Source · Select Committees · Public Accounts Committee
Recommendation 14
14
Accepted
SoLR process deemed more efficient than SAR for ensuring continuity of energy supply.
Conclusion
The government has an obligation to ensure continuity of energy supply to customers in the event of an energy supplier failure. We asked Ofgem what it had learned from recent supplier failures and whether it had reviewed the mechanisms in place for protecting energy customers. Ofgem told us that it kept the default process, the SoLR, under regular review and that the primary issue it saw with the process was the delay in transferring customers from the failed supplier to the new supplier. It explained that issues such as the resolution of any billing of financial issues, or the resolution of service concerned, became more difficult during this transition period, so it planned to establish clearer milestones up front with companies to make sure that happened more smoothly.25 We similarly asked whether the SAR process led to a lower cost for consumers overall than the SoLR process and, if so, did this mean that it needed to review and improve the SoLR process. HM Treasury told us that the easiest way to ensure continuity of supply to customers was via a SoLR rather than the SAR. The Department told us that while the SAR looked attractive, superficially, it actually left the state and the taxpayer financially exposed during the administration process. It explained that the SoLR process was more efficient and quicker where, at its best, there can be competition so that the loss to the consumer is minimised as much as possible, because there is value in customer books.26 Managing financial risks during the SAR - Hedging
Government Response Summary
The government agrees with the committee's observation, stating that Ofgem has already implemented a package of measures since 2021 to strengthen supplier financial resilience and improve the retail energy market, including SoLR payment adjustments and new capital adequacy requirements from Q1 2025, with continued monitoring.
Government Response
Accepted
HM Government
Accepted
2.1 The government agrees with the Committee's recommendation. Recommendation implemented 2.2 As set out in the Energy Security Plan 2023, the government will deliver an energy retail market that works better for consumers, is more resilient and investable, and supports wider energy system transformation. This includes creating a market that is better prepared for future wholesale price volatility and better able to shield consumers from the costs of supplier failure. At the same time, a return to competition and profitability for well-run suppliers that offer value for consumers. 2.3 Since 2021 Ofgem has implemented a package of measures to strengthen the financial resilience of retail energy companies. These reforms will benefit consumers by ensuring a better balance of risks between supply licensees and consumers and, in doing so, reduce the likelihood and cost of widespread failures. A resilient, profitable, investable market is also essential for sustainable competition, where energy retailers have incentives to innovate in the pursuit of net zero and receive a reasonable profit as they drive up consumer service standards. 2.4 Ofgem has introduced: • Enhanced licence application process and milestone assessments • Rules to require licensees to have sufficient control of their assets to reduce costs for consumers in the event of insolvency. • Enhanced monitoring of supplier finances including stress testing, a proactive reporting framework of Trigger Points, and Annual Adequacy Self-Assessments. • Renewable Obligation receipts ringfencing • Licence modifications to direct Customer Credit Balance ringfencing in certain circumstances • Capital adequacy requirements, including a common minimum capital requirement, due to take effect from Q1 2025, with the Capital Floor, Target, and associated compliance framework. 2.5 Ofgem and the Department will continue to work closely to monitor the impact of these changes and identify the need for any further measures to improve the financial resilience of suppliers. 2.6 Ofgem is currently undertaking a Non-Domestic Market Review which includes the market conditions faced by business customers. Ofgem published their statutory consultation on 7 December in alignment with government’s own consultation on expanding business access to redress. Both consultations will close at the end of January 2024 and Ofgem and DESNZ are in constant communication to ensure results are shared and acted upon in a timely manner 2.7 The department and Ofgem have provided the Committee with regular updates on this work, including via Treasury minutes.