Ofgem proposes new tests for energy suppliers to get licences

Companies would have to demonstrate they have adequate financial resources and can meet their customer service obligations before being awarded a licence to supply energy, Ofgem has announced today.

The regulator says that a quarter of all customers are now supplied by small and medium-sized suppliers, but while smaller suppliers frequently top customer service league tables, it says there have been increasing instances of some new entrants providing poor levels of customer service, prompting action by Ofgem against the worst offenders.

The announcement is a win for MoneySavingExpert.com, as founder Martin Lewis has previously called for Ofgem to introduce a threefold test for suppliers before they can get a licence.

If you're looking to switch energy providers, you can do a full comparison via our  and potentially save £100s.

Martin: 'This is very welcome news'

Martin Lewis, founder of MoneySavingExpert.com and Cheap Energy Club, said: "This is very welcome news. About nine months ago, the Head of Ofgem Dermot Nolan asked me what they could do to encourage switching to smaller firms.

"I explained the biggest problem was lack of trust due to poor service and other fears, so the regulator needs a better screening regime on who is allowed to run a new energy firm.

"The raft of small providers has actually risked damaging people's confidence. They do a comparison and see a host of firms they've never heard of – which instantly makes people wary. Then they hear horror stories from the likes of Iresa and instead of scrolling down to find a supplier with decent service, they just give up.

"Encouraging competition is great, but it has to be effective competition and people need a level of quality assurance. The test I suggested Ofgem introduce was threefold. First, that a 'fit and proper person' test applies to those setting up energy firms.

"Second, that a company has the financial resources to run it – this seems like stating the bleeding obvious, but setting up an energy firm is not a minor undertaking and so we need to ensure the finances are in place. 

"And finally we need to ensure firms have the capacity to deal with the numbers of customers they are trying to attract – and if not, their numbers should be capped.

"And it seems Ofgem is doing something very similar. The end result should be when people ask if they can trust a small energy firm, they know that there is at least a minimum standard in effect in order for that supplier to have received the licence in the first place. Energy is a public good, we can't play fast and loose with it."

What will suppliers have to do to get a licence?

Applicants for new supply licences would have to demonstrate to Ofgem that they will have the funds and resources to manage their business for at least 12 months after entering the market.

They must also provide the regulator with a plan to meet their customer service obligations, including Ofgem's complaint handling standards and obligations to assist customers in vulnerable circumstances.

Ofgem is also consulting on tightening its test of whether applicants are 'fit and proper' to be granted a licence.

This means suppliers may have to declare if they've been involved with another business that Ofgem has taken enforcement action against or used the supplier of last resort process on – where an emergency supplier is appointed to take on the accounts of another supplier, if that supplier goes bust.

Ofgem will also have the power to take away a licence, if a supplier is given one and is later found not to be 'fit and proper'.

The new rules should be in place for Spring 2019.

What does Ofgem say?

Ofgem executive director for consumers and markets Mary Starks said: "New energy suppliers that have entered the market over the last few years have offered consumers more choice and helped to drive down energy prices and drive up customer service standards.

"However, complaints against some suppliers have been rising recently and we have had to step in when others have ceased trading.

"Our proposed new tests for suppliers wanting to enter the market will ensure consumers will be better protected against the risk of poor performance, while still allowing more competition and innovation in the energy market to benefit consumers."