The Great Energy Heist: Who Pays for Lost Credit Balances? We All Do.
Introduction: The Vanishing Safety Net
It starts with a simple notification. An email or a letter from your energy supplier, usually curt and alarming, stating that your provider has ceased trading. In the chaotic backdrop of the recent global energy crisis, this became a routine occurrence for millions of households. But the panic sets in not just because of the inconvenience of switching providers, but because of a single, nagging question: What happened to the money I had in my account?
Many energy customers, particularly those who manage their finances prudently by paying a fixed monthly Direct Debit amount higher than their actual usage in the summer, build up a “credit balance.” This is not a bonus; it is the customer’s own money, held in trust to cover the higher consumption of winter. It is a pre-payment for fuel that has not yet been burned.
When an energy company goes bust, that money often vanishes into the ether of bad debt and administrative black holes. The immediate assumption is that the government or the regulators will step in to reimburse these individuals. After all, if a bank fails, the Financial Services Compensation Scheme (FSCS) guarantees your savings up to £85,000. If a travel firm collapses, ATOL protection kicks in.
But in the energy sector, the safety net is full of holes. The uncomfortable, unvarnished truth is that when an energy supplier fails and millions in customer credit balances are lost, there is no magic pot of gold waiting to make those customers whole. Instead, the cost is diffused, hidden, and socialized. Through a complex web of levies, taxes, and higher standing charges, the cost of failure is passed on to the public.
This is the story of how we—all of us, whether we were customers of the failed companies or not—are paying the price for the collapse of the energy market. It is a tale of regulatory failure, moral hazard, and the brutal economics of the “Supplier of Last Resort” mechanism.
Chapter 1: The Great Collapse – A Market Meltdown
To understand who pays, we must first understand the scale of what broke. Between 2021 and 2023, the UK energy market witnessed an unprecedented meltdown. Over 30 energy suppliers collapsed, including household names like Bulb, Avro Energy, Green Supplier Limited, and People’s Energy.
The causes were a perfect storm of geopolitical tensions (notably the war in Ukraine), post-pandemic supply chain struggles, and a regulatory price cap that left many companies exposed when wholesale gas prices skyrocketed. These suppliers, many of which were relatively new and under-capitalized, had bet on prices staying low or rising slowly. When prices spiked, their business models imploded.
But these weren’t just faceless corporations vaporizing. They were custodians of customer cash. When Bulb Energy—the biggest casualty, with 1.7 million customers—entered Special Administration, it held hundreds of millions of pounds in customer credit balances. That money was effectively frozen. It was no longer the customers’ money to spend; it became an asset in the liquidation process, to be used to pay the administrators, the secured creditors, and the costs of transferring the business to a new owner.
The sheer volume of these failures meant that the standard insurance mechanisms—designed for isolated incidents—were completely inadequate. The system was overwhelmed, and when systems are overwhelmed, the bill invariably falls to the taxpayer and the consumer base.
Chapter 2: The Myth of “Protected” Funds
Why do we assume our credit balances are safe? Because we treat energy companies like banks. We give them our money, and we expect to get it back when we need it. However, legally, there is a stark difference.
When you pay money into a bank account, that money is technically a liability to the bank. You are a creditor. If the bank fails, you stand in line to get your money back, and the government guarantees it.
When you pay a surplus to your energy company, the situation is murkier. While Ofgem (the energy regulator) has rules stating that customer credit balances should be held separately and protected, in practice, this protection is not an insurance guarantee. It is a regulatory requirement that is often honored in the breach. When a company becomes insolvent, the Insolvency Service practitioners take over. Their job is to maximize the return for creditors. The administrators may argue that the credit balance money has been spent on operational costs—buying the gas that customers have already used.
Furthermore, the protection is not ring-fenced in a separate trust account in the way a solicitor’s client account might be. It sits in the company’s general cash flow. If the cash flow dries up, the credit balances vanish with it. This creates a fundamental vulnerability in the system: the working capital of the energy company is effectively funded by the interest-free loans of their customers. When the company dies, those loans are defaulted on.
