Andrew Whitehead, senior partner and head of energy at law firm, Shakespeare Martineau Company strategy, Customers, Electricity retail, Energy retail, Gas retail, Governance, Policy & regulation, Regulation, Strategy & management, Opinion

Andrew Whitehead, senior partner and head of energy at law firm, Shakespeare Martineau says Ofgem's changes to supplier licences have come too late for some.

Following its Supplier Licensing Review, launched in June 2018, Ofgem published its long-awaited final decision document on market entry requirements in April.

This document is essential reading for aspiring new market entrants, but also important to existing market participants and consumers who have a vested interest in the health of the energy retail supply market.

A period of instability in energy retail supply, especially the domestic market, has seen the collapse of several energy suppliers, including Extra Energy and Iresa Energy and, most recently, Brilliant Energy.

This comes after a prolonged focus by Ofgem on increased customer switching and greater customer choice, which has encouraged new market entrants. In parallel, Ofgem has been grappling with market complexity and poor customer service, whilst wanting to foster innovation at a time of low carbon transition.

With hindsight, it has been too easy to enter the market as a licensed supplier – helped by availability of “off the shelf” market-ready shell companies. Furthermore, switching sites make it relatively simple for a new entrant with a competitive tariff offering to rapidly build a large customer base of regular switchers, whose brand loyalty will be hard-earned.

This brings heavy financial exposure, not only to the wholesale markets but also to the Renewables Obligation and other government schemes. Added to that is a heavy regulatory burden, with onerous license requirements around customer protection.

As a legal adviser on several of the recent supplier failures, Shakespeare Martineau has seen first-hand Ofgem’s approach when a supplier finds itself struggling.

Often, financial distress and poor customer service are linked, although sometimes this is more perception than reality. Furthermore, suppliers investing in their businesses to meet their legal and regulatory obligations rightly complain there is no level playing field when those not complying are allowed to compete.

However, Ofgem has arguably been over-zealous in imposing restrictions on a struggling supplier’s operations through a provisional enforcement order, in the name of addressing customer detriment, but with the perhaps inevitable consequence of forcing that supplier into insolvency with all the consequences that entails.

Supplier failures have wide-ranging impacts, not just for business creditors and shareholders. Citizens Advice estimates that over 800,000 customers were affected by ten supplier failures in the 12 months to January 2019.

Focused on protecting the customer, Ofgem’s “safety net” involves the appointment of a supplier of last resort (SoLR) to take over the failed supplier’s meter points.

Crucially, this process facilitates the incoming supplier assuming credit balances and applying for its costs to be wholly or partly funded via network charges. Separately, supplier defaults under the Renewables Obligation are mutualised across all other suppliers.

There are few other industries where costs of failure are socialised in this way, and the impact ultimately finds its way to consumers in higher prices.

This latest April decision document from Ofgem covers just one of the elements of the Supplier Licensing Review, market entry.

Applicants for a supply licence will need to meet new requirements from June 2019.  Alongside new “fit and proper” disclosure requirements, they must demonstrate they have planned their financial and operational resources for market entry and are prepared for the costs – although no minimum capital requirements. New entrants must also provide a “statement of intent” around licence compliance especially customer service.

The timing of the licensing process will also be shifted closer to actual market entry.

Consequential changes will be needed to the statutory instruments (SIs) made in 2010 which govern the application process. In fact, Ofgem proposes to replace the SIs with new versions, and has published a consultation on new SIs alongside a new accompanying guidance document.

The new “fit and proper” disclosure requirements will apply to applications for all types of licence, not just supply, and will broaden disclosure requirements, currently covering just unspent criminal convictions and director disqualifications, to capture individuals with “significant managerial responsibility or influence”.

Additional disclosures include involvement in prior SoLR events, enforcement history and actions by other regulators or competition law infringements.

Subject to conclusion of the SI consultation (on which responses are sought by 13 May), the new entry regime is expected to be in place from June 2019.

Ofgem’s attention will then turn to the other areas of its Supplier Licensing Review, namely on-going requirements and market exit. Summary responses on these topics from last year’s consultation will be published in a working paper in May 2019, with a stakeholder workshop in June 2019. The direction of travel will likely include new rules on credit balances, and SoLR process changes.

Ofgem’s new market interventions are now taking shape. There appears to be broad support from market participants, although many argue these changes come too late.

Time will tell whether Ofgem has achieved the balancing act of raising the bar high enough to reduce disruption risk of supplier failure, but not so high that innovation and competition are hindered when most needed. A barometer of success will be whether Ofgem needs to resort quite so often to waiving its ultimate big stick: the enforcement order.

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