Robert Peston: Why rescuing energy customers is expensive for all of us

Under the “supplier of last resort” scheme to protect customers of failed energy companies, every rescued customer of a failed energy company costs the rescuing company £600 to £700 to “on board”, which they have the right to reclaim over 15 to 24 months from every energy customer in the country.

In other words the costs of customers’ mistakes in buying energy from fragile businesses are “socialised”.

As I said earlier this week, there has to be a debate about how fair it is that all UK households will pay a big price for failed businesses and whether this is a grotesque failure of a regulatory system imposed by the Conservative government.

These socialised costs are already significant - around £40 per customer just on the basis of the handful of firms (Avro, Green etc) that have failed already.

And they are likely to rise to circa £90 if the few firms that look most precarious cease trading in coming days.

To be clear, this £90 would be levied on top of massive rises we are seeing now and next April in the energy price cap.

So a big policy question for Business Secretary Kwasi Kwarteng and Chancellor Rishi Sunak is whether that £90 (and probably rising) should be recouped from all energy customers over the normal 15 to 24 months.

That would be another big addition to the cost of living.

More analysis from Robert Peston:

Or should it be spread out over five years or so? One idea being considered by the Treasury to spread the pain - the cost - to all households over several years, and lessen the annual hit, is for it to create a “customer rescue pot”, which would recompense the rescuing companies for the inescapable costs of taking on the customers of the failed companies.

Recompense would be provided in a way that yielded no windfall profits for the big rescuers (EDF, Scottish Power, British Gas et al), and the government would be repaid over several years from small annual increments in the network levy ordered by the regulator Ofgem.

Alternative mooted rescue plans bring greater risks for government. Lending directly to the rescuing companies - widely suggested - is technically harder to do in a way that prevents those rescuing companies generating windfall profits.

This would be politically unacceptable. And the alternative of transferring the customer to a “special administrator” is in effect a form of nationalisation.

The Treasury would have to provide hundreds of millions of pounds, potentially billions, to the the special administrator, but could not prevent profitable customers switching rapidly to other suppliers, which could leave the administrator and the Treasury and therefore taxpayers with potentially large losses.

This is a complex mess.