The energy regulator has been criticised for failing to protect consumer deposits despite fresh attempts to shield households after taxpayers had to pick up a £9.2bn bill when suppliers went bust.
Almost 30 energy suppliers have collapsed since the start of the energy crisis. The collapse of Bulb, by far the largest failure, has been estimated to cost the taxpayer £6.5bn alone, while the remaining failures will cost consumers about £2.7bn. Many of the failures were because of the weak balance sheets of suppliers, which were exposed when the wholesale price of gas began to rise rapidly.
In response, Ofgem is proposing the series of reforms, including setting a minimum amount of capital that suppliers must hold – to reduce the risk and cost of supplier failures.
However, the regulator for Great Britain said it would only “closely” monitor the use of credit balances. Some energy companies, including the British Gas owner, Centrica, have argued that customer credit should be ringfenced to prevent suppliers from using consumers’ money for other corporate purposes. Rivals, including Octopus, have suggested cheaper options.
The Centrica chief executive, Chris O’Shea, hit out at the decision, accusing Ofgem of an “abdication of responsibility”.
He said: “When customers pay upfront for their energy, they are trusting their supplier to look after their hard-earned money. They would be appalled to learn their money was being used to fund day-to-day business activities but that’s exactly what’s happening in some companies, and it undermines confidence in the market.
“If and when a large supplier fails, the recklessness of the decision not to address this issue will be clear for all to see.”
Ofgem said that if the use of customer balances was found to be “reckless”, it would take further action. It plans to introduce powers to require individual suppliers to ringfence their customer credit balances should they not be compliant with its financial resilience rules.
Consumers typically overpay relative to consumption in the summer months, building up big advance deposits with suppliers, which are then run down through the winter. Domestic consumers have their credit balances honoured by their new supplier if their existing supplier fails but the cost of the process is added to all bills.
Ofgem’s chief executive, Jonathan Brearley, has previously said some energy firms use customers’ credit balances “like an interest-free company credit card”.
On Friday he said: “We want suppliers to be able to be innovative and dynamic, while also making sure they are financially stable, and that customers’ money is protected.
“This is a delicate balance and while Ofgem want well-capitalised businesses that can weather price fluctuations, we also don’t want to block the market for new suppliers or force suppliers to sit on lots of capital they could be investing in innovative ideas.
“We are seeking views across the industry, recognising the different business models suppliers have, on whether we have struck the right balance between resilience and competition.”
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An Octopus Energy spokesperson said: “Ofgem [has] wisely adopted a similar approach to the way banks are regulated. We still need to see the details but it should help prevent fly-by-night energy companies setting up, reduce the cost of failure and keep bills down.”
The spokesperson said the proposals would also encourage hedging, a positive move given the failure to buy power in advance proved the downfall of many of the collapsed suppliers.
Gillian Cooper, the head of energy policy for Citizens Advice, said: “It’s essential that these proposals lead to concrete change that is felt by customers. Importantly, we can’t return to a world where customer credit balances can be misused to fund risky business models.”
Ofgem attempted to improve competition in the market but has been criticised for being too slow to act as the energy crisis escalated and many of the new entrants failed.
The new rules will also require suppliers to ringfence the money needed to buy renewable energy.
Ofgem announced consultations on a string of other reforms, including reviewing the rate of return on suppliers’ investments and updates to its price cap. The reforms are expected to kick in next spring.
