Ofgem announces tough new financial measures to ensure energy suppliers can withstand future shocks - including protection for customers’ credit balances
Energy regulator Ofgem is today announcing the next steps in their plans to prevent the kind of energy supplier failures we saw last year and to better protect consumers’ money if they do fail.
The plans set out tough new measures to improve the financial health of energy suppliers meaning they can stand up to future shocks in the energy market, especially over the autumn and winter.
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 will 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.
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, CEO of Ofgem, said:
“Today’s plans are another step in making sure the complex energy market is fair, resilient and works for everyone.
“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.”
When an energy supplier fails, Ofgem’s safety net means its customers are quickly moved to a new energy supplier with their credit balances intact. This protected over 2 million customers last year. But under current rules the new supplier does not get the customer credit balances from the failed supplier, so the costs of replacing those balances are currently shared across all consumer bills. A similar arrangement is in place for money paid through customer bills to the Renewables Obligation, the government’s green levy scheme.
The plans announced today would mean energy retailers are required to protect their customers’ money, so that it isn’t lost if they go out of business adding costs to already high bills and causing a huge amount of stress and worry for customers.
These proposals form part of Ofgem’s plan to build longer-term resilience in the market by encouraging sustainable business models and stopping risky behaviour. Ofgem is creating a market that is better prepared for the significant ongoing challenges as we move towards autumn and winter. And today’s consultations are further work to ensure that energy companies meet the high business and delivery standards that consumers expect, especially now, and that consumers do not bear unreasonable costs from company failures.
Ofgem’s priority is to protect consumers, particularly considering the cost-of-living pressures that all households are experiencing. These proposed measures are part a package of reforms introduced over the last year to improve the retail energy market, accelerating a reform programme that started in 2019 including:
- Stricter entry requirements for new suppliers
- Ensuring people who start and run energy companies are fit and proper people to do so
- Carrying out regular stress tests to ensure energy companies are resilient to volatile market conditions.
Notes to Editors
Definition of fuel poverty Fuel poverty statistics - GOV.UK (www.gov.uk)
- Proposals to better protect consumer credit balances and RO payments in the event of company failure, to prevent the costs being mutualised.
- Proposals to improve the capital adequacy of suppliers, to ensure they have sufficient capital to survive critical periods.
- Requirements for suppliers to have sufficient control over the key assets they need to run their supply business, meaning they are less exposed to failures in another business.
- Strengthening existing Direct Debit payment rules to help prevent excessive credit balance build up.
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