero by 2050, the way forward is clear. Ofgem must redesign the supplier of last resort model to support greater renewable energy capacity from many providers that can be switched in and keep encouraging consumers to go green. If necessary, that might also mean splitting up larger customer bases of an insolvent energy supplier among a plurality of renewable-energy-focused suppliers if no single provider is large enough. By honouring customer choice towards greener energy when appointing a supplier of last resort, Ofgem would not only protect the competitive nature of the market but also ensure that suppliers in administration could possibly return to the market months later if they return to operational and financial stability.

Warmer weather won’t help, and increase in the energy price cap in April may cause more consumers to default on their bills to energy companies. Ofgem should review how its supplier of last resort rules can encompass transfers to a plurality of green suppliers rather than be forced to transfer an entire customer base to fossil fuel-consuming energy companies and put the net zero objective at risk.

Adela Jones is an LLM LPC candidate at The City Law School and has served as a judicial extern for the US District Court for the Southern District of California.

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