Energy regulator Ofgem has announced new measures to prevent energy supplier collapses and to better protect consumers’ money if they do fail.
The plans aim to improve the financial health of energy suppliers meaning they can stand up to future shocks in the energy market, especially over the autumn and winter.
What are the proposed changes?
The new measures aim to improve the financial health of suppliers, to ensure they can weather the current challenges and reduce the risk of failures.
Suppliers will be required to have better control over the key assets they need to run their supply business and rules will be tightened on the level of direct debits suppliers can charge customers, to ensure credit balances do not become excessive.
In addition, the new rules will protect consumer credit balances and green levies when suppliers fail, to prevent the costs being picked up by consumers.
These changes aim to reduce the risk of suppliers going bust and protect the credit balances of energy customers if their suppliers do, preventing a repeat of last year’s failures.
Why have energy suppliers collapsed?
Several factors have contributed to soaring energy prices for households and commercial businesses alike, including high global demand, reduced supply from Russia, and lower solar and wind energy output.
Wholesale energy prices have risen even higher following Russia’s invasion of Ukraine, which is the world’s largest natural gas exporter.
The cost of moving customers to new suppliers from 28 failed suppliers since September 2021, including new suppliers having to buy extra gas at short notice while prices were at record highs and replacing lost customer credit balances and green levy/renewables payments, was £94 per household.
When an energy supplier fails, Ofgem’s safety net means its customers are moved to a new energy supplier with their credit balances intact. This protected over 2 million customers last year. But under current rules, the new supplier does not get the customer credit balances from the failed supplier, so the costs of replacing those balances are currently shared across all consumer bills.
How will the new changes protect businesses?
The new plans mean energy retailers are required to protect their customers’ money, so that it isn’t lost if they go out of business, adding costs to already high bills and causing a huge amount of stress and worry for customers.
Ofgem is also imposing stricter entry requirements for new suppliers, carrying out regular stress tests to ensure energy companies are resilient to volatile market conditions.
Jonathan Brearley, CEO of Ofgem, said: “The energy market remains incredibly volatile and there are a number of huge geopolitical issues continuing to apply massive pressure. Ofgem is working hard to ensure energy suppliers shore up their positions so they can weather the ongoing storm.
“By ensuring that suppliers are operating well-financed, sustainable, and have more resilient business models, we can avoid the supplier failures we saw last year which caused huge stress and worry and added costs to everyone’s bills.
“But if some do still fail, consumer credit balances and green levy/renewables payments will be protected. Currently they are used by some suppliers like an interest free company credit card. Moving forward, all suppliers will have to have enough working capital to run, without putting their customers’ credit balances at risk. Today’s proposals will make sure that customers’ hard-earned money is properly protected so that a company must foot the bill if it fails, rather than consumers picking up the tab.”