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.
Details here.
Related stories:
£100m tab for failed energy suppliers
Energy supplier debt crisis “creating house of cards”
Economy Energy latest failed supplier
Supplier debt crisis creating “house of cards”
Spark Energy shuts down domestic supply business
Ofgem tightens supply licence rules as money goes missing
Big cracks emerging in energy retail
Risk mismanagement: More suppliers will go bust
Utility Warehouse: More independent suppliers will go pop
Click here to see if you qualify for a free subscription to the print magazine, or to renew.
Follow us at @EnergystMedia. For regular bulletins, sign up for the free newsletter.
This is certainly a sensible and welcome initiative by the Regulator. We provide a lot of advice about switching to local residents, and have found that (understandably) consumer confidence has been shaken by the high number of small supplier insolvencies over the last 24 months.
For this reason a lot of consumers are fearful of switching. Hopefully these more robust licencing requirements will bring about some stability in the market and a return of customer trust.