Ofgem will review its approach to supplier licensing and could toughen rules for entry to the energy market to protect consumers against poor customer service and financial instability.
The regulator committed to carrying out this work in its forward work programme for the current financial year, published in March.
It has now outlined its scope for the review in a letter sent to suppliers and prospective suppliers today (11 June).
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.
The regulator said one of its key priorities for the current year is to “enable a better functioning retail market”.
It will consider potential reforms for supply market entry and exit as well as ongoing monitoring and engagement. This will include whether there should be “additional requirements” relating to the financial health of a prospective supplier.
The current licensing regime has “successfully supported” the increase in the number of suppliers in the market, from 27 active domestic suppliers in December 2014 to 66 in September 2017, the regulator said.
Ofgem wrote in its letter: “Customers have benefitted from the competitive pressure caused by new suppliers entering the energy market, helping to deliver more competitive pricing and drive service quality up.
“However, we recognise that low entry barriers, and more participants active in the market, could increase the likelihood of companies entering the market who are not meeting expectations with respect to customer service and of supplier failure.”
As part of the review Ofgem will consider whether its needs “additional tools” to manage market exit and the revocation of supplier licences in “exceptional cases”.
Ofgem will also review its approach to supplier failure and its safety net. The regulator published revised guidance on the criteria it would consider when selecting a supplier of last resort back in 2016.
Since then there have been two instances of supplier failure that required Ofgem’s intervention. The first was in November 2016 when Co-op Energy took on 160,000 customers from GB Energy Supply when the small supplier went bust.
The second was at the end of January 2018 when Green Star Energy was appointed to take on the 10,000 customers of failed supplier Future Energy.
Ofgem said the process has worked “well to date” but the cases have shown areas where the arrangements “could potentially be improved”.
Citizens Advice described Ofgem’s review as a “step in the right direction”.
Victoria MacGregor, director of energy at Citizens Advice, said: “Consumers deserve much more protection from poorly performing energy suppliers.
“Ofgem needs to take back control of its licensing processes. It is too easy for energy firms to enter the market and the process for removing failing companies is too slow.”
She added: “We’ve seen some suppliers granted licences when they simply aren’t ready to provide good quality customer service. Others don’t have robust enough business plans in place to deliver on the low prices they promise consumers, or even survive in the current market.
“We will continue to work closely with Ofgem as this review is conducted to ensure that the new licensing regime better protects consumers.”
The existing regime for obtaining a supply licence is largely based on arrangements introduced in 2003 when Ofgem decided to “significantly reduce the burden on applicants”.
Ofgem’s last “substantial” review of the arrangements was in 2010, when it introduced a risk-based tiered application process.
A spokesperson for Energy UK, said: “With consumer engagement at record levels and more suppliers than ever before to choose from, it is a highly competitive retail energy market.
“This, alongside risk factors such as rising costs outside suppliers direct control, means it is a challenging environment for suppliers of all sizes, including smaller suppliers. So we welcome Ofgem’s review which should ensure there are robust market entry tests to limit any risk to consumers.”
Ofgem said it anticipates changes to be implemented in stages with some areas likely to require longer-term reform, while others could be delivered “more quickly”.
The regulator will publish a consultation on its proposals arising from the review in late summer.