Raft of new measures to boost financial resilience in the energy sector
15 Dec 2021 10:21 AM
Energy suppliers will undergo financial stress testing from January to measure their resilience against a range of scenarios in a raft of new measures announced by Ofgem today to boost financial resilience in the energy sector.
Where stress testing reveals weaknesses, Ofgem will agree an improvement plan for companies to address any concerns, particularly where consumers are at risk.
Ofgem has protected more than four million customers as companies have ceased trading by making sure customers have a supplier and that household credit balances are honoured. However, record global gas prices this year have exposed the vulnerability of some energy suppliers to price shocks.
Reforms announced today will bolster risk management in the sector, protecting the interests of consumers and strengthening the resilience of the energy market.
Confirmed plans include:
- the launch of financial stress testing for suppliers from January;
- requiring supplier Boards to undertake self-assessments of their management control frameworks and provide assurance to Ofgem;
- strengthening existing controls on “fit and proper” requirements;
- exploring how best to tighten rules around the protection of credit balances and Renewables Obligation (RO) payments (1);
- consulting on new financial licence requirements in Spring 2022; (2)
- consulting on requiring suppliers to pause expansion until Ofgem is satisfied that they are financially resilient before they grow beyond certain milestones such as 50k and 200k customers;
As part of Ofgem’s drive to improve the resilience of the energy retail market, it is also seeking views on whether to adapt the price cap methodology to ensure the price cap is better able to handle energy market volatility, whilst retaining its benefits for consumers.
The price cap makes sure that households pay a fair price for their energy and it has driven suppliers to become more efficient, with an estimated benefit of around £1 billion per annum since its introduction. The current price cap methodology, whilst protecting consumers from price spikes, exposes suppliers to risks that are harder to manage at times of high energy price volatility. There is a risk that, if not tackled, this could lead to higher costs for consumers. In addition, Ofgem is launching a consultation today on some potential short term, temporary interventions to help stabilise the market.
Jonathan Brearley, chief executive of Ofgem, said:
“Ofgem has worked hard to protect consumers as gas prices have risen by over 500% in under a year. We have ensured that over four million customers of failed suppliers have stayed on supply, household credit balances have been protected and all customers have been protected by the price cap from fast and extreme price rises this winter.
“Today, I’m setting out clear action so that we have robust stress testing for suppliers so they can’t pass inappropriate risk to consumers. I want to see more checks on staff in significant roles, and better use of data to help us regulate. We need a regime that can enable a sustainable market, to promote our transition to net zero.
“Our priority has been, and will always be, to act in the best interests of energy consumers. The months ahead will be difficult for many, and we are working with the government and energy companies to mitigate the impact as much as we can, particularly for the most vulnerable households.”
Links to all documents published today can be found on the building energy market resilience page.
Measures and consultations announced today focus on strengthening suppliers’ financial resilience so that they can cope with these high and more volatile energy prices, and potential adjustments to the price cap methodology so that it can continue to protect consumers at times of high price volatility without creating unsustainable risks for suppliers.
The details are set out in four documents:
- An Action Plan for Retail Financial Resilience
- A supporting statutory consultation on strengthening milestone assessments and additional reporting requirements
- A discussion paper on potential adaptations to the price cap methodology
- And a supporting statutory consultation on potential short-term interventions to address risks to consumers from market volatility
(1) When energy suppliers cease trading, they often leave behind substantial unpaid Renewables Obligation bills. These costs – which can total millions – are passed on to other suppliers, and ultimately consumers, through a system called ‘mutualisation’. Ofgem is consulting on policy options to minimise mutualisation costs as part of a review of new financial licence requirements in Spring 2022. These new requirements could include measures such as ring-fencing customer credit balances.
(2) The period for assessment of new supplier licences has been extended to nine months, and the regulator is consulting on strengthening the requirement for suppliers to notify Ofgem in advance of any significant commercial or personnel changes, such as changes of ownership.
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