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Ofgem is proposing to introduce an allowance in the pre-payment meter (PPM) price cap to enable energy suppliers to recover bad debt associated with Additional Support Credit (ASC).
It comes as the energy regulator anticipates that suppliers will see an increase in ASC bad debt costs this coming winter, for which there are currently no allowances in the cap.
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.
In a consultation published on Wednesday (28 June), Ofgem said it had seen evidence of what it considered to be a material increase in 2022/23, both in the overall level of ASC issued and the level of ASC bad debt.
It added that it expects demand to increase this coming winter due to continued affordability pressures, and that suppliers may have to issue more ASC as a result of the action the regulator is taking on involuntary PPM installations.
As such, Ofgem is proposing to introduce a temporary allowance of around £13 per typical dual fuel PPM customer in total over 12 months, beginning this October.
Neil Kenward, acting director for markets at Ofgem, said: “This allowance would be added to the PPM cap only, to ensure that the suppliers who serve PPM customers are financially able to issue support credit where needed this winter. In practice, we do not expect this allowance to lead to PPM customers paying more on their bills than comparable direct debit (DD) customers in 2023/24.
“This is because at the Spring Budget, government made a commitment to align charges for comparable DD and PPM customers using the Energy Price Guarantee until April 2024, to ensure that PPM customers no longer pay a premium for their energy costs.
“We are actively working with government to ensure this proposal is aligned with that continued commitment to remove the PPM premium.”
Kenward added that Ofgem recognised that customers bills would be directly impacted once the government’s commitment ends.
“However, subject to the completion of wider Ofgem work on the relative costs of all payment methods, the cost of the ASC bad debt allowance may be recovered across other payment methods as well, not solely PPM. In either case, given the significant benefits of ASC to some of the most vulnerable consumers, we believe this intervention is justified,” he said.
Ofgem is additionally proposing to make the voluntary code of practice surrounding PPM customer protections a compulsory part of suppliers’ licence conditions.
The code was introduced in April 2023 following the explosive allegations against British Gas concerning the way it forcefully installed PPMs. It aims to ensure vulnerable customers are protected when struggling to pay their bills and faced with an involuntary PPM.
As well as making the code a part of supplier licence conditions, Ofgem is proposing to update the ‘Safe and Reasonably Practicable’ guidance to integrate the code’s detailed and more prescriptive elements.
“This is particularly the case for the groups of consumers that are protected from involuntary PPM in all circumstances…and those for whom suppliers need to carry out additional checks…It will allow us to be flexible to change the more prescriptive parts of the code in response to new evidence and/or emerging good practice amongst suppliers,” Ofgem explained.
Ofgem added that the proposals, if implemented, could increase the level of bad debt faced by suppliers. It said the impact is “inherently uncertain” and depends on macro-economic conditions.
The regulator is using two alternative methods to calculate total potential impact of between £74 million and £307 million per year, or between £3 and £14 per household.
“Our current expectation is that the impact is towards the lower end of this range, in a central scenario. This projection compares against a current annual cost of bad debt of around £45 per dual fuel household,” it said.
Last week, the government’s Committee on Fuel Poverty said that the code of practice does not go far enough and called for a ban on forced PPM installations to be extended to the coming winter.
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