Analysis: Could Ofgem’s prepayment meter crackdown end up fuelling ‘bad debt’?
Ofgem has stopped short of banning forced prepayment meter installations today – instead bringing in a code of practice which toughens the circumstances in which they can be used.
This has led to criticism from anti-poverty charities such as National Energy Action and End Fuel Poverty Coalition concerned many vulnerable groups remained exposed to pre-payment meters.
NEA’s chief executive Adam Scorer argued “this should not happen if it causes them physical and mental harm” while Simon Francis, coordinator of the EFPC warned the code of practice “simply does not go far enough and the fact it is voluntary undermines its objective.”
Francis also pointed to what he regarded as the “elephant in the room” – growing household debt.
Campaign group Warm This Winter has warned 29 per cent of the population is in debt to their energy firm following the market crisis and Russia’s invasion of Ukraine.
Not only does this put millions of Brits at risk of fuel poverty if gas prices spike again, but it leaves energy suppliers highly vulnerable to market shocks – which could drive up prices again for every households.
The collapse of 30 suppliers across the energy sector added around £94 onto record energy bills last year, while Cornwall Insight has calculated that customers owed £2bn to suppliers in so-called ‘bad debt’ during the depths of the passing winter.
Industry body Energy UK has highlighted that Ofgem’s decision to reduce the role of prepayment meters will lead to fewer installations which will mean customers falling further into debt.
Dhara Vyas, Energy UK’s deputy chief executive, argued that involuntary prepayment meter installations are “necessary to prevent debt building up further and to minimise additional costs for all customers,” even if they should be used as a last resort,
She said: “Bad debt within the energy industry is increasing to unsustainable levels. As Ofgem acknowledges, the new process will lead to fewer installations by warrant and so it’s likely customer debt will increase even further as a result – as well as from the current pause – which will need to be addressed.”
Andy Mayer, energy analyst at free market think tank, the Institute of Economic Affairs, also warned that suspending forced prepayment meters could raise costs across the energy market.
He said: “Putting up the cost of serving vulnerable customers with expensive interventions, however well intended, risks suppliers avoiding such customers, as to take them on in larger numbers than rivals renders them uncompetitive.
“This in turn will compel the government to create either a social supplier of last resort, or subsidise social tariffs, which will spread the risk, but encourage welfare fraud to avoid higher bills.”
Ofgem referred to bad debt when announcing its prepayment meter code of conduct, when the watchdog confirmed it needs suppliers to support energy users to limit the build-up of bad debt, for the benefit of all consumers in the sector.
It has also separately published a ‘call for input’ on the London Stock Exchange, relating to the allowance in the default tariff cap (the price cap) for debt-related costs -reflecting growing concerns over bad debt in the sector.
City PM understands Ofgem is constantly monitoring bad debt levels, and that it is aware the rules set out in its code of conduct could result in fewer prepayment meter installations.
It also recognises that the current suspension in involuntary prepayment meter installations may contribute to higher levels of bad debt.
The watchdog will include this issue in its consultation over whether the code of conduct for prepayment installations is part of licensing terms.
They will also separately consult on whether an adjustment to the debt-related costs allowance in the price cap may be required, looking in the round at 2022/23 costs and allowances and anticipated costs and allowances in 2023/24.