Minimum capital requirements confirmed for energy retailers

Ofgem has confirmed plans to introduce a minimum capital requirement for energy suppliers as part of its plans to bolster financial resilience in the retail market.

The regulator is additionally pushing ahead with plans allowing it to direct suppliers to ringfence a portion of their customer credit balances (CCBs) when it deems it to be in the consumer interest.

In its previous consultation on the matter published in April, Ofgem proposed to set the capital floor at zero (£0) adjusted net assets per domestic gas and electricity customer from 31 March 2025.

It further proposed to set the target at the equivalent of £130 adjusted net assets per domestic dual fuel customer (£65 per domestic gas and £65 per domestic electricity customer).

Under the proposals, suppliers which failed to meet the capital target would be required to submit a capitalisation plan showing how they intend to do so and would be subject to transition controls until they have an acceptable plan in place.

In its decision document the regulator has confirmed that the common minimum capital requirement will comprise a capital floor of £0 still, but a capital target of £115 adjusted net assets per domestic dual fuel equivalent customer. Ofgem said that it was removing intangible assets from the definition of capital.

“These changes will ensure that the capital being used to meet our requirements is of sufficient quality to meet our resilience policy objectives and reduce mutualised costs, and that the level of capital is sufficient to improve resilience while remaining proportionate,” Ofgem said of its revised plans.

It added that the floor and target would still be supported by the capitalisation plan framework.

It is further proceeding with proposals to ringfence CCBs in circumstances where suppliers are not meeting the capital target and where they do not have sufficient funds to refund customer balances in “a severe but plausible switching event – the Cash Coverage trigger”.

“We are proceeding with ringfencing CCBs as we consulted on but have explained in guidance that we would not expect suppliers who ‘pool’ funds to an investment grade parent overnight to hit the Cash Coverage trigger,” the regulator further explained.

Ringfencing customer credit balances has been a source of much debate in the energy sector over recent years, with clear dividing lines among suppliers.

Ofgem initially planned for retailers to ringfence credit balances so they could be transferred to a new supplier in the case of a market exit.

There was a mixed response from some of the market’s larger suppliers, with the plans being praised by Centrica boss Chris O’Shea but heavily criticised by Octopus Energy chief Greg Jackson.

The regulator subsequently rowed back on the proposals, instead opting to set a “monitoring threshold” to avoid over reliance on the funds to support supplier businesses, before making its current proposals to allow it to order individual suppliers to ringfence their credit balances when they are at risk of not meeting or do not meet the requirements set out in the enhanced Financial Responsibility Principle and/or the minimum capital requirement.

Investec analyst Martin Young has expressed his support following Ofgem’s decision.

“Despite Centrica’s view that Ofgem should have required ringfencing of CCBs, today’s decision is another building block towards a more resilient supply market, and a positive for Centrica,” he said.

Rohan Churm, interim director of financial resilience and controls at Ofgem, said: “We recognise that some stakeholders think we could go further, and others think we are going too far. After carefully considering all the responses we have received we believe this decision is reflective of our aims to balance the benefits of greater resilience with what is achievable, affordable and practical so that we have a competitive market, but also a sustainable one.

“The market will be significantly more resilient, but as in any competitive market, some companies will still fail from time to time. We will continue to engage with the sector and other stakeholders as this new regime evolves and we want to work closely with suppliers to understand capitalisation plans at an early stage.”