Ofgem announces final proposals for supplier licensing reform

United KingdomScotland

Obtaining a licence to supply electricity or gas in Great Britain (GB) is set to get more difficult following the announcement, on 11 April 2019, of Ofgem’s final proposals on new entry licensing requirements. The final proposals represent the fruits of a 10-month review, prompted, in part, by a spate of electricity-supplier collapses and interrelated customer-service-quality failures that has continued throughout Ofgem’s review.

Pursuant to the Electricity Act 1989 and the Gas Act 1986 Ofgem is empowered to prescribe the application process for the grant of various GB electricity and gas sector licences, including that which applies to supply licence applications. The detail of this process is implemented via regulations made by Ofgem and accompanying Ofgem guidance, with the approach Ofgem takes ultimately underpinned by its principal objective to protect the interests of existing and future electricity/gas consumers and its framework of general duties. Ofgem’s final proposals will be implemented via new regulations and guidance (at present published in draft) issued under the existing primary legislation.

Alongside introducing these higher barriers to entry, Ofgem is reviewing ongoing requirements and exit arrangements for licensed suppliers. Ofgem will be consulting during summer 2019 on introducing more robust ongoing requirements, potential new rules on credit balance practices and supplier exit arrangements (including the Supplier of Last Resort process).

Summary of current licensing assessment criteria

The current application regime, as implemented under the existing Ofgem regulations and guidance, involves the provision of relatively rudimentary information including: the applicant’s insolvency status and history; disqualification and criminal offences history of the applicant’s directors, major shareholders and controlling persons; and key dates or other details proposed by the applicant with respect to commencing licensable activities.

There is minimal qualitative assessment of the applicant’s fitness to operate as a supplier in the current regime, and there is no financial testing (beyond reviewing insolvency status/history).

Key changes to the supplier licensing regime

Ofgem’s final proposals conclude that the existing framework should be strengthened, and the bar to entry raised, in order to redress the balance between mitigating supplier-failure risk to the consumer and promoting innovation and competition in the supply market. Draft regulations and guidance have been published setting out how Ofgem proposes to implement this regime. The draft regulations and guidance are subject to an active consultation (please see Next steps and timescales below).

Assessment criteria

The proposals intend to achieve the requisite changes by introducing three new qualitative assessment criteria for granting supply licences:

Criterion 1: The applicant has the appropriate resources for their proposal to enter the market.

Criterion 2: The applicant understands their regulatory obligations and has appropriate plans in place to meet these.

Criterion 3: The applicant is fit and proper to hold a licence.

In brief, the draft regulations and guidance currently under consultation suggest that:

  • Criterion 1 will be primarily assessed through applicants being required to provide financial projections, funding arrangements and their risk management strategy for their first two years operating in the supply market, together with proof of funding for their first year operating in the supply market. The draft guidance makes clear that Ofgem will not prescribe a minimum level of capital for new suppliers, and instead will consider whether an applicant’s resources and proposals appear reasonable.
  • Criterion 2 will be primarily assessed via applicants being required to provide a “statement of intent” detailing how compliance with the customer service obligations under the supply licence will be secured.
  • Criterion 3 will be assessed by reference to a suite of suitability disclosures, which are given teeth by statements made by the applicant regarding bankruptcy, insolvency, debt judgments, Supplier of Last Resort events, compliance history and details of any actions by other regulators.

As previously, the draft regulations and guidance leave Ofgem to assess on a case by case basis whether to accept or reject a supply licence application. Therefore, it is likely that there will be a period of “bedding-in” while industry and Ofgem become accustomed to the new application process and criteria.

The draft guidance does, however, note certain specific scenarios when a licence application may be rejected, including where: a person named in the application (or a person with significant managerial responsibility) was directly involved in recent Ofgem compliance or enforcement action and/or triggered a Supplier of Last Resort event where there was material consumer detriment; the applicant or any related person has previously had a licence application refused or a licence revoked; or the applicant has failed to provide sufficient information to satisfy Ofgem that it meets the relevant criteria.

In order to reflect the increased costs of the enhanced licensing process, under the draft regulations the current application fee of £450 per application would increase to £2,150.

Timing of application

Ofgem has confirmed that licensing should take place after market entry testing has commenced (instead of before, as currently happens), but still ahead of controlled market entry.

The change in timing signals the likely conclusion of ‘supplier in a box’ arrangements, whereby a managed service provider incorporates a shell company, procures a supply licence and coordinates market entry testing without input from the ultimate operators of the supplier entity. Conducting licensing at a later stage and introducing assessment criteria that cannot easily be satisfied by a managed service provider will force the ultimate operators to engage with Ofgem and end the practice of operators purchasing ready-made supplier companies and circumventing Ofgem’s licensing scrutiny.

Next steps and timescales

At the same time as publishing its final proposals, Ofgem published a consultation on the detailed implementation of the new regime, including draft regulations and guidance. The consultation is open until 13 May 2019.

Ofgem aims that, subject to consultation, the new licensing regime will be in place from June 2019.