UK energy companies will not be forced to ringfence customer credit balances as part of new measures designed to better protect bill payers amid the raging energy crisis.
Energy watchdog Ofgem announced proposed reforms to protect consumers and strengthen the energy market, including new minimum capital requirements that it said would reduce the risk and cost of suppliers collapsing.
While a requirement for suppliers to ringfence customer credit balances was not brought in, the regulator will monitor this.
Ofgem also said it was “stamping out the misuse of credit balances”, with stronger rules on how all domestic providers use customer balances and action taken for those found to be “reckless”.
Suppliers will also be prevented from using cash held under the Renewable Obligations rules on behalf of others – in other words there will be ringfencing of the money needed to buy renewable energy.
Earlier proposals to ringfence customer credit balances had been suggested by some in the industry as some suppliers were felt to be irresponsibly spending customer balances, with British Gas owner Centrica PLC (LSE:CNA) having warned that some rivals were using the funds to support “unsustainable commercial models”.
Ofgem chief executive Jonathan Brearley said the proposals “will provide protections, checks and balances for consumers, suppliers and the entire sector to create a more stable market. We want suppliers to be able to be innovative and dynamic, while also making sure they are financially stable, and that customers’ money is protected.”
He added: “This is a delicate balance and while Ofgem want well-capitalised businesses that can weather price fluctuations, we also don’t want to block the market for new suppliers or force suppliers to sit on lots of capital they could be investing in innovative ideas.”
Regulator focusing on the right things?
Chris O’Shea, chief executive of Centrica, said: “Energy companies must be adequately capitalised by their shareholders so that if they fail, the shareholders feel the pain, not UK consumers.
“This feels like an abdication of responsibility by a regulator not focusing on the right things.”
Danni Hewson, a financial analyst at AJ Bell, said Centrica’s robust response raises some interesting questions.
"How many companies run their day-to-day business thanks to an effective loan from customers and why has the regulator stopped short of requiring those funds be ringfenced?" she pondered.
“It’s clear the measures announced today have a number of issues in mind with maintaining the current levels of providers a fairly high priority, as further failures would send shockwaves through an already cracked market place.
“And Centrica will be acutely aware that less resilient companies could still be undermined by any further energy stocks with customers likely to be hived out amongst other providers at yet more cost to those operators.
“However, overall the bigger players are likely to be unphased by the rest of Ofgem’s proposals as their diversity bolsters their bottom lines and having to keep more cash on tap to deal with future shocks shouldn’t prove overly onerous.”
Personal finance analyst Myron Jobson at Interactive Investor said: "I can’t imagine the proposals having much of an impact on the Big Six because of their financial prowess.
"But the ongoing review into supplier profit margin (EBIT) allowance within the retail price cap could impact their bottom lines. The EBIT allowance of 1.9% of costs could be reduced. The allowance is applied to the other allowances within the price cap and consequently the EBIT allowance in the cap scales with customer bills. This may result in profits being unduly high in a high-price and high-cost environment."
Vulnerable customers
Jobson welcomed the new proposals but highlighted that high energy prices will put pressure on households this winter and possibly for longer.
Earlier in the week Ofgem said most energy suppliers are not doing enough to help vulnerable customers during, with many showing signs of “severe weaknesses”.
Energy bills would have risen on average to £4,279 per household from January without the government-funded price cap, Ofgem noted yesterday.
“The energy crisis has exposed key vulnerabilities in the business models of energy firms that don’t have the financial prowess of the big six energy suppliers, which could leave all billpayers footing a sizeable bill when companies collapse,” he said.
“The new proposals will go some way in curtailing risky practices by requiring suppliers to have better control over key assets needed to operate and hold more capital so that credit balances are better protected, and the tab isn't picked up by all customers if the supplier goes under.”
Jobson noted that the energy crisis is “far from over and prices are likely to remain inflated for some time”, with the launch of Ofgem’s proposals coming on the same day that the Office for National Statistics revealed that 55% of adults said they were worried about keeping warm in their home this winter, rising to 70% of those living in the most deprived areas.