Regulation of customer credit retained by energy suppliers

What are customer credit balances?

Domestic energy customers accrue credit on their account when they are paying for more energy than they are using. Customers who pay an equal amount every month will typically build up credit in the summer, when energy consumption is low. In the winter, energy consumption is higher and the cost exceeds the monthly payment. The customer’s credit balance is used to make up the difference.

Ofgem refers to credit balance in excess of what is required to cover winter debt as ‘surplus credit balance.’ It has estimated that, in October 2018, energy suppliers held £590 million to £1.4 billion in surplus credit.

How are credit balances currently regulated?

Ofgem’s rules do not limit the amount of credit suppliers can hold or what they can and cannot do with the money. There are, however, rules designed to limit the accrual of excessive surplus credit. Direct debits must be as accurate as possible based on the information available and suppliers have a general obligation to not be “overly reliant” on customer credit. Customers can request a refund on their credit balance at any time. Credit must be refunded promptly unless there are good reasons not to do so.

What are the issues associated with customer credit balances?

Energy suppliers can view credit balances as a form of revenue because it is, in principle, money that customers will eventually owe them. As such, credit balances may be treated as a source of working capital that can be used by suppliers to meet short-term obligation.

Ofgem, the Business Energy and Industrial Strategy Select Committee, and industry and consumer groups have noted potential issues associated with energy suppliers’ use of customer credit balances as working capital, including that it permits unsustainable business models and that it gives energy suppliers an incentive to set direct debits higher than necessary and to make it difficult for customers to withdraw their credit.

Ofgem has been looking at reforms to better protect customer credit balances since 2018. Proposals to require suppliers to automatically refund credit at the end of the contract year and to limit the amount of credit they hold were dropped. Ofgem has also decided against proceeding with an alternative proposal to require suppliers to ringfence the customer credit they hold. Instead, the regulator has strengthened its rules requiring direct debits to be as accurate as possible and is consulting on a power to direct individual suppliers to ringfence credit balances when they do not meet certain financial resilience standards.

This pack contains information on Ofgem’s rules on credit balances, the issues associated with credit balances and recent proposals for reform, as well as recent Parliamentary material and news items.