Energy firms must justify direct debit hikes

It comes during a period of soaring energy prices for consumers, with Ofgem’s energy price cap rising by 54% to £1,971 at the start of April. These prices are expected to go up again later this year with some predicting it to hit more than £2,900 when the winter price cap kicks in on 1 October. 

In a tweet posted yesterday (3 May), Kwarteng said: “Some energy suppliers have been increasing direct debits beyond what is required. I can confirm Ofgem has today issued compliance reviews. 

“Suppliers have three weeks to respond. The regulator will not hesitate to swiftly enforce compliance, including issuing substantial fines.” 

Ofgem’s chief executive Jonathan Brearley said the regulator would be commissioning these market compliance reviews last month (April), and are designed to ensure these suppliers are fulfilling the licence conditions they are required to operate. 

He explained: “This will include stricter supervision of how direct debits are handled, how much they are holding in customer credit balances, and ensuring companies are held to higher standards for overall performance on customer service and protecting vulnerable customers. 

“This work will allow Ofgem to determine if companies are fulfilling their licence conditions and to work with them to rectify deficiencies. Where they fail to do so, we will not hesitate to take swift action to enforce compliance, including issuing substantial fines.” 

The regulator is also setting out proposals to tackle the misuse of customer credit balances and renewables payments. When examining this, it found the root cause for the failures of many of those suppliers who exited the market was driven by the way they managed the money paid to them by customers. 

According to Ofgem, some suppliers have been using money intended to pay for energy or collected to support the wider development of renewable energy to prop up their finances. This, in turn, enabled them to follow more risky business models with reduced financial resilience and therefore resulted in a higher likelihood of failure. 

Brearley added: “If that supplier becomes insolvent, the cost of replacing those balances has to be picked up by other suppliers and ultimately all energy consumers. 

“Customer credit balances should only be used to reconcile bills, not as a source of risk-free capital. That is why we are considering options to ring-fence credit balances and renewables payments in such a way that they would be protected if a supplier fails.”

Following this, chief executives of some of the UK’s biggest energy companies were called to give oral evidence to the Business, Energy and Industrial Strategy Committee. During this meeting, ScottishPower’s Keith Anderson said the energy price cap system should be scrapped and replaced by a social tariff. 

He highlighted the fact that currently customers on a prepayment meter are at present being charged. E.ON’s chief executive Michael Lewis said his business supported the introduction of a social tariff, as well as suggesting short-term measures the government could bring forward. 

This included removing environmental levies, reducing VAT to zero and extending the warm home discount further. This, he believed, could all be done before the energy price cap increase in October - which is likely to push 30% to 40% more people into fuel poverty.