Ofgem is proposing new reforms for existing suppliers to drive up customer service standards, reduce the risk of energy supplier failure and strengthen the safety net. Increased competition in the retail market has benefitted consumers with cheaper deals, put pressure on incumbent suppliers to improve their customer service offering and brought in new and innovative players into the energy sector.

But as in any competitive market some suppliers may fail to keep up with the pace of more competitive firms. Ofgem wants to ensure that if this happens customers are protected and the impact on the wider market is minimised.

Building on the new entry requirements for new suppliers that came into force in the summer, the new rules for existing suppliers would let Ofgem request independent audits of suppliers’ customer service operations and financial status.

As part of this, new checks would be introduced for growing suppliers before they hit certain thresholds of customer numbers requiring them to ensure they have the operational capability to effectively serve their customers. If they fail the checks, they would be stopped from taking further customers on.3

Ofgem proposes introducing further ongoing ‘fit and proper’ requirements for suppliers, to ensure those in senior management positions are fit to carry out their duties, and a new principle for suppliers to be open and cooperative with the regulator.

All suppliers would have to assess their readiness for orderly failure by maintaining ‘Living Wills’ that would be scrutinised by Ofgem. Suppliers would have to set out what would happen in the event of their failure, including any barriers to an ‘orderly exit’. This could include the likely costs faced by other consumers, disruption to services for their customers and how they would ensure compliance with any relevant licence conditions.

New rules would also be introduced to avoid disruption associated with supplier exit. These would ensure that, when a supplier fails, certain consumer protections around debt collection practices remain in place.

Ofgem is proposing other reforms which would help minimise the costs of mutualisation4 for other suppliers in the event of supplier failure. Suppliers would be required to put in place arrangements to ensure that they would be able to cover a proportion of customers’ credit balances and government environmental scheme costs if they failed. This would not affect the protections already in place to cover all domestic credit balances when a supplier fails.

Ofgem expects competition and innovation which benefit consumers to continue in the retail market after all these reforms are in place.

Mary Starks, Executive Director of consumers and markets, said “Our regulatory regime needs to be effective and proportionate in protecting consumers, while continuing to facilitate competition and innovation. At this stage in the transition to a net zero emissions economy it is more important than ever that innovators can enter the market and prosper, driving benefits for consumers. The new proposals will create more accountability in the market, require more responsible and appropriate behaviour from suppliers in the market and reduce the risk and costs to consumers associated with supplier failure.”

“In the event a supplier fails, the changes will also strengthen the ‘safety net’ and improve the experience of customers when they are transferred, so that consumers can be reassured that whatever happens they will be properly protected.”

Peter Earl, Head of Energy at comparethemarket.com, said “The public deserve to know that stringent measures are in place to prevent the likelihood of an energy supplier collapsing and leaving them in limbo. Following the failure of 13 energy suppliers in the last year alone, Ofgem’s proposed financial checks are undoubtedly a step in the right direction. Bolstering the safety net for energy customers and increasing accountability in the market will likely stem the flow of supplier failures, which in turn should improve consumer confidence in the energy market. Consumers will particularly welcome the proposal to minimise disruption in the event of a supplier failing and a commitment to reducing the fallout risk and costs to consumers.”

Gillian Guy, Chief Executive of Citizens Advice, said “Today’s announcement looks like good news for energy customers. Ofgem’s proposals should limit the costs to consumers of failed suppliers, as well as delivering better consumer protections. Citizens Advice has repeatedly raised concerns about these problems and the regulator’s positive action is welcome.”

“We have seen a number of cases where customers in debt to failed suppliers were subjected to aggressive debt collection by administrators who were not bound by Ofgem rules. Stopping this from happening will reduce the unnecessary stress and pressure placed on affected customers.”

”New requirements to protect customers’ credit balances should go some way to limiting the costs left behind when firms collapse. Our research estimates that recent supplier failures led to an additional £172 million being added to bills. Most of these costs arose from companies leaving behind unpaid industry bills for renewable schemes.”

“The government should legislate to require suppliers make these payments more regularly, and further limit the costs to consumers when these companies fail.”