BLOG: Jonathan Brearley, CEO, Ofgem: Building stronger, financially stable energy suppliers that can weather the gas crisis
Blog posted by: Jonathan Brearley, Ofgem Chief Executive, 20 June 2022.
The British people are dealing with a once in a generation price shock of a scale we have not seen since the oil crisis of the 1970s. A combination of factors ranging from post pandemic increases in demand, to the now clear impact of the Russian invasion of Ukraine, means we have never before seen the price pressures that households face today, likely getting significantly worse in Winter.
I know how difficult it is for many households to pay their energy bills, coming on top of other major financial pressures at the same time. I talk to customers on a regular basis, and I know that the big rise in the April price cap has forced some families to make incredibly difficult choices. People are worried and frustrated and vulnerable customers and those on low incomes in particular are frightened about the future. As we move into the Autumn and Winter, it is likely we will see an even more difficult environment, with the average household annual bill likely to reach £2,800 from October.
As the energy regulator, Ofgem’s top priority is to protect consumers, and this means doing everything we can to prevent further costs being added to bills. One of the key means of doing this is to ensure suppliers of energy are resilient and less likely to fail, the cost of which is ultimately borne by all customers.
Energy companies have had to adapt rapidly to this crisis. Beginning last autumn, 31 supplier failures revealed weaknesses in the sector’s resilience. While the once-in-a-generation global energy price shock we have seen would have resulted in market exits under any circumstances, we have been open that energy companies and the regime behind them were simply not robust enough. Just as was clear in banking, there are lessons to be learned, and major reforms are required to rapidly adapt the energy market in consumers’ interests.
To understand the drivers behind supplier failure, Ofgem commissioned an independent report into the root causes. In response to its recommendations, we are now taking action. We are already bringing in a series of retail market reforms at pace, including tighter controls, new licence conditions relating to financial standards, strengthened assessments at entry and growth milestones, and enhanced monitoring.
Today we are taking this further, setting out our plans to implement tough new measures to improve the financial health of energy suppliers so they can better protect themselves against price shocks and extreme market conditions. These proposals deal with several major issues that affect consumers.
By ensuring suppliers are financially responsible and robust and have proper working capital in place, we can reduce the risk of failures. Supplier failure is not only expensive and disruptive, but can be very worrying and stressful for customers, especially when it comes on top of the current price increases.
If and when suppliers do fail, we are ensuring we do not see a repeat of last year which caused additional and sometimes avoidable stress, worry and financial costs for consumers at an already difficult time.
Many energy suppliers have been treating customers’ credit balances like a company credit card, using the money as an easy source of interest free capital. This is a big issue when a supplier fails and takes those credit balances with them. By forcing suppliers to protect consumer credit balances they hold on their customers’ behalf and green levies they collect for the government, we will ensure failures do not cost consumers any more than they have to. Last year, the 31 suppliers that went out of business added an extra £94 on consumer bills this year.
Finally, we are looking at direct debits to ensure suppliers are not putting them up by more than needed. Suppliers do need to increase direct debit payments as prices go up and to allow their customers build up a surplus of credit in the summer to be spent over the winter when their use is higher. This is a sensible way of spreading costs and flattening spikes for individual customers. However, we are clear direct debits need to be set at a reasonable level, and suppliers need to communicate clearly with their customers before making changes. So we will take action where suppliers have upped their direct debits too much or are sitting on excessive credit balances.
By ensuring suppliers are more financially robust, protecting credit balances in the event of supplier failure, and ensuring that companies do not run up inappropriate credit balances through direct debits that are set too high, we will reduce this risk of failures in the first place and, if and when they do occur, we will reduce unnecessary and unfair additional costs to consumers.
This is just part of Ofgem’s ongoing work to build an energy market that is fair and works for everyone. These include the changes we are making to the price cap to reflect more volatile market conditions, new measures to ensure only fit and proper persons can start and run energy companies, and more rigorous stress testing.
No regulator can, or should, guarantee companies will not fail in the future. However, when household finances are under so much pressure, it is more important than ever that we save energy customers every penny we can and that consumers are not unfairly forced to pay for the risks of their suppliers’ shaky business models. Today’s plans reflect Ofgem’s determination to achieve just that.
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