Ofgem published proposals in April 2022 to ring-fence customer credit balances and Renewables Obligations payments, according to a House of Commons Committee of Public Accounts report on the regulation of energy suppliers1. The proposals formed part of Ofgem's work on supplier financial resilience, following an action plan published in December 2021 that set out how the regulator would improve its collection and reporting of information on suppliers and introduced stress tests to assess how robust suppliers would be to shocks1.
The committee report, published on 13 November 2022, records that Ofgem introduced new requirements for existing firms in January 2021, including a new financial responsibility principle that made it a legal requirement for suppliers to manage costs that would be mutualised in the event of supplier failure1. It states that Ofgem's principal objective is to protect the interests of existing and future consumers1.
The context was a period of supplier failure. Between July 2021 and July 2022, the lack of financial resilience within many energy suppliers and the rise in wholesale prices led to the failure of 29 energy suppliers1. Ofgem transferred the customers of 28 of these to new suppliers through the supplier of last resort process, while the Department took Bulb Energy into special administration because, with 1.6 million customers, it was too big to go through SOLR1. Ofgem's current best estimate of the total cost of supplier failure dealt with through the SOLR process is £2.7 billion, which equates to around £94 per household1. Of that £94 per customer, £66 was reflected in the price cap calculation for April to September 2022 and therefore in customers' bills, with the remaining element to be reflected in future periods1.
The committee recorded that many energy firms supported Ofgem's measures to improve financial resilience, and some would support even more stringent measures, while others were concerned that the reforms could lower competition and lead to bigger bills1. It also noted a suggestion from Octopus Energy that ring-fencing supplier credit balances could add £15 per year to the bill of every UK customer1. Ofgem accepts there are trade-offs between resilience and competition and is developing a framework to manage these1.
"in April 2022 Ofgem published proposals to ring-fence customer credit balances and Renewables Obligations payments"
Why it matters for households
Customer credit balances are the money households hold with a supplier, typically built up through monthly direct debits set above actual usage. When a supplier fails, that money sits inside the failed company, and the household's route to recovering it runs through the failure process rather than a simple refund. Ring-fencing proposals are aimed at separating those balances from the rest of a supplier's finances so they are protected if the company goes under. For a household, the practical link is to final bills and credit refunds and to what happens under supplier of last resort arrangements.
The cost of failures is also borne by households. The £2.7 billion estimate equates to around £94 per household, with £66 of that already reflected in bills for April to September 20221. The proposals sit within the wider energy supplier financial resilience rules that Ofgem sets and enforces as the energy regulator.
What happens next
The committee recommended that Ofgem and the Department review the SOLR and SAR processes and report back as part of their Treasury Minute response1. It also recommended that Ofgem write to the committee within six months setting out how it will monitor and balance levels of competition and resilience in the supplier market1. The report states that, of the 26 suppliers still left in the market, it was "quite possible" that there would be further exits1. The final cost to customers of government support for Bulb Energy will not be known until it is sold or exits the market by other means1.
Sources1 cited
- Regulation of energy suppliers - Committee of Public Accounts, publications.parliament.uk