British Gas has set up a scheme to protect the hundreds of millions of pounds it receives from customers upfront on their future energy bills, after the ‘national scandal’ forced households to pay £500million sterling after a series of energy companies spent consumer deposits before going bankrupt.
The Centrica-owned energy company has pledged to protect the £294 million it holds in credit balances through direct debits from its 7 million customers in a separate bank account from the funds it uses to manage their day-to-day activities.
“I think in any other area of life to use over £500m of customer money to prop up a business that then failed would be considered a national scandal,” said Chris O’Shea , CEO of Centrica. “I am amazed that he is not treated as such in the energy sector.”
This decision makes it the first company in the sector to explicitly guarantee the protection of customers in the event of future market shocks.
Nearly 30 energy suppliers have gone bankrupt in the UK since market gas prices hit record highs last September. Regulator Ofgem has transferred customers from bankrupt firms to a new energy supplier – a process known as a “provider of last resort” mechanism – with customer deposits covered by the new supplier.
However, the money, which Centrica estimated from official documents at around £500 million, is ultimately recouped by charging every household in the UK an additional tax which is added to their energy declarations.
Centrica said the cost of energy company defaults, including lost consumer deposits, was responsible for 10% of Ofgem’s nearly £700 increase in the cap on average household energy bills to £1,971 .
“Every citizen of the UK will be paying part of that half a billion and they don’t even know it – but they should,” O’Shea said. “In my opinion, this borders on the criminal. Where have all those deposits gone – offices, executive compensation, branding deals, advertising, rebates – they have been spent on day-to-day expenses and that is unacceptable.
O’Shea called on Ofgem, which has pledged to introduce tougher new rules to make the market more resilient, to follow its lead and introduce corresponding industry-wide regulations as standard.
“Allowing energy suppliers to take deposits from customers and not requiring them to protect those deposits was something that hadn’t been thought of,” he said. “[Regulations] apply to lawyers, accountants, banks, anyone who takes a client deposit. It’s a glaring mistake that this hasn’t happened in energy, we don’t have the right regulations. »
O’Shea warned that far from improving, the situation with the scale of customer deposits was likely to get worse. Consumers overpay relative to consumption during the summer months, racking up large deposits, which are then depleted during the winter when companies spend more on energy to match usage.
With consumer direct debit payments expected to rise significantly this spring, ahead of a further price cap increase by Ofgem in October, credit balances held by energy companies are expected to increase significantly.
“There are very big suppliers lobbying against [protecting deposits]”, O’Shea said. “The balance is bound to increase and anyone who can’t do that today has already spent their customers’ money on day-to-day expenses.
Last week, Ofgem admitted that it had moved too slowly and that its regulatory agenda had been ‘dominated’ by wanting to open the market to new entrants and promoting competition against the few big players, without protecting customers against poorly managed businesses.
“That was the dominant thought at the time,” said Jonathan Brearley, who was appointed chief executive of Ofgem in February 2020, addressing a committee of MPs last week. “I think we should have combined that with more financial resilience.”
In March last year, months before the gas price spike, Ofgem said it was ‘concerned that some suppliers could use excess customer credit balances to fund otherwise unsustainable business practices’ .
“It’s in the gift of every industry player to hold themselves to a higher standard,” O’Shea said. “I think we at Centrica have a stake in making sure our industry is beyond approach.”