Cost of forced PPM ban on bad debt levels revealed  

The ban on prepayment meter (PPM) installations is adding around £30 million a month to the sector’s bad debt levels, it has been revealed.

Energy UK laid bare the financial impact of the moratorium – which effectively banned forced installations of PPMs – while outlining concerns about growing debt levels in the sector.

It means that up to £120 million has been added to the sector’s bad debt levels as a direct result of the moratorium, which was drawn up in early February after an undercover Times investigation showed PPMs being forced on vulnerable British Gas customers.

Fears around mounting bad debt have been growing over the past few months, with Ofgem currently consulting on the impact of the pause of forced PPM installations. In particular, the regulator is considering tweaking bad debt allowances to accommodate for revenues lost during the pause.

Ofgem has also outlined a new code of practice for energy suppliers around force-fitting of PPMs.

All suppliers have signed up to the voluntary code of practice, which outlines more stringent processes before a forced PPM install can be carried out. It also means that certain groups are exempt from forced installs, including those aged over 85 and people with severe health issues.

Despite issuing the new code of practice, suppliers are still prohibited from applying for warrants for forced PPM installations until Ofgem completes its market compliance review. Ofgem was unable to provide a timeline for when the review would be completed when asked by Utility Week.

The impact of the moratorium on bad debt levels is revealed within Energy UK’s response to Ofgem’s Call for Input on the allowance for debt-related costs.

It states: “Data collated by Energy UK from some suppliers suggests the prepayment moratorium alone is adding around £30 million per month in total customer debt across the industry.

“We urge Ofgem to take a data-based approach to assess the issue and are concerned by the risks attached to possible proxies.”

Energy UK raises concerns about Ofgem’s suggested approach to debt recovery. It states that the proposed float and true up mechanism – which was deployed to tackle debt levels during the pandemic – “will be highly problematic”.

It adds: “The proposed adjustment methodology is complex to design and implement and is unlikely to be fair to customers.

“It will not do enough to reassure investors after a period of significant supplier under-recovery of bills, particularly considering the large debt build-up in the sector and the need for a more robust and enduring solution. It should only be used if more holistic, robust and enduring solutions cannot be implemented.”

Energy UK also calls for debt to be “recovered from as broad a customer base as possible” and warns that “distortions could arise where a notionally efficient supplier has a different ratios of customer payment types, different ratios of default or fixed tariffs; or for existing suppliers relative to new entrants”.

It adds: “While we support action to enable effective cost recovery, the mechanism for cost recovery should be non-distortionary between competing suppliers.

“The challenges in achieving this outcome through this consultation highlights the inadequacy of the notional efficient supplier approach which underpins the current price cap design. Further, the uncertainty around cost recovery risks delaying suppliers’ ability to offer fixed term offers.”

Instead, the trade association said that “most, but not all, of our members support a levy approach”.

“Our members want to see a prompt, simple and repeatable mechanism for debt recovery when costs markedly expand beyond the price cap allowance,” Energy UK’s consultation response adds. “This should be fixed through a more transparent and consistent approach to debt costs within the price cap or by using a separate mechanism.”

Dhara Vyas, Energy UK’s deputy chief executive, has previously argued that involuntary PPM installations are “necessary to prevent debt building up further and to minimise additional costs for all customers,” even if they should be used as a last resort.

She said: “Bad debt within the energy industry is increasing to unsustainable levels. As Ofgem acknowledges, the new process will lead to fewer installations by warrant and so it’s likely customer debt will increase even further as a result – as well as from the current pause – which will need to be addressed.”

Andy Mayer, energy analyst the Institute of Economic Affairs, also warned that suspending forced prepayment meters could raise costs across the energy market.

He said: “Putting up the cost of serving vulnerable customers with expensive interventions, however well intended, risks suppliers avoiding such customers, as to take them on in larger numbers than rivals renders them uncompetitive.

“This in turn will compel the government to create either a social supplier of last resort, or subsidise social tariffs, which will spread the risk, but encourage welfare fraud to avoid higher bills.”

Energy UK recently estimated that debt in the retail energy sector has risen by more than £1 billion in the last year, taking the total estimated debt within the sector to between £3.5 billion and £3.6 billion.

Despite soaring debt levels, consumer research carried out by Ofgem as part of its investigation into PPMs found that the majority of Brits believe suppliers should absorb debt within their perceived profits.

An Ofgem spokesperson said: “We recognise, of course, that our robust action on PPMs could lead to greater levels of non-payment of bills, and therefore impact the cost of debt owed to energy suppliers.

“That is why, in parallel to our work on bringing the supplier-agreed Code of Practice into the supply licence, we are therefore also working to gather evidence on debt-related costs, including through a Call for Input published on 18 April 2023.”

Meanwhile, partner at Baringa James Cooper said: “The combination of energy bill rises, wider inflation and interest rate increases has resulted in the most challenging financial conditions for households in a generation. The result is significant rises in debt levels for households and business and a rising level of risk for the industry – a concerning situation, as no-one wins where debt is concerned.

“We welcome the focus this challenge is receiving, and there is rightly a live debate about the mechanisms, processes and technicalities involved. Whatever solutions we choose, it must be based on industry players working together to help customers.

“This is both a business and a moral choice: the more customers we can help avoid default, the better the outcome for the energy industry and for society.”