New suppliers entering the energy market will be subject to tougher tests from tomorrow (5 July), to “weed out those that are under-prepared, under-resourced and unfit to hold a licence”.
Under the new rules companies applying for a licence to supply energy must undergo more stringent tests, demonstrate they have the financial capability to fund their operations for their first year and outline how they expect to comply with key regulatory and market obligations.
Furthermore directors and major shareholders of companies applying for a licence, as well as senior managers, will also have to show they are “fit and proper” to hold a licence.
While most industry voices have welcomed the new tests, Richard Neudegg, head of regulation at Uswitch.com, exercised caution and said Ofgem should be prioritising the checks and balances on existing suppliers.
Neudegg said there needs to be a new system for triggering a review process as soon as a company begins to have financial or customer service issues.
He added: “Regular stress-tests for suppliers and ongoing fit-and-proper person assessments would reduce the risk of energy customers suffering poor service, or worse, seeing their provider go under.
“We also need to crack down on some of the more outlandish behaviour we’ve seen from a handful of energy companies.
“Some suppliers have brought their own credibility into serious doubt in the last year or so.”
Mary Starks, executive director of consumers and markets at Ofgem, said:“Under the new tests being rolled out, applicants wanting to supply energy must provide details on their proposed plans to meet their customer service obligations, including complaint handling standards and obligations to assist customers in vulnerable circumstances, as well as their funding arrangements.
“The new rules also introduce an enhanced fit and proper assessment.
“The new requirements will help us to weed out those that are under-prepared, under-resourced and unfit to hold a licence.
“This will help reduce the risk of supplier failure and help drive up standards for consumers.
“We will want to continue to encourage competition and innovation, including innovative business models, which benefits consumers, but also to ensure firms have robust business plans.
“We plan to consult early autumn on the ongoing requirements and exit arrangements for suppliers.”
The new rules have come into effect later than expected, with Ofgem’s announcement in April saying they were due to come into force last month.
Ofgem has previously been criticised for its supplier licence regime with consumer advocate groups warning it is too easy for new suppliers to enter the market without the correct processes in place.
In addition, a number of recent supplier failures,such as the ones which followed last year’s “unprecedented” renewables obligation (RO) shortfall, have prompted industry voices to call for more stringent market entry tests.
In response to the changes, an Energy UK spokesperson said: “We welcome Ofgem’s new tougher entry tests for new suppliers entering the retail market.
“We want to see a future retail market where competition thrives and customers benefit from increased choice and service, and aren’t left picking up the tab when suppliers with unsustainable business models fail.”
Matthew Vickers, chief executive at the Energy Ombudsman, said: “While it’s encouraging to see an increasingly competitive energy market, there are risks for consumers when new energy suppliers fail to deliver to certain standards.
“We therefore support the introduction of stronger controls from Ofgem to enhance the robustness of the energy market.
“Setting standards for new suppliers from the outset – and introducing consequences of falling short of these – should help to foster greater consistency across the sector and avoid some of the problems we’ve seen recently.
“In addition to these changes for new entrants to the energy market, we look forward to Ofgem’s proposals for ensuring tougher rules extend to existing suppliers.
“In our role as the Energy Ombudsman, we’re keen to work with all suppliers to help them improve their customer service and complaint handling more generally.”