Energy regulator set to crack down on excessive direct debits as it unveils new plans to protect consumers and prevent more failures
Energy regulator Ofgem is set to crack down on firms hiking direct debits excessively under new proposals announced today. The plans will see existing rules tightened amid concerns suppliers are playing "fast and loose" with direct debit increases and making customers pay more than they need to.
It is one of a number of new proposals Ofgem says are designed to prevent the kind of supplier failures we saw last year and to better protect consumers' money if they do fail, while also strengthening the resilience of the energy market.
The regulator is also planning to force firms to ring-fence customers' credit balances. While customers' credit is currently protected by the Ofgem safety net if a firm goes bust, the failed firm doesn't have to stump up the cash, so the costs of replacing those balances are ultimately shared by us all through higher bills.
We've been calling on Ofgem to crack down on suppliers setting excessive direct debits, with huge numbers of households telling us their direct debits have been hiked way above the average 54% rise to the price cap. In our recent energy directs debits survey – which we shared the results of with Ofgem to aid its investigation into the issue – a quarter of those in credit and on a price-capped tariff said their direct debit had doubled. See how to challenge your direct debit if you think yours has been hiked unfairly.
For help with your energy bills, see Martin's 'Should you fix your energy deal?' analysis of the latest deals and our What to do if you're struggling to pay your energy bills guide.
What exactly is Ofgem proposing?
- Improvements to the financial health of suppliers, to ensure they can weather the current challenges and reduce the risk of failures. This is something Martin has been calling for from as far back as 2018, when he asked Ofgem to tighten up checks on smaller firms to drive effective competition.
Ofgem is proposing that suppliers should be required to maintain sufficient levels of capital to survive market shocks, so suppliers will need to have enough cash available to endure a certain level of unexpected shock and still remain trading.
- Protecting consumer credit balances and green levies when suppliers fail, to prevent the costs being picked up by all consumers. When an energy supplier fails, Ofgem's safety net means its customers are moved to a new supplier and any credit is protected. But the new supplier doesn't currently get the credit balances from the failed firm, so the costs are shared across all consumer bills. A similar arrangement is in place for money paid through customer bills to the Renewables Obligation, the Government's green levy scheme. Under the new plans, firms would have to protect their customers' money, so it isn't lost if they go out of business.
According to Ofgem, the cost of moving customers to new suppliers from 28 failed suppliers since September 2021 – including new suppliers having to buy extra gas at short notice while prices were at record highs and replacing lost customer credit balances and green levy/renewables payments – was £94 per household.
To tackle this, rather than requiring suppliers to put credit balances in a different account to separate customers' money from their own as had been mooted, Ofgem will just require firms to show they have set aside or protected any excess customer cash – worked out by looking at exactly how much customers have paid against what they have been billed for.
It is also proposing to require suppliers to evidence that their accruing renewable obligations are being met on a regular basis.
- Tightening the rules on the level of direct debits that suppliers can charge. This is to ensure credit balances do not become excessive. Under the current licence conditions, firms have to set "fair" direct debits and must take "all reasonable steps" to make sure direct debits are based on the most current info available, unless their terms & conditions specifically say otherwise. Ofgem is proposing to change the licence so suppliers can't include a get-out clause in their T&Cs, and it will no longer ask suppliers to take "all reasonable steps" – they will instead be obligated to set direct debits using the "best and most current info" at all times.
- Requirements for suppliers to have better control over the key assets they need to run their supply business. Strengthening requirements for suppliers to own, control or have legal rights to material assets, such as premises, facilities, staff, equipment, IT systems and brand names, so these can't be retained by a parent company or another company should the supplier fail.
What does Ofgem say?
"By ensuring that suppliers are operating well-financed, sustainable and have more resilient business models, we can avoid the supplier failures we saw last year which caused huge stress and worry, and added costs to everyone's bills.
"But if some do still fail, consumer credit balances and green levy/renewables payments will be protected. Currently they are used by some suppliers like an interest-free company credit card. Moving forward, all suppliers will have to have enough working capital to run, without putting their customers' credit balances at risk. Today's proposals will make sure that customers' hard-earned money is properly protected so that a company must foot the bill if it fails, rather than consumers picking up the tab."