Source · Select Committees · Public Accounts Committee
Recommendation 21
21
Accepted
Ofgem explores new regulations to protect hedging contract assets during supplier failures.
Conclusion
To follow on from Ofgem’s new monitoring of financial resilience of energy suppliers, we asked if it was looking to provide other new regulations, such as ringfencing customer credit balances. Ofgem told us that it had decided not to require energy companies to ringfence customer credit balances, but that it had introduced ringfencing for the renewable levies and obligations as that was money that energy suppliers collected and passed back to government as part the relevant schemes. Ofgem told us that it was considering how to implement a new regulatory requirement to protect assets that related to hedging contracts when suppliers fail, as these assets were currently the subject of creditor claims from providers of finance, rather than being retained for customers’ benefit. Ofgem explained that protecting these residual hedges would help offset the cost of SoLR when customers are transferred to another energy supplier.45 Failure of the energy market and government interventions
Government Response Summary
The government agrees with the committee's observation and states that Ofgem has already implemented a package of measures since 2021 to strengthen supplier financial resilience. These include SoLR payment adjustments, credit balance ringfencing in certain circumstances, and capital adequacy requirements taking effect from Q1 2025, with continued monitoring by Ofgem and the Department.
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.