Ofgem has proposed new financial and customer service tests for companies seeking a supply licence following increased complaints and an unprecedented shortfall in Renewables Obligation (RO) late payments.
Under the proposals, firms would have to demonstrate they have “adequate financial resources” and can meet their customer service obligations before being awarded a license.
This means they must provide the regulator with a plan to meet its handling standards and obligations to assist customers in vulnerable circumstances.
Ofgem is also consulting on tightening its test of whether applicants are “fit and proper” to be granted a licence.
The regulator said the measures, which should be in place by late spring next year, will help “ensure new suppliers are ready to enter the market”, while still driving competition and innovation that benefits consumers.
As part of its ongoing review of licensing arrangements, Ofgem will consult separately next year on proposals to introduce new reporting requirements for suppliers that are already active in the market.
This includes submitting information on the adequacy of their financial and operational resources for running their business, providing customer service and meeting their financial obligations under government schemes.
This, Ofgem says, will “reduce the risk of disorderly supplier exits” by raising standards around financial resilience.
The regulator will additionally examine a range of other issues such as how suppliers accrue, hold and use customers’ credit balances.
Ofgem announced today (21 November) it has launched investigations into Economy Energy and Spark Energy over their failure to meet the deadline for making late payments under the RO scheme. The regulator also confirmed that the remaining RO shortfall for 2017/18 stands at £58.6 million.
Mary Starks, executive director for consumers and markets at Ofgem, said: “New energy suppliers that have entered the market over the last few years have offered consumers more choice and helped to drive down energy prices and drive up customer service standards.
“However, complaints against some suppliers have been rising recently and we have had to step in when others have ceased trading.
“Our proposed new tests for suppliers wanting to enter the market will ensure consumers will be better protected against the risk of poor performance, while still allowing more competition and innovation in the energy market to benefit consumers.”
In response to the announcement, Matthew Vickers, chief executive at the Energy Ombudsman, said: “We wholeheartedly welcome these proposals from Ofgem.
“Small suppliers have brought innovation and competition to the energy market, but there is a need for checks and balances to protect consumers.
“More than 40 per cent of the complaints we now handle are about small suppliers, suggesting that a requirement on new market entrants to provide a commitment to meeting customer service and complaint handling standards would benefit consumers.
“We look forward to Ofgem’s proposals for new reporting requirements on existing suppliers and measures to minimise the impact of supplier failure on consumers.”
Gillian Guy, chief executive of Citizens Advice, said: “Today’s proposals would significantly tighten the rules on firms that want to enter the energy supply market.
“For too long, firms that are unprepared, financially unsustainable or both have been able get a license and start operating as a supplier.
“Ultimately it’s consumers who suffer when unprepared energy companies are able to enter the market.
“Many customers suffer with poor customer service, long waits on the phone and inaccurate bills. And everyone pays the price, through their bills, when weak suppliers fail. The collapse of GB Energy cost consumers £14 million in total.
“While the proposed new rules will protect consumers from unfit firms getting a license in the future, there are still poorly performing suppliers operating now. Ofgem must take appropriate steps to remove these firms from the market.”
There are currently over 70 suppliers in the energy market, with many smaller providers taking advantage of the competitive market space.
However, there has been a number of recent instances of new entrants providing poor levels of customer service, prompting action by the regulator.
In February, Ofgem launched an investigation into Iresa’s customer service process and the following month extended a temporary ban on the company taking on new customers. The supplier ceased trading in July.