Ring-fencing proposals are a ‘positive’ for Centrica

Ofgem’s proposals to obligate suppliers to ring-fence customer credit balances are “a positive” for British Gas-owner Centrica, an industry expert has stated.

The energy regulator unveiled a series of consultations on Monday (20 June), with key proposals including the protection of both credit balances and Renewables Obligation (RO) payments should a supplier fail, as well as initial thoughts on how a failed supplier’s hedges could also be transferred to a Supplier of Last Resort.

Responding to the news, senior Investec analyst Martin Young said that taken together, the proposals align with Investec’s view that the ongoing changes, whether enacted or proposed, are “supportive of well-capitalised, well-run suppliers, and a positive for Centrica”.

Explaining his thoughts further, Young told Utility Week that in the past, companies pricing their tariffs at unsustainable levels meant customers would leave suppliers like Centrica in search of cheaper deals, knowing they would be protected by regulatory mechanisms should their new supplier fail.

He continued: “So then somebody like Centrica has to think ‘hang on a minute, my customers are walking, what do I do?’ Then they potentially have to respond and if they respond through price then that’s impacting the margins that they can make.

“We need that competitive market but we need a competitive market that is full of sustainable and innovative participants and not people who are running unsustainable business models.”

Young said he felt in the past the supplier market had “unsustainable pricing, unsustainable business models and a system that had effectively created moral hazard”.

He added: “If you tighten the rules of the road then those people who otherwise would have engaged in promoting pricing that arguably wasn’t sustainable are going to find it considerably harder to do so.

“If part of their business model was based on being able to grow and finance out of customer monies that had been collected, and exploiting what can be a significant mismatch between when you might collect the revenues and when you might have to pay the money out, if you tighten up on that, it plays very nicely into the hands of the people who have the better capitalisation, who are not financing their business out of customer deposits and quite clearly can afford, by whatever route they choose, to segregate those balances and make sure that they are there for the consumer.

“It pays to the people who have got the better capitalisation and I would put Centrica in that bracket.”