On 17 March 2021, Ofgem issued a consultation on the latest steps it proposes to take as part of its review of energy supplier licensing arrangements - the introduction of rules to reduce the scale of credit balances held by suppliers. This is aimed squarely at reducing the risk that customer credit balances need to be mutualised in the event of supplier failure.
Ofgem is concerned that suppliers may be holding more credit than is required to service their customers and is proposing to implement prescriptive rules aiming to limit the holding of any surplus balances. The regulator is seeking responses to its proposals from stakeholders by 12 May 2021.
We look at this proposal in more detail below.
Why has this been proposed?
Credit balances, which arise primarily from consumers using a fixed direct debit payment model, are used to help consumers spread their energy costs throughout the year. The regulator has noted, however, that some suppliers may be collecting more credit from consumers than is required to facilitate this purpose.
Ofgem has expressed concern that suppliers may be using surplus credit balances to finance risky strategies, particularly unsustainably low-priced tariffs that they would otherwise not be able to offer. Ofgem is of the view that suppliers should not be allowed to use customers' money for these purposes and that if they wish to fund such strategies they should be using their own or their investors' money.
The consultation document indicates that suppliers may have access to up to £1.4 billion of free working capital in the form of credit balances that are not required to supply a customer.
What is proposed?
Ofgem is proposing to introduce two measures:
- "Autorefund", a measure that will require suppliers to refund any credit balance above £0 held by them at the end of each contract year; and
- "Threshold", which will place limits on levels of customer credit to be held by suppliers throughout the year. The thresholds will be relative to each supplier's total estimated annual bills, and suppliers that exceed the thresholds, at an aggregate level, will need to protect the surplus credit balances - either in an escrow account or by way of a guarantee from an investment grade entity.
Both measures are proposed by Ofgem to apply to domestic customer accounts only, which are in credit (net of unbilled consumption).
This consultation marks the latest step from Ofgem on its programme of reviewing the energy supplier licensing arrangements, following the new market entry requirements that were introduced in July 2019 and the new ongoing and existing arrangements that were introduced earlier this year. The aim is to ensure that consumers are protected against the risks of financial instability and poor customer service and has generally been welcomed by the industry.
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