Chapter 3: The “Supplier of Last Resort” (SoLR) – The First Line of Defense (And Cost)
When a supplier fails, Ofgem triggers the “Supplier of Last Resort” (SoLR) process. They appoint a surviving, larger energy company (like British Gas, EDF, or Octopus Energy) to take on the failed company’s customers.
Ideally, this is seamless. The lights stay on. But it is not free. The acquiring company does not do this out of charity. They are compensated for the “hassle” and the cost of onboarding new customers. This includes the IT costs, the cost of setting up new Direct Debits, and—crucially—the cost of honoring the credit balances of the transferred customers.
Wait, you might ask. If the new supplier honors the credit balance, doesn’t that mean the customer gets their money back?
Yes, the individual customer usually sees their credit balance transferred to the new account. They don’t lose the money directly. However, the new supplier demands reimbursement from the industry for taking on these liabilities. They present a bill to Ofgem (or the industry mechanism) that covers the administrative costs and the capital required to float those credit balances.
Where does Ofgem get the money to pay the new supplier? They do not print it. They do not take it from general taxation (yet). They add a levy to the bills of all energy customers across the country.
This is the first way “we all pay.” A specific line item, often hidden in the standing charges or unit rates of your energy bill, is increased to pay for the collapse of competitors. If you were a loyal customer of a stable company that didn’t go bust, your bill went up to pay for the customers of a risky company that did. You are subsidizing the failure of the market.
Chapter 4: The Special Administration Regime (SAR) – The Bulb Effect
The SoLR process works for small to medium failures. But when Bulb Energy collapsed, it was too big for another supplier to swallow whole without choking. The government was forced to invoke the Special Administration Regime (SAR). This is a rare legal process usually reserved for systemically important financial failures.
Under the SAR, the government effectively nationalized the company, using taxpayer money to keep it running while a buyer was found (eventually Octopus Energy).
The cost to the taxpayer was staggering. The government allocated billions in loans to keep Bulb afloat. While the sale to Octopus recouped some of that money, a significant portion—estimated to be hundreds of millions, potentially billions—will be written off as a loss by the Treasury.
Who pays for Treasury write-offs? The taxpayer.
Even if you don’t pay an energy bill directly (perhaps you are a tenant whose bills are included, or you live off-grid), you pay income tax, VAT, and council tax. The cost of the Bulb bailout is added to the national debt, which services interest payments that are funded by the public purse.
In this scenario, the “we all pay” mantra is literal. The failure of one energy company became a line item in the national budget. The credit balances of Bulb customers were effectively guaranteed not by an insurance fund, but by the collective wallet of the British public.
Chapter 5: The Hidden Levy – Socializing the Loss
Let’s zoom in on the mechanics of the SoLR levy, because this is where the pain is felt most acutely by the average household.
Ofgem operates a cost-recovery principle. When a supplier fails, the costs are “socialized” across the revenue of all suppliers. These suppliers then pass these costs on to consumers.
Industry estimates suggest that the total cost of the supplier failures between 2021 and 2023 could exceed £4 billion. This includes the credit balances, the unpaid bills of the failed companies (bad debt), and the administration fees.
To pay this £4 billion, a levy is applied. In practical terms, this means that every unit of gas and electricity you use becomes slightly more expensive. It means your standing charge—the price you pay just to be connected to the grid—creeps up.
This is regressive taxation. A standing charge is a flat fee. It hits the low-income household with a small flat exactly as hard as it hits the wealthy household in a mansion. In fact, because low-income households spend a higher proportion of their income on energy, the levy absorbs a larger percentage of their disposable income.
So, the pensioner who carefully budgeted and stayed with a “Big Six” supplier to ensure stability is now paying an extra £20 or £30 a year on their bill to cover the credit balances of the customers of “Avro” or “Green”—companies they had never heard of and certainly did not choose to do business with.
