Spotlight on smaller suppliers

After a spate of Ofgem actions on small suppliers over the past few weeks, Tom Grimwood asks if this a sign that of trouble ahead for challenger brands.

In recent weeks, Ofgem has taken a series of steps, in quick succession, to address reported failings by smaller suppliers. Are these events a sign that some of the challenger suppliers – which were supposed to be the saviours of the energy market, pro­viding consumers with more choice, and protection from “rip-off” prices and bad ser­vice – are themselves not up to scratch.

Citizens Advice certainly has concerns. “The recent interventions from Ofgem are further evidence of the serious problems with some smaller and newer energy companies,” says director of energy Victoria MacGregor. She believes many of these issues stem from the ease with which new suppliers can enter the market: “Some companies enter the mar­ket before they have processes in place to deliver adequate customer service.

“While individual interventions from Ofgem are important, it should go further, and tighten up its licensing regime to pre­vent these problems from occurring.”

After GB Energy Supply went bust in 2016, Citizens Advice called for suppliers to be stress-tested to demonstrate they can survive wholesale price spikes.

It said companies’ business plans should also be examined to make sure they will have enough staff to deal with increases in cus­tomer enquiries. “The regulator must be able to stop unprepared suppliers from entering the market and take suppliers which aren’t performing well enough out of the market as quickly as possible,” says MacGregor.

Citizens Advice’s energy star ratings show that signing up with a smaller supplier is no guarantee of good service. Challenger sup­pliers have bagged the three top spots in the rankings – So Energy first, Bulb second, and Octopus third – but they also dominate the lower echelons. Economy Energy came last with just 1.2 stars out of five, and Iresa came second from bottom with 1.3 stars.

Meanwhile, the worst performer of the big six, Eon, came in 13th place out of 28, with a rating of 3.3 stars. The best performing was British Gas in fourth, with 4.05 stars.

However, David Crossman, head of regu­lation at consultancy Cornwall Insight, warns against reading too much into the recent spate of announcements by Ofgem. “It’s mainly coincidence driven by sheer numbers,” he says. “There have been an awful lot of new entrants into the energy supply area over the past four or five years.

“When you look back about eight or nine years there were only about ten suppliers – the big six and a few brave entrants – in the marketplace. Now there are about 60.”

He notes that the list of investigations on Ofgem’s website includes a number of ongo­ing and recently closed entries on the big six, including SSE and British Gas. Only last week, SSE paid £1 million into Ofgem’s consumer redress fund after the regulator found it had sent “inaccurate and misleading” billing information to 580,000 pre-payment customers in 2014 and 2015.

“There’s still the same mix there in terms of the ongoing investigations,” he adds. Crossman is also sceptical of calls, such as those from Citizens Advice, for Ofgem to conduct more robust checks before licensing companies to enter the energy market. This could require new legislation to give Ofgem greater powers, something which will be difficult given the amount of parliamentary bandwidth being taken up by other issues, Brexit in particular.

“I can’t see that being a priority,” he remarks. “There are just too many other things going on”. Furthermore, he says the benefits of extra checks would have to be weighed against Ofgem’s responsibility to encourage competition: “Producing a blockage to peo­ple coming in is counter to that.”

Whether or not new licensing procedures are needed, Ofgem clearly has an eye on the issue. Last year, the regulator strengthened its monitoring arrangements for new suppli­ers, and in February it said it would review its approach to awarding supply licences. And just this week it announced plans to review its licensing arrangements. Whatever the outcome, if there was a honeymoon period for the smaller suppliers, it now appears to be over.

Recent developments

Economy Energy and E 

On 31 May, Ofgem alleged that energy suppliers
Economy Energy and E (Gas and Electricity), along with consultancy firm Dyball
Associates, have breached competition law.

The regulator said the pair, and Dyball Associates, had an agreement that prevented the two suppliers “actively targeting” each other’s customers through face-to-face sales.

Ofgem Utility Warehouse probe

On 1 June, Ofgem launched an investigation into the way Utility Warehouse manages its customers who are in debt. The regulator said it will investigate if the supplier has breached rules on the way it manages these customers.

Iresa possible ban extension

Also on 1 June, Ofgem threatened to extend its ban on Iresa taking on new customers after the small energy supplier failed to meet targets to improve customer service. Ofgem had opened a three-month investigation
into the company two months earlier.

Brighter World Energy closes

In December 2017, social supplier Brighter World Energy closed, saying its business model was unsustainable because of market conditions. Its customers were taken on by its partner, council-owned Robin Hood Energy.

Future Energy shuts up shop

The following month, a regional energy supplier with about 10,000 household customers mainly in the North East and Yorkshire – ceased trading. The company said it had been “unable to convert sufficient customers to enable us to forward purchase energy at the most competitive rates”.