The energy regulator strengthened its rules to protect households after taxpayers had to foot a £9.2bn bill when suppliers went bankrupt – but has been criticized for failing to protect consumer deposits.
Ofgem has announced a package of reforms designed to strengthen consumer protection and ensure energy suppliers are more resilient to market shocks.
Nearly 30 energy suppliers have collapsed since the start of the energy crisis. It has been estimated that the Bullp collapse, by far the largest failure, would cost the taxpayer £6.5 billion alone, while the remaining failures would cost consumers around £2.7 billion. Many of the failures were due to suppliers’ poor balance sheets, which were exposed when the wholesale price of gas began to rise rapidly.Read:Newport semiconductor factory: ‘Losing these jobs would be devastating’ | Technology sector
In response, Ofgem is proposing a series of reforms, including setting a minimum amount of capital that suppliers must maintain. Reduce the risk and cost of supplier failure.
However, the UK regulator said it would only monitor the use of credit balances “very closely”. Some energy companies, including British Gas owner Centrica, have argued that limits should be put in place on customer credit to prevent suppliers using consumer money for other corporate purposes. Competitors, including Octopus, have suggested cheaper options.
Centrica CEO Chris O’Shea criticized the decision, accusing Ofgem of “abdicating responsibility”.
He said: “When customers pay upfront for their capacity, they trust their suppliers to take care of their hard-earned money. They will be dismayed to learn that their money is being used to fund day-to-day business activities, but that is exactly what happens in some companies, and it undermines confidence in the market.Read:This Morning reveals handy devices that cost under £20 including a tap aerator and chimney balloons
“If and when a major resource fails, the recklessness of the decision not to address this problem will be evident to all.”
Ofgem said that if the use of customer balances was found to be “reckless”, it would take further action.
Consumers usually overpay compared to consumption in the summer months, which leads to the formation of large advance deposits with suppliers, which then decrease during the winter season.
Ofgem CEO Jonathan Brierley has previously said that some energy companies use customer credit balances “like an interest-free company credit card”.
He said on Friday: “We want suppliers to be able to innovate and be dynamic, while also making sure that they are financially stable, and that customer funds are protected.
“This is a delicate balance, and while Ofgem wants a well-capitalized business that can withstand price fluctuations, we also don’t want to block the market for new suppliers or force suppliers to sit on a lot of capital that they can invest in innovative ideas. We are seeking views on across the industry, recognizing the different business models that suppliers have, is about whether we have struck the right balance between flexibility and competition.”Read:Ofgem director Christine Farnish quits over energy price cap | Ofgem
Ofgem has tried to improve competition in the market, but has been criticized for being too slow to act as the energy crisis escalates and many new entrants fail.
The new rules will also require suppliers to secure the funds needed to purchase renewable energy.
Ofgem announced consultations on a series of other reforms, including a review of the rate of return on supplier investments and updates to its price cap. Repairs are expected to begin next spring.