Energy suppliers to face tougher checks as Ofgem makes raft of changes to prevent more failures amid current crisis
Energy suppliers will have to undergo tougher tests and checks on their finances from January under new rules unveiled today by energy regulator Ofgem. The new rules come after a slew of energy failures in recent months, with more than 20 suppliers going bust since September.
Ofgem has set out a series of new rules which it says are designed to reduce the risk of supplier failures, protect consumers and strengthen the resilience of the energy market.
The rules will see suppliers undergo financial stress testing, and will require supplier board members to undertake self-assessments of how they manage risks. Other proposals include strengthening existing "fit and proper" person requirements, and consulting on measures to boost the financial resilience of new entrants and small, growing suppliers.
As part of the drive to improve the resilience of the energy market, it is also consulting on how it calculates the price cap to ensure the cap is better able to handle market volatility, while still helping consumers.
The announcement comes during a period of crisis for the energy market – with energy wholesale prices (what providers pay) rocketing to record levels. Suppliers are having to sell energy for less than the cost price, due to the current cap. This has led to a total of 23 energy suppliers entering administration since September, affecting nearly four million households.
Rocketing wholesale prices has also meant that there are now no deals meaningfully cheaper than the price cap to switch to. And while the cap is expected to rise by over 40% in April, see why Martin's still warning most not to fix their energy.
Martin: 'Now after the energy price catastrophe we face, it's clear tougher protections are and were always needed'
MoneySavingExpert.com founder Martin Lewis said: "Back in 2018, I suggested to Ofgem three tests that needed to be made before suppliers were granted licences. My concern at the time was that enough new small one-man-and-his-dog firms were either going bust, or playing fast and loose with customers, and that was putting people off switching. Those tests were soon introduced, though not with the level of severity I would have preferred.
"Ofgem has been in a sticky situation for a few years. It has had to balance the Government's wish for a competitive open market energy price solution – which means there needed to be limited barriers to entry – with protecting consumers.
"Now after the energy price catastrophe we face, it's clear tougher protections are and were always needed. In a way that will have been advantageous for Ofgem, as the Government pressure to pump up competition will be playing second fiddle to protecting it from having to bail out firms in the future."
What new checks will suppliers face?
Under the reforms announced today, Ofgem hopes to bolster risk management among energy suppliers, to reduce the vulnerability of energy suppliers to major price shocks. The plans include:
- Financial stress testing for suppliers from January 2022. The regulator plans to assess suppliers against a range of potential scenarios, such as big wholesale energy price changes, or if a large number of customers were to leave or join in a short space of time. It will test to see if suppliers can manage this.
- Requiring supplier boards to undertake self-assessments. Ofgem will require supplier boards to undertake a self-assessment to show that they are managing risk properly.
- Reviewing existing controls on 'fit and proper' requirements. Ofgem already has rules in place to ensure minimum requirements for leadership or executive roles. It is reviewing this to see if the rules need to be strengthened, to ensure greater accountability.
- Reviewing how to tighten rules on protecting credit balances. The regulator will look at greater measures to protect household credit balances, such as ring-fencing this money unless suppliers can demonstrate they have enough capital to cover it by other means. It will consult on this in 2022.
- Consulting on new financial licence requirements, and whether to stop growing suppliers from taking on new customers until they can handle it. As part of the announcement, Ofgem also launched new consultations, including on whether new financial licence requirements are needed.
It will also look at whether it should have the ability to stop growing suppliers from taking on new customers until Ofgem is satisfied they are financially resilient, before allowing them to grow beyond certain milestones, such as 50,000 and 200,000 customers.
Once these measure come in, if any weaknesses are revealed by the new stress-testing measures, Ofgem says it will agree to an improvement plan from the suppliers to address any concerns. If suppliers fail to engage, it can use its enforcement powers, though what that would look like would be decided on a case-by-case basis.
What does Ofgem say?
Ofgem chief executive Jonathan Brearley said: "Ofgem has worked hard to protect consumers as gas prices have risen by over 500% in under a year. We have ensured that over four million customers of failed suppliers have stayed on supply, household credit balances have been protected, and all customers have been protected by the price cap from fast and extreme price rises this winter.
"Today, I'm setting out clear action so that we have robust stress testing for suppliers so they can't pass inappropriate risk to consumers. I want to see more checks on staff in significant roles, and better use of data to help us regulate. We need a regime that can enable a sustainable market, to promote our transition to net zero.
"Our priority has been, and will always be, to act in the best interests of energy consumers. The months ahead will be difficult for many, and we are working with the Government and energy companies to mitigate the impact as much as we can, particularly for the most vulnerable households."