Supplier of last resort (SoLR)
According to the Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC, suppliers of last resort (SoLR) may be appointed by the EU Member States to ensure the provision of a universal service of electricity connection and supply.
Distribution System Operators (DSOs) are in turn covered by the obligation to connect consumers.
Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC does not explicitly foresee universal service, however, it promotes a supply of last resort mechanism for gas consumers.
The Electricity and Gas Directives do not further define the meaning and functions of a SOLR, the recast Directive (EU) 2019/944 of the European Parliament and of the Council of 5 June 2019 on common rules for the internal market for electricity and amending Directive 2012/27/EU is also silent in this regard - only exception is Recital 27, which refers to the possibility for the EU Member States to appoint a supplier of last resort and indicates that the supplier may be the sales division of a vertically integrated undertaking, which also performs distribution functions, provided that it meets the unbundling requirements.
In practice the SoLR is generally used not only as a mechanism to replace failing suppliers, but often performs other functions as well, including protecting inactive consumers or those with payment difficulties (ACER/CEER - Annual Report on the Results of Monitoring the Internal Electricity and Natural Gas Markets in 2017 - Consumer Empowerment Volume, 22 October 2018).
The said ACER/CEER Report of October 2018 indicates that all EU Member States have a form of SoLR for both electricity and gas supply, nevertheless, while in some Member States very few consumers are supplied by an SoLR, in other this proportion is overwhelming.
In most jurisdictions, supply of last resort is considered a precaution for supplier and/or a DSO failure, that is, in cases when a current supplier to the final household consumer goes bankrupt and is no longer able to perform its function, or the licenses of a current supplier or DSO are revoked.
In the ACER/CEER opinion (expressed in the said Report of October 2018) this kind of protection appears to be a “universal function” of the supplier of last resort in electricity – most probably also the intention of the European legislator.
However, suppliers of last resort often protect consumers with payment diffculties or inactive consumers beyond the business failures of energy service companies.
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Protection in the case of payment diffculties refers to situations in which:
- final household consumer does not find a supplier in the free market (no energy supplier is willing to sign a contract with the consumer) or
- final household consumer is dropped by its current supplier because of non-payment.
Inactive consumers enjoy protection through a supply of last resort mechanism if:
- they do not choose a supplier when moving home,
- they do not choose a supplier when markets are deregulated, or
- their fixed term contract expires.
When it comes to the price-setting in many countries the SoLRs have to follow a pre-defined framework when setting the last-resort price.
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See also:
Services of general economic interest (SGEI)
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Less common approaches are:
- direct tariff determination by the National Regulatory Authority (NRA) or
- the absence of any restrictions for SoLRs as regards tariffs.
According to the above ACER/CEER Report, the data shows that the cost to consumers of being supplied by a SoLR is the same or higher than what they used to pay before.
More detailed observations on prices applied by the SOLRs can be found in the ACER Market Monitoring Report 2018 of 30 October 2019 - Consumer Empowerment Volume (p. 13).
According to this Report for both electricity and gas, SOLR energy prices tend, on average, to be higher than the prices paid by consumers served by non-SOLR suppliers in the majority of the EU Member States (in Sweden, for example, the SOLR price is estimated to be 20-30% higher than comparable contracts).
According to the ACER this may indicate that the SOLR is compensated for taking on such an extra task.
Also, there is no single EU Member State where energy sold by a SOLR is generally cheaper than a comparable standard product.
This would indicate good practice since it incentivises consumers to switch to a supplier other than the SOLR.
If a SOLR price is set lower than the average market price, there is a risk of market distortion as it discourages consumers from switching out of the SOLR contract after the bankruptcy of their former supplier.
However, in several EU Member States the prices of the SOLR depend on a case-to-case basis, since SOLR prices are not set by the national regulatory authorities and/or by any legal documents, but rather by the SOLR itself.
Other EU Member States have no experience with SOLR prices as no such supply has come into effect so far.
ACER and CEER in the Presentation of 24 October 2017 (The 6th Annual Report on Monitoring the Electricity and Natural Gas Markets, Main insights, p. 43) recommended that:
- suppliers of last resort or default suppliers should not lead to consumers remaining inactive on a permanent basis,
- SoLR mechanism should not be used as a means to keep regulated prices in place.
The ACER in its Final Assessment of the EU Wholesale Electricity Market Design published in April 2022 refers, in turn, to considerable ‘stress tests’ suppliers of last resort have been put to in 2021 and 2022. The ACER notes that with the rise in energy prices, some suppliers refused to become the supplier of last resort, thereby also refusing additional customers, arguing that this would represent too big a challenge. In other instances, the appointed supplier of last resort in turn went bankrupt, meaning the consumers involved were transferred to yet another such last-resort supplier.
Timing issues are key with regard to the transfer of consumers under this mechanism. In particular, it would seem essential to ensure that the supplier of last resort is responsible for supplying energy (and paying the related grid tariff) from the time the previous supplier exits the market to avoid costs incurred not being unaccounted for vis-à-vis the system operators.
The ACER assessed that while the supplier of last resort mechanism overall have worked, it did cause an economic burden on many designated last-resort suppliers due to the massive influx of new customers.
One particularly difficult phase of supplier exits occurred in the Czech Republic, where in 2021, 16 energy suppliers failed resulting in 960,000 customers being transferred to a supplier of last resort. This represented approximately 10% of the total energy consumers, an unprecedented amount for that mechanism. While the transfers overall were successful, some issues were observed during the process.
Customers faced extremely high prices as the supplier of last resort had to procure energy on a prompt basis; also, as the supply of last resort fell on the winter months, the bulk of heating customers’ costs were spread across six months as opposed to the usual twelve months as amounts owed for consumption needed to be recouped within the time-limit for last resort supply.
As a result, consumers saw an immediate and significant increase (4-5 fold) in their energy costs.
Furthermore, the extremely high and volatile wholesale prices limited the available offers for new customers and delayed the onboarding of some consumer groups. This further prolonged the period for which consumers were faced with high energy costs.