Insolvency (Moratorium) (Special Administration for Energy Licensees) Regulations 2020
(3 years, 7 months ago)
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Lord Callanan
That the Regulations laid before the House on 4 September be approved.
Relevant document: 26th Report from the Secondary Legislation Scrutiny Committee
The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)
I hope that these regulations will be slightly less controversial than the previous ones. The noble Lord, Lord Paddick, looks sceptical.
In the summer, the Government moved quickly to introduce the Corporate Insolvency and Governance Act 2020—many Members here took part in those debates—which inserted new Part A1 into the Insolvency Act 1986, introducing a moratorium regime for companies in financial distress. The moratorium gives those financially distressed companies breathing space from their creditors to pursue a rescue or restructure. The company’s existing management remains in control during the moratorium period but a monitor is appointed to oversee the moratorium.
There was wide support in your Lordships’ House for the new moratorium provisions and the other measures in the Act to help financially distressed businesses, particularly at this time, and I thank noble Lords for that. The Government will be publishing statistics on the use of the new procedures of company moratoriums and restructuring plans later this month. The Corporate Insolvency and Governance Act also inserted Section A50 into the Insolvency Act 1986, which enables regulations to be made to modify the application of Part A1, the moratorium provisions, in relation to a company for which there is a special administration regime.
Similar to other sectors, there are special administration regimes in the energy sector. These cover companies that hold an electricity distribution or transmission licence or a gas transporter licence, a smart meter communication licensee and energy supply companies. The energy special administration powers exist to ensure that essential services, such as electricity and gas supply or the maintenance of distribution networks, continue and that customers continue to be served at the lowest reasonable cost. These powers can also be used to mitigate the risk of financial contagion and to maintain market stability and consumer confidence. This instrument will modify the application of Part A1, the moratorium provisions, in relation to these energy companies.
Therefore, if a relevant energy company enters or has applied to enter a moratorium, the Secretary of State and Ofgem will want to promptly consider whether there is any need to apply for a special administration order. Special administration has never been used in the energy sector and the Government’s assessment is that it remains unlikely, but as a prudent Government we must ensure that we have the powers and processes in place to act swiftly to protect consumers and other market participants should that become necessary.
This instrument will ensure that the Secretary of State and Ofgem will be promptly notified of any moratorium or proposed moratorium for a relevant energy company so that an application for a special administration order can be considered. This will avoid any delay in making that decision and therefore reduce uncertainty for consumers and market participants.
This instrument does one other thing. A relevant energy company in a moratorium will continue to trade and operate as an entity licensed and regulated by Ofgem. Therefore this instrument will ensure that during the moratorium Ofgem can continue to engage in legal processes in relation to relevant energy companies, including to enforce licence obligations and revoke licences without first having to seek the court’s permission, as it would have to where a company was not in a moratorium. This will avoid any delay in Ofgem acting to protect the interests of consumers.
These regulations build on the moratorium provisions in the 2020 Act to ensure that those provisions work effectively alongside the special administration powers for energy supply, energy networks and smart metering, and that the Government and the regulator, Ofgem, are able to take all necessary action to protect the interests of consumers. The regulations, unlike the previous ones, are a short, simple and proportionate step to align the moratorium provision with the need to protect the interests of energy consumers and other market participants. I beg to move.
Lord Paddick (LD)
My Lords, I am guessing that the difference between these regulations with their sparsity of speakers and the previous regulations where there were a lot of speakers is that many people know about the hospitality sector but not many know about administration and insolvency moratoriums as they apply to energy companies. I include myself in that, but let us give it a go.
As I understand it, there are already regulations in place whereby the Secretary of State or Ofgem can ensure continuity of supply of gas and electricity to consumers in the event of insolvency of energy companies. In the event of a large supplier of gas or electricity, electricity and gas transmission companies or network distribution companies becoming insolvent, arrangements can be put in place to ensure that customers continue to be supplied with gas or electricity as cost-effectively as possible until the company in difficulty is either rescued or sold or its customers are transferred to other suppliers.
That is done by the Secretary of State, or Ofgem with the Secretary of State’s consent, applying to the court for an energy administration order, a smart meter communication licensee administration order or an energy supply company administration order. However, as the Minister has said, companies that are in financial distress, including energy companies, can apply for the protection of a moratorium under Part A1 of the Insolvency Act 1986, which was inserted into the 1986 Act by the Corporate Insolvency and Governance Act 2020. Without these regulations, Ofgem or the Secretary of State would be unable to intervene to ensure security of supply without the permission of the court because of the protections provided by the moratorium, which could result in an interruption of supply.
