Market Meltdown - Dec 2021

1 Market Meltdown How regulatory failures landed us with a multi-billion pound bill 1. Contents Executive summary 3 Some suppliers grew rapidly despite repeated 17. reports of non-compliance Consumers are paying the price for energy 5. Market turbulence Ofgem allowed a culture of rule- breaking with 19. some areas of the rulebook Rules ensuring companies were t to trade came 8. too late and didn't go far enough What changes do we need to see? 23. Rules to protect consumers came too late 8. Consumer con dence in the Market needs to be 23. Companies were able to build up large liabilities, 10 repaired much of which consumers will now have to pay We need a plan for how the Market will deliver for 25. Why weren't energy companies nancially resilient? 11 consumers as we decarbonise The rules that were there to protect consumers 14 Recommendations 29. weren't enforced Rules which would have protected customers 15. when suppliers fail weren't enforced Ofgem let companies get away with breaking the 16.

2 Rules 2. Ofgem allowed un t and unsustainable energy companies to trade with little penalty. Despite knowing about widespread problems in the Market , it failed to take meaningful action. Almost 4 million households have seen their Rules to ensure companies were t to trade came too late supplier fail since August 2021 alone, with 28 From 2010 onwards, dozens of companies entered the Market with failures this year. limited checks. Some o ered good service to consumers, but others were poorly prepared. Despite warnings from Citizens Supplier failures since Aug 2021 will cost Advice and others, it was only in 2019 that Ofgem brought in new consumers billion - around 94 per customer rules on Market entry, and in 2021 to improve nancial resilience - from 2022. reforms that came far too slow to prevent the collapse we've seen. Ofgem's reforms failed to improve the resilience of suppliers Government has set aside a further billion of Many recently failed suppliers were poorly capitalised and unable taxpayer money for Bulb's failure.

3 To withstand recent signi cant rises in gas prices. Some had business practices that left them in a precarious position, including: Citizens Advice estimate that consumers whose supplier failed and were moved to a new supplier Being insu ciently hedged' (hadn't bought enough energy saw average price rises of 30/month. in advance). O ering xed term deals that couldn't cover their costs Consumers of failed suppliers are also paying for Amassing customers very rapidly, in some cases fuelled energy Market turbulence with billing delays, by auto-switching services confusion and lost debt protections. Some suppliers used customer credit balances as a cheap way to 40% of people who've heard about supplier fund their growth, rather than use funds from lenders or investors. failures are less likely to switch supplier in future Contacts to Citizens Advice show customers of recently failed as a result. companies had an average credit balance of 353, around 200.

4 More than needed for an average household at this time of year. 3. Rules to protect customers weren't enforced Ofgem and the Government must act to x the problems that led Ofgem's regulatory failings also led to a culture where companies us here and restore consumer con dence in the Market were free to out the rules. Services haven't been good enough and trust has been damaged Only 2 in 5 compliance and enforcement cases in the There should be an independent review of the causes of the last 3 years focused on consumer experience rules. Market turmoil which considers the role of delays in policy changes, Ofgem's approach to compliance and enforcement, The number of Ofgem sta working on enforcement and recommends improvements. fell by 25% between 2017/18 and 2020/21, despite record numbers of suppliers in the Market . Ofgem should introduce a new consumer duty, similar to that being introduced in nancial services, which would put the onus Only 1 of the 20 suppliers that failed between August to on companies to ensure good consumer outcomes in future.

5 Mid November 2021 had a living will' in place, a new requirement from Ofgem which would have protected Consumers need to be protected from the costs of failure customers when suppliers failed. Consumers should be protected from immediate bill hikes resulting from recent supplier failures Ultimately consumers pay for companies' rule- breaking Ofgem has a raft of powers it can use to tackle rule- breaking . But Ofgem and the Government should implement reforms, it's been nearly 3 years since they last used powers to stop a including prudential regulation, to tackle risky business practices company taking on new customers until it improved its service. Ofgem and the Government should improve the supplier failure process so consumers are better protected In the meantime, rules on accurate billing, telephone support and prepayment continued to be outed. Rebuilding a Market that works for consumers and net zero Avro Energy (failed Sept 2021) will cost consumers an Ofgem and the Government should develop clear strategies for estimated 679 million.

