Energy regulator to crack down on direct debit overpayments

The energy regulator Ofgem has today proposed several changes to how energy customers’ credit balances can be used in the event of their provider collapsing. Energy companies will face limits on direct debit overpayments and customers' credit balances will be better protected if their supplier fails.

Ofgem said it wants to ensure energy companies don’t use customers’ direct debit overpayments as an ‘interest-free company credit card’ to help keep them afloat. 

Its plans, which need to be finalised through a month-long consultation, would mean suppliers would have to protect customers' money should they go bust. They would then have to pass on the funds from any customers’ accounts that are in credit to their replacement energy provider. This is a change from the current system, which requires the new provider - and ultimately bill payers - to pay for the credit of customers of firms that cease trading.

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Better protections for energy customers 

The shake-up regarding how providers can use the money in customers’ accounts includes several proposed changes:

• Improvements to the financial health of suppliers, to ensure they can weather challenges in the market.
• Requirements for suppliers to have better control over the key assets they need to run their business.
• Protecting customers’ credit balances and green levies when suppliers fail, to prevent the costs being picked up by consumers. 
• Ring-fencing customers’ remaining credit balances from their supplier should it go bust, and tightening the rules on the level of direct debits that suppliers can charge to ‘ensure credit balances do not become excessive.’

Ofgem’s plans are designed to reduce the risk of providers going bust by ensuring they have sufficient funds to continue trading without having to fall back on customers’ credit balances. 

Under current rules, when an energy supplier ceases trading, the new supplier that its customers are moved to through the Supplier of Last Resort process does not receive customer credit balances from the failed supplier. This means the costs of replacing these balances are shared across all energy customers’ bills.

These proposals follow around 30 provider failures taking place since last autumn. The closures were partly caused by record-high wholesale energy prices, as well as owing to the cost of failing suppliers.

The providers which take on failed energy companies’ customers can claim back some of the costs of doing this, and it is spread across all energy suppliers and their customers. Ofgem estimates that the cost of moving customers of failed companies to new suppliers since September 2021, including buying extra gas at short notice while prices were at record highs, and replacing lost customer credit balances and green levy payments, was £94 per household - over £2.6 billion in total.

• Read more: Energy price rises and supplier failures - your questions answered 

Rising energy bills

The proposed protections mark the next step in Ofgem's wider plan to reduce the number of energy companies that fail. This already includes stricter entry requirements for new suppliers to the market, and conducting regular ‘stress tests’ to ensure companies are financially fit to run.

In addition, they follow Business and Energy Secretary Kwasi Kwarteng writing to Ofgem several weeks ago to ask for a clampdown on energy companies amid claims that some hike up direct debit charges for customers excessively.  

Jonathan Brearley, CEO of Ofgem, said: ‘The energy market remains incredibly volatile. By ensuring that suppliers are operating well-financed, sustainable, and have more resilient business models, we can avoid the supplier failures we saw last year which caused huge stress and worry and added costs to everyone’s bills.

‘But if some do still fail, consumer credit balances and green levy/renewables payments will be protected. Currently, they are used by some suppliers like an interest free company credit card. Moving forward, all suppliers will have to have enough working capital to run, without putting their customers’ credit balances at risk.’

• Read more: Help if you're struggling to pay your energy bill

Have your bills been increased excessively? 

The latest market predictions from energy consultancy firm Cornwall Insight, published on 1 June 2022, suggest that the next price cap in October could bring a further 46% increase to energy bills for a typical household on a variable tariff, taking annual bills from £1,971 to £2,879. This would then increase a small amount again in January, with a 1% increase. From next April, it predicts that prices will drop slightly again - by around 10% of that top figure. 

We have heard from people who have had eye-wateringly high increases to their direct debits. Suppliers must tell you about any rises before they happen and clearly explain how it reached the figure. If your provider can't clearly justify why your direct debit is increasing, you can contact the energy ombudsman.

• Explained: Why are energy direct debits so high? And what you can do about it