Ofgem’s plans to require suppliers to protect a minimum of 50 per cent of customer credit balances have been pushed back.
Ofgem says its plans, introduced as part of a consultation last October, are designed to minimise the costs that need to be mutualised across the rest of the industry when a supplier fails.
Other proposals included in the regulator’s ongoing supplier licensing review, such as milestone assessments, fit and proper tests, and independent audits, will be progressing to statutory consultation this spring as planned.
But, following feedback from the consultation, the energy regulator has decided to phase in its wider mutualisation protection plans.
The first phase of the mutualisation reforms will seek to introduce a “high-level principle” to drive suppliers towards taking action that mitigates the extent of costs to be mutualised in the event of failure. This will be delivered alongside its wider reforms in its spring 2020 statutory consultation.
Details of the principle are yet to be revealed and an Ofgem spokesperson confirmed they would be published with the final decision towards the end of March.
A further consultation will be carried out on the second phase of the reforms in summer, including the need to cover customer credit balances.
Mutualisation has been a major point of frustration among energy suppliers, with the process being triggered twice over renewables obligation (RO payments) since 2018.
Furthermore, last week Utility Week revealed that the Energy Ombudsman was shifting the costs of failed suppliers onto other retailers after they left the market owing the service more than £1.6 million in 2019.
Speaking to Utility Week, one industry source questioned whether Ofgem’s reforms to the supplier licence are coming in too late.
The source said: “Many industry observers are wondering if these are just detailed plans on how to lock the regulatory stable door well after the irresponsible small supplier horse has bolted.
“The plans are welcome and a phased introduction is clearly the right way to proceed, but what we are all looking for is a similarly clear explanation why Ofgem hasn’t used its existing powers already?
“No amount of consultation detail will make up for lack of institutional will.”
Announcing the phasing-in proposals, Ofgem’s deputy director of licensing frameworks for consumers and markets, Lesley Nugent, said the regulator needed to strike a “careful balance” between raising supplier standards without setting barriers to entry, innovation and expansion too high.
“During the consultation period, we received views from a wide variety of stakeholders.
“While generally supportive of the policy intent behind our proposals and the need for action in this area, stakeholders raised a number of complex issues, which we consider merit further investigation and analysis.
“By taking this phased approach to introducing our cost mutualisation proposals, we can begin to deliver benefits for consumers as quickly as possible, while allowing appropriate opportunities to explore stakeholder views and the detailed design of certain aspects of our proposals further.”
Nugent added that alongside Ofgem’s new entry requirements, which came in to force in July 2019, it considers that these reforms will promote “more responsible risk management by suppliers, increase accountability and foster better governance”.
“They will also strengthen our ability to effectively oversee the market and address problems earlier”, she said.
In its response to October’s consultation, Centrica suggested Ofgem’s mutualisation plans did not go far enough.
It said: “The Ofgem proposal for suppliers to ‘protect a minimum of 50 per cent of their customer credit balances and a proportion of government scheme costs in the event of their failure’ does not go far enough.
“Only by requiring suppliers to cover 100 per cent of credit balances and government policy costs will the risk of harm to consumers and competition be adequately addressed.”
In its response EDF said if implemented effectively, the proposed package of reforms will reduce the impact of disorderly market exits on consumers and the wider market.
“We note that the proposals in this consultation will not ensure that all such risks are fully covered by suppliers who then may fail. For mutualisation costs, only 50 per cent of credit balances are proposed to be covered and an undefined proportion of policy costs.
“However, if implemented effectively the proposed package of reforms will reduce the impact of disorderly market exits on consumers and the wider market and are therefore an important first step.
“Once these have been implemented then a further review should take place in 12 months to determine whether additional action is required.”