Ofgem does not meet customer balance ring-fencing requirements


Friday, November 25, 2022 9:14 am

Ofgem has announced further measures to strengthen energy markets and make suppliers financially resilient.

This includes the introduction of capital adequacy requirements, which means that companies must set aside a minimum amount to absorb future shocks.

It is also pursuing foreclosure requirements for renewable obligation payments, meaning they must set aside and protect the money needed to buy green energy.

However, the watchdog has opted to call on suppliers to relinquish the full balance of customer funds — following a lengthy industry row — over the proposal.

Ofgem will instead require suppliers to closely monitor the use of funds.

Ringfencing refers to proposals for energy suppliers to keep customers’ funds in separate accounts for their day-to-day commercial activities and to use money spent by consumers only for energy purchases.

It was first proposed by Ofgem, which launched a consultation on the policy this summer.

It was also backed by a number of energy companies, including Centrica, which owns British Gas, the UK’s largest energy supplier, with more than nine million customers.

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Centrica slams Ofgem’s shield

Centrica CEO Chris O’Shea has condemned today’s decision not to include foreclosure requirements.

He argued that the decision was a “waiver of responsibility” and that Ofgem had failed to learn lessons from the market crisis, which had seen 30 suppliers collapse.

O’Shea said: “Energy companies need to be sufficiently capitalized by their shareholders so that if they fail, shareholders feel the pain, not UK consumers. It’s as simple as that, but the lessons still seem to be unlearned.

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“There seems to be abdication of responsibility by a regulator that is not focusing on the right things. If and when a major supplier fails, the recklessness of the decision not to address this issue will be obvious to all. “

He noted that Ofgem boss Jonathan Brearley had previously said that some companies were “using consumer credit balances as an interest-free credit card”.

Centrica has estimated, based on requests for information from Ofgem, that £400 million in customer assets have been lost from collapsed suppliers during the current crisis.

He believed customers would be “shocked” to learn that their money was being used for anything other than the supply of energy.

He said: “We identified this as a huge risk for consumers in 2016 – before the energy crisis – and Ofgem promised to fix it. The harm has been done.”

E.ON and Utilita also supported the ringfencing proposals.

O’Shea disputed the claim that shielding a customer’s credit balance would cause households to spend more on their utility bills.

This has been a central argument from rival Octopus Energy and other suppliers such as Good Energy and So Energy, who have consistently opposed foreclosure proposals.

Ringfencing – in favor ringfencing – against
Centrica, British gas octopus energy
Eon UK good energy
utility so energy

Foreclosure proposals have divided the energy industry

Octopus CEO Greg Jackson previously labeled proposals for “gross foreclosure” as “financially illiterate”.

He urged Ofgem “not to give in to pressure from older companies whose proposals will only drive up bills and supplier profits”.

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The BEIS Select Committee and Cornwall Insight have also raised concerns about its effectiveness in dealing with industry problems and whether it will hinder innovation in the marketplace.

Ofgem CEO Jonathan Brearley said: “It’s a delicate balance and Ofgem wants well capitalized companies that can withstand price swings. We do not want to block the market for new suppliers or replace suppliers. I don’t want to force them to sit on a lot of capital. They can invest in innovative ideas.

“We are seeking opinions from across the industry, from suppliers of different business models, to determine whether we have struck the right balance between flexibility and competitiveness.

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Ofgem will announce further market reforms

Ofgem’s new measures are the latest attempt to clean up the market – which has cost taxpayers and bill payers around £10bn – following the collapse of more than 30 suppliers in the past 18 months.

The collapse of Bulb Energy alone is estimated to have cost £6.5 billion, making it the largest state bailout since RBS in 2008.

The watchdog has already introduced the fit and proper person rule and the financial stress test.

Before the crisis, Ofgem was criticized for its handling of the energy market – driven by rising wholesale costs and inadequate hedging strategies across the industry.

In its report last year, Citizens Advice criticized the regulator for failing to act against “unqualified energy suppliers” for nearly a decade.

This year, Ofgem regularly publishes performance assessments of how suppliers deal with industry issues, such as the recent report on the treatment of vulnerable customers.

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Ofgem is now planning to review the profit rates of the price cap – the watchdog is considering a variable rate of profit compensation, which is currently set at 1.9 per cent.

The watchdog is also weighing changes in the limit to reflect a change in how electricity grid users are charged – which has moved from a variable price per half hour to a fixed rate based on volume.

It also increased the temporary market stabilization fee, a compensation fee imposed on suppliers who take over customers from other companies to compensate them for covering deliveries.

Ofgem will seek industry-wide feedback on the consultation, with possible improvements to be published next spring.

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