Ofgem confirmed in February 2022 that the costs of supplier failures would be recovered through a volumetric charge added to the unit costs of domestic gas bills1. The decision followed a run of supplier collapses that began in the summer of 2021 and continued into 20221.
The regulator's supplier of last resort process transfers the customers of a failed supplier to a new one through a competitive bidding process, which leaves the receiving supplier with costs including buying energy for the new customers and protecting their credit balances1. Those costs can then be passed on to customers through a levy on energy bills1. Ofgem's latest estimate of the total cost to billpayers of the 29 suppliers that failed as a result of the crisis was £2.7 billion, or around £94 per customer1.
The scale of the failures was set out by the Business, Energy and Industrial Strategy Committee in its July 2022 report on energy pricing and the future of the energy market. Between July 2021 and May 2022, 29 energy suppliers in Great Britain collapsed, with a combined market share of nearly four million customers, more than 10 per cent1. As of May 2022, 24 suppliers were left in the market; eight had a market share above 5 per cent, three above 1 per cent and the remaining 13 had less than 1 per cent1. Bulb Energy, which served around 1.6 million households, was placed into Special Administration in November 2021, the first use of that regime1. The Government spent £0.9 billion in 2021-22 to maintain supply to Bulb's customers and budgeted a further £0.92 billion for 2022-231.
The committee found "overwhelming consensus that the collapse of 29 energy retailers between July 2021 and May 2022 could have been mitigated through robust regulation of suppliers"1. It noted that Ofgem introduced new entry criteria from June 2019 following the Supplier Licensing Review, and that a requirement for companies to have a Customer Continuity Plan, or living will, was introduced in March 20211. The committee said the principle did not come into force until January 20211.
"In February 2022, Ofgem confirmed its decision to add the SoLR charge to the unit costs of domestic gas bills"
The committee also recorded that on 7 July 2022 Ofgem launched a consultation asking stakeholders whether the existing fixed charge on electricity bills for supplier failure costs should be replaced with a usage based alternative1. The outcome of that consultation has not been reported in the material available.
Why it matters for households
The charge sits on the unit rate, so it scales with how much gas a home uses rather than being a flat sum per meter. A household that heats its home with gas and uses more of it therefore carries a larger share of the recovery than a low-usage household on the same tariff. Because the charge is built into the unit rate rather than shown as a separate line, it is not visible as a distinct item on a bill in the way a standing charge is. The committee's £94 per customer figure is an average across all billpayers, not a figure for any individual home.
The decision also bears on policy costs and levies on energy bills more broadly, since supplier failure costs join the other policy and network elements that make up the price cap. The committee's report describes the cap as covering wholesale costs, network costs, supplier operating costs and the costs of government policy, plus 1.9 per cent of revenue for supplier profit and 5 per cent for VAT1. The summer 2022 cap included an additional network charge of £68 per customer to cover supplier of last resort levy costs1.
For a household's energy independence, the practical point is that a share of the gas unit rate now reflects the cost of other companies' failures rather than the cost of the energy itself. That portion is not something a household can avoid by changing its own supplier, because it is recovered across the market. The financial resilience rules that govern how suppliers are licensed and monitored are the mechanism intended to limit how often such costs arise.
What happens next
On 7 July 2022, Ofgem launched a consultation on whether the existing fixed charge on electricity bills for supplier failure costs should be replaced with a usage based alternative1. No decision on that consultation is reported in the material available.
Sources1 cited
- Energy pricing and the future of the energy market - Business, Energy and Industrial Strategy Committee, publications.parliament.uk