Energy regulator sets out proposals to help ensure customers at risk of getting into debt are better supported
Press release
Publication date
Industry sector
Supply and Retail Market
Energy regulator Ofgem is today consulting on plans to protect the energy market and consumers from the growing risk of ‘bad debt'.
This follows an outline of action needed set out by the regulator in October this year.
Bad debt refers to the amount of money owed by customers in the energy system, which is unlikely to be repaid. It is crucial that the regulator ensures that the burden of this increased debt falls as fairly as possible.
Since January 2023, the price cap has fallen from £2,500, under the Government’s Energy Price Guarantee, to £1,928 in January 2024. However, energy prices are still high, and new figures published by the regulator today show that energy debt has reached almost £3 billion – its highest ever level – due to a combination of sustained high wholesale energy prices, and wider cost of living pressures, which have led to unpaid energy bills.
With that in mind, today’s consultation sets out proposals for a one-off price cap adjustment of £16 - equivalent to around £1.33 a month - to be paid between April 2024 and March 2025.
The scale of this debt means that it is crucial that suppliers have sufficient funding to ensure they can meet the strict regulations Ofgem has in place around how they treat customers facing payment difficulties. This adjustment to the price cap will ensure suppliers have the resources to support customers struggling with debt by:
- setting up payment plans
- writing off unmanageable debt on a case-by-case basis
- working out affordable repayment holidays
Other sectors already commonly make provisions within their prices for bad debt costs. However, the regulated nature of the energy sector means that Ofgem is able to use the price cap mechanism to ensure these costs are recovered as fairly and efficiently as possible.
Tim Jarvis, Director General for Markets, said:
“We know that cost of living pressure is hitting people hard and this is evident in the increase in energy debt reaching record levels. We have taken steps to ensure energy firms are taking better care of customers and treating people struggling with debt fairly, through our robust consumer standards, and that companies are getting in touch to offer support, such as affordable payment plans, where needed.
“However, the record level of debt in the system means we must take action to make sure suppliers can recover their reasonable costs, so the market remains resilient, and suppliers are offering consumers support in managing their debts.
“The proposals set out today are not something we take lightly. However, we feel that they are necessary to address this issue. This approach will ensure the costs are recovered fairly, without penalising a particular group of customers.
“The price cap has helped to protect consumers from a volatile gas market. However, it remains a blunt instrument in a changing energy sector, and the way it works may need to change in the future, so customers continue to be protected.”
Ofgem is already taking action to help those struggling to pay their bills this winter through robust new and strengthened consumer standards, which mean that energy suppliers should offer debt repayment plans at the earliest opportunity and consider offering temporary debt repayment holidays, where appropriate. These consumer standards, which came into effect officially yesterday (Thursday 14 December) will:
- improve ease of contact between customer and supplier
- ensure customer contact centres are open at times that meet customer needs
- make it easier for consumers to see how good suppliers’ customer service is by publishing information on their Citizens Advice star rating
Under today’s proposals, any extra costs would not be passed onto customers who use prepayment meters (PPMs) for their energy. This reflects the fact that many PPM customers do not build up the same level of debt as credit customers because they top up as they go.
Where PPM debt does build up, it tends to be because customers have built up debt on other payment methods such as standard credit and are struggling with wider debt issues which means they cannot pay their bills. PPM customers are also able to receive additional support credit from their supplier. If they don’t repay this, then the supplier can incur bad debt.
Although today’s measures will go some way to helping with the issue of debt, Ofgem is also looking at alternative policy responses to the debt issues, beyond the price cap, and will seek views from stakeholders in 2024 on approaches for dealing with bad debt.
Today’s publications are both consultations to further improve the stability of the energy market, and Ofgem welcomes all views around how these debts are recovered.
Notes to editors
The categorisation of this debt is:
- 'arrears' - the amount owed to energy suppliers by customers (ie. including direct debit (DD) balances)
- 'debt' - the amount owed that doesn't have a clear repayment plan (i.e. excluding DD balances)
- 'bad debt' - the amount owed which is unlikely to ever be repaid
- technically the £3bn refers to 'debt and arrears over 90 days due'
Ofgem has also published its decision today to not adjust the price cap level based on variances in wholesale energy costs over Winter 22/23. The regulator considered that observed variances, either upwards or downwards, were more based on the risk management practices of individual suppliers than a systematic feature of the market as a whole.
As part of this wholesale consultation, Ofgem is also asking for stakeholder views on future changes to the wholesale methodology and technical changes to the Annex 2 wholesale allowance model.