Ofgem sets out tougher rules for energy suppliers to protect customers

Credit balances are used by some firms like an interest free company credit card, Ofgem’s boss has said

Big Zero Report 2022

Ofgem has set out new measures to protect customers and futureproof the energy market from further energy supplier failures.

The plan aims to improve the financial health of energy suppliers to ensure they can deal with future shocks in the market.

The proposed changes include:

  • improvements to the financial health of suppliers, to ensure they can weather the current challenges and reduce the risk of failures
  • protecting consumer credit balances and green levies when suppliers fail, to prevent the costs being picked up by consumers
  • requirements for suppliers to have better control over the key assets they need to run their supply business, and
  • a tightening of the rules on the level of direct debits suppliers can charge customers, to ensure credit balances do not become excessive.

These changes are predicted to reduce the risk of suppliers going bust and protect the credit balances of energy customers if their suppliers do, preventing a repeat of last year’s failures that put unfair and unnecessary costs and worry onto consumers.

Two months ago, Business and Energy Secretary Kwasi Kwarteng wrote to the energy regulator to ask for a crackdown on energy firms amid claims some are hiking charges by more than is justified.

The cost of moving customers to new suppliers from 28 failed suppliers since September 2021, including new suppliers having to buy extra gas at short notice while prices were at record highs and replacing lost customer credit balances and green levy/renewables payments, was £94 per household.

Jonathan Brearley, Chief Executive Officer of Ofgem, said: “The energy market remains incredibly volatile and there are a number of huge geopolitical issues continuing to apply massive pressure. Ofgem is working hard to ensure energy suppliers shore up their positions so they can weather the ongoing storm.

“By ensuring that suppliers are operating well-financed, sustainable, and have more resilient business models, we can avoid the supplier failures we saw last year which caused huge stress and worry and added costs to everyone’s bills.

“But if some do still fail, consumer credit balances and green levy/renewables payments will be protected. Currently, they are used by some suppliers like an interest free company credit card. Moving forward, all suppliers will have to have enough working capital to run, without putting their customers’ credit balances at risk.

“Today’s proposals will make sure that customers’ hard-earned money is properly protected so that a company must foot the bill if it fails, rather than consumers picking up the tab.”

Responding to Ofgem’s proposals on protections for customers, Gillian Cooper, Head of Energy Policy for Citizens Advice, said: “Ofgem has previously allowed energy suppliers to run risky business models. As a result, it’s customers who’ve been left to foot the bill when companies collapse.

“We’re glad that Ofgem has listened to our warnings and is taking necessary steps to tackle some of the root causes of these issues.

“It must now ensure suppliers stick to these tougher standards so that people are better protected in the future.”

Dan Alchin, Director of Regulation at Energy UK, said: “We’ve long called for stronger measures to ensure that new suppliers entering the retail market have the right expertise and financial resilience to withstand a volatile environment.

“We also welcome moves to reduce the costs that are passed onto customers when suppliers exit the market – something that has been brought into sharp focus with nearly 30 providers having gone out of business since last August.

“However, this would still leave customers facing substantial costs when a supplier fails, which underlines the importance of creating a sustainable retail market over the next few years.”

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