The energy regulator has said it will consider ring-fencing customer funds in response to concerns that misuse of this money contributed to the recent spate of supplier failures.
Surging wholesale gas prices precipitated a run of supplier insolvencies and Ofgem said one of the “root causes of the failures of many of those suppliers is related to the way that they have managed the money paid to them by customers”.
Jonathan Brearley, the chief executive of Ofgem, said suppliers had been using funds intended to pay for energy or to support the development of renewable energy “to prop up their finances, enabling them to follow more risky business models with reduced financial resilience and higher likelihood of failure”.
“We are considering options to ring-fence credit balances and renewables payments in such a way that they would be protected if a supplier fails,” Brearley wrote in a message on Ofgem’s website yesterday.
Ofgem has vowed to tighten up regulation after 28 suppliers failed since last September, leaving behind more than £2 billion in costs that will be paid for by households. That is expected to include more than £200 million to reimburse customers of failed suppliers for their credit balances, cash they had paid in advance.
Centrica, which owns Britain’s biggest supplier, British Gas, has led calls for ringfencing. It said in February it had transferred customers’ £294 million cash deposits to a separate bank account. However, other suppliers are likely to object to the plans, with some arguing they cannot easily afford to ring-fence the hundreds of millions of pounds that customers have paid. Some use this cash as a cheap source of working capital to help fund their operations, a practice Ofgem has allowed.
Ofgem said it would consider “appropriate transition arrangements to allow companies to make this adjustment whilst preserving financial stability”.
The regulator will launch a broader review of suppliers’ handling of customers’ direct debits, credit balances and customer service levels, including treatment of vulnerable customers amid concerns that standards are worsening.
Ofgem said there were a “series of issues which we find concerning and are investigating further” amid disruption to the market, with more than 4.3 million customers having moved automatically with their credit balances to alternative energy suppliers when their supplier failed.