The announcement that energy supplier Bulb is to enter special administration is indicative of the increasingly dark clouds gathering over the energy industry. The special administration regime for energy supply companies was first legislated for in the Energy Act 2011, but has not been tested until now. It was designed to deal with a "low probability, high impact event" which could seriously destabilise the UK energy market. As suppliers wrestle with soaring wholesale prices and the energy price cap which, currently, forces them to supply at a loss, it is perhaps unsurprising that this emergency process has finally been called upon.

As we explained in our previous post, the usual approach in an energy supplier insolvency is for Ofgem to appoint a Supplier of Last Resort ("SOLR"), enabling the insolvent supplier's customers to be quickly transferred to an alternative supplier. Since August, as many as 22 smaller suppliers have been subject to this process - with customer bases ranging in size from MA Energy Ltd - supplying a mere 300 non-domestic customers - to the largest, Avro Energy, with 580,000 domestic customers.

With 1.7m customers, Bulb is the seventh-largest household energy supplier in the UK. For suppliers of such size, the SOLR regime is simply not viable. Ofgem cannot appoint an SOLR where it would prejudice the supplier's ability to service its existing customers, which would be a clear risk in current circumstances. In any event, finding an alternative supplier able to take on such large numbers would be likely to take some time - and possibly even raise competition issues. Assuming that the customer base would need to be split between more than one supplier, the customer transfer mechanisms lack capacity to deal with such numbers quickly. Meanwhile, the insolvent company's customers would continue to be supplied through the National Grid, at a high cost ultimately met by other industry participants.

The special administration regime is therefore intended not only to protect customers, but also to reduce the impact on other industry participants and (crucially in current market conditions) to lower contagion risk and further destabilisation of the market. The objective of energy supplier administration is to ensure that energy supplies continue at the lowest cost reasonably practicable, until the company can be rescued or its customers transferred to another supplier. This is achieved by provision of Government financial support if necessary, in the form of grants, loans and/or guarantees - with the Government ultimately recouping these amounts either from the company (in priority to other creditors), or through an industry mechanism if there is any shortfall.

While it is to be hoped that a resolution for Bulb's customers will be found relatively quickly, the crisis in the energy industry shows little sign of abating. If market conditions continue on their current course, more insolvencies seem inevitable - with consumers ultimately bearing the cost both in rising prices (if, as seems inevitable, Ofgem raises the energy price cap early next year), and increased consolidation in the market leading to a reduction in consumer choice.