Some households could be in line for significant refunds after the regulator announced plans to cap the amount of credit balances suppliers can hold.

Ofgem estimates that the move could see credit balances of about £1.4bn automatically returned to customers. The average refund would be about £65.

However, separate research by Which? suggests some households could be owed up to £1,000 by their energy supplier.

Are you in credit?

Customers who pay for their energy 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.

However, many customers who pay by fixed direct debit are overpaying resulting in surplus credit balances.  Ofgem estimates that these credit balances totalled about £1.4bn in October 2018.

The regulator is concerned that some suppliers may use customers’ surplus credit balances to fund ‘otherwise unsustainable business practices’.

How would ‘auto-refund’ work?

Ofgem is proposing an ‘auto-refund’ policy would require suppliers to refund any credit balance on the anniversary of when a customer started their contract, re-setting their account back to zero.

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.

So, another idea is to impose a cap on the credit balance that a company could hold.

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.

Jonathan Brearley, chief executive of Ofgem, 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.”

Some households could be owed £1,000

Which? research found that some energy customers who paid via direct debit were in credit with their supplier by up to £1,000, and that not all suppliers were forthcoming when it comes to refunds.

Natalie Hitchins, head of home products and services at Which?, said: “These proposals are good news for consumers, as many may prefer to keep this extra cash in their bank accounts rather than with their energy supplier.

“Customers who pay by direct debit will see their energy accounts build up credit and fall into debt at certain times of the year, depending on how much energy they use, but it should all balance out at the end of the year. It is worth keeping an eye on your balance, and if you consistently have excessive credit you should consider requesting a refund.”

Peter Earl, head of energy at Compare the Market, said: “Energy companies managing credit balances has long been a matter of confusion and complexity for households. Although there is often a focus on customers who are in debt to their supplier, these proposals to return credit balances in a timely manner should be welcomed, especially given the burden the past year has placed on people’s finances. Ultimately, any credit belongs to the customer, whether the suppliers holds it or not.

“It’s worth bearing in mind that sometimes it pays to be in credit though, to prepare you for more expensive bills during the year and potential energy price increases. Households can use significantly different amounts of energy depending on the season, and in particular, consumption has been impacted this year by lockdowns, home schooling and working from home.”