Energy companies need to be regulated like banks to prevent another crash

We’re now more than ten years on from the credit crisis, where banks were brought to their knees and regulators vowed: “Never again.” But in the energy industry today, we’re seeing a crisis that essentially mirrors what happened over a decade ago.

What we need to see now is tighter regulation to protect customers, restore confidence in the sector and ensure suppliers are better prepared for commodity price volatility. In 2007, financial services companies were caught out by the sudden contraction in credit; in 2021, some energy companies have been caught out by a surge in wholesale gas prices.

Both events were unexpected, but not unforeseeable. Both have caused massive distress for customers.

This year some 15 suppliers have gone to the wall, impacting around 2.4 million customers who were promised cheap, unrealistic deals and have now seen a jump in their bills as they’re rescued by suppliers with more expensive – and realistic - tariffs. Two companies collapsed only this week.

We know the pain the rising gas price is causing, both to households and businesses. We’re not perfect – we know that – but we are doing all we can to help our customers through this time. There will always be companies who struggle or fail. But some of those who failed this year were caught out after gambling with their customers’ money.

In energy, most households now pay by direct debit, and they build up credit during the summer months when they use less gas and electricity. Some suppliers who have collapsed this year were using this credit to finance day-to-day operations, rather than to buy energy to honour the deals they had with customers. Almost £400 million of customer credit has gone with them.

If this was 13 banks it would, quite rightly, be a national scandal.

It matters not only on ethical grounds but because everyone else has to pick up the tab. The cost of “replacing” the missing £400 million is “socialised” and now falls to every bill payer in the country through a premium on gas and electricity prices.

Add to that the “socialised” loss on buying energy today to supply the 2.4 million customers of these failed companies, and the unpaid social, renewables and housing insulation costs which energy suppliers are supposed to meet and the total cost is already in the billions. Billions of pounds which are being added to household energy bills to meet the cost of these failures.

To his credit, Jonathan Brearley, Ofgem’s chief executive, recognises that lessons must be learned and that the industry should be better regulated. In my view, there is no time to lose. I’d suggest four areas where regulation must be strengthened to mirror other sectors in protecting customers.

Firstly, energy supply companies must be financially robust. Remarkably, there are no cap adequacy requirements in the energy industry today. Energy suppliers must be required to maintain sufficient readily available capital to withstand market volatility like banks and insurance companies have to.

Secondly, Ofgem should monitor all suppliers to ensure that customer credit is not being misused to fund day-to-day operations. Ideally, customer deposits should be ringfenced

Thirdly, Ofgem should ask suppliers to pay mandatory environmental costs such as the Renewable Obligation in regular instalments rather than wait for one lump sum payment in October. Customers benefit from the Warm Home Discount and the ECO programme that insulates homes and there must be stronger sanctions for companies that do not meet these obligations.

And lastly, there needs to be more focus on who is a fit and proper person to hold an energy supply licence in the same way individuals in banks and insurance businesses must pass strict vetting procedures.

It’s clear that the energy industry stands at a crossroads. There is huge potential for the country as we modernise and decarbonise our energy infrastructure. Net zero will cost money but if we get it right, there are huge advantages, not least in well paid jobs in areas such as renewables and hydrogen. But we must take customers with us on this journey and show we as a sector are worthy of their trust and confidence.

Getting the right regulatory framework shouldn’t be difficult, and it must start now.