Ofgem has promised new tests for companies who want enter the energy retail market, to be applied from June this year, and has promised to follow up with a more testing regime for existing suppliers.
Ofgem said new applicants will have to demonstrate they can adequately fund their operations for their first year, outline how they expect to comply with regulatory and market obligations, and show their intentions to provide a proper level of customer service. Directors and major shareholders of companies applying for a licence, as well as senior managers, will also have to show they are ‘fit and proper’ to hold a licence.
In its consultation on the new changes – which closes on 13 May – Ofgem said, “Any prudent, well-prepared entrant should be able to demonstrate to us at the point of licensing that they have planned their financial and operational resources for entry into the supply market and that they are prepared to meet the costs they will face (for example under government/environmental obligations and other industry costs). The regime will be in place from June.
Ofgem will also consult on new proposals in the summer with the aim of raising standards of existing suppliers. This will include considering new reporting requirements for suppliers who are already active in the market and rules around how suppliers manage customer credit balances.
Ofgem will also review the arrangements for suppliers exiting the market. Under ‘supplier of last resort’ arrangements the costs of failed companies are spread across the market, but with up to a dozen companies exiting the market consumers are bearing increasing costs for the safety net.
Ofgem said, “Strengthening entry and ongoing requirements on suppliers will help to drive up customer service standards and reduce the risk of disorderly supplier exits.”
Mary Starks, executive director of consumers and markets at Ofgem, said: “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.”
Matthew Vickers, chief executive at the Energy Ombudsman said: “… it’s right that Ofgem is putting stronger controls in place and taking action to raise the entry barrier for new market entrants.
“Ensuring that new suppliers know from the outset what they’ll need to do on the customer service front – and the consequences of failing to meet the expected standards – should help to avoid some of the problems we’ve seen in the sector recently and ensure that consumers get the protection they need.
“In addition to the changes announced today, we look forward to Ofgem’s proposals for greater scrutiny and oversight of existing suppliers.”
Gillian Guy, chief executive of Citizens Advice, said: “Ofgem’s new rules are good news for consumers. From June, firms entering the market will need to be set up to deliver good customer service and be financially sound.
“The regulator is right to now turn its attention to the issue of poorly performing suppliers already in the market. Ofgem needs to take steps to identify those companies not delivering for their customers or that may be in financial difficulty and examine if its current approach to resolving problems it identifies is the right one.”
“More firms going out of business remains a possibility. It is essential the regulator acts quickly to better manage future supplier failures. We all end up paying through higher bills when energy companies go bust. Without better ongoing monitoring and new rules to manage future supplier failures, consumers will continue to suffer.”