Research from Cornwall Insight has revealed that the cost of energy supplier collapses will add £34.36 to the energy bills of each household for 2022-23.
Last year, 27 of the UK’s energy suppliers collapsed. In addition to this, Bulb went into special administration.
This happened because these suppliers became caught between surging wholesale costs and the energy price cap. Effectively, this meant that energy suppliers were supplying energy to their customers at a loss.
SoLR mechanism adds money to bills
When these suppliers went out of business, their customers were appointed to other companies through the Supplier of Last Resort (SoLR) mechanism.
When suppliers go through the SoLR mechanism, they are able to recover the cost of the process through Distribution Use of System (DUoS) charges, which are applied to electricity bills.
However, because so many energy suppliers went through the SoLR process last year, this component of our energy bills has risen by a whopping 33.9% for 2022-23, on average. Some regions of the UK will see an even larger price hike, with London and Southern England witnessing a 40% rise.
Why do we need the SoLR mechanism?
Although the SoLR mechanism is obviously costly, it’s important to remember that it also provides a great benefit to customers.
Last year, millions of us were left without a supplier when our provider went out of business. However, the SoLR mechanism ensured that energy supplies were not disrupted and a new supplier was appointed swiftly (we covered what happens when your energy supplier goes bust here).
However, Laura Woolsey, a senior analyst at Cornwall Insight, highlighted the fact that the SoLR process "has come with significant costs".
She added that: "If we are to protect both consumers and companies in the energy market, we need to see more than short-term fixes, we need long-term reform. This includes seriously considering the future of the Default Tariff Cap, which is currently working as a barrier to the success of smaller energy firms and not safeguarding the cost of energy bills. Ultimately if more suppliers fail, consumers will be the ones left with the bill."
Energy bills continue to rise
Earlier this month, Ofgem announced that the energy price cap is increasing to £1,971 in April. Although this price increase is predominantly down to rising wholesale costs, increasing DUoS charges are also forcing energy bills higher.
However, even though the price cap is rising by a whopping 54%, it’s still advised that you stick with the price cap, rather than running an online energy comparison and switching supplier. This is because the best energy deals from the UK’s best energy suppliers still cannot beat the price cap.
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Tom is a freelance copywriter and content marketer with over seven years' experience. Originally from an agency background, he is proud to have worked on campaigns for a number of energy providers, comparison sites and consumer brands.