The regulator's ongoing review into supplier licensing arrangements has resulted in a safety net to protect customers in the event of supplier failure.
Companies would have to demonstrate they have adequate financial resources and can meet their customer service obligations before Ofgem awards them a licence to supply energy.
Over the last decade more consumers have benefited from competition in the energy market, which has driven down energy prices, helped to raise customer service standards and provided more choice.
A quarter of all customers are now supplied by small and medium sized suppliers after switching to get a better deal.
While smaller suppliers frequently top the Citizens Advice customer service league table, there have been increasing instances of some new entrants providing poor levels of customer service, prompting action by Ofgem against the worst offenders.
Over the last year several smaller suppliers have gone out of business. Ofgem has announced it is opening enforcement investigations against two suppliers which have failed to make payments owed under the government’s Renewables Obligation scheme and taken steps to seek repayment from two other firms.
Ofgem is now proposing new financial and customer service tests for companies applying to the regulator for a supply licence to drive up standards. Applicants for new supply licences would have to demonstrate to Ofgem that they will have the funds and resources to manage their business for at least 12 months after entering the market.
They must also provide the regulator with a plan to meet their customer service obligations, including Ofgem’s complaint handling standards and obligations to assist customers in vulnerable circumstances. Ofgem is also consulting on tightening its test of whether applicants are ‘fit and proper’ to be granted a licence.
These measures will help ensure new suppliers are ready to enter the market, while still driving competition and innovation which benefit consumers. They should be in place late spring 2019.
As part of its ongoing review, next year Ofgem will consult separately on proposals to introduce new reporting requirements for suppliers who are already active in the market. This includes regular reporting to Ofgem on the adequacy of their financial and operational resources for running their business, providing customer service, making sure they can continue to serve their customer base and meet their financial obligations under Government schemes.
These proposals to strengthen entry and ongoing requirements on suppliers will reduce the risk of disorderly supplier exits by raising standards around financial resilience. In the event a supplier fails, Ofgem’s ‘safety net’ provision, which protects domestic customers’ credit balances and ensures all customers’ energy supply continues, will remain in place.
Ofgem wants to minimise the impact that supplier failure has on the wider market and consumers. Next year it will consult on a range of options including on how suppliers accrue, hold and use customers’ credit balances. It will also look at how to ensure they can make the payments they owe under the Renewables Obligation scheme.
Mary Starks, executive director for consumers and markets at Ofgem, said: “New energy suppliers that have entered the market over the last few years have offered consumers more choice and helped to drive down energy prices and drive up customer service standards.
“However, complaints against some suppliers have been rising recently and we have had to step in when others have ceased trading. Our proposed new tests for suppliers wanting to enter the market will ensure consumers will be better protected against the risk of poor performance, while still allowing more competition and innovation in the energy market to benefit consumers.”