As Ofgem turns up the heat, what will reforms mean for the energy sector?

Parliament may be paralysed, but in the world of regulation, change is afoot. In a bid to catch up with the way the energy market is evolving, Ofgem has announced a raft of new proposals to better protect consumers from the possibility of their supplier going into administration. New plans under consultation until December 2019 would require small energy supplier to meet more stringent requirements to take on new customers, enhance financial disclosure rules and strengthen the safety net for customers in the event of a supplier’s failure.

Under these new reforms, energy suppliers would have to prove they have the right resources for customer growth when they reach thresholds of 50,000, 150,000, 250,000 and 500,000 to 800,000 customers. Ofgem is also planning to tighten its “fit and proper” requirements, with more scrutiny on the fitness of senior management staff, and bringing in a new openness and cooperation principle.

The new proposals, published at the beginning of the week are in response to over a dozen energy providers going into administration since January 2018 – Toto being the latest to cease trading on Wednesday – and the bill that has been picked up by customers as a result of these collapses.

If the proposals are accepted, it would bring existing energy suppliers into line with new market entrants who have been under additional scrutiny since similar proposals were introduced in June 2019. The final decision on whether to take the proposals forward will be taken in early 2020, but implementation is unlikely to take place before 2021.

Ofgem have long been caught in a dilemma between protecting consumers from market failures and encouraging competition in the energy sector. These proposals are an attempt to find a balance, but as always, the devil is in the detail, and there are some differences of opinion within industry about what this detail should be.  Unsurprisingly, while energy retailers have overwhelmingly supported the ambition of Ofgem, there are different ideas on how financial and operational resilience should be measured.  Where the dial comes to rest will undoubtedly affect what the sector looks like in terms of the number and scale of market participants, and the industry’s overall stability.

Earlier this month, Ofgem warned that Delta Gas and Power, Gnergy, Robin Hood Energy and Toto Energy would be unlikely to meet their Renewables Obligation late payment deadline. Toto ceased trading shortly after and as the example of Solarplicity, which collapsed in August shortly after it was banned from taking on new customers earlier in the year, helps illustrate, Ofgem has already shown that it is not afraid to step into the market where it thinks necessary to do so.

These proposals will give the regulator more scope and power to intervene and could therefore have serious consequences for the industry.

For more information  on what impact these proposals could have on the domestic energy market and advice on how you can engage and prepare, please contact our investor services and specialist energy team.