Ofgem says it expects ’1-4′ suppliers a year to fail as it sets out tighter oversight regime

Ofgem expects “between one and four” energy suppliers to fail per year in future, despite its stricter entry rules, it emerged, as the regulator set out plans to tighten oversight of existing companies and reduce the costs shared by the market when a company fails.

That figure was Ofgem’s estimate in the draft impact assessment, published alongside a consultation on its proposals. It also estimated that each time a company failed it cost customers across the market 44p.

Following failure of a dozen companies, the regulator now wants to force companies to manage financial risk better, show Ofgem that they can manage growth, set in place measures in case of market exit dubbed ‘living wills’ by Ofgem (and partially publicly available) and ensure that company directors qualify as ‘fit and proper’ persons to hold that role.

Ofgem also wants powers to conduct audits of companies it thinks are failing – a power that would also be used if the regulator doubts the completeness or accuracy of information provided, or where specific technical or financial expertise is required to identify the root cause of customer service failures.

To manage financial risk, Ofgem says companies should have credit cover in some form for at least half customers’ credit balances. That will affect all companies with customers on fixed direct debits, who routinely allow credit to build up over the summer to cover higher bills in the winter.

The regulator wants to ensure that, if a company fails, administrators work under the same restrictions as energy companies when collecting debt, such as taking steps to understand whether a customer may struggle to pay. But Ofgem sought feedback on how to handle this as it does not regulate financial servce firms. Finally Ofgem may seek approval powers for ‘book sales’.

Responding to the proposals, Gillian Guy, chief executive of Citizens Advice, said: “Today’s announcement looks like good news for energy customers… We have seen a number of cases where customers in debt to failed suppliers were subjected to aggressive debt collection by administrators who were not bound by Ofgem rules. Stopping this from happening will reduce the unnecessary stress and pressure placed on affected customers.

”New requirements to protect customers’ credit balances should go some way to limiting the costs left behind when firms collapse. Our research estimates that recent supplier failures led to an additional £172 million being added to bills. Most of these costs arose from companies leaving behind unpaid industry bills for renewable schemes. The government should legislate to require suppliers make these payments more regularly, and further limit the costs to consumers when these companies fail”.

Matthew Vickers, chief executive at the Energy Ombudsman said: ”We are particularly pleased to see some action in relation to administrators, because in some instances the conduct of these companies when suppliers fail has been poor and has caused problems for both consumers and gaining suppliers. 

“The idea of introducing checks as suppliers reach certain growth milestones also makes a lot of sense, because we have seen several examples of huge spikes in complaints about companies that have grown rapidly but haven’t had the customer-service infrastructure in place to support this growth. As part of this we’d like to see Ofgem pay close to attention to which suppliers signpost their customers to us when a complaint can’t be resolved, and which don’t.”

He added, “We’d like to see Ofgem do more on .. protection for consumer complaints that are with us for investigation when a supplier fails or is acquired, because currently people can be left stranded.


Further reading

Read the full consultation here

Four suppliers face 31 October deadline to pay £14.7M in outstanding RO payments

Picking up the pieces for failed suppliers will hit customer bills, says Citizens Advice

Ofgem sets out tougher regime for energy suppliers

OPINION: Energy supply company insolvencies – a concern or an opportunity?