Ofgem proposes £1.4bn credit balance overhaul

Energy retailers could soon be required to automatically refund surplus consumer credit balances as part of a regulatory clampdown on unsustainable business practices.

According to research by Ofgem, £1.4 billion was held in surplus credit balances as of October 2018.

In an announcement today (17 March) Ofgem put forward a consultation, as part of its wider supplier licensing review, which proposes requirements for suppliers to automatically refund surplus credit balances every year.

While it recognises the benefits the direct debit payment model can provide, Ofgem says it is concerned that irresponsible suppliers may use surplus credit balances to finance “risky strategies”, particularly unsustainably low-priced tariffs, which they would otherwise not be able to offer.

“We note that a supplier may choose to risk their own or their investor’s money to adopt such a strategy, but we do not think they should risk their customers’ money to do so,” Ofgem said.

Under the proposals, suppliers would be required to automatically refund any fixed direct debit customers’ credit balances one year after they started their contract.

Ofgem said this will complement existing rules requiring retailers to set accurate direct debits by acting as a backstop.

The move would stop surplus credit balances growing year-on-year but would not stop suppliers building up surplus credit balances during the year. To address this, Ofgem is further proposing to introduce a credit balance threshold for all domestic suppliers.

Thresholds would be introduced at key points during the year and suppliers who exceed the threshold, at an aggregate level, will need to protect balances above the threshold.

Ofgem chief executive Jonathan Brearley said the move was an “important” step in making the retail energy market “fairer for consumers”

“These new proposals would ensure that suppliers are not holding onto more of customers’ money than absolutely necessary, potentially returning millions of pounds of customers’ money,” he added.

Speaking to Utility Week, one industry source speculated whether the move will result in a shift away from fixed to seasonal direct debits and said there was also an issue over calculating credit balance estimates.

“You might see a bit of a shift away from fixed direct debits and more to a variable or seasonable direct debit. Does that get round this rule if it is not a fixed direct debit?”

They added: “I guess there’s a question around if they haven’t got a smart meter, if they haven’t got up to date reads, who polices the estimate?”

Responding to the announcement an Energy UK spokesperson said: “Paying by direct debit helps customers budget by ensuring they pay a regular amount each month even though their actual energy usage varies significantly over the year.

“Some suppliers already refund credit balances automatically so we now need to look in detail at Ofgem’s proposals. We look forward to working with them and our members to find an industry-wide best practice approach that supports customers and works for suppliers.”

Meanwhile Ed Dodman, director of regulatory affairs at the Energy Ombudsman, said the organisation received more than 1,000 complaints about credit balance refunds in 2020 alone.

He added: “Just as people are expected to pay their energy bills on time, we think it’s fair to expect energy suppliers to do the same with refunds.

“We know from looking at complaints that suppliers can sometimes take too long to issue refunds, which can be stressful for consumers.

“We think Ofgem’s proposals will help to tackle the problem, setting clear expectations of suppliers and making sure consumers are treated fairly.”

RO mutusalisation

While the proposals announced today only concern consumer credit balances, Ofgem previously proposed suppliers should protect 50 per cent of their credit balances and renewables obligation (RO) payments. The regulator added it is now exploring the RO jointly with the government and will publish a separate consultation addressing RO mutualisation.

Last month the government said it had decided to link the RO mutualisation threshold to the annual cost of the scheme, and for it to be re-calculated each year.

The new arrangement, subject to Parliamentary approval, will increase the mutualisation threshold from £15.4 million to about £62 million for the 2021 to 2022 obligation year, but that figure will rise or fall in future years as the cost of the scheme changes.

This will lower the likelihood of mutualisation being triggered in the event of supplier payment default.