Introduction
The liberalization of the energy market has introduced profound changes both to the structure and efficiency of energy supply, bringing the underpinnings of a competitive market with it. At the same time, while open to the benefits of competition in some parts of the supply chain, the new energy market has become more prone to shock in relation to price fluctuations, its structure and assurance of demand. The 2021-2023 energy crisis has demonstrated the risks of a liberalized energy market in emergency circumstances, where as a result of unprecedentedly high energy prices, substantial number of energy suppliers became insolvent and were unable to supply the market sufficiently. In response to the crisis fall-out, the Commission proposed several structural tools to reduce risk of default among energy suppliers.
The aim of this blogpost is to highlight the potential role of existing EU insolvency and restructuring laws in mitigating energy supplier default and to explore whether their omission within the current regulatory policy is a missed opportunity for more effective enforcement.
New Tools and Competitiveness
Counterintuitively, the mass supplier insolvency during the energy crisis did not purely flow from the high energy prices but rather from insufficient risk hedging on the part of the suppliers. The development of these events forced the Commission to propose new tools, which would ensure a more stable supply of electricity by requiring Member States to impose varying insolvency risk hedging strategies on energy suppliers. Three main tools proposed to hedge the risk were: 1) promotion of power purchase agreements (PPA) on a larger scale, 2) prudential regulation ensuring stricter financial prudency barriers to enter and stay on the market alongside with 3) consolidation of the Supplier of Last Resort regime (SoLR). Although providing security of supply to consumers, the tools have faced criticism regarding their short and long-term negative effects on competitiveness of the downstream energy supply chain. Specifically, the new prudential requirements raised concerns in relation to high barriers to entry for new and smaller energy suppliers, leaving the market less open to new competition. Power purchase agreements raised concerns in relation to their ability to secure protection from volatility of the market only for large suppliers due to the structure of the agreement, leaving smaller players without such advantage. Finally, the SoLR regime, while ensuring customers of insolvent suppliers are transferred to a designated operational supplier, left many consumers with higher renegotiated prices; additionally, the market had to operate in a highly concentrated state.
Private Tools for Public Matters?
The argument regarding the efficacy and necessity of strong regulatory measures post-energy crisis looms large but misses a simple and pertinent question. At its core, the new regulatory solution was a top-down insolvency prevention measure. Through methods such as prudential regulation and SoLR, the regulatory scheme attempted to prevent insolvencies on a structural level, deciding to go with a more coercive method to ensure complete derisking of suppliers. However, within this regulatory scheme of proposed tools, what was the role of existing general restructuring and insolvency mechanisms? A potential answer is, consideration of a private mechanism such as restructuring schemes that often effectively aid in prevention of insolvency in other sectors, were not considered as an appropriate candidate for a highly regulated energy market. The reasoning behind such decision could take different forms, including market-specific over general legislation or a lack of experience/literature on the overlap between the two regimes. However, a more important question would be whether the lack of enforcement of existing restructuring tools is a missed opportunity for a more effective and well-rounded enforcement approach.
Potential of Restructuring Laws in the Energy Market
The restructuring/pre-insolvency regime established under the Restructuring Directive, provides for ample legally enforceable tools for both debtors and creditors in tackling the often acrimonious and negative sum insolvency and pre-insolvency proceedings. Among its plethora of mechanisms, three stand out in their relevance to the discussion: 1) early warning mechanisms 2) stay on enforcement action and 3) protection of new financing. The tools work congruently to ensure that, either insolvency is prevented through prudential checks or that it is averted through an orderly restructuring. The early warning mechanism allows for companies to use online tools to self-assess their financial prudency and imposes third-party reporting obligations on auditors and other involved bodies to report any signs of pre-insolvency of the debtor. On the other hand, if the situation has resulted in the restructuring process, the regime provides a stay on any individual actions by creditors allowing significant time for the debtor to reorganize themselves without going insolvent despite their obligations. Finally, protection of new financing ensures that new investments do not immediately go towards servicing the debt. Overall, the regime creates a legally enforceable net, which catches market players in case there is a risk of insolvency and allows for such players to remain operational during their restructuring/rehabilitation and have a better chance at returning to the market. This, in turn, begs the question of how would such a net, which aims at preventing insolvency, interact with the tools proposed towards the energy suppliers? And could it aid/remedy the competitive drawbacks of the current regime?
A brief overview of how each insolvency hedging tool could interact with EU restructuring laws
|
Tool |
Role of EU Restructuring Laws | Effect on Competitiveness | Description |
| Power Purchase Agreements |
Complementary role: Extension of Power Purchase Agreement-like effects to smaller energy suppliers unable to access Power Purchase Agreements due to their size or creditworthiness. |
Moderate and Indirect | Does not directly limit anti-competitive effects of PPA’s but does provide similar benefits in terms of security of supply. By providing smaller suppliers with better tools and monitoring in terms of financial prudency, the early warning mechanism could make them more insolvency proof. More resilient smaller players could have benefits on overall competitiveness. |
| Prudential Regulation |
Supplementary role: Supplementing the supervision and enforcement of prudential regulation. |
Weak and Indirect | Does not directly diminish the negative effects of prudential regulation on entry barriers; however, it does allow for better supervision of financial prudence by suppliers (third-party reporting obligations/self-assessment tools) in-between the regulatory checks. |
| Supplier of Last Resort |
Remedial role: Rehabilitation of suppliers post license revocation |
Strong and Direct | SoLR guarantees security of supply concretely; however, it severely undermines competitiveness. Restructuring tools play a potentially pivotal role in returning suppliers to the market (those that lost their license post distress). Through its toolbox and most importantly through its protection of new financing, the regime can allow for eventual return of distressed suppliers on the market post-restructuring and to meet licensing requirements yet again. In turn, this development would allow for not only structurally more competition (more competitors on the market) but also a more competitive price on the market for consumers (old price before SoLR transfer). This offers the most concrete and direct effect on remedying the negative effects on competitiveness. |
The table above underlines the type of aiding role restructuring tools can play in the context of each energy risk hedging obligation. The complementarity and relevance of restructuring tools in supporting the existing regulatory regime varies depending on the hedging tool in question. For example, in relation to PPA’s and prudential regulation, the role is purely supportive and often indirect, while the role in the context of SoLR is potentially more significant, alleviating some of the negative aspects of the tool. This in turn presents an opportunity in utilizing existing insolvency/restructuring laws for varying purposes (better supervision or remedying anti-competitive effects) and differing intensities (more/fewer restructuring tools) across the existing regulatory scheme to yield best results from their co-enforcement.
Enforcement Gap: Mobilizing Existing Tools
The purpose of this blog is not to explore the intricacies of the interaction between the two regimes but rather to highlight the potential gap in enforcement. Both regimes (restructuring and energy supplier risk hedging) aim at the same goal, insolvency prevention. Hence, existing restructuring tools could act as a secondary or supplementary level of insolvency prevention and if seen as such, could be tailored to the existing regime and the specificity of the energy sector. In addition to the supplementary role, restructuring tools could also aid in recovery of suppliers who are facing financial difficulty and as such retain or even return more competition to the market. Therefore, the role of private restructuring and insolvency tools in energy policy could be both supplementary and remedial, proposing a bottom-up approach alongside existing top-down regulation. This in turn could mobilize existing tools to address a new problem and thus provide for a more cohesive, integral solution.
