Ofgem introduces new tougher entry tests for energy suppliers

Companies will have to pass new tougher tests before entering the energy market under new proposals announced by Ofgem.

The energy watchdog said to apply for a licence to supply energy from June, applicants will need to demonstrate they can adequately fund their operations for their first year, outline how they expect to comply with key regulatory and market obligations, and show their intentions to provide a proper level of customer service.

Ofgem introduces new tougher entry tests for energy suppliers

Directors and major shareholders of companies applying for a licence, as well as senior managers, will also have to show they are ‘fit and proper’ to hold a licence.

Ofgem will consult on new proposals in the summer with the aim of raising standards of existing suppliers. This will include considering new reporting requirements for suppliers who are already active in the market and rules around how suppliers manage customer credit balances. Ofgem will also review the arrangements for suppliers exiting the market.

Over the last decade more consumers have benefited from competition in the energy market, which has driven down energy prices, helped to raise customer service standards and provided more choice.

However, in the last 18 months, a number of suppliers have failed many of whom provided a poor level of customer service.

Following these supplier failures, Ofgem’s ‘safety net’ has protected domestic customers’ credit balances and ensured all customers’ energy supply continues. Ofgem acknowledges that customers can still experience inconvenience and worry if their supplier fails. 

Strengthening entry and ongoing requirements on suppliers will help to drive up customer service standards and reduce the risk of disorderly supplier exits.

Ofgem aims to minimise the impact, including the cost, that a supplier failure has on consumers and the wider market.

Mary Starks, executive director of consumers and markets at Ofgem, said: “In an ever-evolving market, Ofgem’s objective is to protect consumers while also ensuring they enjoy the benefits of increased competition and innovation that successful new firms entering the market bring.  

“Applying new requirements on suppliers entering and operating in the market will aid us to weed out those that are underprepared, under-resourced and unfit. This will help minimise the risk of supplier failure and help drive up standards for consumers.

“We will adopt a proportionate, risk-based approach to licensing suppliers and will continue to encourage competition and innovation, including innovative business models, which benefits consumers.”

Welcoming the announcement, Citizens Advice Scotland rnergy policy manager, Dr Jamie Stewart, said: “Through the CAB network we see first-hand the anxiety and stress that  poor customer service causes for people in Scotland and it’s good to see that this will be a central part of the new tests.

“Given the large number of companies who have entered the market in recent years, we also welcome OFGEM’s proposal to look again at ongoing requirements for current suppliers.

“We hope both these measures will reduce the risk of suppliers crashing out of the market, which can cost consumers more money as well as causing them stress and disruption.”

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