Ofgem reforms could see credit balances of around £1.4 bn automatically returned
Ofgem is consulting on proposals to limit the amount of customer credit balances suppliers can hold, which could result in as much as £1.4 billion in total or £65 per household on average being returned.
- Ofgem consults on proposals to limit the amount of consumer credit balances suppliers can hold
- This will ensure that consumers paying by fixed direct debit do not overpay for their energy
- The proposals would see as much as £1.4 billion going back to consumers
Customers who pay by fixed direct debit pay the same amount each month based on their estimated consumption.
They typically build up a credit balance during the summer when their energy use is lower and then draw down on this credit during winter.
Suppliers should set the payments so that customers’ credit balance returns to £0 each year on the anniversary of when they started the payments.
However, many customers who pay by fixed direct debit are overpaying resulting in surplus credit balances.
Ofgem’s research found that as much as £1.4 billion was held in surplus credit balances in October 2018.
Ofgem is concerned that some suppliers may use customers' surplus credit balances to fund otherwise unsustainable business practices.
The ‘auto-refund’ policy would require suppliers to refund any credit balances, for domestic credit customers paying by fixed direct debit, above £0 each year on the anniversary of when they started their contract.
Jonathan Brearley, chief executive of Ofgem, yesterday said:
“These new proposals would ensure that suppliers are not holding onto more of customers’ money than absolutely necessary, potentially returning millions of pounds of customers’ money.
“This is an important step in making the retail energy market fairer for consumers at a time when many are facing financial hardship.”
The ‘auto-refund’ proposal would stop surplus credit balances growing year-on-year but would not stop suppliers building up surplus credit balances during the year. To address this risk, Ofgem is also proposing to introduce a credit balance threshold for all domestic suppliers.
These new proposals would also reduce the amount of credit balances held when a supplier fails, reducing the cost to the market and ultimately consumers of covering these additional costs.
If confirmed, the proposals would be rolled out from 2022.
Notes to Editors
- Ofgem has published its consultation on 17 March 2021 and invites stakeholders’ views by 12 May 2021.
- The proposals are part of Ofgem’s wider supplier licensing review, which seeks to mitigate the potential for consumer harm by raising supplier standards of customer service and financial resilience. In 2019, Ofgem raised the standards required of companies entering the energy retail market. Earlier this year, a new range of ongoing and exit requirements for suppliers already operating in the market were introduced.
- Example of proposals: If a consumer who pays in arrears has a credit balance of £50 at the end of the year (12 months from when they first started their contract) this means they have overpaid. The new proposals would automatically move this money from their energy account back to their bank account.
- If a customer is concerned about the size of their balance, they can ask their energy supplier to refund it. Suppliers must do so promptly, unless there are reasonable grounds not to and they must explain to the customer why.
- In summer 2020, Ofgem issued a Request for Information to all domestic suppliers regarding their credit balances and monthly revenue. From this, Ofgem calculated the credit balances required in each month of 2018 for suppliers to collect enough money from their fixed direct debit customers to cover winter debt, the amount a consumer underpays compared to their usage over the winter months, and the actual credit balance positions of all suppliers. This analysis showed that, in October 2018, there was as much as £1.4 billion in surplus credit balances in the market.
- The exact level of surplus credit balances in the market will depend on the methodology Ofgem employs to define what is and is not surplus.
- Ofgem is proposing to apply the thresholds regularly across the year to ensure suppliers either do not collect surplus credit balances or, when they exceed the threshold, they protect the surplus amount. These thresholds would be applied by multiplying the sum of the supplier’s customers’ estimated annual bill for direct debit customers by the relevant threshold percentage. The result of that calculation is the total credit balance the supplier would be permitted to hold at that point in the year. Suppliers would be required to protect credit balances they collect above the threshold, such as through an escrow account or a guarantee from a third party or parent company with a minimum credit rating of investment grade. The threshold would encourage suppliers not to collect surplus credit balances by making them pay to protect any credit balances they hold above the threshold limit.
- Ofgem’s ‘Supplier of Last Resort’ (SoLR) process is used when an energy supplier goes into administration and are unable to remain in business via a trade or sale of assets. Ofgem is then required to step in and appoint a new supplier for the failed supplier’s customers. This process seeks to select a SoLR who would honour domestic customers’ credit balances. On some occasions, following Ofgem’s consent, credit balance costs can be recouped by the SoLR via an industry levy where costs are mutualised or met by all suppliers.
- Ofgem previously proposed that suppliers should protect 50% of their credit balances and Renewables Obligation (RO) payments. Our new proposals concern credit balances only. The regulator is now exploring the RO jointly with BEIS, and will separately publish a consultation exploring the full range of options for addressing RO mutualisation, including increasing the frequency of RO compliance and potential licence changes to require suppliers to protect or demonstrate their ability to pay the RO.
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