A consultation on options to protect the energy market and consumers from the risk of rising debt has been launched today by Ofgem.
Figures obtained by the regulator this summer show that energy debt reached £2.6 billion – its highest ever level – due to a combination of the rise in wholesale energy prices, and wider cost of living pressures.
Under the terms of the price cap suppliers are able to recoup efficient costs, including unrecoverable debt, through the pricing of their services.
With bad debt levels expected to continue increasing, Ofgem is considering whether or not to add a one-off adjustment to the price cap to reduce the risk of energy firms going bust or leaving the market as a result of unrecoverable debt.
The analysis in the paper shows this could result in a temporary rise in consumer bills of up to £17 a year (around £1.50 a month) on average, but is weighed against the risk of customers facing even higher costs and poorer standards of service if suppliers go bust. During the energy crisis, when around 30 suppliers went out of business, every energy customer was charged an extra £82 to cover the costs of ensuring that households were not cut off.
For this comprehensive consultation, Ofgem will engage with industry, consumer groups and the public to consider a range of options, including how to spread the cost of any additional allowance between the varying payment methods.
Proposals under consideration would have varying impacts on the bills of customers with different payment types, based on an average increase of £17 across all customers.
Ofgem has also made clear that, even if approved, any increase would be delayed until the April price cap to protect consumers from rising costs during the winter.
Tim Jarvis, Director General for Markets at Ofgem, said:
“We know that households across the country are struggling with wider cost of living challenges, including energy, so any decision to add costs to the price cap is not one we take lightly.
“However, the scale of unrecoverable debt and the potential risk of suppliers leaving the market or going bust, which passes on even greater costs to households, means we must look at all the regulatory options available to us.
“Ofgem cannot subsidise energy or force businesses to sell it at a loss and suppliers must be in a position to offer high quality services to customers.
“We must consider the fairest way to maintain a stable energy market and we will do this in consultation with all our partners to ensure we are protecting the most vulnerable households.”
The consultation is published on the same day as Energy UK published its Winter 2023 Voluntary Debt Commitment. The agreement signed by energy suppliers includes pledges of additional financial support and steps to provide support for customers in debt.
The commitment, which is welcomed by Ofgem, comes after it convened Energy UK, suppliers and consumer groups, including Citizens Advice, to work together to raise standards and support consumers in debt.
Their commitment sits alongside Ofgem’s work supporting vulnerable customers this winter through Additional Support Credit, levelisation of payment methods, involuntary PPM, Consumer Standards and increased monitoring of near-time indicators of debt.
Today Ofgem is also publishing a working paper on its review of operating costs under the cap and announcing it is allowing the temporary Market Stabilisation Charge (MSC) to lapse.
Introduced in April 2022 as a temporary measure, the charge was designed to stabilise the domestic energy market as wholesale energy prices surged due to Russia’s invasion of Ukraine. The charge, which requires energy companies who acquire a new customer to pay compensation to the previous supplier, is due to expire on 31 March 2024.
That Ofgem has decided not to extend beyond this date is evidence of stability and will help competition return to the market.
Notes to editors
The £2.6 billion figure relates to debt and arrears over 90 days.
It is standard practice for all businesses, not just in the energy industry, to recoup their costs – including unrecoverable debt – through the pricing of their goods and services.
In domestic energy supplier cases, this can only be done via allowances in the price cap.
The review, which is open from October 12 to November 2, will inform a statutory consultation to be published this winter which will make recommendations based on the feedback received.
Ofgem welcomes views on any of the options and considerations discussed in the consultation, including the value, methodology and implementation of the proposed allowance for debt-related costs. Please send your response to firstname.lastname@example.org
Through Ofgem’s July 2023 Request For Information from suppliers, we have seen evidence of a divergence between debt-related costs (on a weighted average basis) and the existing price cap allowances across cap periods April-June. This was predominantly caused by increased bad debt costs in cap period, which could partly reflect that government support packages were no longer mitigating the impact of underlying bad debt pressures.
As part of our debt-related costs RFIs (in January, April and July) we have gathered data from suppliers on how much of the debt-related costs incurred have been directly caused by the moratorium on Involuntary PPM installations and related policy changes.
These figures indicate that the moratorium and related policy changes created around £25m per month of additional debt-related costs between February 2023 to June 2023, with further significant costs expected in the second half of 2023.