Paying upfront – what happens when an energy firm goes bust?

How safe is paying for energy upfront?

How safe is paying for energy upfront?

Two table-topping energy companies &#8211 Spark and Flow Energy &#8211 are asking customers to pay for their energy upfront.

Spark, which has been in the spotlight more for its poor service than cheap prices, stipulates customers’ accounts must be in credit by at least one month’s energy bill. Flow, a new kid on the block, asks customers to pay in advance by monthly direct debit.

It’s no surprise two of the smallest players operate in this way. To compete with the big boys, cashflow is key.

It allows them to bulk-buy energy in advance for less, so they can offer best buy deals to build market share where the big firms dominate.

You could argue the big six use similar tactics when they set direct debits over and above what’s needed to cover your usage (though remember, you’ve always got a right to a fair direct debit).

I’m in no way suggesting either Spark or Flow are at risk. But paying upfront for anything always begs the question, how safe is your money? What actually happens if an energy firm goes bust?

You’ll probably lose cash

As with folding retail companies, when an energy firm goes bust and owes you money, you become a secured creditor. Effectively, you join the end of a long queue of people looking to get cash back. So if you get anything, the chances are it will only be a fraction of what’s owed.

While banks have a fairly robust compensation scheme in place, the energy sector has no such thing. Though of course, the maximum loss with energy bills is likely to be far less compared with a savings or bank account, unless you’re spending a fortune on power.

There’s little you can do other than hope for the cash back. Though it’s possible if it ever happened, other energy firms may step in and cover lost money if you switch to them. If your bill was over £100 and you paid by credit card, there’s a possibility you would be covered by Section 75 rules, but it’s untested.

The regulator will ensure continuity of supply

If an energy company goes into administration and the administrator can’t find a buyer, Ofgem has powers under the Utilities Act 2000 to appoint a new supplier for affected customers, and to ensure this handover takes place as smoothly as possible. It says there’s no risk of disconnection if your supplier goes bust.

On top of this, the Government has put together some contingency plans (the Energy Supply Company Administration Rules). It’s aimed at ensuring a stricken firm can keep operating until it is sold, rescued, or its customers are switched elsewhere, and will work in addition to the powers Ofgem already has.

Fingers crossed, we’ll never need to find out how effective these measures actually are.

What are your thoughts? Let us know in the comments section below or in the forum discussion.