Industry regulator Ofgem has published final proposals aimed at re-shaping the supplier retail market. The proposals are designed to improve customer service, lower the risk of supplier failure and de-risk the contagion effect in the event that a supplier does fail.
For many years, Ofgem has been keen to drive competition in energy markets by increasing the number of suppliers in a market that had come to be dominated by the so-called ‘Big Six’. However, in doing so there have often been suspicions that the due diligence associated with the granting of supply licences had not been as robust as it could be. This has led to certain suppliers being unable to support the customer service requirements of their client-base, whilst 24 energy companies went bust alone in 2019.
Although supplier failure is a sad inevitability of all industries, the level of government renewables subsidy in UK electricity prices means that a supplier going out of business can have negative consequences for other market participants. For example, this year we have already seen mutualisation on a number of schemes, including Contracts-for-Difference and Renewables Obligation. Mutualisation occurs when a shortfall in funds collected for a given subsidy scheme (often as a result of supplier failures) has to be passed on to the other suppliers, who may in-turn have to pass it on to their customers. The passing through of additional costs to consumers is rarely received well, and can build distrust in the market, whilst also being a threat to customer budgets.
Ofgem’s new proposals outline a framework for growing suppliers to ensure that they can demonstrate that they are able to service their client-base, as well as their financial obligations. Failure to demonstrate this could lead to Ofgem preventing them from taking on more customers. Suppliers would also have to have plans in place to minimise the costs that are mutualised across other suppliers in the event that they do fail.
Mary Starks, Executive Director of Consumers and Markets, said: “These proposals will drive up suppliers’ customer service standards and lead to greater resilience in the sector, whilst reducing the risk and costs to consumers associated with supplier failure.”