Ofgem is proposing to introduce new checks on suppliers to create more accountability in the market and to require more “responsible and appropriate” behaviour.
The energy regulator opened a consultation today (22 October) and proposed rules which would allow it to request independent audits of suppliers’ customer service operations and financial status.
As part of this, new checks would be introduced for growing suppliers before they hit certain thresholds of customer numbers, requiring them to ensure they have the operational capability to effectively serve their customers. If they fail the checks, they would be stopped from taking further customers on.
As the proposals stand the customer thresholds will be:
- 50,000
- 150,000
- 250,000
- 500,000-800,000
Ofgem is further proposing to introduce more ongoing ‘fit and proper’ requirements for suppliers, these will ensure those senior management are fit to carry out their duties, and a new principle for suppliers to be “open and cooperative” with the regulator.
In addition a requirement for suppliers to maintain ‘living wills’ is being proposed which would assess their readiness for an “orderly failure”. Ofgem would scrutinise these wills which will set out what would happen in the event of supplier failure.
This could include the likely costs faced by other consumers, disruption to services for their customers and how they would ensure compliance with any relevant licence conditions.
New rules would also be introduced to avoid disruption associated with supplier exit. These would ensure that, when a supplier fails, certain consumer protections around debt collection practices remain in place.
Further reforms are being proposed which would help minimise the costs of mutualisation for other suppliers in the event of failure.
Suppliers would be required to put in place arrangements to ensure that they would be able to cover a proportion of customers’ credit balances and government environmental scheme costs if they failed.
This, Ofgem says, would not affect the protections already in place to cover all domestic credit balances when a supplier fails.
Mutualisation has been a point of concern among suppliers, as was evidenced when the process was triggered for the first time ever over unpaid renewables obligation (RO) payments last year.
Suppliers who had met their obligation were required to fill the gap and cover the relevant shortfall.
The regulator expects competition and innovation which benefit consumers to continue in the retail market after all these reforms are in place.
The new proposals follow a recent spate of market exits, as well as the introduction of tougher licensing conditions earlier this year.
So far in 2019, a total of seven suppliers have exited the market: Economy Energy, Our Power, Brilliant Energy, Cardiff Energy Supply, Solarplicity, Eversmart Energy and Rutherford Energy.
Mary Starks, executive director of consumers and markets, said: “Our regulatory regime needs to be effective and proportionate in protecting consumers, while continuing to facilitate competition and innovation.
“At this stage in the transition to a net zero emissions economy it is more important than ever that innovators can enter the market and prosper, driving benefits for consumers.
“The new proposals will create more accountability in the market, require more responsible and appropriate behaviour from suppliers in the market and reduce the risk and costs to consumers associated with supplier failure.
“In the event a supplier fails, the changes will also strengthen the ‘safety net’ and improve the experience of customers when they are transferred, so that consumers can be reassured that whatever happens they will be properly protected.”
Industry voices react to the proposals
Matthew Vickers, chief executive at the Energy Ombudsman
“These reforms are good news for energy consumers and will address some of the market issues around supplier failures.
”We are particularly pleased to see some action in relation to administrators, because in some instances the conduct of these companies when suppliers fail has been poor and has caused problems for both consumers and gaining suppliers.
“The idea of introducing checks as suppliers reach certain growth milestones also makes a lot of sense, because we have seen several examples of huge spikes in complaints about companies that have grown rapidly but haven’t had the customer-service infrastructure in place to support this growth.
“As part of this we’d like to see Ofgem pay close to attention to which suppliers signpost their customers to us when a complaint can’t be resolved, and which don’t.
“As the ombudsman we’re spending more and more of our time investigating complaints about smaller suppliers.
“Some of these companies don’t always make their customers aware of their right to escalate a complaint to us, so in some cases what we’re seeing could just be the tip of the iceberg in terms of the problems customers are experiencing.
“While we welcome this consultation, another area that we’d like to see Ofgem do more on is protection for consumer complaints that are with us for investigation when a supplier fails or is acquired, because currently people can be left stranded.
“We have raised this with the regulator and we will continue to work together in order to identify a positive solution that benefits consumers.”
Gillian Guy, chief executive of Citizens Advice
“Today’s announcement looks like good news for energy customers. Ofgem’s proposals should limit the costs to consumers of failed suppliers, as well as delivering better consumer protections.
“Citizens Advice has repeatedly raised concerns about these problems and the regulator’s positive action is welcome.
“We have seen a number of cases where customers in debt to failed suppliers were subjected to aggressive debt collection by administrators who were not bound by Ofgem rules. Stopping this from happening will reduce the unnecessary stress and pressure placed on affected customers.
”New requirements to protect customers’ credit balances should go some way to limiting the costs left behind when firms collapse. Our research estimates that recent supplier failures led to an additional £172 million being added to bills. Most of these costs arose from companies leaving behind unpaid industry bills for renewable schemes.
“The government should legislate to require suppliers make these payments more regularly, and further limit the costs to consumers when these companies fail”.
Stephen Murray, energy expert at MoneySuperMarket
“The supplier failures in the last 18 months highlight that lessons have to be learnt and reforms introduced across the market to tighten up processes and ensure suppliers are trading responsibly and protecting customers.
“We can’t ignore the cost that supplier failures are putting on the energy market and the existing supplier base. Ultimately these costs will wash down into higher customer bills and we have to do all we can to minimise the amount UK households are paying.
“Ultimately this has to be policed by the regulator and today’s suggested reforms are welcome and, like the reforms for new entrants recently introduced, definitely not before time.
“The energy market is thriving with dozens of suppliers offering choice, competitive tariffs and good customer service. The regulator has to make sure there are conditions in place for this to continue and the announcement today is another step towards a more sustainable residential energy market.”
Richard Neudegg, head of regulation at Uswitch.com
“Consumers should be reassured by these proposals from Ofgem. The regulator is focusing on solid measures to ensure good customer service and minimise the risks if an energy company goes out of business.
“The proposed thresholds for assessing whether suppliers can continue to serve their customers well as they grow larger should help prevent companies from becoming too big too quickly. This could also influence the tactics they use to attract new customers if they know there are checks in place.
“The requirement for providers to give more details about how they will meet their financial and environmental obligations, and to have plans in place should the worst happen and they need to cease trading, also means there should be less risk that customers of other suppliers have to pick up the tab because one company has behaved irresponsibly.
“But the real test of the proposed new rules will come when Ofgem has to enforce them. The whole industry will be watching to see if the regulator’s bite is as strong as its bark.
“We have seen many suppliers going bust over the last 18 months, and we will likely need to wait until well into 2020 before these new rules come into force.”