broken electricity pylon

Energy suppliers to undergo financial stress testing to prevent future collapse

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Energy suppliers are set to undergo financial stress testing from January 2022 under new rules from Ofgem that aim to avoid a recurrence of the collapse in energy suppliers due to high prices in autumn and winter this year.

The regulator wants to measure supplier’s resilience against a range of scenarios and will agree an improvement plan for companies to address any concerns should they come up, particularly where consumers are at risk.

According to analysts at Investec last month, consumers in England, Scotland and Wales could be forced to pay £3.2bn to cover the costs left behind by 26 gas and electricity providers that went bust in the wake of the high prices.

Ofgem believes its new reforms will help to bolster risk management in the sector, protecting the interests of consumers and strengthening the resilience of the energy market.

As well as the financial stress testing for suppliers from January, supplier executive boards will also be required to undertake self-assessments of their management control frameworks and strengthening existing controls on “fit and proper” requirements.

They will also be consulting on requiring suppliers to pause expansion until Ofgem is satisfied that they are financially resilient before they grow beyond certain milestones such as 50,000 and 200,000 customers.

It is also seeking views on whether to make changes to the price cap so that it is better suited to volatility in the energy markets, whilst still retaining its benefits for consumers.

The price cap was one reason why so many suppliers collapsed this year, as they were forced to charge consumers much less for the energy they were using than the wholesale price.

Jonathan Brearley, chief executive of Ofgem, said: “Ofgem has worked hard to protect consumers as gas prices have risen by over 500 per cent in under a year. We have ensured that over four million customers of failed suppliers have stayed on supply, household credit balances have been protected, and all customers have been protected by the price cap from fast and extreme price rises this winter.

“Today, I’m setting out clear action so that we have robust stress testing for suppliers so they can’t pass inappropriate risk to consumers. I want to see more checks on staff in significant roles and better use of data to help us regulate. We need a regime that can enable a sustainable market, to promote our transition to net zero.

“Our priority has been, and will always be, to act in the best interests of energy consumers. The months ahead will be difficult for many and we are working with the government and energy companies to mitigate the impact as much as we can, particularly for the most vulnerable households.”

In October, Which? said that consumers should be given more information about where green energy suppliers source their electricity and gas supplies, in order to prevent greenwashing.

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