In the media

Who will bear the brunt of credit balance crackdown?

By Adam John

Utility Week

28 June 2022

PA’s Amy Marshall and Liz Parminter, energy and utilities experts, comment on the announcement made by Ofgem on plans to obligate energy suppliers to ringfence customer credit balances and renewables obligations payments in an article in Utility Week.

The article explores the differing views on the proposed regulations, writing about the impact this will have upon both the consumer and energy suppliers.

Speaking to Utility Week, Amy considers the impact these rules might have had on the entry of new suppliers, had they been introduced at an earlier stage.

She comments: “Thinking back to when some of the suppliers that are now successful and well established entered the market you have to wonder how they would have thought differently about their business plans if the amount of funding they would have had to have behind them under the new rules were a requirement.

Adding: “It is difficult to prove as a counterfactual but the opportunity cost of innovators not entering the market is something we need to guard against.”

The article goes on to explore alternatives to ringfencing credit balances, highlighting Octopus energy’s suggestion of ATOL-style insurance.

Adding to the debate, Liz says: “If you subscribe to our hypothesis, that there needs to be a more systemic review of all of the markets, I suspect that there is some commonality between them.

“Because both parties are saying there needs to be some protection for consumers or some form of mutualisation. And it’s just a question of the different types of intervention.”

The article goes on to consider Ofgem’s ideas on how failed supplier’s hedges can be moved to a Supplier of Last Resort (SoLR)

To this, Liz adds that the proposals will be beneficial for SoLR as they will foster more transparency.

She explains: “I think it’s absolutely the right thing to do because it would encourage people to take on those customers. During the SoLR process people bid for those books and they don’t always bid in the knowledge of what the hedge position is, in my experience.”

Liz continues: “If those things were transparent and evident, they may be more attractive. I guess the converse of that is that they may have hedges in place themselves already. And they may not want to double-up on that position. So I guess the key thing is to make those things transparent.”

Contributing to this, Amy explains: Broadly speaking, I think it’s very sensible. And just from a very basic perspective, it makes eminent sense to have the positively valued assets and the negatively valued assets together if you’re talking essentially about a transfer process which is to protect consumers.

“What do I mean by that? We’ve seen lots of examples and I think it’s mainly by accident, rather than design of customer books that don’t have a huge amount of value going one way down the SoLR route, and then hedge books with a huge amount of value returning value to shareholders and founders etc.

“So from a from a principle perspective, to reduce impact on the consumer and to reduce impact on the supplier of last resort, it makes sense.”

Liz concludes: “There’s things that Ofgem needs to do which fall into the short, medium and longer term. In the short term, of course they have to address the criticisms around the ringfencing of credit balances and the like, because I think that is part of the problem but not the whole picture.

“In that respect it is welcome but there is still need, in our view, for a proper look at it much more systemically. It is a bit of a sticking plaster when you start to think about the broader issues around security of supply and wholesale markets – you still do need to address those issues as well.”

Read the article in full here

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