Ofgem announces GB energy market reforms

Minimum capital requirements for domestic energy suppliers set by Ofgem are to change significantly in 2025, following a series of reviews and consultations earlier this year.

The energy regulator has announced the new rules for homes and businesses and is consulting on potentially far-reaching new customer service requirements for the domestic market and expanding the rules relating to the non-domestic market. The changes to minimum capital requirements for domestic suppliers are due to come into effect on 31 March 2025.

New capital requirements

The changes are intended to ensure increased resilience to resist market shocks for suppliers following a number of failures in 2021.

Building on its April 2023 statutory consultation, Ofgem is now introducing a minimum capital requirement in the form of a capital floor of £0 adjusted net assets per dual fuel customer equivalent and a capital target of £115 adjusted net assets per dual fuel equivalent customer. 

It is also introducing reforms for direct suppliers to ringfence a portion of their customer credit balances when it is deemed to be in the consumer interest.

Separately, the customer credit balance (CCB) ringfencing measures direct suppliers to ringfence CCBs when they are below the capital target or the "cash coverage trigger".

The cash coverage trigger for CCBs requires that the licensee maintains monthly balances of cash in the bank at a level equal to or greater than 20% of gross CCBs – and net of unbilled consumption owed to their fixed direct-debit customers.

Ofgem is also modifying existing licenses so that it can direct the ringfencing of customer credit balances when a supplier is below the capital target or the cash coverage trigger.

This is intended to support long-term stability in the market and lower the risk of future energy supplier failures, but is also likely to have a significant impact on smaller suppliers.

Driving up service standards for consumers

Ofgem considers, on the basis of qualitative research and previous consultations, that there has been a decline in consumer satisfaction with customer service by domestic energy suppliers since 2018.

The energy regulator consulted in May 2023 on broad policy proposals to address this dissatisfaction and has firmed up these proposals in the form of rule changes in this consultation. 

New licence conditions would require suppliers to keep enquiry lines open "longer than standard working hours" and provide support for customers struggling with bills, including offering temporary repayment holidays if customers are unable to pay. Suppliers would also be required to be available through different methods of contact, such as email, telephone or webchat, to take into account consumer needs.

They would need to be able to identify and prioritise domestic consumers in vulnerable situation who may require immediate assistance, make 24/7 emergency support available for any customer cut off from their power or gas supply as a result of issues with their supplier, and publish information on their customer service performance.

Suppliers have a very short window to respond to Ofgem's consumer standards consultation before it closes on the 23 August 2023.

Protection extended to non-domestic customers 

Ofgem identified issues in its separate non-domestic market review and consultation that it considers require regulatory change. The consultation is open until 6 September 2023.

This proposed changes to the regulatory framework include a requirement for timely responses to complaints and stepped-up reporting to Ofgem on complaint handling, as well as widening the standard of conduct rules, which currently only apply to micro-businesses, to all businesses, and increased transparency of third-party commissions for all customers (rather than, as currently, just for micro-business consumers as currently.

Amendments are proposed to the guidance on deemed contract rates for customers, who are yet to agree contractual terms with an energy supplier, in order to avoid overcharging, and to licence conditions to require suppliers securing any contracts through brokers (not just, as currently, micro-business contracts) to only work with energy brokers that are part of a qualifying redress scheme;

The consultation also requests that government regulate the third-party intermediary market, access is expanded to the energy ombudsman to non-domestic market suppliers; and protections are increased for domestic customers under non-domestic contracts (such as care homes or social housing).  

Ofgem also announced that it is working with stakeholders to adapt the Retail Energy Code in order to avoid excessive delays and minimise documentation requirements during tenancy changes, require energy suppliers to be flexible with businesses with peak fixed rate price rates; and increase monitoring of security deposits through Ofgem's security deposit best practice guide.

Osborne Clarke comment

Suppliers to the domestic market that wish to comment on the firmed-up proposals have until 23 August 2023 to do so and, where they responded to the May consultation, can check the new consultation document for any comment on previous responses.

Domestic energy suppliers will have until 31 March 2025 to comply with Ofgem's minimum capital requirements – smaller suppliers should, therefore, consider the detail of the changes carefully in order to establish the impact on their businesses.

Ofgem's proposals for domestic and non-domestic consumers are likely to increase energy suppliers' compliance burden. As stakeholders, suppliers are, therefore, encouraged to submit their responses to the regulators' non-domestic market review findings and consultation by its close on 6 September and to its consumer standards statutory consultation that closes in August 2023.

Information on how to submit responses to each consultation can be found in the consumer standards consultation and non-domestic market consultation releases. If it would be helpful to discuss your planned response or have any questions in relation to Ofgem's proposals, please do contact one of our experts.