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Tougher rules for energy firms on the way

Emma Lunn
Written By:
Emma Lunn

Energy suppliers will undergo financial ‘stress testing’ from January to measure their resilience against a range of scenarios under new rules announced by the energy regulator.

But experts say Ofgem is ‘shutting the stable door after the horses have bolted’ following the collapse of at least 26 energy firms in the past few months.

Under the plans where stress testing reveals financial weaknesses, Ofgem will agree an improvement plan for companies to address any concerns, particularly where consumers are at risk.

Ofgem said it had protected more than four million customers where companies have ceased trading by making sure customers have a supplier and that household credit balances are honoured. When a firm goes bust, the regulator uses the ‘supplier of last resort’ process to move its customer base to a different energy company.

Record global gas prices this year have exposed the vulnerability of some energy suppliers to price shocks. Earlier this month, Citizens Advice accused Ofgem of failing to act against unfit suppliers, ultimately leaving consumers with the bill for its failures.

Ofgem said the reforms announced today will bolster risk management in the sector, protect the interests of consumers and strengthen the resilience of the energy market.

Confirmed plans include the launch of financial stress testing for suppliers from January, strengthening existing controls on ‘fit and proper’ requirements, and looking at how to tighten rules around the protection of credit balances and Renewables Obligation (RO) payments.

Ofgem also plans to consult on new financial licence requirements in Spring 2022, and also consult on plans to require suppliers to pause expansion until Ofgem is satisfied they are financially resilient before they grow beyond certain milestones such as 50,000 or 200,000 customers.

The regulator also confirmed it was considering adapting the energy 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 aims to ensure that households pay a fair price for their energy. Ofgem says it has driven suppliers to become more efficient, with an estimated benefit of about £1bn per annum since its introduction.

But 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. Ofgem says 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: “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.”

Richard Neudegg, head of regulation at Uswitch.com, said: “Introducing financial stress testing after 26 energy providers have exited the market feels like the very definition of shutting the stable door after the horses have bolted. Financial testing should have been used to identify the suppliers that were ill-equipped to handle the shocks that have rocked the market. While necessary for the future, these proposals are clearly too late to help the current crisis.

“Ofgem’s priority must now be to build a resilient market that can stand strong in the face of any future shocks. The way the price cap works has also been a major factor in the current energy crisis. It is currently delaying the pass-through of the full shock to the system for consumers, but the regulator cannot prevent this coming in April.

“Ofgem is considering changes to tariffs that seem intended to bolster the surviving larger suppliers, and to ensure that they get enough money out of customers to cover crisis losses partly through reducing the escape routes available to households. Make no mistake, a lot of pain is coming for consumers when energy bills rise from April. It brings into stark contrast how inadequate current support for the most vulnerable households is, making it critical that more is done to support those who need it most.”