Following the recent collapse of Iresa and other challenger suppliers, Ofgem’s decision to review its approach to issuing energy supply licences, including the criteria against which licence applications are assessed, may seem a bit like shutting the door after the horse has bolted. But it presents an opportunity to clarify regulation in retail supply, which must be welcomed.
The recent supplier failures have highlighted issues regarding financial stability and the levels of customer service in the sector. Establishing some objective criteria in these areas for the purposes of market entry and ongoing monitoring might not follow the current trend towards more principles-based regulation, but should help ensure greater transparency and certainty for both energy suppliers and their customers.
The current arrangements for obtaining a supply licence do not require the applicant to undergo extensive vetting but are aimed instead at maximising market entry, to support competition and innovation. This is intended to reduce the dominance of the “big six”, but in some cases may have resulted in a disproportionate amount of Ofgem’s time being spent assessing supplier performance.
If Ofgem decides to vet prospective suppliers, it will need to set out minimum standards that are both measurable and objective, so it is clear to new entrants what will be expected of them. Imposing specific requirements after a supplier has become operational for the purposes of performance monitoring risks deterring new entrants and therefore reducing competition in retail supply.
Ofgem will also have to ensure it does not set the bar for minimum performance standards too high, not only because this may deter new entrants, but also because non-price competition is a way in which suppliers differentiate their offerings. Setting standards too high would remove the potential for competition on service quality.
The scope of Ofgem’s review will apparently include the possibility of greater powers to revoke the licences of suppliers whose poor performance adversely affects consumers. The current powers are appropriately limited in scope and require a process to be followed in which revocation is very much a last resort. Any change in this area will need to be balanced and proportionate or competition may be affected.
Ofgem’s consultation will give all energy providers an opportunity to influence industry reform. The review will enable the minimum standards expected of energy suppliers to be clarified in a manner that will benefit both suppliers and their customers.