Octopus objects to additional bad debt allowance in PPM cap

Octopus Energy has opposed plans by Ofgem to introduce an allowance in the prepayment meter (PPM) price cap to enable energy suppliers to recover bad debt associated with Additional Support Credit (ASC).

ASC is provided by retailers to PPM customers who are in danger of self-disconnecting after previously using up other options such as emergency or friendly hours credit. Although ASC must be repaid by consumers, funds which are not are ultimately written off as bad debt.

Ofgem proposed the allowance in June over fears suppliers will see an increase in ASC bad debt costs this coming winter, for which there are currently no allowances in the cap.

In its response to a consultation on the matter trade body Energy UK said its members “broadly welcome” the ASC allowance proposal, but that Octopus was not in favour.

“Octopus Energy wishes to make clear that it does not support this proposal as it considers the proposed implementation to be flawed and that it would reduce the incentive on suppliers to manage debt effectively. Instead, Octopus Energy encourages Ofgem to consider the cost of bad debt and payment differentials in the round as part of its price cap operating expenditure review,” it said in a footnote.

Octopus is thought to be concerned that the bad debt costs are yet to materialise, if they will at all.

Rachel Fletcher, the company’s director of policy and regulation, told Utility Week: “We’re in a cost of living crisis and we should be doing everything we can to keep bills as low as possible for customers, so we do not agree with making any pre-emptive increases to the price cap.”

Meanwhile the trade body warned that “for efficient costs for customers under the price cap there needs to remain an incentive on suppliers to help customers manage their debt and avoid involuntary prepay in the first place”.

This, it said, is vital to drive suppliers to reduce the cost of serving their PPM customers.

Octopus is also opposed to any supplier levy or reconciliation mechanism to deliver payment levelisation, as the supplier has concerns it would introduce “moral hazard”.

Due to their higher costs to serve, PPM and standard credit customers face higher bills than those who pay by direct debit.

Under the Energy Price Guarantee (EPG), the government has temporarily levelled PPM and direct debit standing charges from 1 July this year to 31 March 2024. However, the Treasury has tasked Ofgem with making proposals for removing the PPM “premium” permanently after the EPG ends.

Energy UK said: “We support the decision for costs to be allocated to the PPM cap on the assumption that it is currently being levelised in cost with direct debit through Energy Price Guarantee support. Most of our members expect Ofgem to come forward with a plan to socialise this levelisation across bills as requested by the government.”