Citizens Advice has warned there could be “serious implications” for Ofgem’s safety net following the introduction of a pay upfront tariff by a small supplier.
Eversmart Energy, based in Manchester, introduced its Family Saver Club tariff in October.
The tariff allows customers to pay for the annual energy bills up front and promises 12 per cent interest on customers’ credit balances, or one per cent a month.
On its website the supplier claims that the tariff is “better value than an ISA or a high street savings account”.
However concerns have been raised that Ofgem’s safety net, which requires suppliers to cover credit balances after a firm has failed, was not designed to cover the failure of firms where customers may have credit balances running into the thousands.
Gillian Guy, chief executive of Citizens Advice, said: “Buying your energy is not the same as opening a bank account or ISA. And energy suppliers are not subject to the same regulations as banks or financial services providers.
“The question of whether suppliers should be advertising energy as an attractive alternative to savings products is one that Ofgem needs to look at.
“Market innovations and the development of new products can have unintended consequences. If similar products and practices become more widespread, there may be serious implications for Ofgem’s safety net.
“It was not designed to cover the failure of firms where customers may have credit balances running into thousands of pounds.”
A spokesperson for Eversmart was keen to point out that paying up front is a model used in other sectors, including in car insurance and broadband provision.
They added:“Caring for our customers is incredibly important to us and naturally we take any concerns from Citizens Advice seriously.
“We’re updating our website to make it clear that the interest paid is on monthly credit balances, and that the product itself is not a financial investment product – it’s the cheapest fixed rate tariff in the country, that gives the brilliant benefit of 1 per cent a month interest on credit balances.”
In response to the concerns, an Ofgem spokesperson said: “There is no prohibition in the conditions that stops suppliers from offering tariffs where customers pay for their energy upfront for a year. All suppliers must be clear and transparent in the marketing of all their tariffs and must treat their customers fairly.
“In previous SoLR [supplier of last resort] cases, Ofgem has had a range of competitive bids from potential SoLRs. We would expect there to be interest from competitors in gaining the customers of a failing supplier.
“When we decide on whether to appoint a SoLR we take into account whether the supplier is willing to honour customers’ credit balances and arrangements to take on the costs of repaying domestic customers’ credit balances and how much, if they intend to do so, claim for through the levy as part of Ofgem’s safety net.”
Meanwhile, Ian Barker of BFY Consulting, said:”Eversmart’s pay in advance product looks interesting – for an average customer it would make it the cheapest tariff in the industry on a net basis (i.e. after the ‘interest’ has been paid).
“Paying a year in advance is much more common place in financial service for products such as car and home insurance – with additional fees charged for the ability to pay monthly.
“Given the recent SoLR’s it’s likely that suppliers are being asked for more credit collateral up front from their trading counter parties in order to secure a fully hedged position.
“From a risk perspective it’s an interesting point made by Citizens Advice – if these products became more common place then the way the safety net is currently set up the impact would be smeared.
“I guess there’s a question on whether the safety net is up to date with a fast changing market? There certainly seems to be a lot of consternation on the socialising of costs from recent SoLRs.”
Ofgem announced in November that Eversmart was one of 14 companies which had failed to pay its renewables obligation (RO) payments by the 31 October late payment deadline.
Eversmart owed £367,149.82 in RO payments as of 31 October.
The regulator said Eversmart, along with URE Energy, has been given until 31 March 2019 to make outstanding payments through monthly installments.
Ofgem said it is ready to issue a final order requiring full payment if they fail to do so.