Proposals that could see energy credit balances of around £1.4billion automatically returned to households has been criticised by an industry insider who says the move is simply addressing the symptom but not the root cause.
Under new plans from Ofgem, suppliers could be limited to the amount of customer credit balances they can hold, which the regulator says could result in as £65 per household on average being returned.
However, an industry insider said the plans have only been put in place due to direct debits being far too high for customers in the first place.
They believe the regulator has made the decision to return credit balances as it suspects some suppliers are holding excessive credit balances to fund their tariffs or cover debt.
Whilst Ofgem’s proposals look to return money to customers, it could result in bills going up
Ofgem’s proposals will mean suppliers can retain credit balances that are enough to cover their customers consumption through the winter but no more.
This can be achieved if customer’s direct debits are at the correct level – however, many aren’t and suppliers that currently need higher direct debits to fund their cheap tariffs would be deemed non-compliant if the suggested changes go through.
Under the new rules, they will then have to increase the price of their tariffs to cover their debt, which reduces credit balances, or be forced to refund the money by the regulator.
It is thought the latter is unlikely to happen as some suppliers simply won’t have the cash to do so and will therefore likely go bust.
As such, the remaining suppliers pick up the cost of credit balances and, ultimately, will have to increase prices meaning bills go up.
Refunding thousands, if not millions, of pounds will be difficult for a number of suppliers after many faced a difficult financial year as they had to help support customers who could no longer pay their bills.
At present, the average profit margin for suppliers is -1.4 per cent, highlighting the struggle many face, especially after the pandemic.
The insider said: ‘Suppliers are actually loss making and not sitting on lots of cash and so the reality is likely that zero will be returned to customers and the cheapest tariffs will disappear.’
They added Ofgem did not consult providers about these plans before announcing them, leaving many providers wondering how they would stump up the money the regulator is asking for.
Suppliers could be limited to the amount of credit balances they can hold, Ofgem’s plans say
This is Money asked Ofgem how it calculated that £1.4billion would be returned to customers.
It said its research found as much as £1.4billion was held in surplus credit balances in October 2018, a figure based on suppliers holding £2.4billion in fixed direct debit credit balances in total.
To calculate what was and was not surplus, it requested information from suppliers on what their fixed direct debit customers’ consumption was in each month of the year as a proportion of the entire year.
From this, it modelled what credit balances were required in each month and compared this to what suppliers were actually holding.
A spokesperson for Ofgem said: ‘For suppliers doing the right thing and only collecting the credit balances they need, our proposals will not affect them.
‘Where suppliers are currently relying on surplus credit balances – and let’s be clear that is consumer overpayment – to sustain their business, they will face the cost of the risk they are putting onto the rest of the market.
‘This will mean they have less access to working capital and our proposals will bite on them.’
It said its consultation also includes a credit balance threshold to limit the total amount of credit balances suppliers can hold at set points during the year, again to stop over collection.
Suppliers would be required to protect any credit balances they collect above the threshold, such as through an escrow account or some form of financial guarantee.
This is Money also asked whether it would be more beneficial for energy suppliers to ensure they set direct debits at the correct level to begin with to avoid a massive debit.
Many are on estimated bills that mean they are either underpaying or overpaying.
Ofgem said suppliers must currently set fixed direct debits based on the volume of energy they expect the customer to use over the year.
They must base this estimate on the best and most accurate information available to them including the most recent meter reading.
Ultimately, if the proposals are confirmed and go ahead, the regulator said it will work with suppliers during the implementation period adding it has ongoing conversations with all suppliers to ensure they are compliant with regulations.
If suppliers fail to abide by the regulation, it says it can step in and take formal action. This can start with a fine and if non-compliance continues, ultimately it could lead to the regulator revoking their licence.
Again, this could lead to less providers in the market meaning less competition and higher prices.
The insider said: ‘The new plans are addressing the symptom and not the root cause. It is a vicious cycle that is getting worse.’