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Energy suppliers face tougher rules to improve their financial resilience as Britain’s regulator seeks to avoid a repeat of the market rout that led to the collapse of dozens of poorly capitalised companies during the energy crisis.
Ofgem on Wednesday said it would introduce new capital requirements to ensure retailers could withstand market shocks such as surges in energy prices from March 2025. The rules will require suppliers to hold a minimum capital buffer of £115 per domestic customer.
Thirty suppliers collapsed in late 2021 and early 2022 following a surge in wholesale energy prices in the run-up to Russia’s invasion of Ukraine. It led to criticism of the regulator for having allowed companies without sufficient financial backing into the market, as it tried to boost competition.
The collapses added £94 to every British household’s energy bills last year to cover the costs of rescuing customers from failed suppliers and paying off their credit balances.
Ofgem said it wanted “all energy suppliers to be financially secure to ensure consumers benefit from a stable energy market”.
It also announced it would be able to order suppliers to ringfence advance payments from consumers, rather than using them for working capital, if there were any concerns about any retailer’s viability.
The trade body Energy UK said it was “supportive” of Ofgem’s move. “It is in everyone’s interests that we have a sustainable and healthy retail sector,” it added.
However, the regulator’s intervention has also been criticised. Citizens Advice, the consumer watchdog, recently hit out at Ofgem’s plans to allow suppliers to make more profit in part to help them comply with the tougher financial controls.
Centrica, the owner of the biggest supplier British Gas, had previously called on Ofgem to introduce tougher requirements on ringfencing consumer payments.
Under the new rules, suppliers who fall below the threshold of £115 per customer will still be able to retain their licence but would need to work with Ofgem to reassure the regulator they can restore the capital buffer and could be banned from taking on new customers in the meantime. Ofgem said it would only withdraw a licence should the buffer fall below zero.
The announcement comes as the energy market begins to stabilise following the turmoil that started in the summer of 2021 when Russia weaponised its vast gas resources by restricting supplies to western Europe ahead of its full-blown invasion of Ukraine.
The government eventually intervened and subsidised energy bills after wholesale prices surged as Russian troops crossed the border in late February last year.
Blanket support for households has ended but energy bills remain far higher than pre-crisis levels. Under Ofgem’s current price cap, which limits how much suppliers can charge for energy, typical households will pay £2,074 annually — well above the pre-crisis average of £1,150.
Ofgem, which expects energy suppliers’ profits to strengthen as the market continues to stabilise, warned them earlier this month not to start paying dividends until they were financially stable.
Centrica is expected to announce a strong rebound in profits at British Gas when it reports its first-half results on Thursday, driven by Ofgem rules that allow suppliers to recoup excessively high costs associated with buying energy during the crisis.
Ofgem is also toughening its stance on suppliers to business customers following concerns they were being overcharged as wholesale prices fall.
Many businesses have complained they are stuck on expensive contracts fixed when wholesale prices peaked last summer. The price cap on energy bills does not apply to businesses, but the regulator said it expected suppliers to “work proactively” with customers and potentially renegotiate deals where needed.
Tina McKenzie, policy chair at the Federation of Small Businesses, welcomed Ofgem’s initiative and urged suppliers to “act with fairness and adapt”.
