Energy sector shows early support for Ofgem’s new financing rules

The energy industry has shown initial signs of supporting Ofgem’s announced capital adequacy reforms, with the watchdog looking to shore up the crisis-hit sector following the collapse of 30 suppliers over the past three years.

Big Six supplier EON, home to over 5m customers, has welcomed Ofgem’s decision to require suppliers to have minimal net assets, which will be measured on a per customer basis.

Jose Davila, director of strategy and external affairs at EON UK, told City A.M. that today’s decision was “big step in the right direction.”

He argued that energy firms chiefly collapsed because of a “lack of proper financial controls on new entrants” driving up people’s bills to record levels and causing industry wide instability.

“Their risk-taking behaviour was never properly managed and that allowed companies to effectively use and lose customers’ money, leaving a trail of destruction when they failed, with the British public picking up the tab,” he said.

The strategy executive revealed that EON has “constantly argued for greater protection measures” to stop suppliers “gambling with customers’ money”.

Davila said: “We welcome these steps to establish rules that mean customers’ money cannot be used to fund a business when suppliers have no equity on their balance sheet. This is a big step in the right direction.”

EON has previously called on Ofgem to introduce full-scale ringfencing into the energy market which the watchdog ultimately opted against earlier this year following a protracted industry row between multiple suppliers.

It was also backed by challenger supplier Good Energy, home to around 250,000 customers with its clean technology solutions.

Chief executive Nigel Pocklington told City A.M. that Ofgem is “right to tighten up the rules” due to the sheer number of supplier failures from “poor financial practices.”

“Good Energy is not a new entrant but we are a challenger in the market. We have remained robust through the turbulence of the last two years because of our financial sustainability and our prudent approach to trading,” he said.

This ensured they now “have a healthy cash balance” and are looking to innovate further with new options such as small-scale generators to the market, while investing significantly in heat pump and solar services.

Trade association Energy UK cautiously welcomed yesterday’s decision, confirming it was “supportive of Ofgem’s efforts to ensure suppliers are financially resilient through capital requirements,” while caveating that it still needs to examine the proposals in detail.

An Energy UK spokesperson said: “It is everyone’s interests that we have a sustainable and healthy retail sector and while current suppliers did withstand the extreme volatility of the past couple of years, we must avoid a repeat of the multiple supplier failures from autumn 2021 and the costs and disruption those imposed on customers.”