6 Since 2018 Citizens Advice the retail Market and its role in supporting decarbonisation. raised concerns with Ofgem about the company on 10 separate occasions as it nearly tripled in size. These should consider how to enable consumer engagement and innovation in a more consolidated Market . 4.. Consumers are paying the price for energy Market turbulence If a larger supplier fails, it may not be feasible for a new supplier to Supplier failures since Aug 2021 will cost take on their customers all at once. This happened for the rst time billion with the failure of Bulb, which served around million households. In this case, Ofgem can ask for an administrator to take over the company, and the Government will give it nancial backing to continue supplying customers until a buyer can be found, or until batches of around 94 per customer from 2022 customers can be sold to other suppliers. The proceeds of the sale will help recoup the Government's costs, but if there is a shortfall it can choose to recover the costs through charges on energy bills.

7 The When an energy supplier fails, Ofgem normally appoints a new Government has set aside an initial billion to keep Bulb running. supplier to take on its customers. This will incur costs - like paying for energy for the new customers and protecting their credit balances - Customers of failed suppliers may also incur a cost when moving to a which the new supplier can apply to use an industry levy to recover. new supplier. Since August 2021, all customers of the failed suppliers The costs of the levy are mutualised' - paid for by all other consumers have been transferred to the new supplier's default (variable) tari , through an extra charge on our bills. priced at the price cap. New analysis by BFY Group, commissioned by Citizens Advice, Given the typically lower xed tari s customers of failed suppliers estimates that the total cost to bill-payers of supplier failures since were moving from, Citizens Advice estimated that moving from a failed August 2021 will be billion (not including Bulb)1.

8 An Ofgem to supplier to a new supplier costs customers 30 month. Households decision to recover these costs more quickly than normal means on Universal Credit that were a ected by supplier failures will have consumers will see an increase in bills from April 2022 of 94 per particularly struggled, as these coincided with changes to reduce their customer2. This is on top of an expected increase in the price cap of weekly payments by 20 in October 20214. between 400- 520 in the same period3. 5. Failures can also cause a great deal of In particularly worrying cases, people were Supplier failures can continue to a ect confusion for consumers. The Citizens Advice coming to Citizens Advice for help after some customers for weeks or even months after a consumer advice service saw a 140% suppliers did not maintain their company has failed. The consumer advice month-on-month increase in calls in communication channels. services continues to help people with: mid-September as more suppliers failed.

9 This meant people were unable to provide Credit refunds: People are concerned that The week beginning 20 September saw a meter readings, download bills, or even they won't get their credit balances back, 9,000% increase in views to our advice pages contact an engineer if their pre-payment meter and some customers have built up on supplier failures. stopped working. hundreds of pounds of credit due to incorrect billing practices. Fig. 1 Pageviews to Citizens Advice supplier failure webpages, 30 August - 19 September 2021. Sydney's story*. 8k Avro Energy, failed September 2021. Check who's taken over A customer is elderly with severe health your energy supplier 6k problems; they have had over 1100 taken from their account, even though they were in credit. This is much higher than their Pageviews 4K. usual direct debit, and the customer Choosing your energy tari . doesn't know why they took this amount. 2K Your energy supplier has gone bust The customer can't a ord to buy essentials, but doesn't know how to get in touch with 0K the failed supplier, as there are no phone 30 Aug 4 Sep 9 Sep 14 Sep 19 Sep lines, and their website is not working.

10 6. Debt and Billing: Customers have Delays in complaints being resolved: Multiple supplier failures: Customers concerns about a potential debt or Customers are seeing delays in face particular di culties if they have billing error, but have not been able to accounts being transferred over, recently switched between one or get in touch with their previous or new causing stress - especially if they have more failed suppliers, as it becomes supplier. an outstanding complaint or complex unclear who is responsible for the query. customer. Emma's story* Parvati's story* Joshua's story*. People's Energy, failed September 2021 Green, failed September 2021 Igloo, failed September 2021. Emma is elderly, unable to read her meter Parvati had an ongoing issue with Green, as Joshua, who is disabled and needs extra and doesn't use the internet. Usually they had increased her direct debit by over 5 support with communications, had someone comes to read the meter but they times its original amount, despite her not received a nal bill from Igloo in October haven't for weeks.