The Government claim that the urgency of passing this legislation is twofold: first, because energy companies face significantly increased financial pressures due to the coronavirus pandemic; and secondly, because these pressures will become more acute in the autumn and winter of 2020, for example, as electricity suppliers are liable for significant payments that are due under the renewables obligation scheme by the end of October. This scheme requires a certain level of electricity to be generated from renewables or a payment in lieu if that threshold is not reached.
The Minister will correct me if I am wrong on any of this but if I have understood everything correctly, then several questions arise. Why was the potential difficulty of energy companies applying for a moratorium under Part A1 of the Insolvency Act 1986, as inserted by the Corporate Insolvency and Governance Act 2020, not foreseen when the 2020 Act was drafted? The Minister said that the Government moved quickly to bring in this legislation; one has to wonder whether it was brought in too quickly.
How will the Secretary of State ensure that the provisions in this statutory instrument will not discourage energy companies from looking into restructuring and rescue options before filing for insolvency? What are the specific causes of the increased financial pressures on energy companies as a result of the coronavirus pandemic? The Minister says it is unlikely that these regulations will be needed, yet the accompanying advice from his department to noble Lords says that they are necessary and urgent.
What scope is there for the Government to defer payments due under the renewables obligation scheme for energy companies in financial distress to prevent them having to apply for insolvency or a moratorium on insolvency? What scope is there for the Government to provide other forms of financial assistance that have been given to support other sectors during the coronavirus pandemic, as an alternative to these regulations?
In normal times, such interventions are to enable another supplier to be put in place to provide continuity of supply. Although the Minister, on the one hand, paints a rosy picture about these regulations not being likely to be needed, on the other the advice is that they are needed urgently. To what extent is the whole energy industry facing difficulty, such that it requires this urgent action by the Government? Can the Minister assure consumers that the Government will take whatever steps are necessary to ensure continuity of supply, even outside the provisions of these regulations? I look forward to hearing the Minister’s reply.
Lord Stevenson of Balmacara (Lab) [V]
My Lords, I thank the Minister for his introduction to this SI. Insolvencies of energy companies have occurred in increasing numbers in recent years. They have a number of causes, but does the Minister agree that they include: undercapitalisation of new entrants to the supply market; overoptimistic plans for growth in new customers; and inadequate provisions of levies and other requirements on energy companies that are part of the funding landscape? Five relatively small energy providers, with fewer than 200,000 customers, went bankrupt last year and since 2016 a total of 13 companies, some of which were considerably larger, have gone under.
As the Minister said, the SI modifies the working of the moratorium regime in Part A1 of the Insolvency Act 1986 in respect of particular energy companies involved in the provision or distribution of gas, electricity and smart meter services. The key provision that the SI introduces will require struggling companies to notify the Department for Business, Energy and Industrial Strategy that they are in a moratorium, so that the Secretary of State can consider whether to apply for a special administration order that would enable Ofgem to protect continuity of supply and, if appropriate, commence proceedings for the transfer of supply to another company through the supplier of last resort proceedings.
Standing back from this process, in effect it is equivalent to a successful competitive bid from another energy company for the customers of a failed company, with provisions about continuity of tariffs, prices and so on being part of the bid process. The company taking over other companies may of course be compensated for the work involved in doing so through payments spread across the sector. But because of the risk of a high number of sizeable companies going bust, these payments have become a real source of concern for otherwise stable energy companies which find themselves having to underwrite payments for failed companies that may previously have tried to undercut them with cheap but unsustainable customer tariffs. Can the Minister confirm that this issue is being kept under review?
A related concern appears to be borrowing to fund the levy payments of troubled companies, as they are using the sums required to pay these levies to keep themselves afloat. In 2019 we lost eight domestic energy suppliers, meaning that half a million customers were moved to suppliers that they had not picked, with 87% ending back at one of the big six companies. Are the Government considering short or long-term changes to the conditions for payment of these levies by energy companies, in the light of this year’s circumstances?
