Ofgem propose improved licensing tests for new energy suppliers

The UK's gas and electricity watchdog, Ofgem, has proposed new rules to check the quality of new energy suppliers before they are allowed to enter the market.

Under the proposals, companies would need to show financial health as well as suitability to meet customer service requirements prior to being awarded a license by Ofgem.

The watchdog applauds the proliferation of energy suppliers in the UK, saying that consumers are benefiting from increased competition. However, they also recognise the chaos that can ensue if a supplier is unable to remain financially viable.

Their proposals are designed to only allow competent providers to enter the marketplace. Executive Director for consumers and markets at Ofgem, Mary Starks, said that the entry of new suppliers had 'helped drive down energy prices and drive up customer service standards'.

However, she also said that complaints had been on the rise and that Ofgem had needed to stop in when suppliers ceased trading. The new proposals, she said, would 'ensure customers will be better protected' against poor service while still allowing competition.

The Ofgem proposal

Ofgem is proposing tests for both financial wellbeing and for customer service standards. New companies will have to demonstrate the Ofgem that they are competent to manage their businesses for a minimum of 12 months before being allowed to enter the marketplace.

They would also be asked to provide plans for meeting customer service obligations, which include remaining compliant with Ofgem's complaint handling standards. The test will also look at their capacity to provide for customers in vulnerable circumstances.

In addition to these new licensing requirements, Ofgem are looking at ways to implement reporting requirements from suppliers already in the marketplace. These are expected to include information on customer service, financial position and adequacy of resources to run their business.

They are also looking at the way suppliers accrue, hold and use credit balances from customers. This is something they've been aiming to address for a couple of years now.

The finalisation of the new licensing tests are expected to be in place by spring next year.

A bad year for energy firms

Over the course of 2018, a number of energy suppliers have failed to remain viable. Notably, small energy suppliers Iresa and Usio both ceased trading in the past few months, leaving thousands of households wondering what to do.

Prior to this, GB Energy Supply, Future Energy and Gen4U also collapsed. It is thought that these failures affected around 270,000 households in total.

Ofgem were always quick to step in, appointing other suppliers to manage the accounts of the stranded households. However, it's always preferable to be confident that even the smallest supplier is capable of staying in business.

With more people than ever before switching away from the big six energy suppliers, it's crucial that Ofgem maintain consumer confidence in small suppliers so customers feel empowered to seek out the best deals.

Maintaining customer service levels

As well as ensuring companies are financially capable of catering to their customers, Ofgem want to make sure that high standards of customer service are achieved too.

They say that one in four energy customers are supplied by small and medium firms now, and that although many offer exemplary customer care, there have been 'increasing instances' of new entrants failing to provide a good service.

Although, in general, complaints regarding energy firms are reducing, there has been something of a spike in recent issues, highlighted by the latest Ofgem complaints handling survey.

This year's survey showed that while customer satisfaction was higher than it has been in the past, almost two out of three customers were dissatisfied with the way their supplier had handled their complaint.

These reforms come as part of a wider market and regulatory shake up by Ofgem, which as resulted in a number of positive steps, such as the recently announced energy price cap.