Briefing Note | November 2021
Retailer of Last Resort
Retailer of Last Resort (ROLR) sounds like an apocalyptic shopping movie. It’s a dramatic sounding term to describe a more mechanical process: what happens when an energy retailer fails.
Energy retail is not like most other retail: it is a key link in the provision of an essential service that must be provided 24 hours a day, 7 days a week. All parts of the electricity (gas) supply chain: generation (producer), transmission (pipelines), distribution and retail are required to delivering this.
While the role of the energy retailer is more invisible than the other more “physical” elements of the process, it is no less important. Energy retail is an increasingly competitive market, with a growing number of smaller players who are all delivering the final stage of energy supply. That supply must be maintained, even if they fail.
The critical role of energy retailers is that of aggregator and insurer. Energy retailers contract bulk gas and electricity from often highly volatile wholesale markets. They then absorb these risks and sell this supply to their household and business customers at much flatter, fixed, household-sized prices.
Household and small business customers are not exposed to the natural volatility of wholesale energy markets because retailers shield them from it. Energy retailers are possibly mis-described. They are really risk managers rather than retailers. Their profits are better described as risk premiums.
If an energy retailer fails, its customers need to be immediately caught by another retailer, so that someone else can keep them connected to energy supply and shielded from wholesale market volatility until they can re-select another retailer.
ROLR is a system where (mostly) larger retailers register to be the Retailer of Last Resort in the event that such failures occur.
Recent gas shortages and resulting spikes in wholesale electricity prices in the UK resulting in the collapse of a number of smaller retailers, requiring their customers to be transferred to other retailers. This can pose commercial risks for the acquiring retailers as they are required to honour lower retail prices offered to consumers but pay higher wholesale prices to supply them.