A combination of the energy price cap, the effects of Covid-19 and the imminent emergence of this year’s levy payment point may cause a further number of energy companies to go under this year—perhaps the Government are effectively acknowledging this through the SI. Can the Minister tell the House how many companies he anticipates may become insolvent this year, and distinguish between those companies that are in difficulty because of immediate problems and those in difficulty because of their own business models and poor management of liabilities?
My party has always supported a competitive energy market that provides cheap and reliable services to customers, but this cannot be at the expense of letting consumers have rights of access to the essential energy provisions that they need. I look forward to the Minister’s response.
Lord Callanan (Con)
I thank both noble Lords for their contributions to this debate. The moratorium provisions in the Corporate Insolvency and Governance Act will help businesses in financial distress, giving them the appropriate breathing space from their creditors to pursue a rescue or restructure. This SI builds on that, ensuring that the Government and Ofgem can act swiftly in response to events. It will ensure that consumers will be protected if and when an energy company enters a moratorium.
However, the energy sector is fundamentally robust, even in the face of events such as Covid-19. For instance, in the supply market, there are around 57 energy suppliers that serve households, which is up from 12 in 2010. In the business energy market, there are around 80 licensed electricity and gas suppliers. New-entrant suppliers now serve more than 40% of the household gas and electricity markets, which is up from around 1% in 2010. The Government welcome this increasingly competitive and innovative market, and we continue to promote competition as the best driver of value and service for customers.
However, as in any competitive market, it is normal for energy suppliers to fail from time to time. Ofgem and the Government are focused on ensuring that exits are orderly and that, during the process, customers are protected. When an energy supplier fails, the supplier of last resort process is triggered. Ofgem revokes the supplier’s licence and appoints another supplier to take over its customers. The process allows for a quick transfer of customers. In the first instance, Ofgem invites suppliers to bid to take on the customers and chooses the supplier that will offer the best value for consumers. Ofgem has successfully used this process for multiple supplier insolvencies and is confident that the process remains robust.
In the event that the use of the supplier of last resort would not be practicable, there is a special administration regime. This has never been used in the energy sector, and the Government’s assessment is that it remains unlikely. However, of course, as a prudent Government, we have to ensure that we have the powers and processes in place to act swiftly to protect consumers and other market participants should it become necessary.
I will now deal with a number of the questions that were asked by both noble Lords. The noble Lord, Lord Paddick, asked why the changes were not included on the face of the Corporate Insolvency and Governance Act. It was important to move quickly to bring forward this Act in order to help businesses in financial distress at the time. This meant that we had to prioritise the content of the Bill and deliver some provisions, such as this one, in following secondary legislation.
The noble Lords, Lord Paddick and Lord Stevenson, asked about the moratorium and whether it would increase costs for energy consumers. The answer is no. The purpose of the moratorium is to provide the time and space to pursue a rescue or restructuring of the company, which would avoid the company failing. It is normally in the interests of creditors, including customers, to avoid the failure of an energy company. However, if one does fail, domestic customers have the credit balances on their accounts protected.
The noble Lord, Lord Paddick, also asked about the number of energy companies that we expect to access a moratorium. As I said, the sector is fundamentally robust, but it is normal in a competitive market for some businesses to fail. However, the market is strong, with around 60 suppliers. Ultimately, of course, a decision to enter a moratorium is one for the company’s directors, working alongside the monitor, so he will understand that I cannot speculate on numbers.
The noble Lords, Lord Paddick and Lord Stevenson, asked about the payment of levies. We are working with Ofgem on potential reforms to reduce the likelihood that suppliers fail to meet their payment obligations and to mitigate the impact in the event of non-payment. Ofgem has already made licence modifications aimed at increasing the robustness of suppliers’ financial practices and is consulting on further changes.
Again, the noble Lords, Lord Paddick and Lord Stevenson, asked me about the number of energy companies that we anticipate may become insolvent. Again, I am sure that both noble Lords will understand that I cannot speculate on numbers, but we think that the market is fundamentally robust. The noble Lord, Lord Stevenson, asked how likely it was that a company would go insolvent. I say again that the market is robust, and, occasionally, companies will fail, but we do not expect very many to do so. I think that deals with all the questions from both noble Lords.
These regulations align the operation of the corporate moratorium regime that we introduced in the summer with the existing powers to protect the interests of energy consumers and other market participants when energy companies are in financial distress. I commend these regulations to the House.
The Deputy Speaker (Lord Alderdice) (LD)
My Lords, the Hybrid Sitting of the House will now resume.