Centrica reignites calls for ringfencing and hits out at rival firm Octopus Energy

British Gas owner Centrica slammed rival firm Octopus Energy (Octopus) and its proposals for a travel insurance model to protect consumer credit balances, amid the escalating energy sector row over ringfencing.

The supplier’s boss Chris O’Shea warned regulations around ringfencing had to evolve, or the industry risked another market crisis.

He said: “Regulation on this needs to change or we run the risk of history repeating itself. Despite the many failures, wealthy private energy company owners are still using customer money as free working capital today. If they are successful, they become even wealthier, and if they lose, UK consumers picks up the tab.”

Ringfencing refers to Ofgem proposals for energy firms to hold consumer credit balances in a special account, with the funds only spent on securing energy supplies rather than being used to fund commercial operations.

Customers conventionally 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.

However, the lethal combination of soaring wholesale costs, the constraints of the price cap, poor management and insufficient hedging has seen 30 energy firms collapse – directly affecting over four million customers.

Centrica has estimated, based on requests for information from Ofgem, that £400m of customer credit balances have been lost from collapsed suppliers during the current crisis.

O’Shea said: “We think this is wrong and as a responsible supplier we have already ringfenced our customers’ money. Customers tell us when they pay up front for their energy, they are trusting their supplier to look after their hard-earned money.”

British Gas is the UK’s largest energy supplier, home to over nine million customers.

It has has been ringfencing customer credit balances as a matter of company policy since March earlier this year.

As part of its submission to Ofgem, Centrica commissioned research from economic consultants Oxera into ringfencing.

It compared ringfencing with Octopus’ counter-proposal for the Air Travel Organiser’s Licence (ATOL) scheme for energy users.

The ATOL scheme is the compensation scheme for customers of travel organisers in the UK,

It is managed by the Civil Aviation Authority (CAA).

Currently, the per-passenger ATOL charge is the same flat rate of £2.50 per passenger for all participant firms

Oxera determined that “compulsory co-insurance models, such as the ATOL in transport and the FSCS in financial services … would not be appropriate for dealing with the specific market failures of the UK energy supply market.”

O’Shea said: “Economists have looked at Octopus’ idea of an ATOL style insurance type approach and it doesn’t solve any of the problems in the market. Their idea would allow companies to continue to operate risky business models and dip into customers deposits as a free overdraft facility.”

Consumer rights charity Citizens Advice has forecast that the market carnage will add £164 per year on to energy bills this winter, while the National Audit Office estimates households face a £2.7bn clean-up bill from the supplier of last resort process – which ferried 2.3m customers from fallen firms to surviving suppliers.

Meanwhile, energy specialist Cornwall Insight has forecast the price cap will peak at £3,363 per year this January, during the coldest month of the year when energy demand is at its highest.

Industry row over ringfencing escalates

Ofgem has since announced a series of reforms to clean up the energy sector, including financial stress tests and fit and proper person rules, alongside plans for a quarterly price cap.

Currently, the watchdog has settled on a 30 per cent limit for ringfencing, and initiated a further industry consultation on the issue.

While Centrica backs ringfencing, the proposal has been contested by multiple energy firms, concerned it would drive up bills and stifle innovation.

This includes Octopus, the country’s fifth-largest energy firm and home to over 3m customers.

It has described Centrica’s proposals as “financially illiterate.”

The company’s chief executive Greg Jackson warned last month that ringfencing runs the risk of “handing the market back to turgid incumbents” through over-burdening the energy sector with regulations.

He urged the regulator not to give in to “pressure from archaic companies, whose proposals will only drive up bills and supplier profits.”

Its own research warns that consumers face an additional £30 per year charge to their energy bills if 100 per cent ringfencing was brought in while not resolving the key issues that caused the crisis.

In his view, poor management and insufficient hedging were the key drivers of the market crisis, rather than ringfencing.

This outlook was shared by rival firms Good Energy and So Energy, while City A.M. understands Ovo Energy has raised concerns over ringfencing proposals.

Earlier this year, Good Energy’s chief executive Nigel Pocklington, told City A.M. that Ofgem’s proposal to reform the energy market would benefit established players and hamper challenger firms with smaller reserves of revenue.

He said: “If we’re not careful, we’ll go back to a world of four large energy companies, which is where we came from 20-plus years ago.”

So Energy co-founder Simon Oscroft warned that higher costs to entry will stifle innovation.

Speaking to City A.M., Oscroft said: I struggle to see how a new supplier could come in unless they have an extreme amount of funding and a huge parent above it. So, we will see less innovation as a result of many of these changes.”

By contrast, E.ON UK and Utilita Energy both support Centrica’s position and back ringfencing.

However, the two most vocal energy companies are Octopus and Centrica – which have been at loggerheads over the issue for several months.

The two firms were also competing to buy Bulb Energy, however City A.M. understands Octopus is the last remaining bidder for the de-facto nationalised firm.

City A.M. has approached Octopus and Ofgem for comment.

The post Centrica reignites calls for ringfencing and hits out at rival firm Octopus Energy appeared first on CityAM.

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