Octopus Energy has called for more rigorous market reforms to protect customer money without inflating bills.
The call comes after Ofgem announced proposals to protect customer balances following the cost of 28 supplier collapses since September 2021 adding £94 to bills.
According to Octopus Energy – the fourth biggest supplier in Britain – ringfencing customer balances does not adequately tackle the causes and cost of supplier failures.
Research conducted by the company found that the gross cost of ringfencing for customers would be £15-30, and the net cost £5. Such a move would increase supplier profits without fixing the major causes of failure, it said.
Octopus Energy found that a lack of hedging was responsible for £85 of the cost of supplier failures, whilst credit balances only accounted for £7.
It is therefore pitching for an insurance protection policy for credit balances to be brought in, similar to that provided to holidaymakers (ATOL) or the Financial Services Compensation Scheme used to protect bank deposits.
The company suggested such protection would offer greater protection than ringfencing balances and cost five to ten times less at around £2.
“It’d be bonkers to raise customer prices and increase supplier profits when much cheaper alternatives would be at least as effective in protecting customers’ money,” said Greg Jackson, CEO and founder of Octopus Energy Group.
“Crude ringfencing is financially illiterate, which is why it’s not used in other industries. Its proponents need to be honest that it would cost customers a lot more than it saves, and would actually drive up supplier profits.”
A study conducted by YouGov and commissioned by Centrica in April, found that 86% of consumers want their balances protected, while 13% were unsure and just 1% didn’t think balances should be protected.
Centrica’s CEO Chris O’Shea called for customer balances to be ringfenced when speaking at a Department of Business, Energy and Industrial Strategy (BEIS) select committee meeting in April. He reiterated his call in response to Ofgem’s proposal this week.
“The regulator should resist pressure from companies to adopt ill-considered ideas which would make the crisis worse for customers and more profitable for suppliers,” continued Jackson.
“Octopus wants to see much more stringent measures which don’t add to bills or profits. An ATOL-style insurance for customer balances, strict controls on hedging and management requirements would cost customers 5-10 times less than ringfencing and wouldn’t add to supplier profits.”
A lack of hedging was by far the greatest reason for company failure, and was responsible for 85% of the cost of failures.
Octopus funded customer debit balances of £670 million last winter, the company noted, and its customers are in net debit nine months of the year.
Since it was set up in 2016, the supplier has grown to have 3.2 million customers in Britain. It has taken on customers from failed suppliers including Avro Energy’s 580,000 domestic customers.
Additionally, it is rumoured to be eying the acquisition of Bulb, which went into special administration in 2021. The company, which has 1.6 million customers, faced criticism when it emerged that its six-month rolling hedge strategy left it unable to cope with surging gas prices.
