Ofgem criticised over cost of dealing with fallout from collapse of eight companies

This article is more than 1 year old

This article is more than 1 year old

British households face an £80m bill to cover the costs of transferring more than half a million customers from bust energy firms, raising questions over whether the regulatory regime is fit for purpose.

Eight suppliers have ceased trading this year amid rising wholesale prices, forcing energy regulator Ofgem to step in and appoint new suppliers. Four have collapsed in the past two months alone, including One Select on Monday.

Each of the UK’s 28m homes could have an average of £1.75 added to their energy bills to compensate the new suppliers, according to a Guardian analysis.

Ovo, ScottishPower and other suppliers who have taken on customers of failed firms can recoup some costs through a mechanism known as “Supplier of Last Resort”, ultimately paid for by all consumers via their bills.

Those claims will take months to settle, but there are historical figures that provide a guide to the bill awaiting consumers.

Co-Operative Energy successfully claimed £14m for taking on the 160,000 customers of GB Energy when it went bust in 2016, implying the cost for rehoming 551,500 residential customers in 2018 would be £48.2m.

Industry experts said the number was credible, and could be higher still depending on the credit balances held by the collapsed firms. An initial application for compensation by one supplier this year would indicate a bill more like £76m.

Even taking the more conservative figure, the amount all households are liable for looks likely to be about £80m, or nearly £3 for each annual energy bill, once renewable energy subsidies left unpaid by failed firms are counted.

Spark Energy and Extra Energy, which ceased trading within days of each other in November, together owed around half of a £58m shortfall in renewables obligation payments.

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Stephen Littlechild, the former chief energy regulator, said questions should be asked about Ofgem’s administration.

Questions over energy firms’ £58m debt to renewables obligation scheme | Letters Read more

“The shortfall is to be recovered from other suppliers. So prudent suppliers, and ultimately their customers, will have to bail out imprudent ones,” he wrote in a letter to the Guardian.

He added: “How were some suppliers allowed to build up debts of £58m? Should there not be more frequent monitoring, say at quarterly or monthly intervals rather than annually, with payments on account throughout the year?”

The costs facing all consumers could rise significantly if more firms falter, which industry sources warn is a serious possibility.

Concerns have been raised over the future of Economy Energy, which has 250,000 customers, after it came under Ofgem investigation for not meeting renewables obligation payments, one indicator that a firm is under stress.

The company has also recently closed all its social media pages. It declined to tell the Guardian why.

“In response to the recent speculation and circulating misinformation, we would like to provide assurance that we at Economy Energy have no intention of closing our doors,” the company said on its website.

Ed Reed, head of research at analysts Cornwall Insight, said: “We’ve consistently said over the course of this year that conditions are right for tough times in retail and unfortunately that’s come to pass.”

He added that prospects were not getting better for small suppliers, and some could be caught out by short-term wholesale prices rising suddenly if there are cold snaps this winter.

One industry source said the costs showed that the regulatory regime needed updating to account for these level of failures. “Supplier of last resort was contingent on there being few defaults. That was Ofgem’s view. That’s not been the case.”

Consumer group Citizen’s Advice said the costs of the unpaid renewable subsidy payments and supplier of last resort scheme would “inevitably be passed onto bill payers”.

Gillian Cooper, head of energy policy, said: “It’s only right that consumers’ credit balances are protected when suppliers fail. However, measures must be taken to stop firms failing in the first instance.

“Ofgem’s review of supplier licensing must ensure that those firms who are unprepared or financially unsustainable are no longer able to get into this market.”

Ofgem said: “In a competitive market, only well-run suppliers which can offer a consistently good level of customer service and sustainable deals should be able to operate.

“To help raise standards, and to minimise the impact of supplier failure on the market, Ofgem has proposed new tests for suppliers wanting to enter the market.”