Credit, Collections & Insolvency News
New reforms by energy regulator Ofgem could soon call on suppliers to hand £1.4billion in customer credit back to households under plans to stop energy companies from holding on to customer credit balances.
Ofgem is concerned that some suppliers may be using customers’ surplus credit balances, which tend to build up over the summer when bills are lower, to fund otherwise unsustainable business practices. The new reforms will ensure that consumers paying by fixed direct debit do not overpay for their energy.
Ofgem is consulting on proposals to limit the amount of customer credit balances suppliers can hold, which could result in as much as £65 per household on average being returned.
Ofgem says that customers who pay by fixed direct debit pay the same amount each month based on their estimated consumption. They typically build up a credit balance during the summer when their energy use is lower and then draw down on this credit during winter.
Suppliers should set the payments so that customers’ credit balance returns to £0 each year on the anniversary of when they started the payments. However, many customers who pay by fixed direct debit are overpaying resulting in surplus credit balances.
The regulators research found that as much as £1.4 billion was held in surplus credit balances in October 2018 and is concerned that some suppliers may use customers’ surplus credit balances to fund otherwise unsustainable business practices.
The ‘auto-refund’ policy would require suppliers to refund any credit balances, for domestic credit customers paying by fixed direct debit, above £0 each year on the anniversary of when they started their contract.
Jonathan Brearley, Chief Executive of Ofgem, said “These new proposals would ensure that suppliers are not holding onto more of customers’ money than absolutely necessary, potentially returning millions of pounds of customers’ money.”
“This is an important step in making the retail energy market fairer for consumers at a time when many are facing financial hardship.”
The ‘auto-refund’ proposal would stop surplus credit balances growing year-on-year but would not stop suppliers building up surplus credit balances during the year. To address this risk, Ofgem is also proposing to introduce a credit balance threshold for all domestic suppliers.”
These new proposals would also reduce the amount of credit balances held when a supplier fails, reducing the cost to the market and ultimately consumers of covering these additional costs. If confirmed, the proposals would be rolled out from 2022.
Commenting on Ofgem’s consultation Alistair Cromwell, Acting Chief Executive of Citizens Advice, said “Suppliers should not be able to hold on to their customers’ money unnecessarily, particularly at a time when so many households are already struggling financially. These reforms should restore fairness and protect consumers from paying the price when suppliers fail.”
Peter Earl, Head of Energy at comparethemarket.com, said “Energy companies managing credit balances has long been a matter of confusion and complexity for households. Although there is often a focus on customers who are in debt to their supplier, these proposals to return credit balances in a timely manner should be welcomed, especially given the burden the past year has placed on people’s finances. Ultimately, any credit belongs to the customer, whether the suppliers holds it or not.”
“It’s worth bearing in mind that sometimes it pays to be in credit though, to prepare you for more expensive bills during the year and potential energy price increases. Households can use significantly different amounts of energy depending on the season, and in particular, consumption has been impacted this year by lockdowns, homeschooling and working from home.”