Ofgem unveils financial responsibility principle for suppliers

Ofgem will introduce a financial responsibility principle for suppliers to minimise the likelihood and extent of costs to be mutualised in the event of their failure.

The regulator’s final proposals on tougher license conditions designed to raise standards for energy suppliers and minimise consumer detriment were published this morning (25 June). It initially consulted on the rule changes last year.

The regulator has been undertaking a review of its supplier licence regime since mid-2018, following criticism that it was too easy for new suppliers to gain market entry. Since the start of that year 18 suppliers have exited the market through the supplier of last resort (SoLR) mechanism.

The proposals include milestone checks for growing suppliers to ensure that they are prepared to meet their financial obligations and able to effectively serve their customer base, as well as plans to mitigate the effects of cost mutualisation on the wider market.

Mutualisation has been a major source of contention in the past two years, with compliant suppliers required to pay out millions of unpaid renewable obligation (RO) payments.

In order to mitigate its effects, a financial responsibility principle is being introduced requiring all suppliers to take actions to minimise the likelihood and extent of costs to be mutualised in the event of their failure.

Where suppliers do not manage risks effectively, Ofgem will be able to take action under the new requirement, enabling them to intervene to address unsustainable behaviour, pricing practices or business models.

The milestone thresholds, which apply in terms of the number of unique accounts, will be set at 50,000 and 200,000 domestic customers, for each individual fuel. Suppliers would be required to notify Ofgem when they approach, and when they reach, these thresholds for each fuel. Those who are not up to standard may be banned from taking on any more customers.

In addition to milestone assessments, suppliers may be required to undergo dynamic assessments at points where Ofgem is concerned about their financial position. Warning signs such as missed payments for example would be used to consider whether to undertake a dynamic assessment.

Elsewhere, the regulator plans to introduce requirements to minimise the cost and disruption to the wider market in the event of supplier failure. For example, when administrators take over failed suppliers, they would have to provide similar consumer protections around debt collection practices to former customers as active suppliers.

Where suppliers are engaging in a customer book sale, they will be required to notify Ofgem. The regulator will also have more powers to ensure such transactions do not cause harm to consumers.

Furthermore, retailers will be required to have and maintain a customer supply continuity plan outlining their plans to ensure an orderly exit from the market in the event of its possible failure. Suppliers will be required to submit its plan when requested by Ofgem, including as part of the new milestone assessments.

Mary Starks, executive director of consumers and markets, said: “Energy suppliers have been at the core of the industry response to the Covid-19 crisis, protecting customers and the energy supply of those most in need.

“Now more than ever we need to ensure that suppliers are set up in the right way to treat customers fairly and meet the challenges of today’s energy system.

“These proposals will drive up suppliers’ customer service standards and lead to greater resilience in the sector, whilst reducing the risk and costs to consumers associated with supplier failure.”