The new rules are designed to help drive up standards for customers and reduce the risk of supplier failure. Applicants will now need to demonstrate they can adequately fund their operations for their first year, show how they will comply with their regulatory and market obligations, and also demonstrate how they will provide proper levels of customer care. Directors and major shareholders of the companies applying for a licence will need to show that they are ‘fit and proper’ to hold a licence.

Ofgem is also considering a raft of new proposals to raise the standards of existing suppliers, consulting with stakeholders over the summer. The regulator will consider new reporting requirements for suppliers alongside rules on managing customer credit balances.

In the last 18 months, a number of suppliers have failed, including One Select, Spark Energy and Extra Energy. A number of providers had called on the regulator to provide better supervision and monitoring of new providers, many of which had adopted unsustainable pricing models. However, to date, Ofgem’s ‘safety net’ has protected domestic customers’ credit balances and ensured all customers’ energy supply continues.

Mary Starks, executive director of consumers and markets at Ofgem, said: “In an ever-evolving market, Ofgem’s objective is to protect consumers while also ensuring they enjoy the benefits of increased competition and innovation that successful new firms entering the market bring.

“Underprepared, under-resourced and unfit”

“Applying new requirements on suppliers entering and operating in the market will aid us to weed out those that are underprepared, under-resourced and unfit. This will help minimise the risk of supplier failure and help drive up standards for consumers. We will adopt a proportionate, risk-based approach to licensing suppliers and will continue to encourage competition and innovation, including innovative business models, which benefits consumers.”

Natalie Hitchins, Which? head of home products and services, said: “Greater checks and transparency are desperately needed to ensure that energy companies are sustainable and deliver customers the service they deserve. People shouldn’t be left waiting many months for credit refunds when their supplier goes bust.

“But it is vital that any new tests don’t stifle innovation or competition between suppliers. The regulator needs to closely monitor energy firms and ensure customers can still switch to better deals offered by companies providing great service. People should shop around for the best energy deal for them. Those unhappy with the service they are receiving should check the results of our energy customer satisfaction survey to find a better-rated supplier. Those switching could also save around £300 a year.”