Ofgem has moved to protect consumers from the cost of supplier failures, with the potential introduction of capital adequacy requirements and renewable obligation (RO) receipts.
It has outlined a range of new proposals, including building on work underway to ensure suppliers are even more financially secure, to protect customers. This is of particular importance given the collapse of nearly 30 suppliers between September 2021 and July 2022.
Ofgem is additionally considering preventing suppliers from using the RO money that they hold on to on behalf of others. Suppliers could be required to ringfence the money that is needed to buy renewable energy.
The RO scheme requires energy suppliers to purchase a set percentage of power from renewable sources, helping support decarbonisation and the expansion of the renewable energy sector. These can be addressed in two primary methods. One is the through the purchase of RO certificates and the other is via payment into a buy-out fund.
But there has been a shortfall in payments over recent years, with , mutualisation triggered for the fifth year in a row in 2022. In the previous year, it was reported that mutualisation left an RO shortfall of £218,300,151.73.
Ofgem’s final proposal focuses on stamping out the misuse of credit balances. To achieve this, the regulator is calling for the reinforcement of rules on how all domestic providers use customer balances. If they are found to be reckless, further action would be taken, via the Enhanced Financial Responsibility Principle.
“These proposals will provide protections, checks and balances for consumers, suppliers and the entire sector to create a more stable market. We want suppliers to be able to be innovative and dynamic, while also making sure they are financially stable, and that customers’ money is protected,” said Jonathan Brearley, chief executive of Ofgem.
“This is a delicate balance and while Ofgem want well capitalised businesses that can weather price fluctuations, we also don’t want to block the market for new suppliers or force suppliers to sit on lots of capital they could be investing in innovative ideas. We are seeking views across the industry, recognising the different business models’ suppliers have, on whether we have struck the right balance between resilience and competition.”
The regulator is seeking feedback on all aspects of the consultations from sector stakeholders and beyond, and it is anticipated reform of these policy areas will be published in Spring 2023.
It will also be making further policy changes, including a review into the earnings before interest and taxes (EBIT) aspect of the price cap, market stabilisation charges to reduce supplier failure risks, balancing services use of system in order to update the price cap and price cap programme of work so stakeholders have an opportunity for input on updating the measure.
Ofgem also reemphasised its commitment in protecting consumers and vulnerable customers – something the energy regulator has been under scrutiny over recently. After the rise in the price cap, The Good Law Project planned to sue Ofgem on allegations it had “failed to mitigate the impact of rising energy bills on consumers”.
The energy regulator had also been deemed “incompetent as the regulatory authority” according to a report from the Department of Business, Energy and Industrial Strategy (BEIS) select committee.
Since the beginning of the energy crisis in 2021, Ofgem has brought in an number of additional measures to scrutinise suppliers – such as its stress tests – as well as carried out further reviews of market participants. For example, it found that 17 energy suppliers have weaknesses in the way they support vulnerable customers it announced this week, although this has been contested by some, due to incomplete evaluations by the energy regulator.
“Ultimately, we have a responsibility as a sector to ensure we are protecting consumers’ interests by making sure our financial regulations are as robust as they can be,” Brearly added.
“At a time of extremely high energy bills, that responsibility is more important than ever. I accept that there are very different views across the industry, but I encourage all retailers to work with us to move the sector to a more vibrant and resilient position.”
Citizens Advice believe that these measures are needed to ensure the collapse of energy suppliers on the scale seen in 2021 does not happen again. However, it is vitally important that these proposals lead to concrete changes.
Of the suppliers that collapsed, some 2.4 million customers from 28 them were placed with a new company through the Supplier of Last Resort mechanism. This is expected to add £2.7 billion (£96 per customer) to energy bills. Additionally, there is the cost of Bulb being placed into special administration, which could have cost as much as £4 billion according to some reports.
“Ofgem must ensure people never again experience the chaos and cost of multiple suppliers going bust,” said Gillian Cooper, head of energy policy at Citizens Advice.
“It’s essential that these proposals lead to concrete change that is felt by customers. The only way that will happen is if these new rules are enforced.
“Importantly, we can’t return to a world where customer credit balances can be misused to fund risky business models.”