I remember back in 2014 while working for the then new supplier Extra Energy, customers would say to me, “how do I know you won’t go bust.” I always reassured them we’d be around and would create the Big 7. I was wrong. They closed down November 2018.

Ofgem are now looking to make things harder for potential energy companies wanting to join the UK market, by making the rules tougher and increasing the cost of entry. This is after seeing loads of smaller energy suppliers go bust recently. To put things into perspective, there were 69 active suppliers in the domestic gas and electricity retail markets as of September 2018 – while back in 2011, there was just 14 suppliers.

Ofgem will be increasing the fee they charge new entrants from the current £450 to £2,150 in June.

They also will be asking potential new entrants to show they have enough cash to operate for 12 months. Potential new entrants will also need to share extra information about their directors and also how they plan on dealing with customer service.

I have no experience on the regulatory side of this and what impact these really have but I have some experience working for a new supplier doing dodgy things to win business. My personal view on these steps they are planning is that they simply don’t go far enough. I get that they don’t want to destroy competition but I think if there’s money to be made in the market, competition will thrive. The problem is, unless suppliers put consumers on ridiculous standard tariffs, they make very little profit. With fears of nationalisation, we probably won’t get many more entrants.

Ofgem want to stop businesses with poor finances from entering the market and that’s a good thing but charging a fee of £2,150 hardly demonstrates that.

The directors and senior managers test is definitely a good one if implemented properly. Many senior managers in this industry have some funny reputations and I’m sure the people at Ofgem would be aware of this. Whether or not they’ll still just allow these people to set up new firms, we’ll have to see. In principle though, it sounds good.I’ve read that Ofgem are thinking about introducing some reporting throughout the year for suppliers currently in the market. That likewise sounds good but generally speaking, reports are easy to fudge when produced internally. An external audit would make more sense.

Suppliers failed because they were gambling on wholesale prices, using customers credit to stay afloat and not paying their renewable obligations. I have no idea how Ofgem would be able to track that but I’m sure theres a way. Perhaps having someone from Ofgem in each of the newer suppliers for a few years until they’ve proved themselves? Who knows.

Maybe place suppliers in a traffic light system of finances and publish it to consumers as way of motivation suppliers to stay in the ‘green’ so to speak.

From speaking to my own clients, every-time I mention a cheaper alternative with a smaller supplier they haven’t heard of, I’m met with the same concerns of them going bust. These supplier failures affect us all, big time. Things need to be more transparent in order to gain trust again. If they don’t, my clients and others will just keep choosing the Big 6, since it’s safer and ‘less headache’.

It’s widely accepted that when a supplier fails, it costs more money to all of us. Companies like Extra Energy knowingly sold tariffs at a loss. That effectively means the loss-leading tariffs via which the failed suppliers acquired customers will now be paid by everyone else.

Ofgem said that in a competitive market, there will always be failures and that it was impossible to say that the new rules would have prevented the mass collapse. I agree but would perhaps if these collapses weren’t so sudden, consumers would be more confident in the market. Customers now fearing switching to smaller companies could lead to the Big 6 dominance growing again.

Ofgem recently announced they were opening investigations into companies who failed to make their renewable obligation payments, and that’s exactly what we as consumers want to see – accountability. Publicise this information, shame the suppliers and the good suppliers will shine.

I recently tweeted at Ofgem and I like their response, take a look;

Another one bites the dust. Would be nice to hear if Ofgem think all these energy companies closing down is a good thing?

— Hamed Adefuwa (@HamedAdefuwa) January 8, 2019

Hi Hamed, we don't see it as a good thing. More suppliers coming into the market offering good deals have boosted competition and choice for consumers. In the last decade we’ve seen growth in market share of independent suppliers grow from <1% to around 25%.

— ofgem (@ofgem) January 8, 2019

Our role is ultimately to protect consumers, not suppliers. If a supplier does fail, Ofgem’s safety net will protect customers.

— ofgem (@ofgem) January 8, 2019

Appreciate the reply and I actually agree with you although from working at Extra Energy for a year in 2014/15 it was clear their business model wasn't sustainable. None of my former colleagues were surprised and I would believe Ofgem weren't either.

— Hamed Adefuwa (@HamedAdefuwa) January 8, 2019

 

Another thing that needs looking into is the safety net procedure Ofgem have. It encourages suppliers to bid for the customers of a failed energy supplier. It doesn’t however encourage suppliers to takeover and ‘save’ a failing supplier. If suppliers took over before the company failed, this would save all consumers a lot of money since the burden of paying the credit balances of all the failed suppliers customers falls on all of us.

Let me know if I made any mistakes as I’m absolutely no expert in this. I’m just a 27 year old energy broker, who spends his days finding energy prices for SME businesses in the UK. I’m mostly wondering why these supposedly “tighter” rules seem so loose. Also looking to share my thoughts and hopefully document my journey. Perhaps I’m asking too much from Ofgem. Thanks for reading.