Energy regulator Ofgem is planning to refine its ‘supplier of last resort’ arrangements – which take effect when an energy company fails – so that customers who are in credit with the failed supplier are less likely to lose their cash.

Supplier of last resort arrangements provide a mechanism for other companies to take on customers from a failed company. But Ofgem says that customers in credit are “unsecured creditors of the failed supplier in a formal insolvency process. The default position is that the customer is unlikely to receive all (or possibly any of) this money back from the failed supplier.”

Ofgem suggests several options. In one it would take into account whether a company taking on customers could restore credits in whole or in part. But Ofgem warns that would not necessarily mean all customers’ credit could be recovered and the regulator may not be able to secure them if it has to appoint a new supplier quickly.

Ofgem is also looking at ways of ring-fencing customer credits. But it warns that option could affect small suppliers badly because they may rely on credit balances for working capital etc. In addition a compliance framework would add to industry and company costs.

Finally it suggests an insurance scheme for the industry but notes that option was previously rejected.

Doug Stewart, chief executive of Green Energy, said:  “Whilst Ofgem says supplier failures are rare, these proposals highlight a very real risk that exists in the retail energy market – suppliers offering savings of £200-300 that aren’t sustainable and some suppliers using customers money to fund their working capital.  Established energy companies bill their customers in arrears, new entrants, by and large, take cash up front to use in their business which means consumers never see the benefit of the so called £200-£300 savings.

“Ofgem speaks about restoring trust in the energy market:  they are right but this proposal isn’t a solution.  It simply masks an unwelcome and unnecessary risk that doesn’t need to exist.  Customers deserve better.”

Ofgem wants views on its proposals by 29 July. See full consultation here

Further reading:

Winter is coming… and a perfect storm for energy price spikes

Last winter price spikes, not blackouts, were the main fear. Has anything changed?

Will auto-switch services change the game for energy companies?

 

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