Good Energy has waded into the industry debate over ringfencing customer credit balances, warning that the policy will add costs to people’s bills and dampen innovation in the market.
The boss of the renewables-only supplier, Nigel Pocklington, told City A.M. Ofgem’s proposal to reform the energy market would benefit established players and hamper challenger firms with smaller reserves of revenue.
He said: “If we’re not careful, we’ll go back to a world of four large energy companies, which is where we came from 20-plus years ago.”
Ringfencing refers to industry proposals to separate customer credit balances from the commercial operations of energy firms, by allocating the money into a separate account that can only be used for buying supplies for households.
The concept is backed by Centrica, which owns the UK’s largest energy firm British Gas with over nine million customers.
It has ringfenced customer credit balances as a matter of company policy since February, and has warned hundreds of millions of pounds have already been lost from customer deposits amid the market carnage over the past nine months – which has seen 29 domestic suppliers collapse.
The energy giant’s chief executive Chris O’Shea slammed Ofgem for failing to commit to 100 per cent ringfencing last month, instead calling for 30 per cent of balances to be protected while continuing its consultation with the industry.
Commenting on the issue, he said: “When customers pay up front for their energy, they are trusting their energy supplier to look after their money and they would be appalled if they thought their money was being used to fund day to day business activities. We want our customers to know that their money is safe with us.”
Pocklington suggested ringfencing was an example of a policy that looked appealing on first glance – but had serious drawbacks that could harm the industry when assessed more thoroughly.
For instance, he argued it would drive up energy bills as suppliers would need to raise more revenue to power their operations.
He said: “It looks good, but it will add costs to people – financing costs – and there should be other ways of ensuring that a well-run energy business looks after customer deposits and can maintain solvency without necessarily going to this degree of protection.”
Innovation at risk from credit balance protections
The energy boss also echoed the concerns of So Energy’s co-founder Simon Oscroft, who feared it will stifle innovation.
He explained: “There is a real risk that some of the former incumbents are now making very loud arguments for things that are entirely in their benefit that act as a dampener on innovation in the energy market – which we do need even if some of the experience over the last two years it’s not been great.”
So Energy revealed its concerns about Ofgem’s regulatory push in recent months to City A.M. last week.
Co-founder Simon Oscroft told City A.M. that while he supported efforts to clean up the industry and improve the sector, there was a risk that proposals such as ringfencing would prevent exciting new entrants from entering the industry.
He said: “I struggle to see how a new supplier could come in unless they have an extreme amount of funding and a huge parent above it. So, we will see less innovation as a result of many of these changes.”
Meanwhile, Octopus Energy’s chief executive Greg Jackson has also hammered the proposals, describing “crude ringfencing” as “financially illiterate.”
He urged the regulator last month not to give in to “pressure from archaic companies, whose proposals will only drive bills up and supplier profits.”
City A.M. understands Ovo Energy has also raised concerns over ringfencing requirements.
Price cap woes add to sense of industry urgency
The issue of ringfencing has become a real bone of contention in the sector, although it is only part of a wide array of reforms proposed and sanctioned by Ofgem since the market crisis began last summer.
It has also brought in fit and proper person rules, financial stress tests, market stabilisation charges, and is proposing a quarterly price cap.
The watchdog’s boss Jonathan Brearley told Parliament last month the price cap is expected to rise to at least £2,800 per year in October – putting immense strain on households ahead of the winter.
Meanwhile, energy specialist Cornwall Insight has forecast that the cap will climb over £3,000 per year in January, when demand is at its peak in the coldest month of the year.
The former Chancellor Rishi Sunak unveiled a £15bn package of support for households last month, however, this will only partially alleviate costs with most households receiving a £400 saving.
Good Energy is home to around 250,000 customers, who mostly secure locally generated electricity via a feed-in-tariff.
It is publicly listed and trades on the FTSE AIM-All Share.