Tougher market entry tests – is Ofgem focusing on the right issues?

Last week Ofgem introduced tougher market entry tests for new suppliers. Yet, despite most industry voices welcoming the move, there are some who would like to see the rules strengthened for existing suppliers. Adam John examines whether the tough new rules should be even tougher.

Meanwhile, Stephen Forbes, managing director at SSE Energy Services, gives his views on the tougher tests in a separate piece. 

Following a series of recent high-profile market exits of fledgling energy retailers new, tougher market entry tests came into effect on Friday (5 July).

Ofgem has previously received heavy criticism for allowing ill-equipped companies to enter the market, with Citizens Advice saying last year that it was “too easy” to get a licence to start supplying energy.

The rules have been broadly welcomed by most, but some industry voices have urged Ofgem to toughen up the rules for existing suppliers as well as new entrants, while others have suggested they are not focusing on the issues at hand.

Richard Neudegg, head of regulation at Uswitch.com, says the rules are “long overdue” and that he wants to see Ofgem prioritising the checks and balances on existing suppliers.

“Regular stress-tests for suppliers and ongoing fit-and-proper person assessments would reduce the risk of energy customers suffering poor service, or worse, seeing their provider go under”, he adds.

For some however, there is a feeling the rules are missing a vital point.

David Elmes, leader of the Warwick Business School Global Energy Research Network, says while Ofgem is right to have reacted to recent events in the market, the new tests have a more traditional view of suppliers instead of focusing on the new services they offer.

Specifically Elmes points to how suppliers are now using smart meters and other products to help their customers use energy more efficiently, as opposed to simply supplying gas and electricity.

He says: “Hopefully they are making sure that people enter the market in the traditional sense of selling gas and electricity at a decent price with good service.

“But it’s sort of missing out on the whole question of, are they the market participants who will help us carry on transforming the energy system?

“We want to encourage companies to come in offering innovative products and services in energy markets.”

But what exactly is Ofgem doing to ensure new entrants are more robust?

Under the new rules companies applying for a licence to supply energy must undergo more stringent tests, demonstrate they have the financial capability to fund their operations for their first year and outline how they expect to comply with key regulatory and market obligations.

Furthermore directors and major shareholders of companies applying for a licence, as well as senior managers, will also have to show they are “fit and proper” to hold a licence.

Ofgem adds that it plans to consult in the early autumn on the ongoing requirements and exit arrangements for suppliers.

Undoubtedly current market rules allow for competition, with consumers having access to more choice than ever before in who supplies their energy.

Yet the ease of entry into the open market has contributed to the woe of thousands of customers who received their supply from a failing energy supplier.

With measures in place such as the supplier of last resort (SoLR) process, customers are protected should their supplier fail. Yet there are still calls for more stringent checks to be brought in for those suppliers with a lot of complaints against them.

Of those suppliers who have failed in the last 18 months many, if not all, were blighted by complaints from disgruntled customers – ultimately leading to their demise.

Ofgem does have tools at its disposal to use when a supplier begins to have serious customer service issues, such as provisional orders banning suppliers from taking on new customers until it resolves issues.

Ryan Thompson, a partner at Baringa Partners, is another who would like to see the ongoing monitoring of existing retailers as a way of preventing the need for remedial measures.

Yet Thompson asserts that the use of provisional orders by Ofgem may have “unintended consequences” and have the potential to do a supplier more harm than good.

“It’s getting the right balance in stepping in quick enough to stop that supplier having undue impact on their customer base but at the same time not putting that supplier into a death spiral by intervening too soon – it might be that supplier could work its way out of the situation”, he adds.

Still, a vast amount of customer complaints can spell doom for a newer, smaller retailer.

Last year the Energy Ombudsman revealed that a failure to adequately deal with complaints led to the collapse of supplier Iresa.

In 2018 alone the ombudsman accepted a total of 2,282 complaints about Iresa for investigation.

Another failed supplier, Spark Energy, was subject to more than 800 investigations into customer complaints by the Ombudsman in the 12 months prior to it failing last November.

Matthew Vickers chief executive at the Energy Ombudsman, welcomes the introduction of the tougher entry tests.

Vickers says: “In addition to these changes for new entrants to the energy market, we look forward to Ofgem’s proposals for ensuring tougher rules extend to existing suppliers.”

Vickers’ comment echoes that of Neudegg’s and represents a recurring theme – while tougher tests are welcome, more needs to be done to scrutinise existing suppliers.

Neudegg however goes even further and calls for a “crackdown” of the more “outlandish” behaviour the market has witnessed from a handful of companies, with some having brought their own credibility into serious doubt.

One of the major catalysts for a change in the rules was the renewables obligation (RO) debacle which took place towards the end of last year in which 34 energy suppliers missed the deadline for making their Renewables Obligation Certificate (ROC) payments in full.

The following month Ofgem announced a mutualisation process would be triggered for the first time ever after suppliers failed to pay off enough of the deficit to bring it below the relevant shortfall.

Of eight suppliers which ceased trading last year all but two were revealed to have missed the late payment deadline for the RO payments.

Furthermore, two out of the three suppliers which failed so far this year were also on the list of those who failed to meet the late deadline.

It’s clear there is an urgent need for stronger and more robust tests for companies wishing to enter the energy market. Competition is good but only when it works for the benefit of the consumer.

Ofgem was right to introduce tougher market tests but for some in the sector, there is a feeling that the ongoing monitoring of existing suppliers is a more pressing issue.