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British energy suppliers will face more stringent regulations to enhance their financial stability. The move by the UK’s regulator, Ofgem, aims to avoid a repeat of the market turmoil that saw numerous undercapitalized companies collapse during the energy crisis.
Ofgem announced on Wednesday that it will introduce new capital requirements from March 2025, ensuring retailers can withstand market shocks, such as energy price surges. The rules will mandate suppliers to maintain a minimum capital buffer of £115 per domestic customer.
In late 2021 and early 2022, thirty suppliers collapsed due to soaring wholesale energy prices leading up to Russia’s invasion of Ukraine. The regulator faced criticism for allowing financially weak companies to enter the market in an attempt to boost competition.
The costs of rescuing customers from failed suppliers and covering their outstanding balances amounted to an additional £94 on every British household’s energy bills last year.
Ofgem’s objective is to ensure the financial security of all energy suppliers, thereby promoting a stable energy market.
The regulator also announced the authority to direct suppliers to ringfence advance payments from consumers instead of using them for operational purposes, should concerns arise regarding a supplier’s viability.
Energy UK, the trade body, expressed support for Ofgem’s actions, emphasizing the importance of a sustainable and healthy retail sector.
However, Ofgem has faced criticism for its plans to allow suppliers to generate higher profits to comply with the stricter financial controls, according to consumer watchdog Citizens Advice.
Centrica, the parent company of British Gas, previously urged Ofgem to enforce more rigorous requirements regarding the protection of consumer payments.
Under the new rules, suppliers failing to meet the £115 per customer threshold can retain their license but will need to collaborate with Ofgem to restore the capital buffer. They may also face a ban on acquiring new customers until compliance is achieved. Ofgem will only revoke a license if the buffer falls below zero.
This announcement comes as the energy market starts to stabilize following the turbulent events that commenced in the summer of 2021. Russia’s strategic utilization of its gas resources resulted in supply restrictions to western Europe, ultimately leading to a full-blown invasion of Ukraine.
The government intervened by subsidizing energy bills after wholesale prices surged in late February last year when Russian troops crossed the border.
While blanket support for households has ended, energy bills remain significantly higher than pre-crisis levels. Under Ofgem’s current price cap, typical households pay £2,074 annually, well above the pre-crisis average of £1,150.
Ofgem, anticipating increased profits for energy suppliers as the market continues to stabilize, issued a warning this month against paying dividends until financial stability is ensured.
Centrica is expected to announce a strong rebound in profits for British Gas in its upcoming first-half results. This is driven by Ofgem rules that allow suppliers to recover excessively high energy purchasing costs during the crisis.
Ofgem is also adopting a tougher approach towards suppliers to business customers amid concerns of overcharging as wholesale prices decline.
Many businesses have expressed dissatisfaction with expensive contracts established during peak wholesale prices last summer. Although the energy bill price cap does not apply to businesses, the regulator expects suppliers to proactively engage with customers and potentially renegotiate deals when necessary.
Tina McKenzie, policy chair at the Federation of Small Businesses, has welcomed Ofgem’s initiative and urged suppliers to act fairly and adapt.
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