Restructuring within the energy sector: What can be learnt from the Bulb Energy special administration?

20th June 2022

Why is this case interesting?

For the first time, the high court[1] has exercised its discretion to make an order under the Energy Act 2004 and Energy Act 2011 appointing special administrators in respect of an energy supply company rather than using the more familiar process of appointing an alternative supplier.

The court also concluded, and provided a formal direction, that the special administrators had the power, and it was proper for them, to enter into a £1.69 billion funding agreement that provided for repayments outside the usual statutory order of priorities and allowed certain unsecured creditors to be paid in full.

The legal and regulatory framework

Ofgem has two tools to deal with failing energy suppliers – the Supplier of Last Resort regime (SoLR) and an Energy Supply Company Special Administration (Special Administration).

The SoLR regime allows Ofgem to direct another energy supply company to be appointed as supplier of last resort to the customers of a failing supplier, which the SoLR is obliged to comply with under its licence terms. Ofgem must be satisfied that the SoLR can supply the additional customers without significantly prejudicing its ability to continue supplying its existing customers (which is becoming increasingly difficult given the vast number of recent failures). The failing supplier’s licence is revoked and the SoLR must supply to the failed supplier’s customers on a deemed contract rate. Continuity of supply to customers is therefore guaranteed.

The Special Administration regime on the other hand was introduced as a different option where a transfer to a SoLR would not be practicable. A failing supplier can be placed into Special Administration only through an application to court by either the Secretary of State or Ofgem (with the Secretary of State’s consent). Once appointed, the Special Administrator’s objective is to continue to contract to supply gas and electricity to customers at the lowest practicable cost until the company is rescued or its business transferred.

So why were special administrators appointed for Bulb Energy?

Three reasons were cited by Ofgem for using the special administration regime rather than a SoLR transfer:

1. There were competition concerns around transferring Bulb Energy’s 1.7million customers to another large energy supplier via the SoLR regime.
2. Concern that existing suppliers were already under significant strain, having already absorbed 2.7 million customers from the numerous energy suppliers that had failed prior to Bulb Energy.
3. The likely additional levy claim from a SoLR which would add further financial stress to the sector and consumers in the short term (the SoLR regime allows for the suppliers acting as SoLRs to make a claim for any reasonable costs they incur as a result of the transfer).

How we can help

Recent supplier failures have provided an unprecedented insight into how the SoLR regime operates and enabled a closer examination of the consequences from an insolvency perspective. Ofgem have stated that they will be implementing reforms to help deal with the energy crisis, with improvement in financial resilience being one of the main drivers for change. At Walker Morris we have an Infrastructure and Energy team who work closely with our restructuring lawyers, resulting in a team of experts who can help you navigate the tricky times ahead.

[1] In the matter of Bulb Energy Limited [2021] EWHC 3757 (Ch)