The energy regulator has tightened its rules to protect households after taxpayers were left to pay a £9.2billion bill when suppliers went bankrupt – but it has been criticized for failing to protect deposits consumers.
Ofgem has announced a package of reforms to strengthen consumer protection and ensure energy suppliers are more resilient to market shocks.
Nearly 30 energy suppliers have collapsed since the start of the energy crisis. The Bulb collapse, by far the biggest failure, is estimated to cost the taxpayer £6.5bn, while the remaining failures will cost consumers around £2.7bn. Many of the failures were due to weak supplier balance sheets, which were exposed when wholesale gas prices began to rise rapidly.
In response, Ofgem is proposing a series of reforms, including setting a minimum amount of capital that providers must hold – to reduce the risk and cost of supplier failures.
However, Britain’s regulator said it would only “closely” monitor the use of credit balances. Some energy companies, including British Gas owner Centrica, have argued that customer credit should be earmarked to prevent suppliers from using consumers’ money for other business purposes. Rivals including Octopus have suggested cheaper options.
Centrica chief executive Chris O’Shea blasted the decision, accusing Ofgem of an “abdication of responsibility”.
He said, “When customers prepay for their energy, they trust their supplier to take care of their hard-earned money. They would be appalled to learn that their money is being used to finance day-to-day business activities, but that is exactly what is happening in some businesses, and it is undermining trust in the market.
“If and when a major supplier fails, the recklessness of the decision not to address this issue will be clear to all.”
Ofgem said if the use of customer balances was found to be “reckless” it would take further action.
Consumers typically overpay relative to consumption during the summer months, racking up large deposits with suppliers, which are then depleted during the winter.
Ofgem chief executive Jonathan Brearley has previously said some energy companies use customer credit balances “like a company credit card with no interest”.
He said on Friday: “We want suppliers to be able to be innovative and dynamic, while ensuring they are financially stable and customers’ money is protected.
“It’s a delicate balance and while Ofgem wants well-capitalized businesses that can withstand price fluctuations, we also don’t want to block the market for new suppliers or force suppliers to sit on a lot of capital that they could invest in innovative ideas.We seek perspectives across the industry, recognizing different vendor business models, to see if we have struck the right balance between resilience and competition.
Ofgem tried to improve competition in the market but was criticized for being slow to act as the energy crisis intensified and many new entrants failed.
The new rules will also require suppliers to set aside the money needed to purchase renewable energy.
Ofgem has announced consultations on a range of other reforms, including a review of providers’ rate of return on investment and updates to its price cap. The reforms are expected to come into force next spring.