Octopus Energy urges Ofgem to enforce hedging to protect the industry

Octopus Energy has urged the regulator to put more emphasis on hedging to boost the resiliency of domestic suppliers.

The energy firm welcomed Ofgem’s latest moves to reform the industry, and hoped it would boost hedging across the domestic energy sector.

Commenting on the reforms, a spokesperson said: “We still need to see the details but it should help prevent fly-by-night energy companies setting up, reduce the cost of failure and keep bills down.

“It should also encourage hedging, which is important because lack of hedging was the reason 30 companies failed. There’s more to be done to enforce hedging but this is a good start.”

Hedging refers to buying energy through long term contract arrangements rather than on the spot market – with multiple suppliers exposed amid soaring wholesale costs over the past 18 months by a lack of hedging arrangements – combined with the constraints of the price cap.

So far, the energy crisis has cost taxpayers and bill-payers around £10bn – directly affecting over three million customers and contributing to record energy bills which have climbed to £2,500 per year even with historic Government support.

The collapse of Bulb Energy alone is estimated to cost £6.5bn alone – making it the biggest state bailout since RBS in 2008.

New reforms brough in by Ofgem include the introduction of capital adequacy requirements, meaning firms will have to set aside a minimum amount of funds to withstand future shocks.

It is also demanding ringfencing requirements for renewable obligation payments, meaning they will have to separate and protect the money required for buying green energy.

Octopus wins industry ringfencing row

The watchdog has opted against ringfencing requirements for the entirety of customer credit balances – following a protracted industry row over the proposal.

Ofgem will instead demand suppliers to closely monitor the use of credit balances.

Ringfencing refers to proposals for energy suppliers to hold the credit balances of customers in a different account to their day-to-day commercial operations, and for money spent by consumers to only be used for procuring energy.

This will be a huge boost for Octopus, which has consistently opposed ringfencing, amid a sustained public dispute with rival British Gas owner Centrica.

Octopus Greg Jackson had hammered the proposal as “financially illiterate”, with the supplier warning it would add further costs to people’s energy bills.

The issue has split the sector with multiple firms taking contrasting positions over the issue.

Centrica’s chief executive Chris O’Shea has slammed the decision.

He argued the decision was an “abdication of responsibility” and that Ofgem had failed to learn the lessons of the market crisis which had seen 30 suppliers collapse.

O’Shea said: “Energy companies must be adequately capitalised by their shareholders so that if they fail, the shareholders feel the pain, not UK consumers. It really is as simple as that, but it appears lessons have still not been learnt.