Ofgem demands energy suppliers urgently review customers’ increasing direct debits

The energy watchdog Ofgem has announced that it has conducted an urgent review into cases of customers’ soaring direct debit payments. 

As a result, it's put five providers on notice that they need to improve the way they decide changes to monthly payments, or risk fines. 

Energy suppliers have also been told they must refund customers quickly if they build up a large credit balance due to their direct debit demands being inaccurate. 

This comes as energy market analysts at Cornwall Insight predicted the next price cap review, which will come into effect in October 2022, could push a typical household’s annual bills to as much as £3,244 – an increase of 65% from current rates.

Read on to find out more about what Ofgem’s review has revealed and what it means for your bills.

Ease the squeeze on your household bills with our latest cost of living advice and tips

‘Flawed’ direct debit processes 

Ofgem looked at payment processes by 17 large suppliers in its month-long consultation on direct debit overpayments. Five energy providers were found to have ‘moderate or severe weaknesses’, while seven more companies have 'minor' issues.

The five companies with 'moderate or severe weaknesses' are Ecotricity, Good Energy, Green Energy UK, Utilita Energy and Tru Energy. They have been told to to take ‘immediate and urgent action’. 

Ofgem's assessment revealed what it calls 'flawed' processes, and cites a spectrum of weaknesses in companies' approaches to setting direct debits.

The concern is that in some cases these flaws could lead to customer direct debits being set incorrectly, or not being checked on for a long time. This can lead to the build-up of either unnecessarily large credit balances or debt, depending on whether the customer is over- or underpaying.  

Ofgem has also ordered all energy providers to justify cases of direct debit payments increasing by more than 100% between February and April 2022 – equating to over 500,000 customers. 

It said that while it has not 'found evidence of unjustifiably high direct debits', companies must review all of these cases. Where appropriate, it expects suppliers to adjust any miscalculations, including making repayments if needed, and consider whether a goodwill payment is warranted. It has given energy firms two weeks to draw up action plans detailing how they will progress these steps.

Energy suppliers must tell you about any changes to your direct debit before they happen and clearly explain how they reached the figure they want to charge. If your provider can't clearly justify your direct debit amount and won't change it for you, you can contact the energy ombudsman to make a formal complaint.

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

Rocio Concha, director of policy and advocacy at Which? said: 

‘The cost of living remains consumers’ number one priority, yet Which? has heard concerning stories of consumers having their energy direct debits miscalculated or increased by huge amounts, while our research shows many customers are struggling to understand their bills and pricing.

‘It’s encouraging to see the regulator taking action over poor performance and Ofgem should not hesitate to impose penalties on any suppliers that fail to make the necessary improvements.

‘At a time when consumers are paying more than ever before for energy, the regulator must also work with government and suppliers to explore ways of using data proactively to offer targeted support to those in most need of help before they have to turn to debt charities. Which? will seek to work with businesses in energy and other key sectors to find more ways to support consumers through the tough times ahead.’

Know your payment options

WIth all this talk of direct debit issues, you might be wondering whether it's the best way to pay. But for most households, you'll find it's still your cheapest option. 

There are three main ways to pay for your energy usage. The best one for you depends on your budget and how you manage your money. Here are the options:

Direct debit:

• You pay the same amount once each month or quarter, and know exactly what each month's payment will be.
• Tends to be cheaper than paying once you receive your bill as almost all companies offer a discount.
• Suppliers estimate how much they think you will use over the year, and divide it by 12 (or four) to determine a reasonable monthly (or quarterly) direct debit amount.
• You pay this into your account each month, building up a little pot of credit. Your supplier then uses this to pay for the energy you've actually used each month. 
• While it's a convenient way to pay, you should make sure you are aware of how much you're paying, how that relates to the amount you're actually billed for, and how much credit you're building up. Keeping close tabs on this means you'll spot any issues quickly and can resolve them before they get too problematic.

Payment on receipt:

• If you pay quarterly when you receive your bills - sometimes called quarterly cash or cheque or QCC - you have the advantage of only ever paying for the energy you’ve actually used. 
• You’ll pay once every three months, on receipt of your bill, for that quarter’s use.
• Tends to be more expensive than a direct debit as it’s not discounted. 
• You’ll pay a lot more in winter months than in summer.

Prepayment:

• Pay for your energy before you’ve used it.
• You top up a prepayment key or card at local retailers, or some providers now let you do so via a smartphone app.
• Bills likely to be higher than those paid by direct debit. Prepayment meters are covered by a separate, higher price cap.
• Some providers, such as Boost, specialise in energy supply for customers with prepayment meters. Its daily standing charge is currently 37p for gas and 50p for electricity.
• Find out more on whether a prepayment meter is right for you.

Find out more: Energy tariffs explained 

What is coming next for energy prices?

The October price cap, announced at the end of August, is likely to bring more heartache for energy customers. Analysts are predicting that variable tariffs could rise by as much as 65%, bringing the average annual bill for a typical user up to more than £3,200.

Oliver Archer, lead analyst at Cornwall Insight, told us he expects competitively priced deals won’t be offered until at least 2023: ‘The combined effect of high commodity forecasts and the [energy] regulator’s interventions mean it is currently unlikely we will see high numbers of cheap tariffs before the New Year.’

Daniel Alchin, deputy director, retail at Energy UK said: ‘competitively priced fixed deals and switching suppliers will only return when there’s a sustained fall in wholesale prices, making them at least closer to previous levels and most significantly lower than the price cap. The financial incentive to switch isn’t there right now.’

These projected variable tariff increases mean it might be worth fixing a deal. Ensure you shop around if you want to fix, rather than necessarily go with what your provider suggests. Although, if it does offer fixed deals to existing customers that aren’t on the open market, they may be worth switching to.

How to switch energy provider

You can use our impartial switching service, Which? Switch, to find energy deals that might be right for you. 

Please bear in mind that if you are currently on a variable tariff, any comparison site (including Which? Switch) will make price projections based on your tariff staying the same over the year. As we know that variable tariffs are likely to rise considerably in October, you'll need to factor this into any decisions about what will be cheapest for you. 

Find out how to check whether a fixed energy deal is right for you.

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