Ofgem must prevent customers being forced onto PPMs

Ofgem must hold energy companies to account to ensure they do not unnecessarily force customers who are struggling to pay their bills onto prepayment meters (PPMs).

The Business, Energy and Industrial Strategy (BEIS) Committee issued the demand after being told by witnesses as part of its inquiry into the energy retail market that suppliers have been breaking rules over the treatment of indebted customers.

Under the Ability to Pay principles, suppliers must base repayment rates for energy debts on customers’ ability to pay and then monitor the arrangements once they have been set up. If customers are struggling to make repayments, suppliers can either install a prepayment meter if appropriate or use the Fuel Direct scheme to collect payments directly from certain means-tested benefits.

In the report on its inquiry released on Tuesday (26 July), the BEIS Committee said the second of these two options may be preferable as its avoids the risk of self-disconnection.

The report cited witnesses who said energy companies have been breaking the rules since the onset of the current price crisis, with customers being “aggressively chased” for debts and suppliers being less proactive in ensuring repayment plans are affordable. It noted that Ofgem chief executive Jonathan Brearley had acknowledged there were “troubling signs” about how some retailers were treating customers in debt following April’s price cap rise.

The BEIS Committee said work and pensions secretary Therese Coffey wrote to the regulator in May, warning that some suppliers no longer intend to offer Fuel Direct as a payment option to claimants in debt. Coffey said the Department of Work and Pensions (DWP) had heard examples of claimants being told prematurely the only option available was for them to have a PPM installed.

Energy UK said at the time that the problem was caused by the DWP’s decision to make significant changes to the Fuel Direct scheme on the eve of the new price cap coming into force in April “without any consultation with the industry” and that it could have been avoided through “better communication and giving suppliers reasonable notice”.

It added: “The sudden nature of the announcement meant that some suppliers were initially concerned they would be in danger of breaching licence conditions – through no choice of their own – and wanted to avoid that outcome, which is why they asked us to seek clarity from Ofgem about the potential implications.”

Despite receiving assurances from Brearley that Ofgem would investigate the issue, the BEIS Committee said Ofgem has only taken enforcement action against suppliers in breach of the Ability To Pay principles on one occasion. It urged the regulator to “take swift and firm” action” against companies breaching the licence conditions and “ensure suppliers promote a range of debt repayment options.”

Responding to the report, an Energy UK spokesperson said debt collection activities are “closely regulated” and that suppliers are required to “act appropriately and sensitively when dealing with customers in arrears”.

The BEIS Committee additionally recommended that the government develops a scheme to help vulnerable customers accelerate the repayment of debt that has accrued as a result of the energy crisis, for example, by matching the payments made by customers through the Fuel Direct scheme.

It said Ofgem should also publish data on the levels of debt in the market on a quarterly basis as well as analysis on the levels of bad debt it expects suppliers to accrue this winter after accounting for further increases to the cap and the government’s support package.

Smart PPMs

The report similarly highlighted concerns that Ofgem is failing to enforce rules requiring suppliers to install smart PPMs, rather than legacy PPMs, when customers are in payment difficulty.

Out of the 4 million PPM customers in Britain, around half are using a legacy PPMs meaning they have to leave their home to top up, face a limited selection of tariffs and are at greater risk of self-disconnection.

The New and Replacement Obligation (NRO) requires suppliers to take “all reasonable steps” to install a smart meter when a meter is replaced or installed for the first time.

However, National Energy Action (NEA) told the committee that customers who have fallen behind on their energy bills have had legacy PPMs installed instead of smart meters.

In response, the report said: “Replacing legacy prepayment meters with smart prepayment meters is crucial to protecting vulnerable customers in the coming months because they allow suppliers to identify customers who are at risk of self-disconnection and provide immediate support.

“Yet we are hearing reports that, once again, Ofgem is not enforcing its rules which require suppliers to install smart prepayment meters, rather than legacy prepayment meters, when customers are in payment difficulty.”

It called on the regulator to properly enforce the New and Replacement Obligation and for the government to make it mandatory for all households with a PPM to “have a smart meter installed urgently”.

Self-disconnection

In December 2020, Ofgem introduced new requirements for supplier to identify customers who are, or are at risk of, self-disconnecting and offer short-term support through emergency and friendly hours credits. However, Citizens Advice and NEA said the regulator is also failing to enforce these rules.

While Ofgem wrote to the BEIS Committee in June this year and stated that levels of self-disconnection appear to have remained broadly stable since September 2021, the report said the regulator only collects partial data, which largely covers smart PPM customers from whom suppliers can retrieve information remotely. It said Ofgem’s assessment of the levels of self-disconnection do not align with the “influx of cases” Citizens Advice has been responding to.

The charity warned that self-disconnections are now at a record high, with the first four months of 2022 seeing more cases of self-disconnection than the whole of 2021. It received more than 2,400 cases between April and May of this year – a nearly six-and-half-fold increase on the same period in 2021.

The BEIS Committee requested that Ofgem improves it data collection on self-disconnection and publish this information on a quarterly basis.

It accused Ofgem of lacking a “sufficient understanding” of the risks facing PPM customers when the price cap next increases in October and said the regulator should conduct an impact assessment of how this is likely to affect rates of self-disconnection.

“We call on Ofgem to review the existing Ability To Pay framework to determine whether further, immediate action is needed to address an increase in self-disconnection come October,” the report added.

“We also ask Ofgem, ahead of this winter, to work with suppliers to help identify vulnerable prepayment customers who are at risk of self-disconnection, for example those who have high energy demand due to the use of medical equipment and offer to convert these users to credit mode to maintain their supply.”

The committee recommended that both Ofgem and the BEIS department set a target to end all self-disconnections by the end of the smart meter roll out at the end of 2025.

PPM price cap

The report was also highly critical of Ofgem’s decision to end the safeguard tariff that was available to PPM customers between 2017 and 2020 and merge into the market-wide price cap mechanism: “This meant that the specific protections for prepayment customers were subsumed into the wider energy price cap, resulting in them paying more for policy costs, such as for smart metering.”

Due higher costs of service, the price cap for PPM customers is currently £46 higher than the cap for direct debit costs, a situation which Scottish Power chief executive Keith Anderson described as “perverse.”

“It is unacceptable that prepayment customers, who are often moved to a prepayment meter because they cannot afford their energy bill, pay more for their energy than direct debit customers,” the committee stated.

“We recommend that Ofgem addresses this differential, for example by reinstating the safeguard tariff for prepayment customers.”

The committee said this should be a temporary measure, whilst the government consults on the creation of a social tariff for vulnerable customers, which it also recommended alongside the move to a relative price cap for the rest of the market.