Need in the energy sector

Industry commentators are warning of a possible spike in utility bankruptcies this fall. In this article, we examine the challenges these vendors are currently facing and discuss what action the directors of the affected vendors should take during this period.

Challenges in the energy sector

Wholesale energy prices are currently rising at a near unprecedented rate, with UK energy wholesale costs now over 50 percent higher than in February as lockdown restrictions have been eased and wholesale gas prices hit a 16-year high. Following Ofgem’s recent announcement that it would raise the energy price cap for standard tariff prices on October 1 by over 12 percent to the highest level since it was introduced in 2019, some providers have already announced price increases to offset their higher costs.

In addition to the rise in wholesale prices for energy, providers are also faced with deadlines for their renewable energy obligations. The Renewables Obligation (RO) scheme obliges electricity suppliers in England and Wales to purchase some of the electricity they supply to customers from renewable sources annually. This obligation can be fulfilled by providing Ofgem with a certain number of Renewables Obligation Certificates (ROCs) or by making a cash payment instead of each ROC. Suppliers who fully or partially fulfill their obligation via the buy-out option have until August 31st to make the required cash payment. Suppliers who have not met their obligations by this deadline must make a late payment by October 31st, which bears interest on a daily basis.

What does this mean for suppliers?

Suppliers who have won customers on the basis of fixed price contracts but have not secured themselves against rising purchase costs will be exposed to changes in wholesale prices for energy and can be faced with a number of unprofitable agreements. These trading difficulties combined with a potentially substantial RO buyout obligation (which is now due subject to late payment) could quickly see these suppliers face liquidity and solvency problems.

The issue of non-compliance by suppliers from the RO is high on the agenda of Ofgem and the Department for Business, Energy & Industrial Strategy, which recently published a joint consultation on the matter. Options that are being considered include a legal obligation for suppliers to pay their RO more frequently to reduce the risk of failure, and a license-based obligation for suppliers to secure their arising obligations from the system (e.g. in trust), since however, if the consultation does not end until early November, all reforms for the current RO period would come too late.

What Action Should Directors Take?

As in any emergency, time is of the essence and when directors have doubts about the financial viability of their business they should seek independent professional advice ASAP. In more severe cases where there is no reasonable prospect of bankruptcy avoidance, such advice may assist the Directors in assessing the steps they must take with Ofgem to minimize the loss to creditors in order for them to be theirs Able to meet obligations and minimize the personal liability risk.

Further general guidelines on governance and duties can be found here

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