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Is there an energy supplier heaven?

Tom  Faulkner Tom Faulkner Analyst
6th November 2019

Hapless demise

Toto Energy’s exit of the market on 23 October pushed the number of suppliers leaving the market in 2019 alone up to nine. Alongside this, Gnergy has been issued with a Final Order, while both Nabuh Energy and Breeze Energy find themselves subject to Provisional Orders, meaning that licence revocation could be on the horizon for any of them, unless they pay their outstanding Renewables Obligation (RO) in full.

The day before Toto bowed out, Ofgem released the second stage of its Supplier Licensing Review focusing on the ongoing requirements and exit arrangements. In it, the regulator sets out a whole suite of ways it considers will improve the standard of suppliers in the market and better facilitate their exit. Granted, this is the first stage of the consultation and there is a long way before these proposals will turn into regulation, but there is a risk that this is a rushed and somewhat impulsive set of suggestions that may require further time to assess.

Ofgem has never shied away from the fact that its duties are to protect the consumer and that it wants to facilitate a competitive, well-functioning market. This does not preclude supplier failures, but the impacts of the proposals, in particular on smaller suppliers, could be vast and need to be assessed.

Meeting your maker

One of the regulator’s proposals is to require suppliers to cover at least 50% of their credit balances. This could either be through some sort of insurance or via an escrow account – Ofgem will set out a “menu” of options – as a way of reducing the costs on a Supplier of Last Resort (SoLR) or the rest of the market should the supplier fail. It would not be surprising if a few people choked on their morning coffee when they first saw this proposal, and it does seem a little intriguing. First off, should Ofgem choose to run with this preferred option, suppliers will have three to six months with which to find and implement sufficient protection. This could be a challenge for some providers within the time period.

Additionally, in the impact assessment the regulator cites a cost case of £35mn and claims that the smaller half of the market will be able to secure credit insurance at a cost of 0.5% of the annual balance, with larger companies using other means. This figure “was provided to Ofgem by a well-known high street bank as an indication of what these costs could be”. There is no denying that this would indeed give greater protection, but there are questions on a) the people that would actually be willing to insure a smaller supplier’s credit balances; and b) what would happen if a supplier is not able to obtain insurance or security of this kind.

Moving to a better place

Not all the proposals are as uncertain as the above. Ofgem has outlined some suggestions that are likely to be met with a less frosty reception by parts of the market. Living wills would require suppliers to outline their exit arrangements in the event of their failure; milestone assessments would require suppliers to pass assessments at different customer thresholds to ensure that they have the right systems and processes in place to support their customer base and; Ofgem may block a trade sale where it considers that undertaking the SoLR process will serve and protect the customers better. The irony of this final point is that this comes too little too late for some of Solarplicity’s customers who had to make the journey to EDF Energy via Toto. They say hindsight is a wonderful thing so perhaps Ofgem is learning from the past.

There is no doubt that the supply market is a tough place to operate, and the SoLR train seems to be pulling into the station a lot more often. Greater market protection and regulation is needed to protect consumers better and reduce further costs across the market. Ofgem has definitely got the right stick, but the stick is big with different parties at each end of it, so finding the balance is key. At the moment, there is perhaps a risk that these proposals will lead to unintended consequences, but it would be pertinent to remember these are only proposals. Nothing is set in stone yet.

Cornwall Insight operates a Compliance Service to help suppliers understand their obligations. This provides alerts on key developments (such as the ongoing monitoring and exit arrangements) and access to our comprehensive Energy Supplier Compliance Portal. The portal has been updated for Q3 2019 and has all the information needed for a supplier to comply with their obligations. For more information get in touch with Tom Faulkner at t.faulkner@cornwall-insight.com or 01603 542123 

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