Regulator Ofgem is proposing to introduce a small levy on all energy bills to ensure customers don't lose out if their energy firm becomes insolvent.

While the prospect of an energy supplier going out of business is unlikely, it's not out of the question, and if it happened, it could leave customers with credit on their balance out of pocket. Ofgem estimates that the average customer is more than £100 in credit at some point in the year.

MoneySavingExpert.com has previously called for this issue to be tackled in meetings with Ofgem, which is taking action in the form of a consultation paper launched today.

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What's Ofgem proposing?

Ofgem's called for energy suppliers to pay in to a fund that would be used to reimburse those in credit with a particular firm, on a case-by-case basis, should it go bust. It would be up to the supplier to decide whether to pass the cost on to its customers, which would result in a rise in the cost of energy bills.

The regulator says introducing a levy will ensure energy customers' money is better protected, and insists it will only have a "small impact" on bills for everyone else. It hasn't yet published any figures showing how much would be added to the typical bill though.

It's also seeking views on whether other approaches, such as ring-fencing credit balances, or insurance arrangements, may be better ways to provide protection.

Martin Lewis
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How does Ofgem currently deal with energy supplier insolvency?

At the moment, if an energy company goes bust, Ofgem appoints a replacement supplier to ensure customers continue to be supplied with energy.

As part of the process for selecting a replacement supplier, Ofgem will take into account who can best protect customers' credit balances. However, there's no formal mechanism for those with outstanding credit to be refunded.

How common is it for an energy customer's account to be in credit?

Direct debit payments spread the cost of energy bills throughout the year, so it's not uncommon for energy customers to be in the red during winter when energy usage is high, then build up credit in the summer when energy usage is low.

According to Ofgem estimates, a typical customer's credit balance peaks at a little over £100 each year.

Ofgem rules state that a customer can ask their supplier to refund their credit balance at any time and the supplier cannot unreasonably refuse this.

What Ofgem says about the proposals

Rachel Fletcher, Ofgem's senior partner for consumers and competition, says: "We are proposing a safety net to protect customers' credit balances in the unlikely event of a supplier failure.

"There are big savings to be made from switching, of around £200-£300, and now over 40 suppliers to choose from. These protections are designed to give people peace of mind so they can have complete confidence to shop around for the best deal."

What are the next steps of the consultation?

If you want to register your view you need to respond to proposals raised in the consultation paper by 29 June.

Ofgem states in its consultation paper that you can do this by emailing Giulia Branzi or Mark Mills, or by post to Giulia Branzi, Ofgem, 9 Millbank, London, SW1P 3GE.

The energy regulator hopes to publish its proposed next steps this autumn.

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