Fees for energy companies wanting to enter the UK market will rise nearly fivefold from this summer under new rules drawn up after the collapse of a string of smaller suppliers.
Ofgem, the UK energy regulator, said on Thursday that from June companies wanting to sell electricity and gas to British households will have to prove they have sufficient funds to trade for a year. They will also have to show that their directors, major shareholders and senior managers are “fit and proper” to hold a licence to operate, meaning they will have to declare any criminal convictions or involvement with previous failed businesses.
The stricter rules, which will see market entry fees rise from £450 to £2,150, were drawn up by Ofgem after several smaller companies went bankrupt, and criticism from established suppliers that the current system was too lax.
Iain Conn, the chief executive of British Gas’s parent company Centrica, has previously said it was “easier to become an energy supplier than it probably is to set up a bank account”.
Ofgem’s current vetting process includes asking for information about a new company’s arrangements to start supplying energy, details of its ownership structure and a background check on directors to see if they have been disqualified from being director of a company.
The number of new suppliers in the UK’s domestic energy market has rocketed in recent years from 14 in 2011 to a peak of 73 by June of last year as the government and regulators have encouraged greater market competition. During this time, the share of the six biggest participants — British Gas, EDF Energy, Eon, Npower, ScottishPower and SSE — has fallen from nearly 100 per cent to about 75 per cent as customers have been lured away by cheaper deals from newer entrants.
However, 11 small suppliers have failed since January 2018 as new market entrants have not always hedged properly against potential swings in wholesale market prices, while some have been accused of offering unsustainably low prices and poor customer service. The sector as a whole has come under added pressure with the introduction in January of a widespread cap on households energy bills.
When a supplier fails, the costs of ensuring continued supply to its customers can be spread across the rest of the sector.
The new requirements, which Ofgem has been consulting on since November, will also force new entrants to detail how they expect to provide a “proper” level of customer service.
The regulator will consult this summer on further plans to improve the standards of existing suppliers and it will also review the arrangements when companies exit the market.
Stephen Forbes, chief commercial officer and co-head of SSE Energy Services, said: “We would like to see Ofgem go further and now introduce regular checks for suppliers already in the market, ensuring they remain fit for purpose, similar to those used by the FCA for financial institutions. Our hope is these changes rid the market of unscrupulous suppliers and directors while creating a more stable and competitive market for customers.”
Mary Starks, executive director of consumers and markets at Ofgem, said: “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.”
The changes announced on Thursday were given a cautious welcome by the industry, although questions were raised about whether the measures still went far enough.
Which?, the consumer group, said “greater checks and transparency are desperately needed to ensure that energy companies are sustainable” but added: “It is vital that any new tests don’t stifle innovation or competition between suppliers.”
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