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New energy suppliers to face tougher checks

New energy suppliers to face tougher checks

Companies applying for a licence to supply energy will have to undergo tougher tests from June, following Martin Lewis's calls for "quality control" after a run of smaller firms went bust over the past year.

Applicants wanting to become an energy supplier will need to show the energy regulator Ofgem that they can adequately fund their operations for their first year, outline how they'll comply with key regulatory and market obligations, and show how they'll provide a proper level of customer service.

The directors and major shareholders of the firms, as well as senior managers, will also have to show they are "fit and proper" to hold a licence.

Ofgem will also consult on new proposals in the summer, with the aim of raising the standards of existing suppliers. This will include considering new reporting requirements for suppliers, and rules around how they manage customers' credit balances.

Martin: 'For many years, there's been too many one-man-and-his-dog suppliers'

Martin Lewis, founder of MoneySavingExpert.com, said: "For a few years now, there have been too many one-man-and-his-dog suppliers in the energy market – pushed by the Pavlovian political response that only more competition will improve things.

"Yet this has been incredibly damaging to people's confidence in switching. When I explain how to compare tariffs, I've had to constantly urge people to 'scroll down' as most of the very cheapest are usually loss-leading providers trying to rapidly build market share to help their cash flow.

"They offer unsustainable prices, and are sometimes unsustainable companies. I personally wouldn't switch to many of these new small suppliers. Especially as there are still £300/yr-odd savings to be made going with still cheap but reliable providers with a good track record. Even I would say it's worth going with safety over purely the cheapest price.

"It's for this reason, when I met Dermot Nolan, the CEO of Ofgem, many months ago, and he asked me what needs doing to help switching, my answer was that we need better quality control of who is given a licence. I suggested a 'fit and proper person' test, a financial solvency test, and a capacity test to see how many customers should be allowed to sign up.

"He promised me he'd look at that – it's taken over a year, it put out a consultation on the idea, and now it's going to happen. This should help rebolster people's faith that they can switch, and switch in safety. And that means overall lower bills for many who need it."

What's the background?

Ofgem first announced its plans to tighten its checks on energy suppliers last year, and launched a consultation in November.

At the time, it cited concerns about poor customer service and financial instability as the reasons for launching the consultation.

Several energy suppliers, including Brilliant Energy, Our Power, Economy Energy, Spark Energy, Extra Energy, Future Energy and Iresa Energy have stopped trading in the last year.

What does Ofgem say?

Ofgem executive director of consumers and markets Mary Starks said: "In an ever-evolving market, Ofgem's objective is to protect consumers while also ensuring they enjoy the benefits of increased competition and innovation that successful new firms entering the market bring.

"Applying new requirements on suppliers entering and operating in the market will aid us to weed out those that are underprepared, under-resourced and unfit. This will help minimise the risk of supplier failure and help drive up standards for consumers.

"We will adopt a proportionate, risk-based approach to licensing suppliers and will continue to encourage competition and innovation, including innovative business models, which benefits consumers."