01 September 2021

Industry commentators are warning of a potential spike in the number of insolvencies among energy suppliers this autumn. In this article we examine the challenges currently facing these suppliers and discuss what actions the directors of impacted providers should be taking during this period.

Challenges in the energy sector

Wholesale energy prices are currently increasing at a near unprecedented rate, with the wholesale cost of UK energy now being over 50 per cent higher than it was in February due to the easing of lockdown restrictions and wholesale gas prices reaching a 16 year high. Following Ofgem’s recent announcement that its energy price cap on default tariff prices will rise by over 12 per cent on 1 October to its highest level since it was introduced in 2019, a number of suppliers have already announced corresponding price increases to offset their higher costs.

Along with the surge in wholesale energy prices, suppliers are also contending with deadlines relating to their renewables obligations. The Renewables Obligation (RO) scheme imposes an annual obligation on electricity suppliers in England and Wales to obtain a proportion of the electricity that they supply to customers from renewable sources. This obligation can be settled by the supplier presenting a certain number of Renewables Obligation Certificates (ROCs) to Ofgem or by making a cash 'buy-out' payment in lieu of each ROC. Suppliers electing to discharge their obligation in whole or in part via the buy-out option have until 31 August to make the required cash payment. Any suppliers who have not met their obligations by this deadline must make a late payment, which is subject to daily interest, by 31 October.

What does this mean for suppliers?

Suppliers who have signed up customers on the basis of fixed-price contracts but who have not hedged against rising input costs will be exposed to the movements in wholesale energy prices and may be left facing a raft of unprofitable agreements. These trading difficulties, combined with a potentially significant RO buy-out liability (which will have now fallen due, subject to the late payment period), could quickly leave these suppliers facing liquidity and solvency issues.

The issue of suppliers defaulting on their obligation under the RO is high on the agenda of Ofgem and the Department for Business, Energy & Industrial Strategy who recently released a joint consultation on the topic. Among the options being considered are a legislative requirement for suppliers to settle their RO more frequently to lower the level of default risk and a licence-based requirement for suppliers to protect their accruing obligation under the scheme (for example via a guarantee or by putting funds in escrow), however with the consultation only closing in early November, any reforms would come too late for the current RO period.

What actions should directors be taking?

As is the case in any distressed situation, time is of the essence and if directors have any doubt about the financial viability of their company they should seek independent professional advice as soon as possible. In more serious cases, where there is no reasonable prospect of avoiding insolvency, that advice can assist the directors in assessing the steps they need to take, in conjunction with Ofgem, in order to minimise loss to creditors so that they can discharge their duties and minimise the risk of personal liability. 

Further general guidance on governance and duties is available here but if you have specific questions or would like to discuss the topics in this article further, please contact Andrew Eaton.

This article was written by Gareth Grand and Andrew Eaton.

Key contact

Andrew Eaton

Andrew Eaton Partner

  • Corporate Restructuring and Insolvency
  • Private Equity
  • Banking and Finance

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