New energy suppliers would have pass financial and customer service tests before they are awarded a licence to operate on the market.
It is part of Ofgem’s latest proposals to provide a “safety net” to customers in the event a supplier goes bust and to drive up standards after several small energy providers went bankrupt over the last year.
A quarter of all customers are currently supplied by small and medium sized suppliers after switching to get a better deal – however, there have been increasing instances of some new entrants providing poor levels of customer service.
Applicants for new supply licences would have to demonstrate to Ofgem they have sufficient funds and resources to manage their business for at least 12 months after entering the market.
They must also provide a plan to meet their customer service obligations, including the regulator’s complaint handling standards and obligations to assist customers in vulnerable circumstances.
The measures, which are part of a consultation until 23rd January 2019, are expected to put into place during spring 2019.
Mark Starks, Executive Director for Consumers and Markets said: “New energy suppliers that have entered the market over the last few years have offered consumers more choice and helped to drive down energy prices and drive up customer service standards.
“However, complaints against some suppliers have been rising recently and we have had to step in when others have ceased trading. Our proposed new tests for suppliers wanting to enter the market will ensure consumers will be better protected against the risk of poor performance, while still allowing more competition and innovation in the energy market to benefit consumers.”
Ofgem is also proposing to consult separately on proposals to introduce new reporting requirements for suppliers who are already active in the market, including regular reporting on the adequacy of their financial and operational resources for running their business, providing customer service and making sure they can continue to serve their customer base.
Ofgem is reviewing its approach to licensing and regulating suppliers to raise standards around financial resilience and customer service. It is an important step in enabling a better functioning retail market and the regulator intends to introduce a package of reforms. The scope of the review will encompass Ofgem’s: conditions for suppliers entering the market, ongoing requirements, monitoring and engagement and arrangements for managing supplier failure and market exit.
This first consultation outlines its initial proposals for new licence application criteria. It also sets out options for ongoing requirements, for discussion. Future papers will present detailed proposals around ongoing requirements and exit arrangements, for consultation.
Competition in the retail energy markets has increased significantly in the last half decade. The market share of the six largest suppliers has steadily decreased and now almost a quarter of customers get their energy from small and medium suppliers. This has brought benefits to consumers through increased price competition and pressure on incumbent suppliers to improve their customer service offering.
However, there has also been an increase in supplier failures and inadequate customer service provision in certain cases. Financial difficulty and poor customer service are often interrelated. Ofgem says its current arrangements successfully protect consumers when a supplier fails. Nonetheless, failure is disruptive and can impose costs on competitors. Furthermore, frequent failures risk undermining consumers’ confidence in the market and motivation to switch to a better energy deal.
The regulator therefore wants to strengthen its licensing and regulatory regime to drive up standards in the sector and minimise competitors’ and consumers’ exposure to financial risks and poor customer service. Our licensing and regulatory regime needs to be effective and proportionate in protecting consumers, while facilitating competition and innovation. At this stage in the transition to a low carbon energy system it is more important than ever that firms with innovative business models, products and services can enter the market in a way that delivers benefits for consumers.
That said, energy is an essential service; there are minimum standards that suppliers must meet and any company entering the market needs to be well-prepared. Ofgem is therefore consulting on proposals to increase scrutiny of potential new entrants to ensure they are adequately prepared, resourced and that they are fit to operate in
the energy supply markets. Entrants must adopt a robust approach to risk management, and be adequately resourced to maintain appropriate customer service standards.
Even so, in a competitive market Ofgem would expect some suppliers to fail; it wants to ensure if this happens, their customers are protected and wider market impacts are minimised. Alongside this we are therefore considering new ongoing requirements on all active suppliers and provisions to better manage potential supplier exit, to mitigate against the risks and impacts of potential supplier failure.