Tougher entry tests for energy suppliers entering the market will be rolled out from June to drive up standards for customers and reduce the risk of supplier failure.
Companies wanting to enter the market will be subject to more “stringent” tests. They will have to demonstrate to Ofgem they have “sufficient funding” and provide a customer service plan.
The regulator will also launch a consultation on “ongoing requirements” for suppliers currently in the market in the summer.
Ofgem’s announcement today (11 April) has been welcomed by Citizens Advice, which described the intervention as “good news for consumers”.
Under the regulator’s new rules applicants will be required to show they can “adequately fund” their operations for their first year, outline how they expect to comply with key regulatory and market obligations, and show their intentions to provide a proper level of customer service.
Directors and major shareholders of companies applying for a licence, as well as senior managers, will also have to show they are “fit and proper” to hold a licence, the regulator warned.
Mary Starks, executive director of consumers and markets at Ofgem, said: “In an ever-evolving market, Ofgem’s objective is to protect consumers while also ensuring they enjoy the benefits of increased competition and innovation that successful new firms entering the market bring.
“Applying new requirements on suppliers entering and operating in the market will aid us to weed out those that are underprepared, under-resourced and unfit. This will help minimise the risk of supplier failure and help drive up standards for consumers.
“We will adopt a proportionate, risk-based approach to licensing suppliers and will continue to encourage competition and innovation, including innovative business models, which benefits consumers.”
Ofgem highlighted that over the last decade “more consumers” have benefited from competition in the energy market, which it said has “driven down energy prices, helped to raise customer service standards and provided more choice.”
But it acknowledged that in the last 18 months, several suppliers have failed many of whom provided a “poor level of customer service”.
The regulator’s “safety net” has protected the domestic customers’ credit balances and ensured all customers’ energy supply continues.
“Customers can still experience inconvenience and worry if their supplier fails,” Ofgem said.
Ofgem’s consultation later this year will aim to raise standards of existing suppliers. It will include the consideration of new reporting requirements for suppliers who are already active in the market and rules around how suppliers manage customer credit balances.
The regulator will also review the arrangements for suppliers exiting the market to reduce the risk of “disorderly” exits and minimise the impact, “including the cost”, that a supplier failure has on consumers and the wider market.
Responding to the announcement, Energy UK’s chief executive, Lawrence Slade said: “We welcome measures from Ofgem to introduce tougher entry tests for new suppliers entering the retail market. We want to see a future retail market where competition thrives and customers benefit from increased choice and service and aren’t left picking up the tab when suppliers with unsustainable business models fail.”
Gillian Guy, chief executive of Citizens Advice, added: “Ofgem’s new rules are good news for consumers. From June, firms entering the market will need to be set up to deliver good customer service and be financially sound.
“The regulator is right to now turn its attention to the issue of poorly performing suppliers already in the market. Ofgem needs to take steps to identify those companies not delivering for their customers or that may be in financial difficulty and examine if its current approach to resolving problems it identifies is the right one.
“More firms going out of business remains a possibility. It is essential the regulator acts quickly to better manage future supplier failures.
“We all end up paying through higher bills when energy companies go bust. Without better ongoing monitoring and new rules to manage future supplier failures, consumers will continue to suffer.”