This is the antithesis of market capitalism. In a true market, failure should result in losses for the shareholders and the management of the failed company. Instead, the management took their fees, the shareholders lost their equity, but the operating losses (including the customer credit) were shifted to the general public.
Chapter 6: The Regulatory Failure – Why Was This Allowed?
How did we get here? The finger must be pointed at the regulatory architecture designed by Ofgem and the Department for Business, Energy and Industrial Strategy (BEIS).
For years, regulators encouraged a “challenger” market. They wanted new, small suppliers to enter the market and drive down prices for consumers. To facilitate this, they lowered the barrier to entry. They required less working capital to start a company. They allowed these companies to rely heavily on customer credit balances for cash flow.
In essence, the regulator allowed new entrants to operate with a business model that depended on a constant stream of new customer money to pay for the gas bought for existing customers. This is a classic Ponzi-like dynamic (though not necessarily fraudulent, just structurally unsound). It works fine when the company is growing and prices are stable. It collapses instantly when growth stalls or prices spike.
Ofgem failed to stress-test these companies. They did not demand adequate “hedging” (buying energy in advance to lock in prices). When the price of gas quadrupled, the unhedged suppliers were caught with their trousers down. They had sold energy to customers at £100 but had to buy it in the wholesale market at £400.
The regulator failed to ring-fence customer credit balances in an independently managed trust. If they had, when the company went bust, the trust would have been dissolved, and the money returned to the customers. Instead, they allowed the money to be used as working capital, guaranteeing that when the ship sank, the passengers’ life jackets were stolen.
Chapter 7: The Moral Hazard – Rewarding Recklessness
The socialization of these losses creates a dangerous economic phenomenon known as “moral hazard.”
Moral hazard occurs when an entity takes on excessive risk because it knows that it won’t have to bear the full consequences of that risk. If I know that the government will bail me out if I crash my car, I will drive faster.
In the energy market, the message sent to future entrepreneurs is cynical but clear: “Heads you win, tails we lose.”
If you start an energy company and it succeeds, you make millions in profit. You can sell the company and retire. If it fails, Ofgem will step in, arrange for your customers to be moved, and the industry (i.e., the customers) will pick up the tab for the credit balances and the admin costs. The directors face few personal consequences. The limited liability company protects them from the debts.
This distorts the market. Prudent, well-managed companies that hedge their energy and maintain strong capital reserves are at a competitive disadvantage. They have to hold cash reserves that “challenger” companies don’t hold. The challengers can offer cheaper prices because they are gambling with customer money.
When the gamble fails, the prudent companies are forced to clean up the mess via the levy mechanism. This punishes the responsible actors in the market and rewards the gamblers, at least until the house of cards falls. The fact that “we all pay” means that the market signal that should punish failure (bankruptcy and loss for the owners) is muted.
Chapter 8: The Trust Deficit – The Erosion of Consumer Confidence
Beyond the immediate financial hit, there is a long-term cost to the “we all pay” dynamic: the death of trust.
The Direct Debit system relies on trust. Customers agree to overpay in the summer because they trust that the money will be there to lower their bills in the winter. This trust is essential for the stability of the energy market. It allows suppliers to manage their cash flow and purchase energy in advance, which stabilizes the grid.
When customers see headlines like “Customers lose £X million in credit balances,” that trust evaporates.
What is the rational response for a consumer? Stop paying by Direct Debit. Switch to “Pay on Receipt of Bill.” This allows the customer to keep their cash in their own bank account until the last possible moment.
However, this is disastrous for the energy market. If everyone moves away from Direct Debits, the liquidity of energy suppliers dries up. They lose the working capital they use to buy wholesale gas. This increases the risk of further defaults, which in turn leads to higher levies, which further erodes trust.
It is a vicious cycle. The failure to protect credit balances creates a behavioral shift in the consumer base that makes the entire system more fragile and expensive. We all pay not just in levies, but in the inefficiency and increased risk premiums of a broken market.
