Ofgem considers rules to reduce consumer cost from supplier failures

Ofgem has published a policy consultation considering a new policy to run alongside the Supplier of Last Resort (SoLR) levy process that could help further protect consumers from costs of future supplier failures calling this the SoLR Levy Offset.

Ofgem’s Supplier of Last Resort (SoLR) safety net ensures that when an energy company fails customers do not need to find a new supplier as Ofgem will switch their accounts to a new supplier without any interruption. It also ensures that if domestic customers’ account balances are in credit, they will get back every pound they held in credit with their old supplier.

During the energy crisis of 2021, 30 suppliers went out of business, many suppliers were required to act as SoLRs – and were able to claim for the costs they incurred (including wholesale energy costs and administrative costs) under the SoLR levy process. The costs of any approved SoLR levy claims are ultimately paid for by consumers via their bills.

Since the energy crisis, Ofgem has strengthened the rules to ensure that suppliers are more resilient to shocks and less likely to fail. Suppliers are required to have capital to cover their risks and ring-fence certain aspects of their finances including Renewables Obligation receipts and, where appropriate, customer credit balances, which makes them the first line of defence.

Ofgem says that ss a result, the market is becoming significantly more resilient, but as in any competitive market, some companies will still fail from time to time.

Now Ofgem is consulting on a proposal called the SoLR Levy Offset that could further reduce the costs to consumers if a supplier fails in the future. The costs claimed under the SoLR levy would be a liability of the failed supplier. This liability could be recovered through the insolvency process where the failed supplier has residual value available to pay creditors. If adopted, this change would only apply to future supplier failures.

Tim Jarvis, Director General for Markets at Ofgem, said “Protecting customers is our top priority and we want to ensure that when companies go bust they are first in line to pay for their failure, not consumers.

“We’ve already brought in tough new rules to make suppliers more financially stable, which includes requiring suppliers to have their own capital at risk so that they can better withstand shocks.

“If implemented, these new rules would go further towards shielding consumers from the impact of failures in the future and mean that shareholders would not be able to see any return from an insolvency process until the costs of keeping their customers on supply had been met.”

The consultation will be open until Friday 5th April, 2024.