Ofgem rule changes risk penalising ethical suppliers

Last week Ofgem introduced proposals to toughen up the rules for energy suppliers. The chief executive of Good Energy, Juliet Davenport, believes there is a real danger that the proposals could penalise well-run businesses if introduced.

Toto Energy is now the 16^th supplier to go under within two years. The company had only recently taken on 43,000 new customers when Solarplicity ceased trading in July.

The story of failed small suppliers has become both familiar and a glaring problem for the industry. Toto’s demise came a mere day after Ofgem announced proposals to better ensure suppliers pay their bills and do not exit the market with bad debt.

You do not need to be an energy industry insider to know something is wrong when so many companies are falling like dominos. Ofgem has understandably taken action to create stronger barriers to entering the market. Its new set of rules look to the existing crop of suppliers, so the regulator is not left to pick up the pieces when more firms go bust.

These new rules cover a range of practical changes: suppliers should prove they can handle more customers as they grow; Ofgem can bring in the auditors if necessary; and senior managers should meet a ‘fit and proper’ requirement.

These rules make common sense. But it is disappointing that the regulator is having to strong arm companies into running their businesses properly. The idea of a ‘living will’ that sets out what a company would do in the event of a failure is something businesses should have anyway. So why has energy attracted so many ‘entrepreneurs’ that do not have such a baseline level of business ethics or understanding of governance?

As a publicly listed company, Good Energy regularly reports on its financial performance, going above and beyond what many suppliers currently disclose. This level of detail should be commonplace in the market, promoting transparency and preventing poor management.

The danger in Ofgem’s new proposals is that they could hurt well-run businesses. Requiring them to put cash down up front to cover the cost of customer balances and environmental schemes is excessive and could impact liquidity within businesses which need it to do good.

There is huge variety in business models among suppliers of different sizes. Obligating them all to keep a pot of money on hold could have unintended consequences, such as stifling growth and innovation. It will also favour the big six, and consequentially reduce competition.

Good Energy has always complied with its obligations, on time, year after year. The reason is simple: we have a proper governance process and have been in the market for 20 years. Ofgem is right to stamp out incompetence, but making other companies pay for someone else’s failure is not how the market should operate.

The right route needs to start with the right questions: why weren’t the non-executive directors protecting cash flow? And why weren’t administrators called in earlier? These businesses clearly were not acting ‘fit and properly’; what are the existing laws that were not enforced and should have been?

Toto’s exit won’t be the last. In fact, the news that the Capacity Market has passed state aid rules could come as a shock to some poorly run companies. Suppliers who had taken the savings and applied them to customer bills could now run into trouble. A new auction and large unpaid bills will have to be paid for, increasing the pressure on struggling finances.

In a functioning market, the news of one failed supplier is normal and a sign of healthy competition. 16 in 24 months is a sign of something else altogether. New policy in this area should protect that competition and not punish the good guys.