Energy companies would have to demonstrate they have adequate financial resources and can meet their customer service obligations before Ofgem awards them a licence to supply energy under proposals announced as part of the regulator’s ongoing review into supplier licensing arrangements.

Over the last decade more consumers have benefited from competition in the energy market, which has driven down energy prices, helped to raise customer service standards and provided more choice. A quarter of all customers are now supplied by small and medium sized suppliers after switching to get a better deal.

While smaller suppliers frequently top the Citizens Advice customer service league table, there have been increasing instances of some new entrants providing poor levels of customer service, prompting action by Ofgem against the worst offenders. Over the past year six smaller energy suppliers have gone out of business.

Ofgem has announced it is opening enforcement investigations against two suppliers which have failed to make payments owed under the government’s Renewables Obligation scheme and steps to seek repayment from two other firms. Ofgem is now proposing new financial and customer service tests for companies applying to the regulator for a supply licence to drive up standards. Applicants for new supply licences would have to demonstrate to Ofgem that they will have the funds and resources to manage their business for at least 12 months after entering the market.

They must also provide the regulator with a plan to meet their customer service obligations, including Ofgem’s complaint handling standards and obligations to assist customers in vulnerable circumstances. Ofgem is also consulting on tightening its test of whether applicants are ‘fit and proper’ to be granted a licence.

These measures will help ensure new suppliers are ready to enter the market, while still driving competition and innovation which benefit consumers. They should be in place late spring 2019.

As part of its ongoing review, next year Ofgem will consult separately on proposals to introduce new reporting requirements for suppliers who are already active in the market. This includes regular reporting to Ofgem on the adequacy of their financial and operational resources for running their business, providing customer service, making sure they can continue to serve their customer base and meet their financial obligations under Government schemes.

These proposals to strengthen entry and ongoing requirements on suppliers will reduce the risk of disorderly supplier exits by raising standards around financial resilience. In the event a supplier fails, Ofgem’s ‘safety net’ provision, which protects domestic customers’ credit balances and ensures all customers’ energy supply continues, will remain in place.

Ofgem wants to minimise the impact that supplier failure has on the wider market and consumers. Next year it will consult on a range of options including on how suppliers accrue, hold and use customers’ credit balances. It will also look at how to ensure they can make the payments they owe under the Renewables Obligation scheme.

Mary Starks, executive director for consumers and markets at Ofgem, said: “New energy suppliers that have entered the market over the last few years have offered consumers more choice and helped to drive down energy prices and drive up customer service standards. However, complaints against some suppliers have been rising recently and we have had to step in when others have ceased trading. Our proposed new tests for suppliers wanting to enter the market will ensure consumers will be better protected against the risk of poor performance, while still allowing more competition and innovation in the energy market to benefit consumers.”

Peter Earl, Head of Energy at comparethemarket.com, said “This is an important development which we hope will give people more confidence that the supplier they have chosen has been rigorously tested before being allowed to operate. The rapid emergence of new energy suppliers has delivered a shot in the arm for competition and has helped boost switching activity significantly in recent years. However, with the collapse of companies such as GB Energy and, more recently, Future Energy and Iresa, it has become clear that more needs to be done to vet companies before they go to market. These new tests proposed by Ofgem should lessen the chances of failures and, in reducing such collapses, help to avoid a huge headache for customers.”

Gillian Guy, Chief Executive of Citizens Advice, said “Today’s proposals would significantly tighten the rules on firms that want to enter the energy supply market. For too long, firms that are unprepared, financially unsustainable or both have been able to get a license and start operating as a supplier. Ultimately it’s consumers who suffer when unprepared energy companies are able to enter the market. Many customers suffer with poor customer service, long waits on the phone and inaccurate bills. And everyone pays the price, through their bills, when weak suppliers fail.  The collapse of GB Energy cost consumers £14m in total.”

“While the proposed new rules will protect consumers from unfit firms getting a license in the future, there are still poorly performing suppliers operating now. Ofgem must take appropriate steps to remove these firms from the market.”