Extra Energy ceases trading – Ofgem announces new supplier fitness tests

Ofgem has activated ‘supplier of last resort’ measures as Extra Energy ceases trading. The company has around 108,000 domestic accounts and 21,000 business customers.

Gillian Guy, Chief Executive of Citizens Advice, said: “Today’s news and other recent supplier failures again highlight how essential it is that suppliers operating in the market have sustainable business models.”

The company is the sixth to go out of business this year. Ofgem responded by announcing plans for new tests for companies applying for new supply licences. They would have to demonstrate to Ofgem that they will have the funds and resources to manage their business for at least 12 months after entering the market, and provide the regulator with a plan to meet their customer service obligations, including Ofgem’s complaint handling standards and obligations to assist customers in vulnerable circumstances.

Ofgem is also consulting on tightening its test of whether applicants are ‘fit and proper’ to be granted a licence.

The new measures should take effect in late spring 2019.

Ofgem will consult separately on proposals to introduce new reporting requirements for existing suppliers. This will involve regular reporting to Ofgem on the adequacy of companies’ financial and operational resources for running their business, providing customer service, making sure they can continue to serve their customer base and meet their financial obligations under government schemes.

It will also consult on a range of options including on how suppliers accrue, hold and use customers’ credit balances and how to ensure they can make the payments they owe under the Renewables Obligation.

On Extra Energy, Ian Barker of Bfy Consulting noted:

“Extra Energy were supplying at peak an annualised 2.3TWh of power which declined over time to 0.8TWh – as a result of an agreement with Ofgem following issues with their billing system. … Extra struggled for some with both billing and settlements – although things were improving. Cash collection was also a challenge, and debt book/bad debt much higher than peers. In addition, Cost to Serve was 4x higher than would be allowable under price cap – likely driven by high fixed costs and a declining customer base. Based on the 2016 accounts, their German parent had loaned the UK business significant amounts of money – with a securitised charge being placed over the business earlier in November. The price cap announcement was likely a death knell for Extra, as they wouldn’t have been able to recover their losses, cover their operating costs, and have a feasible chance of repaying the inter-company loan.”

Further reading

Energy suppliers: do they need more oversight?

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