Ofgem's New Rules To Prevent Energy Firms Going Bust

UK energy watchdog Ofgem has announced new rules to make gas and electricity suppliers more financially secure.

The move comes after 30 firms collapsed in less than a year meaning millions of customers were switched to new, often more expensive suppliers.

The rules set a financial buffer energy firms must hold to make them better able to withstand market disruption.

Ofgem will also tell firms there should be temporary repayment holidays when customers cannot pay.

Under the new rules, customers in vulnerable situations must be prioritised and energy supplier's helplines must stay open for longer and be easier to contact.

Ofgem will also go ahead with proposals to allow it to tell suppliers to ringfence a portion of customer credit balances.

The regulator said the moves would ensure energy suppliers would be "more resilient to severe but plausible market shocks". They would also allow consumers to "benefit from a stable energy market".

The idea is to make sure companies hold a level of capital which makes them better able to weather any "sudden changes in market conditions, such as the price shock in 2021 that prompted the failure of 30 suppliers".

Since September 2021, about 2.3 million domestic customers whose supplier has collapsed have been switched to a new supplier. Ofgem estimated the collapses cost each UK household an extra £83.

The new rules will come into force from 31 March, 2025.

Earlier this month Ofgem chief executive Jonathan Brearley wrote to energy suppliers warning that the regulator was "ready to act" against suppliers that "do not yet have sufficient capital if they use profits for paying dividends above recapitalising".

Ofgem said it had always been clear reasonable profits were essential for a "sustainable and well-functioning sector", but the letter made clear that financial resilience must be "prioritised".

However, while companies will have to ringfence some customer credit balances in case of failure, Ofgem had been under pressure to make them ringfence all their credit balances.

But the watchdog said it did not think it was in the consumer interest to introduce market-wide ringfencing of customer credit balances. It said it already had "strict rules in place to ensure that suppliers don't overly rely on credit balances and refund these on request". When a supplier collapses credit balances are protected.

The new changes go further to make sure the energy firms "put their own capital at risk rather than overly relying on customer money", it added.

And it said it had brought in "specific triggers that will notify us when a supplier may be over-relying on customer credit balances in the future, and we may direct certain suppliers to ringfence funds if we think this is best for customers".

The regulator has also proposed new rules to ensure all domestic customers can get support from their supplier if they are struggling to pay the bills.

Ofgem director Neil Lawrence, said customers should be able to contact their supplier "without frustration or undue delay when they need help".

Suppliers were "short-changing too many of their customers, who deserve better", he said.

A consultation on these new consumer standards will run until 23 August with a decision expected by early October. Any changes are expected to be in place by December 2023 to "help protect and support consumers from Winter 2023-24 onwards".

Ofgem has also proposed a series of reforms to improve standards of customer service for business customers. It says many firms are struggling in the face of high energy costs and severe stress caused by volatile prices.