Ofgem: Suppliers risk their licence if they fail to ringfence renewable payments
Suppliers will have to ringfence renewable payments separately from their commercial operations or risk breaching the requirements of their licence in Ofgem’s latest move to crack down on the energy sector.
The watchdog has enshrined the requirement into the licencing conditions for suppliers amid the shift to renewable energy, with firms expected to help fund the UK’s green ambitions.
Ofgem has also shown itself prepared to issue fines, with Delta Gas and Power being forced to cough up £530,000 last year for unpaid renewable obligation payments, with threats to take away its licence for late payments.
The additional requirement of ringfencing under the licensing terms for renewable payments toughens the green energy obligations suppliers face.
An Ofgem spokesperson said: “Our robust processes have kept millions of customers on supply when their energy firm has collapsed. We’ve taken a range of steps to reduce the cost to consumers if and when a supplier does collapse and, crucially, taken steps to reduce the risk of supplier failure in the first place.
“That’s why our detailed proposals will mean that consumers are better protected from costly supplier failures in the form of a more robust and financially resilient energy retail market. Instead of passing on avoidable costs if they fail, suppliers will have to securely ringfence the cash to pay their legally binding renewable obligations.”
It has also reopened the ringfencing debate for customer credit balances with a further consultation of the concept within the industry alongside minimum capital requirement.
In this case, it is proposing that if credit balances at suppliers end up above 50 per cent of its revenues, ringfencing rules can kick in – meaning credit balances would have to be separated from commercial operations.
It has defined this as the enhanced financial responsibility principle.
Last November, Ofgem settled on the idea of ringfencing renewable obligations and a minimum capital requirements following a protracted industry debate over whether to ringfence customer credit balances as a matter of course.
In associated documents, the watchdog said: “We decided at this stage not to proceed with the market-wide ringfencing of customers’ credit balances, but instead proposed to set a monitoring threshold to avoid
suppliers overly relying on these funds and to introduce powers to direct individual domestic suppliers to ringfence customer credit balances when they are at risk of not meeting set financial standards.
“We recognised that a monitoring threshold approach would be better targeted against risk and would not therefore impose costs on efficient suppliers – which we considered to be in the best interests of consumers.”
A spokesperson later added: “Our enhanced financial responsibility principle will also introduce effective monitoring that will allow us as energy regulator make a judgement about whether suppliers hold sufficient capital against their business risks. We want all suppliers to have sustainable business models and operate responsibly in the retail market so it’s fair for everyone.”
The announcements came on the same day the government’s first offshore wind champion, Tim Pick, called on Ofgem’s powers to be ramped up to help the UK meet its net zero targets.
This included expanding the regulator’s short-term focus to “a longer-term view”, including the goal of decarbonising the power system by 2035.
This echoes the recommendations by Downing Street’s net zero kingpin, Chris Skidmore, earlier this year who raised concerns over Ofgem’s role in both keeping energy bills as low as possible while also making the industry stable and sustainable.
The government has been approached for comment.