Consumers to foot £4bn bill in event of 'Big Six’ crash

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Householders could be forced to provide up to £4bn to meet the cost of any of the six leading energy suppliers going out of business, under revised plans drawn up by the Government to avoid market chaos.

The collapse of one of the major groups is rated as highly unlikely but the Government wants contingency plans in place to safeguard against the risk of consumers being left in the dark and the economy suffering.

Ed Davey, Energy Secretary, is looking to intervene quickly in the event of a big company failure and is anxious to ensure there is adequate protection as the UK energy market reforms enter a crucial stage.

Four of the six EDF (Paris: FR0010242511 - news) of France, E.ON and npower of Germany and Scottish Power, owned by Iberdrola (Other OTC: IBDRY - news) of Spain are subsidiaries of powerful global groups, while UK businesses Centrica (LSE: CNA.L - news) and Scottish & Southern Electric are big players in their own right.

The commitment of the foreign-owned groups to the UK market is not being questioned but analysts feel the Government does not want to find itself helpless if the parent faces a crisis and the UK subsidiary suffers.

Small suppliers are seen as the most vulnerable in a competitive market where the “Big Six” have been under fire. The Government feels the existing mechanism is strong enough to withstand the failure of the smaller energy groups.

Provisions have been made in the “Big Six” regime for a rescue framework based on a special administration regime that would avoid a re-run of the hiatus experienced with the banks and are designed to keep essential services running.

But a cost recovery programme outlined in an Energy Department consultation paper on the issue, open for comments until March 15, shows how the rescue costs could trickle down and leave consumers saddled with paying for the rescue for five years.

Under what the department says is the worst case and least likely scenario household bills could rise by between £7 and £32 a year on average over the period, equivalent to a maximum contribution of £4bn on the basis of 25.5m households in the UK.

An Energy Department official said: “It is extremely unlikely that any of the large energy suppliers in the UK would become insolvent. None the less, the Government believes that it is prudent to have in place a framework that will ensure the continued operation of a major supplier until its customers can be transferred to other partners.”

The Government has already used the 2011 Energy Act to introduce a special administration regime to provide protection for the National Grid (LSE: NG.L - news) and the electricity and gas distribution networks it operates, as well as the rail and water industries, but feels the provisions are not strong enough to cope with the market fall-out from the collapse of one of the “Big Six” and wants to take extra powers.

They would enable the Government to intervene to continue to fund the stricken company to protect consumers, maintain market stability, safeguard electricity supplies and minimise the cost to the customer. Under the present set-up, the rest of the industry would have to step in to maintain supplies and cover costs if one of the “Big Six” went bust.

Mr Davey is concerned the set-up is not strong or robust enough to avoid instability and contagion in the market and leaves the Government and Ofgem, the regulatory body, without any control over costs passed to the customer.

EDF said it is broadly supportive of the proposals, while Centrica declined to comment.

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