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British Gas owner accuses Ofgem of ‘abdication of responsibility’

energy crisis ofgem
energy crisis ofgem

The energy watchdog has been accused of an “abdication of responsibility” after dropping plans to stop suppliers from spending customer deposits.

Ofgem was criticised on Friday for abandoning proposals to make companies ring-fence customer credit balances, prompting British Gas owner Centrica to claim lessons from the energy crisis were not being learnt.

Chris O’Shea, chief executive of Centrica, said: “Energy companies must be adequately capitalised by their shareholders so that if they fail, the shareholders feel the pain, not UK consumers.

“This feels like an abdication of responsibility by a regulator not focusing on the right things.”

Currently there are no rules barring suppliers from using consumer balances for everyday spending.

If a supplier goes bust and it cannot honour the balances of those who were in credit, the debt is mutualised among all households and repaid through levies on bills.

The regime contributed to a tab worth billions of pounds that consumers are now being forced to pick up, after some 30 suppliers were felled by surging gas and electricity prices in the past two years. Many of the companies had failed to buy enough energy in advance.

Among those that collapsed were Avro Energy, which supplied 590,000 households, and Bulb, which supplied 1.5 million. Avro was later found to have become highly dependent on customer balances for everyday spending, owing creditors £250m and costing bill payers £680m.

Over the summer Ofgem set out plans to protect consumer balances and stop companies from using them “like an interest-free credit card”.

But on Friday the regulator – which has been heavily criticised for failing to properly scrutinise poorly run suppliers – rowed back on the proposals.

It said the costs of forcing companies to ring fence customer balances would outweigh the benefits, after some suppliers including Ovo and Octopus Energy warned it would mainly benefit larger, traditional companies such as Centrica while making it harder for smaller ones to compete - including those that are efficiently managed.

Earlier this year, Octopus, the energy supplier, told MPs that even well-run companies tend to be owed more by their customers than vice versa for most of the year.

Requiring suppliers to ring fence credit balances would create a need to raise extra money to cover those in debit, resulting in higher bills for everyone, the company argued.

Instead, Ofgem’s new measures will require suppliers to hold a minimum sum of cash reserves to help them cushion the blow of future price shocks, while also forcing them to ring fence money used to buy green energy.

Greg Jackson, chief executive of Octopus, said: “We still need to see the details but it should help prevent fly-by-night energy companies setting up, reduce the cost of failure and keep bills down.”

Mr Jackson said the main reason that many suppliers collapsed was their failure to buy enough energy in advance - a practice known as hedging - and that more focus on this issue was required.

The regulatory crackdown came as a Canadian pension fund snapped up a 25pc stake in SSE’s electricity grid business for almost £1.5bn.

The energy giant’s transmission network sends renewable electricity generated north of the Scottish border to destinations where it is needed in the south.

Selling a stake in the grid will allow SSE to raise cash for further investment in the division as well as other parts of the group, a statement said.

Since last year, the company has been under pressure from activist investor Elliott Management to spin off its renewable energy operations.

But SSE has insisted that partnering with investors is a better approach, allowing it to raise funds while maintaining a portfolio spanning traditional and renewable energy assets.

In the UK alone, the company says it could invest more than £24bn this decade in areas such as offshore wind.

SSE will remain the majority shareholder and continue managing the business, but the pension fund will be given representation on the board of the transmissions business.

An Ofgem spokesman said: “Consumers will always have their credit balances returned to them should their supplier go bust.

“Today’s proposals are about finding the most cost-effective way to protect these credit balances that does not put more costs on already high bills. We think allowing suppliers to use some of their customer credit balances for innovation, operating cash and hedging but not for riskier spending liking funding unsustainable growth, is the right balance.

“This is a similar model to banking where customer debit and savings account cash can be used by the bank for general lending but cannot be used for playing the riskier financial markets.

“We will closely monitor how suppliers use their customers’ credit and take action where needed.”