Insolvency and Business Rescue for the Energy Sector

Energy is not an ordinary business to fail. When a licensed supplier goes under, homes cannot be left without power, so the sector is governed by Ofgem and has its own rescue system that works very differently from normal insolvency. The gas price shock of 2021 and 2022 exposed how fragile many suppliers were, and dozens collapsed in a short space of time.

The model that failed was undercapitalised suppliers selling fixed-price deals while buying gas unhedged on the spot market, with the price cap preventing them from passing soaring costs on. That produced heavy losses very quickly, and the same forces now press on renewable generators and green-tech firms whose growth depended on cheap capital that has since dried up.

For a licensed supplier, failure rarely means an ordinary liquidation. Ofgem steps in, moves the customers to another supplier under the Supplier of Last Resort process, and the cost is spread across the industry. For a very large supplier, a special administration keeps it running with government support until a buyer is found.

The important question, whether you run a supplier, a generator or an energy-services business, is whether it can meet its obligations, including the customer balances and regulatory payments it is required to protect, as they fall due.

This guide explains the warning signs of insolvency in an energy business, how the Supplier of Last Resort and special administration regimes work, and what may happen to customer balances, your licence and any debts you have personally guaranteed.

Insolvency in the Energy Sector

Electricity and gas businesses sit in a very small insolvency category, so the raw company figures tell you little. A handful of failures can leave millions of customers affected, and a managed transfer of customers through Ofgem often does not appear as an ordinary insolvency at all. The real picture comes from Ofgem’s record of supplier failures and market interventions.

The named collapses show the pattern. The businesses that failed were rarely short of customers. They were short of the capital and the hedging needed to survive a market where the wholesale price moved further and faster than their pricing and the cap allowed, and that is the position we are most often asked about.

What’s Driving Energy Insolvencies

What turns them into an insolvency is the way they act on businesses that hold customer money and carry strict regulatory obligations while margins are thin. Three account for most of the failures.

Wholesale prices, hedging and the price cap

The failures of 2021 and 2022 had a common cause. Suppliers had sold fixed-price tariffs to customers but had not hedged, meaning they had not locked in the cost of the gas and electricity to supply them. When wholesale prices surged several times over, they were forced to buy at the top of the market while the price cap stopped them charging customers enough to cover it.

This is the structural weakness we see behind most supplier failures. A thinly capitalised supplier caught between a fixed selling price and an uncapped buying price runs up losses with astonishing speed, and has no reserve to absorb them. The market has consolidated sharply as a result, but the same exposure remains for any supplier that grows faster than its capital and its hedging can support.

Customer balances and regulatory payments

Energy suppliers hold significant sums that are not really theirs. Customers who pay by direct debit build up credit balances over the year, and suppliers must also make Renewables Obligation and other regulatory payments.

Using either as working capital is one of the clearest routes to a disorderly failure, and Ofgem now requires suppliers to ring-fence customer credit balances and these payments.

The warning here is direct. A supplier that leans on customer money or delays its regulatory payments to fund day-to-day trading is not bridging a gap, it is deepening one, and it is the pattern that draws regulatory intervention. Treating protected money as available cash is both a serious compliance failure and a strong sign the business is already insolvent.

Capital drying up for generation and green-tech

Beyond retail supply, distress has spread to renewable generators, electric-vehicle charging networks and other green-tech businesses. These are capital-intensive and were often built on the expectation of cheap, plentiful funding to reach the scale at which they become profitable.

As the cost of capital rose, that funding became harder and dearer to secure. Projects that relied on continued investment to bridge the years before they turned a profit found the money withdrawn, and even well-backed businesses that had raised substantial sums have run out of road before reaching profitability.

For these firms the pressure is less about the wholesale price and more about the flow of investment.

Warning Signs an Energy Business Is in Trouble

These are the signs that a financial problem is becoming a solvency one, and in this sector some are regulatory as much as financial. The first of them is usually visible inside your business before a regulator acts, and that is when advice is most useful and least costly.

• Inadequate hedging for demand. Being exposed to the wholesale market for volumes already sold to customers at a fixed price, so a price rise turns straight into a loss.
• Margin calls you cannot meet. Wholesale trading counterparties demanding additional cash cover as prices move, draining liquidity quickly.
• Leaning on protected money. Using customer credit balances or delaying Renewables Obligation and other regulatory payments to fund trading. This is both a compliance breach and a clear distress signal.
• Failing Ofgem financial checks. Struggling to meet Ofgem’s financial-resilience and capital requirements, or facing questions about your ability to continue supplying.
• For generators and green-tech, funding withdrawn. An expected investment round or facility not completing, leaving your business without the cash to continue.

