Time for suppliers to improve standards for energy consumers
There is no doubt this has been a difficult year for the energy sector, with several companies exiting the market. The dramatic rise in wholesale gas prices has brought major changes, and suppliers in particular have had to adapt quickly to extreme changes in market conditions.
However, the people who are suffering most as a result of the gas crisis are customers, who are feeling the effects of the recent and unprecedented 54% increase in the price cap from 1st April. Alongside this, we have seen extraordinary disruption in the market, with over 4.3 million customers moving automatically with their credit balances to alternative energy suppliers when their supplier failed.
We are also seeing troubling signs that some companies are reacting to these changes by allowing levels of customer service to deteriorate.
Ofgem collects and reviews a range of metrics directly from suppliers, in addition to information from consumer groups, NGOs and members of the public, and this has highlighted a series of issues which we find concerning and are investigating further. For example, concerns have been raised that some suppliers may have been increasing direct debit payments by more than is necessary, or directing customers to tariffs that may not be in their best interest. We have also seen troubling stories about the way some vulnerable customers are being treated when they fall into difficulties.
When households are facing massive increases in their energy bills, it is particularly important that suppliers are held to account and bad practices are addressed quickly. In particular, now more than ever we need suppliers to stick to the requirements in their license on how they work with customers in financial distress.
The challenges that our customers face today should be a call to action for energy retailers to improve things, both in the way they do business to ensure it is resilient, and in the way they treat customers. To ensure this happens, today Ofgem is setting out two areas where we are working to tighten and strengthen our supervision of the market.
First, we are commissioning a series of Market Compliance Reviews from suppliers to ensure they are fulfilling the licence conditions they require to operate. This will include stricter supervision of how direct debits are handled, how much they are holding in customer credit balances, and ensuring companies are held to higher standards for overall performance on customer service and protecting vulnerable customers. This work will allow Ofgem to determine if companies are fulfilling their licence conditions and to work with them to rectify deficiencies. Where they fail to do so, we will not hesitate to take swift action to enforce compliance, including issuing substantial fines.
Second, we are setting out proposals to tackle the misuse of customer credit balances and renewables payments. In examining the gas crisis, we have identified one of the root causes of the failures of many of those suppliers who exited the market is related to the way that they have managed the money paid to them by customers. This is money that is intended to pay for energy, or collected to support the wider development of renewable energy.
However, some suppliers have been using these balances to prop up their finances, enabling them to follow more risky business models with reduced financial resilience and higher likelihood of failure. If that supplier becomes insolvent, the cost of replacing those balances has to be picked up by other suppliers and ultimately all energy consumers. Customer credit balances should only be used to reconcile bills, not as a source of risk-free capital. That is why we are considering options to ring-fence credit balances and renewables payments in such a way that they would be protected if a supplier fails.
Ofgem is clear in its purpose: to protect consumers’ interests. In a difficult and volatile market, that means it is imperative that we scrutinise and hold companies to a higher standard. Where energy retailers fail to act responsibly, we will take tough and decisive action using the full range of regulatory tools at our disposal, including punitive measures if necessary. We are also working with government to consider what additional powers may be needed so that we can continue to protect consumers in a rapidly changing market.
Working with energy companies where we can, but taking action to drive compliance where required, Ofgem will continue to work hard to build a resilient and flexible energy market that is fair to all consumers.