Ofgem: ‘Won’t pay’ fears have not materialised

Fears that energy customers would stop paying their bills despite having the funds to do so have not materialised, Ofgem has claimed.

The regulator told Utility Week that bad debt levels show that the fear over “can pay but won’t pay” behaviour has not yet happened.

Concerns that customers would simply stop paying their bills emerged earlier this year ahead of the ban on forced prepayment meter (PPM) installations.

Energy UK has recently estimated that the PPM moratorium is adding around £30 million a month to the sector’s bad debt levels.

However, Ofgem head of price cap policy Marcus McPhillips said that debt levels associated with the PPM moratorium are at the lower end of early estimates, dispelling fears over “can pay but won’t pay”.

“Earlier this year, before the moratorium was in place, there was an expectation that banning forced PPM installations would have a much bigger effect on bad debt levels than what has transpired so far,” McPhillips said.

“The fact that the additional levels of bad debt from the moratorium are at the lower level of original estimates probably means that the fear over ‘can pay but won’t pay’ behaviour hasn’t materialised so far.”

Breaking down the £30 million a month estimate that Energy UK has provided works out at about £15 per customer, whereas initial estimates put the impact of the PPM moratorium as high as £30 per customer.

In total, around £120 million is estimated to have been added to the sector’s bad debt levels as a direct result of the moratorium, which was drawn up in early February after an undercover Times investigation showed PPMs being forced on vulnerable British Gas customers.

Energy UK has also recently estimated that debt in the retail energy sector has risen by more than £1 billion in the last year, taking the total estimated debt within the sector to between £3.5 billion and £3.6 billion.

While the impact of the moratorium has been less than originally feared, British Gas chief executive Chris O’Shea warned that all households face higher energy bills if suppliers are unable to prevent struggling customers from running up large debts.

In an interview with the Financial Times, O’Shea said: “It’s all very well saying, we are going to stop X, Y and Z . . . [but] ultimately if you have people in categories where you can’t install a prepayment meter, then the general population is paying for their energy.”

He added: “If bad debts go up because of this, Ofgem will have to increase the price [suppliers can charge].”

Meanwhile, Energy UK advised caution about coming to any conclusions in relation to the impact of the PPM ban, saying that “it’s too early to say”.

“The £30 million a month figure is an early and snapshot estimate,” an Energy UK spokesperson said. “It’s also always difficult to predict debt levels precisely in advance, especially in a situation without any previous like this one.”

The spokesperson added: “The nature of debt is that it accumulates – especially when you’ve had an extended period of high prices and when the removal of bill support means customers are effectively paying more this summer than they were last winter.

“And although PPM installs by warrant might have resumed by then – looking ahead, the outlook for bills over next winter is that they will still be far higher than pre-crisis levels – and as yet, we don’t know what, if any, support will be in place. So all that points to likelihood of debt levels increasing.”

Fears around mounting bad debt have been growing over the past few months, with Ofgem currently consulting on the impact of the pause of forced PPM installations. In particular, the regulator is considering tweaking bad debt allowances to accommodate for revenues lost during the pause.

However, Utilita chief executive Bill Bullen recently told Utility Week that changes proposed by Ofgem will only stem retail losses, warning that if nothing changes more suppliers will leave the market as Shell confirmed it is doing earlier this month.

Ofgem has also outlined a new code of practice for energy suppliers around force-fitting of PPMs.

All suppliers have signed up to the voluntary code of practice, which outlines more stringent processes before a forced PPM install can be carried out. It also means that certain groups are exempt from forced installs, including those aged over 85 and people with severe health issues.

Despite issuing the new code of practice, suppliers are still prohibited from applying for warrants for forced PPM installations until Ofgem issues its initial findings from the market compliance review.

Affordability is one of the themes at Utility Week Forum this October. To find out more click here.