Stricter testing for new energy suppliers mooted by Ofgem

In a speech to energy market stakeholders today, Ofgem chief executive Dermot Nolan revealed that the regulator is considering a review of the rules governing energy firms. This follows the collapse of GB Energy last year.

He said: "With the increasing number of energy suppliers, many of whom are small, and the rising wholesale prices, there has been a lot of interest in the sector's financial stability.

"We have had many representations from those who consider we should require companies to meet more significant financial tests both before and after receiving a licence."

An Ofgem spokesperson later confirmed that financial and stress tests are one of a number of proposals the regulator is looking at. A decision will be made on these later in the year. If more stringent testing were introduced, it's hoped it would reduce the risk of suppliers going bust.

Make sure you're not paying over the odds for your gas and electricity by checking out our Cheap Energy Club.

What protection is currently in place if my supplier collapses?

Ofgem has a safety net designed to protect customers' money in the event a supplier goes out of business – introduced a month before GB Energy went belly up last November.

The safety net allows whichever firm is appointed to take on the collapsed provider's customers to recover the cost of credit balances via a levy across all energy suppliers.

Ofgem says it's unlikely that suppliers will pass on the extra cost to customers, but if they do, the cost is estimated to be less than £1 per customer.

The benefits of competition

Despite potentially reviewing how newer companies are tested before being granted a supply licence, Ofgem says it recognises the importance of having an increased number of suppliers within the energy market, as this often leads to more competitive pricing and better deals for consumers.

Nolan added: "We are conscious also of the benefits that consumers derive from the competition that new entrants can bring. So we will review our approach to awarding supply licenses, the financial requirements on suppliers and how we monitor supplier performance later this year."

Market competition means other options are available for customers stuck on expensive standard variable tariffs – the average standard tariff with EDF and Npower comes to £1,134/year, with the average standard tariff for fellow big six providers British Gas, Scottish Power, SSE and E.on costing £1,056/year.

In comparison, smaller providers can offer deals that are up to £200 cheaper a year. Full details can be found in our Cheap Gas and Electricity guide.