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Energy suppliers must be ready to demonstrate compliance with new principles

Emma  Bill Emma Bill Analyst
10th February 2021

From 22 January, energy suppliers were required to follow new principles resulting from Ofgem’s Supplier Licensing Review (SLR), which initially kicked off nearly three years ago. Such was the breadth of the SLR, changes were introduced in two rounds, with the first round of changes bringing the introduction of tougher entry tests for new suppliers from June 2019. The second round sought to improve regulation for existing suppliers and in November 2020 the regulator confirmed that it would implement further requirements for all active suppliers, with the majority of these now in effect.

In recent years principles based regulation has seen to be Ofgem’s preferred way of regulating suppliers and the new Financial Responsibility Principle (FRP) is no exception. It requires suppliers to manage responsibly costs that could be mutualised in the unfortunate event of a supplier exiting the market. This includes customer credit balances, network charges and environmental and social scheme costs, all of which are at risk of being picked up by others in the market. However, Ofgem is considering whether principles based regulation is sufficient to drive the response it desires from suppliers and whether more prescriptive requirements to this end are necessary. The regulator is due to consult on further changes to reduce likelihood and scale of cost mutualisation early this year. In earlier proposals “serious and credible reservations” were raised about the impact of prescriptive measures on future entry and competition and Ofgem is seeking to address these before any final decision is made.

Ofgem has provided guidance on some of these latest changes to the electricity and gas supply licences. For example, guidance on the FRP sets out “minimum requirements” which the regulator expects suppliers to meet. Suppliers must ensure they are able to demonstrate compliance with these requirements through appropriate means. Ofgem refers to evidence as including cash flow projections, budgets, guarantees or proof of investments. The guidance confirms that, while there will be no set timeframes for requesting information in assessing compliance with the FRP, Ofgem will be looking at ways to gather data for an initial assessment of the market landscape. In the first instance, the regulator will look to information it already holds on suppliers such as that gathered through existing procedures or tools.

Two further principles in relation to operating capability and transparency require suppliers to ensure they have the capability, systems and processes in place to effectively serve their customers and comply with their regulatory obligations, and engage in a constructive dialogue with Ofgem on an ongoing basis.

Another significant change from this year is the requirement for suppliers to complete milestone assessments at 50,000 and 200,000 domestic customers for electricity and gas, separately. This, and the introduction of similar dynamic assessments, provides further means for the regulator to gather information. Ofgem has, again, provided guidance on milestone assessments, with some notable changes to the timings around the assessment since the statutory consultation.

While these and several other changes came into force last month, suppliers will have until 18 March to produce and maintain a strategy for safeguarding continuity of supply to customers. Within the licence drafting, such a strategy is referred to as a Customer Supply Continuity Plan (CSCP). A CSCP must include, among other things, details of arrangements with third-party service providers, billing system information, customers on the Priority Services Register, customer numbers and customer payment method information. Suppliers will need to submit their CSCP at Ofgem’s request, but also as part of milestone and dynamic assessments.

While the interpretation of principles-based regulation is not necessarily straightforward, new enforceable principles largely formalise what the regulator has come to expect of suppliers, and indeed, what many suppliers would look to ensure they have in place to remain competitive. The inclusion of “minimum requirements” in associated guidance documents infer that the bar can (and possibly should) be raised among suppliers. Principles around customer service and transparency, for example, prompt companies to think about the plans and processes they have, or choose to, put in place.

The SLR has now concluded for the most part, with the exemption of stakeholder consideration of further proposals around cost mutualisation referred to in this blog. It will be some time before we’re able to conclude whether or not the new requirements are having the desired effect. While some believe that the changes did not come soon enough, it is hoped that consumers and industry alike will benefit from the enhanced regulatory oversight of suppliers.

We recently held our biannual compliance webinar to discuss these and other recent changes to the supplier compliance landscape. The webinar, which forms part of our Energy Supplier Compliance Portal service, also set out further changes for the remainder of 2021. If you wish to discuss changes to energy supplier compliance or request a demonstration of our online portal, please get in touch with e.bill@cornwall-insight.com.  

In addition, through our offerings in supplier compliance – including our Compliance Service and Energy Supplier Compliance Portal – we interpret the regulatory framework to understand specific, enforceable, obligations. We run workshops and courses on Domestic and Non-Domestic Energy Supplier Compliance. These include a high-level overview of the regulatory framework including primary legislation; the supply licence and important requirements which sit outside of the licence; organisations you should be aware of and the top compliance considerations along the customer journey. We will also take a look and discuss upcoming changes which will impact on supplier compliance too.

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