If more than one of these is true, the business may already be unable to pay its debts as they fall due, which is the legal test that matters. In energy, the regulator is closely involved, so taking advice early, from a licensed insolvency practitioner alongside your regulatory advisers, is what keeps the process orderly.

For a licensed supplier especially, an early, managed approach protects customers and reduces the cost that ultimately falls on the wider industry. Bringing someone in early is what keeps some control over how, and when, that happens.

Supplier of Last Resort and Special Administration: What Makes an Energy Insolvency Different

The single biggest difference in energy is that a licensed supplier cannot simply be wound up, because its customers must keep their supply. Instead, two special mechanisms sit above ordinary insolvency, and which applies depends mainly on the size of the supplier.

Both are led by the regulator rather than the company, and both are the points directors are most surprised by once a company is already in difficulty.

How Supplier of Last Resort works

When a supplier fails, Ofgem normally uses the Supplier of Last Resort process. It revokes the failed company’s licence and moves its customers to a surviving supplier, chosen by Ofgem, which takes them on and honours their credit balances so that customers are protected. The customer does not lose supply, and does not lose the money already paid in.

The cost of taking on those customers, which can run to hundreds of millions of pounds, is met by the incoming supplier and then recovered across the whole industry through a levy that ultimately reaches consumers’ bills.

Recent reforms have gone further, making those recovered costs a direct liability of the failed supplier’s estate, so that its shareholders cannot extract value before the cost of keeping customers supplied has been covered.

Special administration for the largest suppliers

For a very large supplier, moving millions of customers to a single rival at once is not practical, and the cost would be too great to absorb. In that situation the government and Ofgem can use a special administration instead, as happened with one supplier that had 1.7 million customers.

Under a special administration, the company keeps trading under appointed administrators, with government funding used to keep it running, until it can be returned to the market or sold to a buyer. It is a rescue designed to protect customers and the wider system, not the company’s shareholders, and it is reserved for failures too large for the ordinary Supplier of Last Resort route to handle.

Your Options if an Energy Company Can’t Pay

Once the company cannot pay its debts as they fall due, your duties change and creditors’ interests come first. What that means in practice depends heavily on whether you hold a supply licence, because a licensed supplier’s route is shaped by Ofgem rather than chosen freely. None of this is a defeat, and we talk directors through each path.

The earlier the conversation, with your regulatory advisers alongside, the more orderly the outcome tends to be.

• Regulator-led routes for licensed suppliers. If you hold a supply licence, an insolvency will usually run through Ofgem’s Supplier of Last Resort process, or a special administration for the largest suppliers, rather than an ordinary liquidation. Engaging early with Ofgem is essential.
• Administration for unlicensed energy businesses. For generators, green-tech and energy-services firms, administration can hold off creditors while the business, its contracts or its technology are sold, sometimes to a buyer who continues the operation.
• Company Voluntary Arrangement or Time to Pay. Where an unlicensed energy business is viable and the issue is debt or defined HMRC arrears, a CVA or a Time to Pay arrangement may restructure the position while it trades on.
• Creditors’ Voluntary Liquidation. Where an unlicensed energy business cannot be saved, a CVL closes it in an orderly way and deals with creditors, though it does not clear personal guarantees you have given.

The honest question is whether the business can meet its obligations, including the money it holds for customers and the regulator, without relying on funds it is required to protect. Where a viable unlicensed business faces a debt or timing problem, a restructuring or Time to Pay can carry it through.

Where a supplier is failing, an early, managed exit alongside Ofgem protects customers and limits the cost passed to the wider market. If you have given a personal guarantee, or you are concerned about how customer balances or regulatory payments have been handled, tell us at the first meeting, because both change the advice.

Frequently Asked Questions About Energy Insolvency

Related Guides: Energy and Insolvency

• Company Administration: rescue, breathing space and going-concern sales.
• Company Voluntary Arrangements: restructuring debt while trading on.
• Creditors’ Voluntary Liquidation: the standard route to close an insolvent company.
• HMRC Time to Pay Arrangements: spreading VAT and PAYE arrears.
• Are Directors Personally Liable for Company Debts?: where company debt becomes personal.
• Can’t Afford to Pay Suppliers: dealing with creditor pressure.