Energy regulator Ofgem has published an update on the Supplier of Last Resort (SoLR) policy consultation to help protect consumers from fronting the cost of failed suppliers.
It also guarantees that in the event of a supplier’s failure, its customers still have an energy supplier. Ofgem will switch customer accounts to a new supplier without any interruption and ensure that if domestic customers’ account balances are in credit, they will get back every pound they held in credit with their old supplier.
This process incurs a cost for the companies acting as SoLRs from wholesale energy prices and administrative costs—these are claimed back under the SoLR levy process. Following the energy crisis of 2021, which saw 30 suppliers go out of business and left 3.2 million people without electricity, SoLR levy claims totalled £2.35 billion and were ultimately paid for through consumer bills.
Since the energy crisis, Ofgem has strengthened the rules so that suppliers are more resilient to shocks and less likely to fail: Suppliers must have capital to cover their risks and not overly rely on customer money like credit balances to fund their businesses.
Now, Ofgem has taken the next step by introducing the SoLR Levy Offset which will ensure the costs claimed under the SoLR levy will be the liability of the failed supplier, recovered, for example, through insolvency processes. The SoLR Levy Offset would obligate suppliers to pay the networks the amount of any SoLR levy claim if the supplier failed and a SoLR was appointed
Ofgem found that if this policy had been in place during the 2021 crisis, an estimated 60% of the total paid to SoLRs through the levy process could have been recovered, excluding customer credit balances. Should the new rule be adopted, it will apply from early in 2025.
Tim Jarvis, director general for markets at Ofgem, said: “Our priority is to protect consumers, and if a supplier fails, every possible step should be taken to minimise the impact on customers. Any remaining assets from a failed supplier should be used to offset costs on household bills.
“These new rules will help to shield customers from the cost of failures in the future by ensuring shareholders won’t benefit financially from the insolvency process until the costs of keeping their customers on supply has been met.”
The policy consultation was first opened in February 2024 and will conclude in October this year.
Preventing another energy crisis
Shortly after the energy crisis, a report by the Energy and Climate Intelligence Unit (ECIU) found that 34% of the British public saw energy company profiteering as the key cause.
One of Ofgem’s initiatives intended to mitigate the impact of the energy crisis was the introduction of the ban on acquisition-only tariffs (BAT) in April 2022. Acquisition-only tariffs are a way for energy suppliers to entice new customers to move suppliers by offering them cheaper prices. Despite a consultation on ending the BAT, the regulator confirmed in July this year that the ban will remain.
Meanwhile, Labour has made good on its promises to introduce windfall taxes for oil and gas companies, with Ed Miliband criticising the Tory government’s lack of a “proper” windfall tax. On 29 July this year, Labour chancellor Rachel Reeves announced further changes to the Energy PRofits Levy (EPL), headlining a 3% increase from 35% to 38% to bring the rate of tax on upstream oil and gas to 78%.
