Green Star Energy has emerged as the winner of Ofgem’s supplier of last resort (SOLR) process for the 10,000 or so customers of failed supplier Future Energy. The process seems to have worked well with physical supplies continuing at the same tariff rates—be they fixed or variable—until 30 September. This commitment has been made despite the higher policy costs that are to come in to force from 1 April 2018. The new supplier has also undertaken “largely” to meet the cost of protecting the credit balances held by Future Energy’s customers.
We know there was a lot of interest in the process so suspect Ofgem had plenty of options from which to choose. The terms agreed also suggest a competition improved the terms on offer to Future Energy’s customers, especially as Green Star Energy is willing to find the cash to fund much of the customers’ credit balances. Coincidentally the Future Energy SOLR transfer occurred shortly after Ofgem published final information on the last time the process was used when GB Energy failed in November 2016. GB Energy’s customers were transferred to Co-operative Energy. Some 11 suppliers offered to take on those customers, with the majority offering to guarantee the credit balances including refunds owed to lost customers. All suppliers said they would claim on the SOLR levy to at least some extent in order to underwrite this commitment.
Co-operative Energy offered to honour the existing GB Energy prices for the duration of all contracts and was able to assure Ofgem that it would be able to serve them. At that time Co-operative Energy was in the backwash of customer service problems triggered by the implementation of a new billing system. In the out-turn the GB Energy customers were served by the same systems and structures that had been put in place before the failure. It seems from Ofgem’s figures Co-operative Energy also took on about 30% of the cost of securing the customer credit balances.
The securing of credit balances is clearly critical to the confidence consumers have in the market. They will include money paid in advance for energy yet to be delivered. Unless the SOLR supplier steps forward to secure these balances the majority of the customer monies would be absorbed in the company administration process causing real harm to customers.
The SOLR levy is the means of getting that cash back from, in the end, all consumers through higher distribution charges. The timing of when suppliers charge their direct debit customers is important in determining the scale of these credit balances. Historically direct debit payments have been taken after consumption, but many tariffs now seek payment in advance. Some suppliers, notably Ovo Energy, will pay interest on credit balances on advance direct debit payments, recognising the commercial value they gain from the advance payment, compared with alternatives such as borrowing the same amount of cash from a bank.
Suppliers operating payment in advance will tend to run higher credit balances. Is it time for a higher duty of care to customers served on these terms? Perhaps this could be evidenced through interest payments but equally consideration could be given to financial stress testing on entrant suppliers for whom advance payment is their primary form of business.
Ofgem’s 2017-18 workplan talks of how it “will learn lessons from any supplier insolvencies” and when he launched the document Dermot Nolan spoke of “review[ing] our approach to awarding supply licences, the financial requirements on suppliers and how we monitor performance later this year”. Other sectors, including Irish energy and water in Great Britain, do have contingency to test the robustness of business plans, but this is sensitive especially where an entrant is intending to pursue a new model. Unchecked in energy though, we risk ending up in a situation where the profits from the advance payment business model are privatised but the losses, through the SOLR levy, are socialised.