Ofgem has published its proposals to stop businesses with poor credentials and finances entering the energy retail market.
The regulator is acting after a spate of suppliers went bust in 2018 and early 2019, many leaving debts that other suppliers – and their customers – will now pick up.
From June, anyone that wants a supply licence will need to demonstrate they have the finances and wherewithal to operate in the energy market, with sufficient funding to meet both growth and regulatory obligations. They will also have to pass a fit and proper person test.
Cost of failure
Some of the defunct suppliers were caught out when wholesale prices began to rise. They failed to properly match their buying and pricing strategies and as their liabilities increased, wary trading counterparties increased risk premiums. Facing spiralling debt, many spent the money they should have been setting aside for the Renewables Obligation buyout fund, which suppliers collect up front via bills and are required to pay into the fund each year.
As a result, Ofgem found the buyout fund to be almost £60m light for 2017-18. Cornwall Insight estimates it will be around £44m short for 2018-19.
That effectively means the loss-leading tariffs via which the failed suppliers acquired customers will now be paid by everyone else.
Ofgem said that in a competitive market, there will always be failures and that it was impossible to say that the new rules would have prevented the mass collapse. But by taking appropriate action now, it hopes to avoid a repeat performance.