U.K. to Start Financial Stress Tests for Energy Suppliers

(Bloomberg) --

The U.K. energy regulator will start stress testing suppliers from January to make sure they can withstand the price volatility that wiped out two dozen suppliers in the past five months. 

If those tests reveal any financial weaknesses, Ofgem will agree on improvements with the company, according to a plan published on Wednesday. The proposals include a limit on how quickly a supplier can take on customers, with the watchdog able to ask companies to pause their expansion if it deemed that would risk their financial stability.

The biggest price swings ever seen in Europe’s power and natural markets have wreaked havoc on Britain’s energy industry, with more than 4 million households forced to switch suppliers. Ofgem is under pressure to improve the market to stop this from happening again. 

“I’m setting out clear action so that we have robust stress testing for suppliers so they can’t pass inappropriate risk to consumers,” Ofgem Chief Executive Officer Jonathan Brearley said. “We need a regime that can enable a sustainable market.”

A parliamentary inquiry has started and will examine the role that policy and the regulatory environment contributed to the current situation.

How U.K. Energy Crisis Is Hitting Household Suppliers: QuickTake

The regulator is also proposing that customer credit balances should be ring-fenced so that they cannot be used to pay charges the company owes.

The period for assessment of new supplier licenses has been extended to nine months, and a consultation has been launched into whether suppliers should have to notify Ofgem in advance of any significant commercial or personnel changes, such as changes of ownership.

Ofgem is also consulting on changes to how the nation’s energy price cap is calculated. The measure, that limits the amount suppliers can charge 15 million customers on default tariffs, is due to jump in April after the soaring wholesale rates. Suppliers have complained about the time lag for adjustments to the cap even when there are huge changes in prices.

Temporary measures could be brought in before April, but a new methodology won’t be ready before October, Ofgem said.

The government has stated that the price cap will remain place to protect consumers. Ofgem has said that volatile prices mean that without changes “there is a risk of further supplier failures and exits, and an undermining of investor confidence to enter or invest in the retail market.”

The regulator isn’t expecting prices to drop any time soon.

“It is vitally important to note that the volatility in the gas market is not over, and we are continuing to see significant shifts in the market, particularly for Summer 2022,” Ofgem said.

(Updates with details on price cap from 8th paragraph.)

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