Ofgem proposes new financial checks and tests for existing suppliers

• ·        Ofgem consults on reforms for existing suppliers to drive up customer service standards, reduce the risk of supplier failure and strengthen the safety net 
• ·        Fast growing suppliers will have to demonstrate to Ofgem they are able to serve additional customers effectively and meet industry obligations whilst remaining financially viable
• ·        Ofgem expects competition and innovation which benefit consumers to continue after reforms are in place

Ofgem is proposing new reforms for existing suppliers to drive up customer service standards, reduce the risk of supplier failure and strengthen the safety net.

Increased competition in the retail market has benefitted consumers with cheaper deals, put pressure on incumbent suppliers to improve their customer service offering and brought in new and innovative players into the energy sector.

But as in any competitive market some suppliers may fail to keep up with the pace of more competitive firms. Ofgem wants to ensure that if this happens customers are protected and the impact on the wider market is minimised.

Building on the new entry requirements for new suppliers that came into force in the summer, the new rules for existing suppliers would let Ofgem request independent audits of suppliers’ customer service operations and financial status.

As part of this, new checks would be introduced for growing suppliers before they hit certain thresholds of customer numbers requiring them to ensure they have the operational capability to effectively serve their customers. If they fail the checks, they would be stopped from taking further customers on.³

Ofgem proposes introducing further ongoing ‘fit and proper’ requirements for suppliers, to ensure those in senior management positions are fit to carry out their duties, and a new principle for suppliers to be open and cooperative with the regulator.

All suppliers would have to assess their readiness for orderly failure by maintaining ‘Living Wills’ that would be scrutinised by Ofgem. Suppliers would have to set out what would happen in the event of their failure, including any barriers to an ‘orderly exit’. This could include the likely costs faced by other consumers, disruption to services for their customers and how they would ensure compliance with any relevant licence conditions.

New rules would also be introduced to avoid disruption associated with supplier exit. These would ensure that, when a supplier fails, certain consumer protections around debt collection practices remain in place.  

Ofgem is proposing other reforms which would help minimise the costs of mutualisation⁴ for other suppliers in the event of supplier failure. Suppliers would be required to put in place arrangements to ensure that they would be able to cover a proportion of customers’ credit balances and government environmental scheme costs if they failed. This would not affect the protections already in place to cover all domestic credit balances when a supplier fails.  

Ofgem expects competition and innovation which benefit consumers to continue in the retail market after all these reforms are in place.

Mary Starks, executive director of consumers and markets, said:

“Our regulatory regime needs to be effective and proportionate in protecting consumers, while continuing to facilitate competition and innovation. At this stage in the transition to a net zero emissions economy it is more important than ever that innovators can enter the market and prosper, driving benefits for consumers.

“The new proposals will create more accountability in the market, require more responsible and appropriate behaviour from suppliers in the market and reduce the risk and costs to consumers associated with supplier failure.

“In the event a supplier fails, the changes will also strengthen the ‘safety net’ and improve the experience of customers when they are transferred, so that consumers can be reassured that whatever happens they will be properly protected.” 

Notes to editors

1.    The consultation is open until 3 December 2019 for responses. 

2.    Ofgem plans to issue the statutory consultation for these proposals in early 2020.

3.    Ofgem proposes that suppliers demonstrate they have appropriate resources for growth and understand regulatory obligations at the following customer numbers: 50,000; 150,000; 250,000 and 500,000-800,000.

4.    Mutualisation can be an effective way to ensure that the relevant schemes continue to operate as intended. However, it can mean that suppliers that manage their costs responsibly are required to cover some of the unpaid costs of other suppliers. It can also increase costs for consumers as a whole.

The Capacity Market and several government schemes have mechanisms to spread the cost of unrecovered amounts across the wider industry. What this means in practice is that, for example, where a supplier fails without settling their scheme obligations, their costs may then be spread across other suppliers and ultimately passed on to consumers. A similar outcome is achieved, though via a different mechanism, in the case of customer credit balances, the cost of which can be recovered from wider industry via a ‘Last Resort Supplier Payment’. The spreading of these costs is referred to as ‘mutualisation’.

5.    If a supplier goes bust Ofgem's safety net, also known as the ‘Supplier of Last Resort’ process, will make sure customers always have an energy supply, domestic credit balances are protected and that customers will feel as little change as possible.