Specialist management consultancy Baringa Partners has added its voice to companies supporting financial checks and ‘stress tests’ for energy suppliers.
Ryan Thomson, partner at Baringa, said: “The energy market will struggle to support more than 50 active suppliers sustainably over time, and GB Energy going bust is an example of how spikes in wholesale energy prices and market volatility can catch new entrants off guard. Existing suppliers are not immune to challenges and so Ofgem could be right to subject them to stress tests as well.
“However, wider questions still need to be answered for a secure and successful energy market. With standard variable tariffs under fire and many making zero margin on the lowest priced tariffs, energy suppliers could justifiably ask government and the regulator how they are expected to make sustainable returns.
“We may have to accept that not everyone can be on the lowest tariffs. And the measures of a competitive market should include more than the number of suppliers and how often customers switch.”
Pete Moorey, head of campaigns at consumer organisation Which? previously said Ofgem should investigate new energy tariffs as they come onto the market to see whether they are fair, because “some don’t deliver what they promise”.
Moorey was giving evidence to MPs on the Select Committee on Business, Energy and Industrial Strategy, in a one-off evidence session this week on the outcome of the Competition and Markets Authority investigation. But he was echoing concerns raised by some energy suppliers over whether the regulator should carry out more detailed checks as more companies join the market.
In December, New Power spoke to two energy company chiefs about their concerns.
Peter Haigh, managing director at Bristol Energy, says the failure of GB Energy shook the market and concerned customers. “We had a number of calls from GB Energy customers and whatever the regulator says, they are still worried about credit balances and energy supply.”
There should be a more testing process for entering the domestic supply market, he says: “Talking with my shareholders, they are incredulous that anyone can set up an electricity supply company, with no test of any kind. Compare that with insurance, where intermediaries have to register with the Financial Services Authority”.
Haigh says, “It’s bizarre how easy it is to get a supply licence … and it’s essentially free.”
Haigh has in mind two forms of engagement with the regulator. The first is an entry test, which might require the regulator to understand who is on the company board (and whether they meet ‘fit and proper persons’ tests like those used in other sectors like healthcare companies), the level of funding behind the company, and details of the entrant’s business model, and customer growth projections and how they will be serviced. Then, Haigh says, the regulator should keep tabs on the company with an annual health check on issues like collateralisation.
Doug Stewart is chief executive of Green Energy. He wants Ofgem to have more understanding across energy companies about “how profitable these companies are, where their cash is coming from, whether they have any equity to meet their commitments, whether they are hedged, whether they are exposed, and whether they can write the contracts they talk about”.
He says, “Ofgem should look at the business model and ask just a few questions: where will you get your energy and how will you pay for it? How will you meet calls for collateral and for energy if you are in imbalance? I don’t want more administration and make monthly returns, but [Ofgem] should have the power to audit.”
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