Energy suppliers row over how to protect customers’ overpaid credit

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

Centrica’s chief executive, Chris O’Shea, said its competitor’s proposed solution to protect consumers with an insurance scheme would allow companies to “operate risky business models and dip into customers’ deposits as a free overdraft facility”.

It suggests customer funds should be ringfenced in a separate account, but Octopus has claimed that option would cost consumers up to ?30 extra a year, arguing “crude ringfencing is financially illiterate”.

Nearly 30 energy suppliers have collapsed over the past year as a rise in wholesale costs, combined with the industry price cap, squeezed companies out of business.

Customers typically overpay for their energy use in the summer months and then that credit is used over 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 bust last year, which has in turn pushed up standing charges for customers to compensate for the lost funds. Citizens Advice estimated the failures would cost each household ?164 a year through bills.

The collapse of Bulb, which has been put into government-run administration, could also cost taxpayers ?3bn. Attempts to auction off Bulb have drawn just a single bid, from Octopus.

Ofgem, the energy regulator, is now attempting to reform the market to prevent a repeat of those failures, but suppliers are split on how best to protect consumers from the cost of further collapses.

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

Centrica backs the proposals, but Octopus is putting forward an alternative it claims would be cheaper – an insurance protection policy for credit balances, comparable to the kind provided to holidaymakers through Atol or used to protect bank deposits through the Financial Services Compensation Scheme.

The Atol scheme sees travel businesses pay a ?2.50-per-customer fee into a fund which is used to refund and repatriate travellers, including when companies go bust.

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

Oxera said “a flat fee funding structure would not force suppliers choosing a high-risk business model to bear the cost of the higher risk”.

O’Shea said: ‘‘As a responsible supplier we have already ringfenced our customers’ money. Customers tell us when they pay upfront for their energy, they are trusting their supplier to look after their hard-earned money.

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

An Octopus spokesperson said:”Satisfying credit balances (and other obligations) of failed suppliers adds about ?5 a year to bills – but British Gas’s proposals to tackle this could add ?30 to bills every year, and increase supplier profits.

“We are in an energy crisis and everyone should be focused on bringing bills down – so it seems crazy to propose a ‘fix’ that costs six times more than the problem, which is why Octopus urge the regulator and industry to find a better value solution. We would love to work together with British Gas to find a better way.”

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

Separately on Thursday, the North Sea Transition Authority said it had given a licence to Centrica to reopen its Rough gas storage field in the North Sea amid concerns about capacity across Europe this winter as Vladimir Putin restricts supplies from Russia. Centrica remains in talks with government about reopening the site, which closed in 2017.