The energy sector fell victim to a difficult year in 2019, and 2020 may be no different. The market is rapidly evolving and 2019 was a year of significant change for many suppliers. Back in 2016, Ofgem, the UK energy regulatory body, relaxed its rules that allow energy suppliers to obtain a licence to trade, allowing those with scarce capital and limited industry experience to emerge into the market. Such acts were intended to increase competition and drive better customer service, yet have created an uncertain market saturated with new suppliers.
Serious attempts have been undertaken to rectify these issues in order to rule out faint-hearted suppliers. In doing so, Ofgem introduced the domestic price cap at the beginning of 2019. Only in place until 2023, the cap is a protection mechanism against exorbitant energy prices for consumers as a short term solution whilst Ofgem introduces broader reforms, such as smart meters. The cap is intended to reflect the wholesale cost of energy, banning suppliers from hiking up prices for increased profit and ensuring that consumers get a fair deal at all times.
Following its review in September, the cap dropped to £1,179 for a number of reasons, including that of low demand during the winter. This was good news for consumers following the increase to £1,254 after its first review in March. Wholesale energy prices significantly fell between February and June last year, and as a result, the drop will ultimately protect 11 million consumers on default tariffs. Introducing this market-driven price cap is just one way in which Ofgem has attempted to regulate the volatile market.
In order to ensure new energy firms are up to the challenge of competing, all start-ups looking for a licence to trade will now be required to meet fit and proper tests. These will include proof of funds to operate for their first year and the demonstration of real intention to provide their customers with good service. So, while new business is desired to increase competition and, in turn, (hopefully) provide consumers with a better service, Ofgem only want those who will be able to survive the long term.
While these checks may prevent the faint-hearted from entering the market, what about the unstable suppliers already out there?
Well, Ofgem has plans for them too.
It intends to hold already established firms accountable to financial checks and tests upon reaching certain customer number thresholds, with all failures to pass such checks halting the suppliers from taking on more customers. On top of financial checks, the firms would have to assess their exit plan in case of failure, and demonstrate how they would ensure customer protection in such event. Mary Starks, executive director of consumers and markets, acknowledges the real need to facilitate competition and innovation whilst being effective in protecting consumers. These changes, and proposed changes within the market are hoped to create more transparency and accountability.
As predicted before the introduction of the price cap, numerous energy suppliers have gone bust as a result of these stricter rules. In 2019 alone, 9 energy suppliers had to throw in the towel, the most recent being Breeze Energy, breaking 2018’s record. Failures were furthered by the requirement of suppliers to pay their share of the Renewable Obligations to Ofgem by 31 August 2019. As a result, we are experiencing a period of consolidation within the market as some suppliers exit and others merge, leaving Ofgem responsible for the redirection of failed suppliers’ customers. Overall, Ofgem has a duty to regulate the supply of energy to consumers, ensuring they are receiving fair value, meaning that it is only going to continue to weed out those questionable suppliers who fail to keep up with the more competitive suppliers.
If you have questions or would like more information on any of the above, please do not hesitate to contact a member of our specialist Energy team.
This article was co-written by Nicola Kelly.