The UK regulator is imposing tougher regulations on energy suppliers to increase their financial stability. This is to prevent a repeat of a market crash that caused dozens of companies with low capital to collapse during the recent energy crisis.
Ofgem announced on Wednesday that it will introduce new capital requirements for retailers to make sure they can withstand market shocks, such as increases in energy prices starting March 2025. Suppliers will be required to maintain a capital buffer of £115 for each domestic customer.
Thirty energy suppliers went bankrupt in 2021 or 2022 due to a spike in wholesale prices before the Russian invasion of Ukraine. The regulator was criticized for allowing companies with insufficient financial backing to enter the market as they tried to boost the competition.
Last year, the collapses increased every British household’s electricity bill by £94. This was to cover costs associated with rescuing consumers from failed suppliers and repaying their credit balances.
Ofgem stated that it wants “all energy providers to be financially stable to ensure consumers enjoy a stable market”.
If there was any concern about the viability of a retailer, it could also order that suppliers ringfence any advance payments made by consumers rather than use them as working capital.
Energy UK, a trade association, said that it “supported” Ofgem in its move. It is in the interests of everyone to have a healthy and sustainable retail sector, it said.
The regulator’s actions have also been criticized. Citizens Advice, a consumer watchdog , recently criticized Ofgem for its plans to allow suppliers more profit to help them meet the stricter financial controls.
Centrica, owner of British Gas, the largest supplier, had earlier called on Ofgem for tougher requirements regarding ringfencing payments to consumers.
According to the new rules suppliers who fall under the £115 threshold per customer can still retain their license, but will need to work closely with Ofgem in order to assure the regulator that they can restore the buffer. They could also be prohibited from accepting new customers until the buffer is restored. Ofgem stated that it would only revoke a license if the buffer fell below zero.
The announcement comes at a time when the energy market is beginning to stabilize following the turmoil which began in summer 2021, when Russia weaponised their vast gas resources and restricted supplies to Western Europe before its full-blown invasion Ukraine.
After wholesale energy prices spiked after Russian troops crossed into the country in late February of last year, the government intervened to subsidise bills.
Energy bills are still far above the levels of pre-crisis. Ofgem’s current price cap limits the amount suppliers can charge consumers for energy. This means that typical households are expected to pay £2,074 per year, well above the average £1,150 of pre-crisis.
, Ofgem’s division that expects the profits of energy suppliers to increase as the market stabilises, warned earlier this month to not start paying dividends before they are financially stable.
Centrica will likely announce a significant rebound in profits for British Gas on Thursday when it releases its first-half results. This is due to Ofgem regulations that allow suppliers the opportunity to recover excessive costs incurred by buying energy during this crisis.
Ofgem has also tightened its stance towards suppliers of business customers, following complaints that they are being overcharged due to the fall in wholesale prices.
Many businesses complain that they are stuck with expensive contracts that were fixed at the peak of wholesale prices last summer. Businesses are not covered by the price cap for energy bills, but regulators expect suppliers to work “proactively” with their customers to renegotiate contracts where necessary.
Tina McKenzie is the policy chair of the Federation of Small Businesses. She welcomed Ofgem’s initiative and encouraged suppliers to “act with fairness and adjust”.