Ofgem announces £350 million support scheme to help struggling energy suppliers

The Economic fallout

According to the energy regulator, the scheme is targeted at smaller energy suppliers who don’t have an investment grade credit rating and those that have been unable to gain access to government introduced support mechanisms.

The support scheme has been introduced due to increasing fears that the sharp reduction in the demand for energy because of the pandemic could see a rise in the number of energy suppliers going out of business.

The support is capped at £1.6 million per electricity supply group and £1.2 million per gas shipper - in total around £350 million.

The number of domestic and non-domestic customers defaulting on their energy bills has risen over the past month and the number of consumers cancelling direct debits has increased as both households and businesses struggle to pay their bills.

With every supplier that goes bust, the market is impacted and often ends up with the consumer picking up the bill for the costs that they incur.

Those energy suppliers that are eligible for the scheme will be able to defer paying charges to maintain electricity and gas grids ‘for an extended period’ and any deferred payments will accrue an interest rate of 8% and have to be repaid by the end of March 2021. 

Conditions

For an energy supplier to be considered for the scheme they must abide by several conditions. Ofgem listed these as:

• Not to pay out dividends or give out bonuses or raise management pay rates
• Suppliers are expected to have the appropriate capability, processes, and systems in place as a pre-requisite to being able to meet their obligations.
• Suppliers must continue to treat their customers fairly and continue to act in line with their various legal duties and regulatory requirements.

Ofgem also warned that should any supplier or shipper take advantage of the schemes and subsequently leave the market; network companies are expected to pursue any debt through the liquidation process.

Backdoor Bailout complaints

Some in the energy sector have raised concerns that the scheme is nothing more than a ‘backdoor bailout’ for their competitors that have used questionable business models and that those companies already in difficulty will use the scheme to try and shore up their finances.

The concerns come after several smaller energy suppliers went under in 2018 and 2019 due to the introduction of the price cap and increasing competition in the market.

Ofgem has helped to develop the support scheme along with network companies amid fears that more electricity and gas suppliers could go bust as a result of businesses dramatically reducing their energy usage since lockdown was imposed at the end of March and a rise in domestic and non-domestic customers defaulting on their bills.

"Ofgem expects network companies to support energy suppliers and shippers who are facing cash flow challenges as a result of the unprecedented public health emergency triggered by Covid-19," the regulator said in an open letter.

“Our overarching aims during this crisis are to ensure that energy consumers are offered the support and service they need, to minimise disruption for consumers and other market participants that could arise should companies exit the energy market in a disorderly way over the next few months, and to mitigate the risk to consumers of a material decline in competition arising from the potential exit of otherwise efficient suppliers,” said Ofgem in an open letter.

No change to the price cap

Despite the impacts of the COVID-19 pandemic on the wider economy and on peoples spending power Ofgem announced that there will be no change to the energy price cap.

 “The default tariff cap protects customers from being overcharged and ensures they pay a fair price for energy. The default tariff cap allows suppliers headroom to take account of unexpected costs, like a short-term increase in bad debt. We do not have sufficient evidence to justify amending the price cap to reflect increased bad debts for the next six-month cap period starting in October 2020.

In the longer term, if there is a material change in suppliers’ costs as a result of COVID-19 impacts, including bad debt costs, we will consider how to reflect these in the default tariff cap methodology while protecting existing and future domestic default tariff customers,” the regulator said. 

Further Reading

Energy Suppliers and Generators call for changes as the costs from the Covid-19 pandemic pile up

Ofgem confirms gas charging reforms will be implemented in October despite criticism from business leaders

The Post Covid-19 Energy Forecast: What comes next?

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