Energy providers argue over how to protect customers’ overpaid credit

The owner of British Gas has hit back at rival Octopus Energy in a row over how best to protect overpaid household credit in the fallout from a series of supplier failures.

Centrica chief executive Chris O’Shea said its competitor’s proposed solution to protecting consumers with an insurance scheme would allow companies “to exploit risky business models and tap into customer deposits by as a free overdraft facility”.

It suggests customer funds be ring-fenced in a separate account, but Octopus claimed the option would cost consumers up to £30 extra a year, arguing that “gross ring-fencing is financially illiterate”.

Nearly 30 energy providers have collapsed in the past year as rising wholesale costs, combined with industry price caps, pushed them out of business.

Customers typically overpay for their energy usage during the summer months, and then that credit is used during the winter, to keep direct debits consistent throughout the year.

Administrators were unable to recover hundreds of millions of pounds in deposits after suppliers went bankrupt last year, which in turn increased ongoing charges for customers to make up for lost funds. Citizens Advice estimated that the breakdowns would cost each household £164 a year in bills.

The collapse of Bulb, which has been handed over to government administration, could also cost taxpayers £3billion. Bulb’s auction attempts attracted only one bid, that of Octopus.

Ofgem, the energy regulator, is now trying to reform the market to prevent these failures from happening again, but suppliers are divided on how best to protect consumers from the cost of further meltdowns.

Ofgem has proposed rules that would require energy suppliers to place customer funds in a separate account, ensuring that any overpaid credit would be preserved in the event of a meltdown. It has concluded a consultation on the matter and is expected to issue an update in the coming weeks.

Centrica supports the proposals, but Octopus is offering an alternative it says would be cheaper – an insurance policy for credit balances, comparable to that provided to holidaymakers through Atol or used to protect bank deposits through the Financial Services Compensation Scheme .

The Atol scheme sees travel companies pay a fee of £2.50 per customer into a fund, which is used to reimburse and repatriate travellers, including when companies go bankrupt.

Centrica has now commissioned economic consultancy Oxera to study Octopus’ suggestion and submitted the findings to Ofgem. Its report concluded that “compulsory co-insurance models” such as Atol “would not be appropriate to deal with the specific failures of the UK energy supply market”.

Oxera said, “A flat-rate financing structure would not require vendors to choose a high-risk business model to bear the cost of higher risk.”

O’Shea said: “As a responsible supplier, we have already reserved our customers’ money. Customers tell us that when they prepay for their energy, they trust their supplier to take care of their hard-earned money.

“Economists have looked at Octopus’ idea of ​​an Atol-style insurance-like approach and it doesn’t solve any of the market’s problems.”

An Octopus spokesperson said: “Satisfying credit balances (and other obligations) from defaulting suppliers adds around £5 a year to bills – but British Gas’s proposals to fix this could add £30 to bills each year and boost supplier profits.

“We are in an energy crisis and everyone should be focused on cutting bills – so it seems crazy to come up with a ‘solution’ that costs six times as much as the problem, namely Octopus is urging the regulator and industry to find a better value solution.We would be delighted to work with British Gas to find a better solution.

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This week it emerged that the founders of People’s Energy Company, a supplier which went bankrupt in September 2021, are set to receive around £50m through the insolvency process.

On Thursday, the North Sea Transition Authority said it had granted a license to Centrica to reopen its raw gas storage field in the North Sea amid concerns over capacity across Europe this winter as Vladimir Putin restricted supplies from Russia. Centrica remains in talks with the government about reopening the site, which closed in 2017.

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