The UK Energy Bills Crisis

What just happened?

Five of the UK's leading economic groups have called on the government for urgent and robust help to tackle the UK's energy crisis, warning that inaction will lead to reduced investment, increased poverty and the risk of an inflationary spiral. (1)

What does this mean?

The rise in energy prices is the contraction in wholesale gas prices worldwide, which began in 2021, partly caused by the rapid pace of economic recovery after the outbreak of the coronavirus pandemic and a year of historically low global energy consumption due to business closures and traffic shutdowns. (2) As a result of the recovery, demand has increased, putting further pressure on global supplies due to the harsh winter in the Northern Hemisphere in 2020/21 and the mild summer that has just been experienced in Asia, especially in China, where demand for air conditioners is about to decline facing the sticky heat through the roof. (3)

A relatively windless summer in Europe and a drought in Brazil also meant that the amount of renewable energy generated by turbines and hydroelectric power plants for storage was less than expected. The Russian gas giant Gazprom, continuing to fulfil its long-term contractual obligations, refused to supply its storage facilities in Europe to the usual extent to protect itself from market fluctuations and the gradual closure of the Groningen fields in the countries. (4) Finally, according to the International Energy Agency: "The Covid-19 lockdown caused some maintenance work [infrastructure] from 2020 to 2021, which affected supply at a time when demand was growing. (5) The impact was particularly felt in the UK, Norway and areas of the continental shelf of the North Sea. In addition, unscheduled shutdowns of LNG plants, upstream supply issues, unforeseen repairs and delays in some projects have further strained the global gas market." (6)

As a result of this perfect storm of factors, wholesale gas prices are reported to have risen 250% since January 2021 and 70% in August alone, reaching a record price of 450p per trimester in December. (7) Sunak and Affairs Minister Kwasi Kwarteng have been working on possible measures to mitigate the impact of a projected increase in electricity bills of nearly 50%, equivalent to £600 a year for the average household when the top price is lifted in April. (8) Ofgem, the energy regulator, will announce a new price cap early next month, and Kwarteng said Sunak would use his March 23 spring announcement to chart out a support package. (9)

Reflecting the growing concern of companies of all sizes, five business groups highlighted the likely damage to household budgets if the government does not intervene. They noted that increasing the average household electricity bill to 2,000 hp per year alone would add 1-2 percentage points to the annual inflation rate - already at 5.4% in 30 years at the most - and push another 2 million people into energy poverty. "This will cause serious damage to low-income families, but this increase in spending will affect the entire economy," the letter says "Therefore, we urge [the government] to take action to cushion the growth of domestic bills and support the most vulnerable."

The letter said businesses have also been hit by a sharp increase in electricity bills, with further increases looming as flat-rate contracts expire. The scale of the crisis has left companies defenceless as they face rising wages, shipping costs and taxes. Small and medium businesses are most at risk. Many companies will have no choice but to pass the costs on to themselves. Customers, adding additional inflationary pressure," the groups said. Along with other countries, the UK has been hit by rising global wholesale gas prices, driven in part by increased demand following countries' recovery from the pandemic.

How does this impact the legal sector?

The insolvency of energy suppliers is highly regulated, with the intent of the main regulatory regimes to protect consumers' interests, ensure the continuity of supply despite possible supplier failures, and try to stimulate competition in the energy market. Ofgem may primarily use the Provider of Last Resort (Solr) regime as an alternative to applying the state of emergency. In the prescribed circumstances, an insolvent supply company has a legal obligation to notify both the Secretary of State and the Gas and Electricity Markets Authority that it is unable to pay its debts. (10)

Similarly, a supplier of last resort that proposes to appoint directors or apply its guarantees to the supplier company must notify both the State Secretariat and the Gas and Electricity Markets Authority of this intention. Directors may not be appointed, and any appointee holder may not declare his safety within 14 days of such notice. The two options are hierarchical: if it is possible to appoint a Solr, Ofgem will not apply for special administrative order. (11) If a Solr is appointed instead, the defaulting supplier's license will be revoked so that it will no longer be a regulated activity and may instead be subject to a "normal" administration (or liquidation) process. (12)

Ofgem will usually file a bankruptcy petition for the relevant supplier, after which its license may be revoked. This process has been applied to six British energy companies that have recently gone bankrupt. (13)

Ultimately, however, if it is not possible to appoint a Solr, Ofgem has the right to request the appointment of directors under emergency management. In practice, the emergency administration regime has never been applied and is likely to be applied only in the case of a large energy supply company. The news, however, suggests that Ofgem's sources have indicated that a special administrative regime may be required in the event of an onion-sized supplier's failure. (14)

Assessing firms:

#Akin Gump LLP #Allen & Overy LLP #Clifford Chance LLP #Kirkland & Ellis International LLP #Latham & Watkins #Linklaters LLP #Freshfields Bruckhaus Deringer LLP #Milbank #Weil, Gotshal & Manges (London) LLP #White & Case LLP #Ashurst #Hogan Lovells International LLP #Mayer Brown International LLP #Slaughter and May

¹ https://www.theguardian.com/business/2022/jan/21/uk-energy-bills-crisis-cbi-bcc-iod-make-uk-fsb-covid

² https://www.theguardian.com/business/2022/jan/21/uk-energy-bills-crisis-cbi-bcc-iod-make-uk-fsb-covid

³ https://www.un.org/development/desa/dpad/wp-content/uploads/sites/45/WESP2020_FullReport.pdf

⁴ https://www.gazprom.com/press/news/2021/december/article544924/

⁵ https://www.iea.org/reports/global-energy-review-2021/economic-impacts-of-covid-19

⁶ https://www.theguardian.com/business/2022/jan/21/uk-energy-bills-crisis-cbi-bcc-iod-make-uk-fsb-covid

⁷ https://www.nationalworld.com/lifestyle/money/why-are-energy-bills-going-up-uk-price-increase-explained-amid-rising-wholesale-gas-prices-and-2022-forecast-3507001

⁸ https://www.standard.co.uk/news/uk/kwasi-kwarteng-households-government-rishi-sunak-boris-johnson-b977986.html

⁹ https://www.independent.co.uk/news/uk/home-news/energy-price-rise-why-uk-b1998901.html

¹⁰ https://www.dlapiper.com/en/uk/insights/publications/2021/09/energy-suppliers-in-crisis-the-legal-issues/

¹¹ https://www.ofgem.gov.uk/information-consumers/energy-advice-households/what-happens-if-your-energy-supplier-goes-bust

¹² https://www.shearman.com/Perspectives/2021/10/Recent-Gas-Supplier-Failures-in-the-UK?sc_lang=zh-CN

¹³ https://www.ofgem.gov.uk/energy-advice-businesses/what-happens-if-energy-supplier-your-business-goes-bust

¹⁴ https://www.dlapiper.com/en/uk/insights/publications/2021/09/energy-suppliers-in-crisis-the-legal-issues/