Ofgem further revises credit balance ringfencing proposals

Ofgem has revised its proposals requiring suppliers to ringfence their customer credit balances (CCBs) in certain circumstances, as well as its plans for minimum capital requirements.

Elsewhere, the regulator has confirmed its decision to implement an enhanced Financial Responsibility Principle which would obligate suppliers to show they have sufficient capital to meet their liabilities, as well as requiring them to ringfence Renewables Obligation (RO) payments from the current scheme year onwards.

Ofgem began consulting on mandatory market-wide ringfencing of credit balances in June last year, before revising its proposals in November to require this only in certain circumstances.

It additionally outlined plans for a minimum capital requirement for all domestic suppliers to be brought in over a number of years. It proposed setting a shorter-term target for domestic suppliers to have net assets of £110-220 per domestic customer by the end of March 2025.

However in a further statutory consultation published on Wednesday (5 April), Ofgem proposed to set a capital floor and capital target, rather than a single minimum capital requirement.

The capital floor is an absolute minimum level of capital below which Ofgem believes a supplier should not fall as it would not be in the consumer interest to do so.

It is proposing to set the capital floor at zero (£0) adjusted net assets per domestic gas and electricity customer from 31 March 2025.

“Our rationale for this level is we believe that a supplier must have some loss-absorbing capital, alongside other risk management tools, to withstand shocks. A supplier in a negative net asset position and therefore unable to pay its debts as they fall due is technically insolvent and is in a vulnerable position should there be further shocks,” Ofgem explained.

It further highlighted how the Oxera report into the failings of the energy market “showed that all suppliers who went on to fail had negative, and deteriorating, net equity positions”.

Capital Target

Ofgem is further proposing the introduction of a capital target to act as a “loss absorbing buffer for all firms in times of stress” to boost their resilience.

Its minded to position is 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).

“After the introduction of the capital target, firms should still judge the adequacy of their capital in a prudent manner, as the common minimum is not intended to cover all the risks that firms could choose to take,” it warned.

Ofgem is proposing that suppliers which do not meet the capital floor would be in breach of the licence condition.

Those which do not meet the capital target meanwhile 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.

“We believe this approach strikes the best balance for consumers in providing strong incentives for suppliers in a stronger starting position to achieve and maintain the target, but also enabling those currently less well capitalised to take longer if needed to avoid exit, while facing more scrutiny and controls to mitigate the risks for consumers,” Ofgem explained.

Ringfencing CCBs

Ofgem said it continues to believe that having the power to order suppliers to ringfence their CCBs in certain circumstances “is in consumers’ best interests”.

It is now proposing that it should have this power in circumstances when suppliers are not meeting the capital target to address the concerns about reliance on CCBs as a source of working capital.

It further proposes suppliers should maintain monthly cash balances at a level equal to or greater than 20% of gross CCBs net of unbilled consumption owed to their fixed direct debit customers.

Ofgem additionally suggests identifying unsustainable business practices early by identifying if suppliers do not have sufficient cash to honour customer requests to settle credit balances at an appropriate level “in a severe but plausible switching scenario” and when a high volume of refund requests are received.

Summarising its latest proposals, Ofgem said: “In addition to the enhanced financial responsibility principle and ringfencing of RO receipts being implemented through a separate decision, this package of measures will help deliver a retail energy market that is secure, sustainable, and therefore able to deliver the innovation and positive consumer outcomes needed in the future.”