From January, energy suppliers will need to undergo financial stress testing to prove their resilience in light of the cascade of supplier collapses in recent months.
Ofgem has announced a raft of new measures to boost the sector's resilience, including the stress tests which are designed to reveal weaknesses. Should these be found, the regulator will agree on an improvement plan for companies to address concerns, especially if they are deemed to put consumers at risk.
Other reforms include supplier boards being required to undertake self-assessments of their management control frameworks and provide assurance to Ofgem. Existing controls will be strengthened to “fit and proper” requirements, and the regulator will explore how to tighten rules around the protection of balances and Renewable Obligation (RO) payments.
Earlier in December, mutualisation of the RO was triggered for the fourth year, after supplier exits left a shortfall of £218 million unpaid.
Additionally, Ofgem will consult on new financial licence requirements in Spring 2022 and on the possibility of requiring suppliers to pause expansion before they pass certain milestones such as 50,000 or 200,000 until the regulator is satisfied they are financially resilient.
“Ofgem has worked hard to protect consumers as gas prices have risen by over 500% in under a year. We have ensured that over four million customers of failed suppliers have stayed on supply, household credit balances have been protected and all customers have been protected by the price cap from fast and extreme price rises this winter,” said Jonathan Brearley, chief executive of Ofgem.
“Today, I’m setting out clear action so that we have robust stress testing for suppliers so they can’t pass inappropriate risk to consumers. I want to see more checks on staff in significant roles, and better use of data to help us regulate. We need a regime that can enable a sustainable market, to promote our transition to net zero.”
These new measures come in addition to Ofgem announcing it is seeking views on adapting the price cap methodology to better handle energy market volatility in November.
The new measures follow criticism of the regulator from groups like Citizens Advice, which accused Ofgem of a “catalogue of errors” that allowed so many suppliers to fail, and has left consumers with a multi-billion-pound bill.
In total, 27 suppliers have collapsed in 2021, with 25 of these shuttering since the gas price truly began to spike from August.
This includes; Zog Energy, Social Energy Supply, Neon Reef, Omni Energy, MA Energy, Zebra Power, Ampoweruk, Bluegreen Energy Services, Goto Energy, Pure Planet, Colorado Energy, Daligas, ENSTROGA, Igloo Energy, Symbio Energy, Hub Energy, Green Network Energy, Simplicity Energy, Avro Energy, Utility Point, People’s Energy, PfP Energy and MoneyPlus Energy.
Commenting on Ofgem’s new measures, Dame Clare Moriarty, chief executive of Citizens Advice, said: “Reform of the energy market is urgently needed. Ofgem’s failure to adequately regulate the sector left it vulnerable to recent price spikes, with the subsequent collapse of 26 firms leaving bill payers facing a multi-billion pound bill.
“Ofgem is right to prioritise building sustainable and resilient business models that can withstand increases in wholesale gas prices. Everyone should be able to trust their energy supplier is fit to operate.”