Energy supplier abuse: how businesses will end up paying their bills
The recent hike in energy prices has left many energy suppliers going bust, affecting 2.1 million households in the UK.
Factors for the rise include the invasion of Ukraine, cold winters, COVID and the more recent rampant inflation.
However, it is coming to light that a lingering credit mismanagement problem was lurking in the background, acting as the last straw to the problem.
Some suppliers were using customers’ accumulated credit like an interest free-loan, leading them to take on unnecessary risks, and become insolvent when the tides turned.
In this article, we look at why this credit exists in the first place and what steps Ofgem is taking to correct this issue before UK households and businesses have to turn their heating back on.
Are the suppliers entirely at fault for their irresponsible yet legal behaviour? Or is it the fault of the regulator for not setting the rules properly?
Why do energy suppliers accumulate credit from their customers?
Despite the aggressive rollout of smart meters over the last decade which lets energy suppliers bill the exact usage for the billing period, many households and businesses still have traditional meters.
Since most households and businesses do not promptly send meter readings, the energy supplier is forced to estimate consumption based on historical readings from past years, in addition to an arbitrary premium chosen by the supplier.
This premium is added as a safety margin in case of energy price rises, an increase in energy consumption compared to historical data, and of course to accumulate additional credit from their customers.
We’d like to add that none of this credit would be necessary if we had a network of smart meters leveraging blockchain to give our real-time usage open-sourced data.
What happens with this credit?
The direct debit over payments is normally held by the energy supplier and used as credit for customers’ future bills. Generally, it is not directly paid back to the customers but used to reduce future bills.
However, it is coming to light that some of this owed money was being misused by some suppliers who were taking on too much risk, causing them to default with the recent increase in wholesale energy prices.
What happens when a supplier goes bust?
When suppliers go bust, Ofgem, the regulator, steps in to guarantee that the energy supply to businesses remains uninterrupted.
A new business energy supplier is re-appointed to facilitate billing and customer services from the point where the supplier stopped operating. See our list of recently failed energy suppliers and their replacements.
When this happens, your business is not contractually-bound to them so you may switch to a new energy supplier free of charge.
What is the knock-on effect of the lost credit?
The problem arises when a supplier goes bust and the credit owed to its customers is not transferred over to the new suppliers, as mandated under current regulation.
This effectively leaves customers liable for paying the same debts that were owed to them in the first place in the form of an increased unit price of energy on customers’ energy bills.
If you have watched “The Big Short”, this situation may seem eerily similar to the failure of banks in the 2008 financial crisis, which was ultimately bailed out by taxpayers.
According to the regulator, the cost of moving suppliers (including purchasing gas at short notice at high prices) has ultimately increased the bill of households by 94 pounds.
We have not found figures for the costs to businesses but there is no reason to believe this would be significantly lower.
What will Ofgem do?
Ofgem is yet to finalize its decision, but the current proposals involve introducing tighter rules on how much credit a supplier can accumulate and have access to, in order to prevent harming consumers.
A decision is expected shortly to improve the financial situation of all existing suppliers before the UK plunges into a winter of unknown magnitude, which may tip some suppliers into trouble if energy prices remain high.
In the new plans, the outstanding credit accumulated by customers would be ‘ringfenced’ to prevent bad management, and in case of failure would be transferred over to the new suppliers.
Is the supplier of the regulator to blame?
In a deregulated market, energy suppliers are competing with each other, adhering to the rules as loosely as possible to gain an advantage over their competitors.
If there are no appropriate rules on how to manage direct debits, we think it is natural that some will take the riskier approach of utilizing this capital, leaving them vulnerable when times get rough.
And rough is an understatement for the negative string of unpredictable events leading to a spike in energy prices: covid, inflation, cold winters and the invasion of Ukraine, as we showed in our latest monthly energy market update.
Ultimately, the problem is that consumers always end up being the most affected, in what is yet another tragedy of the complex system we live in.
Comparing Suppliers
There is no way of knowing for sure what suppliers may go under next winter, but if you want to get the full picture of what is out there available for you, feel free to utilize our freely available energy supplier comparison tool.
