Utility Week

18 | NOVEMBER 2021 | UTILITY WEEK Policy & Regulation Analysis Taking the credit A new Utility Week report, produced in association with Gentrack, interviewed senior industry executives about Ofgem's plan to make suppliers refund custom credit balances. We found that many are profoundly worried. E arlier in the year Ofgem consulted on proposals to limit the amount of cus- tomers' credit balance suppliers can hold, which the regulator says could be as much as £1.4 billion in total, or £65 per household on average being returned. This money comes from customers who pay by direct debit, the monthly amount being calculated from their estimated annual consumption. They typically build up a credit balance during the summer when their energy use is lower and then draw down on this credit during winter. Ofgem is concerned that some suppliers may use customers' surplus credit balances to fund otherwise unsustainable and "risky strategies, particularly unsustainably low- priced tariffs, which they would otherwise not be able to offer". The "auto-refund" proposal would require suppliers to refund any credit bal- ances above zero each year on the anniver- sary of when their direct debit domestic customers started their contract. It would stop surplus credit balances growing year on year but would not stop suppliers building up surplus credit balances during the year. To address this risk, Ofgem is also propos- ing to introduce a credit balance threshold for all domestic suppliers. This would require balances retailers collect above the threshold to be protected. This could be done through an escrow account or a guarantee from a third party or parent company with a minimum credit rating of investment grade. Ofgem says the threshold would encourage suppliers not to collect surplus credit bal- ances by making them pay to protect any credit balances they hold above the thresh- old limit. The recent spate of collapses has thrown the spotlight on this issue and whether the current practice of mutualisation of these credit balances across the sector remains fea- sible, as larger suppliers, like Avro Energy, go out of business. These new proposals would also reduce the amount of credit balances held when a supplier fails, reducing the cost to the mar- ket, says Ofgem, and to the consumers who ultimately assume the additional costs. Currently, when an energy supplier goes into administration and is unable to remain in business via a trade or sale of assets, Ofgem's Supplier of Last Resort (SoLR) pro- cess is used. The regulator then steps in and appoints a new supplier for the failed company's customers. This process seeks to select an SoLR who will honour domestic customers' credit balances. On some occa- sions, following Ofgem's consent, credit bal- ance costs can be recouped by the SoLR via an industry levy where costs are mutualised or met by all suppliers. RO problems Ofgem previously proposed that suppli- ers should protect 50 per cent of the failed supplier's credit balances and Renewables Obligation (RO) payments. These propos- als concern credit balances only. The regu- lator is now exploring the RO jointly with BEIS, and will separately publish a consul- tation exploring the full range of options for addressing RO mutualisation, including increasing the frequency of RO compliance and potential licence changes to require sup- pliers to protect or demonstrate their ability to pay the RO. Some suppliers have been lobbying hard for changes that would reduce liability of mutualisation across the sector, but it would be a hammer blow to some smaller firms who use credit to hedge future supplies. It

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