Energy bills direct debit: What Ofgem announcement means for consumers

·4 min read
Ofgem's clampdown will prevent energy providers from increasing direct debits excessively. Photo: Getty
Ofgem's clampdown will prevent energy providers from increasing direct debits excessively. Photo: Getty

Britain's energy regulator has announced new plans to protect consumers who pay their bills through direct debit to "ensure credit balances do not become excessive".

Ofgem accused some energy companies of using customers' accumulated credit like an "interest-free company credit card".

The new financial measures will also ensure suppliers can withstand future shocks, it said, adding providers will be able to "weather the ongoing storm" of industry challenges, especially over autumn and winter.

Monday's announcement comes after the energy price cap jumped 54% in April and average bills rose by £693 ($849) a year for around 18 million households on standard tariffs, and £708 for 4.5 million prepayment customers.

Prices are forecast to rise to more than £2,600 a year in October when the cap is next reviewed.

Read more: Energy bills: Ofgem plans frequent price cap reviews

As the regulator announces a clampdown as households face a cost of living crisis on the back of soaring energy, fuel and food prices, what do the changes mean for customers?

What are the changes?

Ofgem proposed changes to tighten rules on the level of direct debits suppliers can charge.

It also wants to protect credit balances when firms fail so the costs are not passed onto customers.

It comes after a string of high profile closures linked to high wholesale oil and gas costs. The surging costs of wholesale natural gas, exacerbated by the war in Ukraine, has driven energy bills to record highs in recent months.

Around 28 energy suppliers have gone bust since September 2021, in the wake of soaring wholesale energy prices. Consumers paid on average an extra £94 each to cover the costs of moving to new suppliers.

The watchdog, which regulates bills for 23 million households, said firms will be required to have enough working capital to run, without risking their customers’ credit balances.

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Jonathan Brearley, CEO of Ofgem, said: "By ensuring that suppliers are operating well-financed, sustainable, and have more resilient business models, we can avoid the supplier failures we saw last year which caused huge stress and worry and added costs to everyone’s bills.

"But if some do still fail, consumer credit balances and green levy/renewables payments will be protected. Currently they are used by some suppliers like an interest free company credit card.

"Today’s proposals will make sure that customers’ hard-earned money is properly protected so that a company must foot the bill if it fails, rather than consumers picking up the tab."

Watch: Why are gas prices rising?

What does this mean for consumers?

Ofgem has said the changes will reduce the risk of suppliers going bust and protect the credit balances of energy customers if they do.

When energy suppliers failed, Ofgem’s existing safety net meant two million consumers last year were moved to a new supplier with their credit balances intact.

However, under current measures new suppliers don't get the customer credit balance transferred from the failed supplier. This means that the costs of replacing those balances are shared across all customers’ bills.

The new rules ensure customers are quickly moved to a new supplier with their credit balances intact if a supplier fails, according to the regulator.

The proposals, which still need to be finalised through a consultation, would mean suppliers must protect their customers' money if they go bust and pass on the funds from accounts which are in credit to the replacement supplier.

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Gillian Cooper, head of energy policy at Citizens Advice, said: "Ofgem has previously allowed energy suppliers to run risky business models. As a result, it's customers who’ve been left to foot the bill when companies collapse.

"We’re glad that Ofgem has listened to our warnings and is taking necessary steps to tackle some of the root causes of these issues.

"It must now ensure suppliers stick to these tougher standards so that people are better protected in the future."

Watch: How to prevent getting into debt

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