Ofgem put forward statutory consultations on 25 November 2022 on further changes intended to strengthen the financial resilience of energy suppliers, according to the government's response to the Committee of Public Accounts1. The consultations cover three areas: new capital adequacy requirements, ringfencing of Renewables Obligation (RO) balances, and new Ofgem powers to direct ringfencing of credit balances1.
The regulator is not proceeding with earlier proposals to ringfence customers' credit balances, and is instead consulting on new powers to direct ringfencing of credit balances if needed1. It is also looking to put in place an industry-wide minimum requirement for capital reserves and other measures intended to minimise the number of supplier failures in future1.
"On 25 November 2022, Ofgem put forward statutory consultations on further changes intended to strengthen the financial resilience of suppliers"
The consultations sit alongside earlier changes listed in the same document: licence condition changes to improve supplier risk management under the Supplier Licensing Review, which took effect on 22 January 2021; an enhanced assessment process for supply licence applications, last updated in December 2021; the Financial Resilience Action Plan, published on 15 December 2021, which increased monitoring of suppliers' financial resilience including through stress testing; and new requirements on asset ownership, with guidance updated on 23 May 20221.
The context given is 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 Bulb Energy, with 1.6 million customers, was placed into the special administration regime because it was too big for that route1.
On capacity, Ofgem approved an additional three full time equivalent staff for Retail Compliance focusing on financial resilience in November 2022, and had 60 full time equivalent staff in compliance and enforcement in position as of 30 September 20221. Over three years it issued over 60 Orders to suppliers as part of action on over 80 supplier cases, with penalty and redress payments of over £37.5 million, out of a broader figure of over £300 million across all regulated parties1. Enforcement action has been initiated against TruEnergy, Foxglove, UK Energy Incubator Hub, Utilita and Scottish Power1.
| Consultation area | Status |
|---|---|
| New capital adequacy requirements | Out for statutory consultation from 25 November 2022 |
| Ringfencing of Renewables Obligation balances | Out for statutory consultation from 25 November 2022 |
| New powers to direct ringfencing of credit balances | Out for statutory consultation; earlier proposal to ringfence credit balances not being taken forward |
Why it matters for households
Supplier failure is not only a market event. When a supplier collapses, its customers are moved to another company through the supplier of last resort process, and the costs of that transfer can be spread across the wider customer base, which the document describes as the mutualisation of significant costs for consumers1. The Committee of Public Accounts concluded that Ofgem's failure to effectively regulate the energy supplier market had cost households an estimated £2.7 billion, with further costs expected1.
Capital adequacy requirements and ringfencing rules bear on what happens to money held by a supplier. Credit balances are the sums households build up on accounts, typically through monthly direct debits set above actual usage, and they sit with the supplier until they are refunded or used. The consultation is on powers to direct ringfencing of those balances if needed, rather than a general requirement to ringfence them1. Renewables Obligation balances are a separate pot of money within supplier finances.
The document also sets out the wider support picture for the winter. Under the Energy Bills Support Scheme, announced in May 2022, all households in the UK were to receive £400 of support with energy bills, paid as six instalments from October 20221. Suppliers confirmed that vouchers had been sent to all two million customers with traditional prepayment meters1. The Energy Price Guarantee was described as bringing a typical household's bill in Great Britain down to the equivalent of around £2,500 per year for the six months from 1 October 2022 to the end of March 2023, saving a typical household £900 over the winter of 2022-231.
What happens next
The document records target implementation dates for the government's responses to the Committee's recommendations, not for the consultations themselves. Ofgem committed to write to the Committee within six months on how it will monitor and balance competition and resilience in the supplier market, with a target date of May 20231. A review of the costs and benefits of the price cap from a consumer's perspective carries a target implementation date of April 2024, and the government said it will develop a new approach to consumer protection in energy markets applying from April 2024 onwards, considering options including social tariffs1. Ofgem also said it would keep the Committee informed of the results of a market compliance review into customer service and complaints arrangements, due to be published early in the new year1. The outcome of the three statutory consultations has not been reported in this document.