Setting standards in energy retail

Ofgem’s review of supply licences must protect customers without compromising competition on service quality.

After the recent collapse of Iresa and other challenger suppliers, Ofgem’s decision to review its approach to issuing energy supply licences – including the criteria against which licence applications are assessed – may seem a bit like shutting the door after the horse has bolted. However, it presents an opportunity to clarify regulation in retail supply.

The current arrangements for obtaining a supply licence do not require the applicant to undergo extensive vetting but are aimed instead at maximising market entry, to support competition and innovation in the retail sector.

If Ofgem decides to go down the path of vetting prospective suppliers prior to allowing entry into the market, it will have to set out minimum standards that are both measurable and objective so it is clear to new entrants what will be expected of them.

Ofgem will also have to ensure that it does not set the bar for minimum performance standards too high, not only because this may deter new entrants, but also because non-price competition is a way in which suppliers differentiate their offerings. Setting standards too high would take away the potential for competition on service quality.

The imposition of some objective criteria for service standards may have some benefits for suppliers. In particular, it should provide a more objective measure for determining when a supplier is acting unfairly. In the recent and well publicised case of Iresa, which, before its demise, regularly came in as one of the cheapest deals on the market, Ofgem imposed extensive restrictions on its operations through a provisional order. Ofgem’s reasoning was centred on alleged unfair treatment of customers, largely on the grounds of poor service, using Ofgem’s own metrics.

The scope of Ofgem’s review will apparently include the possibility of greater powers to revoke the licences of suppliers whose poor performance adversely affects consumers. The current powers are limited and require a process to be followed in which revocation is a last resort. Any change in this area will have to be balanced and proportionate or competition may be affected.

Ofgem’s forthcoming consultation will give all energy providers an opportunity to have their views heard and influence industry reform. The review is an opportunity to clarify the minimum standards expected of energy suppliers and to do so in a manner that will benefit both suppliers and their customers.