Ofgem to bring in tougher supplier tests after string of energy firm failures

Companies applying for a licence to supply energy will need to undergo stricter tests from June, it was revealed on Thursday, as Ofgem attempted to address the string of energy supplier failures in recent years.

The energy industry regulator said applicants would need to demonstrate that they could adequately fund their operations for their first year, outline how they expected to comply with key regulatory and market obligations, and show their intentions to provide a proper level of customer service.

Directors and major shareholders of companies applying for a licence, as well as senior managers, would also have to prove they were “fit and proper” to hold a licence.

The new tests come after a series of energy supply start-ups had failed in recent years, with Brilliant Energy, Economy Energy, Extra Energy, Future Energy, Gen4U, Iresa Energy, National Gas and Power, One Select, Our Power, Spark Energy and Usio Energy among the firms that went bust.

It began with the failure of GB Energy in November 2016 - at the time, the failed energy firm in eight years - after the government encouraged start-up competition in the sector to put more price pressure on the so-called ‘big six’ suppliers.

Ofgem said it would consult on new proposals in the summer, with the aim of raising standards of existing suppliers.

That would include considering new reporting requirements for suppliers who were already active in the market, and rules around how suppliers managed customer credit balances.

Ofgem said it would also also review the arrangements for suppliers exiting the market.

The regulator said that over the last decade, more consumers had benefited from competition in the energy market, which had driven down energy prices, helped to raise customer service standards and provided more choice.

However, the number of suppliers that had failed in the last 18 months was a cause for concern, it added, with many of them providing what it saw as a poor level of customer service.

Following those supplier failures, Ofgem’s ‘safety net’ had protected domestic customers’ credit balances and ensured energy supply continued.

Ofgem did acknowledge that customers could still experience inconvenience and concern if their supplier failed, however.

Strengthening entry and ongoing requirements on suppliers would help to drive up customer service standards and reduce the risk of disorderly supplier exits, it explained.

The regulator said it aimed to minimise the impact, including the cost, that a supplier failure had on consumers and the wider market.

“In an ever-evolving market, Ofgem’s objective is to protect consumers while also ensuring they enjoy the benefits of increased competition and innovation that successful new firms entering the market bring,” said Ofgem’s director of consumers and markets Mary Starks.

“Applying new requirements on suppliers entering and operating in the market will aid us to weed out those that are underprepared, under-resourced and unfit.

“This will help minimise the risk of supplier failure and help drive up standards for consumers.”

Starks said the regulator would adopt a proportionate, risk-based approach to licensing suppliers.

“[We] will continue to encourage competition and innovation, including innovative business models, which benefits consumers.”