British Gas has set up a scheme to protect the hundreds of millions of pounds it receives in advance payments from customers towards their future energy bills, after the “national scandal” that left households on the hook to pay £500m after a string of energy firms spent consumers’ deposits before going bust.
The Centrica-owned energy firm has pledged to ringfence the £294m it holds in credit balances through direct debits from its 7 million customers in a bank account separate from funds it uses to run the day-to-day business.
“I think that in any other walk of life using over £500m of customers’ money to prop up a business that subsequently failed would be considered a national scandal,” said Chris O’Shea, the chief executive of Centrica. “I’m amazed it is not treated as such in the energy business.”
The move makes it the first company in the sector to explicitly guarantee protection for customers in the event of future market shocks.
Almost 30 energy suppliers have gone bust in the UK since gas market prices rocketed to record highs last September. The regulator Ofgem has moved customers of failed businesses to a new energy provider – a process known as the “supplier of last resort” mechanism - with customer deposits covered by the new supplier.
However, the money, which Centrica has estimated from official filings is about a combined £500m, is ultimately recouped by charging every household in the UK an additional levy that is added to their energy statements.
Centrica said the cost of the energy company failures, including the lost consumer deposits, was responsible for 10% of Ofgem’s near-£700 increase in the cap on average household energy bills, to £1,971.
“Every single citizen in the UK will be paying for some of that half a billion and they don’t even know it – but they should,” O’Shea said. “In my view it verges on criminal. Where have all those deposits gone – offices, executive compensation, branding agreements, advertising, discounts – it has been spent on day-to-day expenses and that is unacceptable.”
O’Shea called on Ofgem, which has vowed to introduce tougher new rules to make the market more resilient, to follow its lead and introduce matching industry-wide regulations as standard.
“Allowing energy suppliers to take customer deposits and not making them protect those deposits was something that wasn’t thought through,” he said. “[Regulations] apply to solicitors, accountants, banks, anyone who takes a customer deposit. It is a glaring error that it hasn’t happened in energy, we don’t have the right regulation.”
O’Shea warned that far from getting better, the situation relating to the scale of customer deposits was likely to get worse. Consumers overpay relative to consumption in the summer months, building up big advance deposits, which are then run down through the winter when companies spend more on energy to match usage.
With consumers’ direct debit payments expected to increase substantially this spring, before another increase in the price cap by Ofgem in October, the credit balances held by energy companies are likely to increase substantially.
“There are some very large suppliers lobbying against [protecting deposits],” O’Shea said. “The balance is set to get bigger and anyone who can’t do this today has already spent their customers’ money on day-to-day expenses.”
Last week, Ofgem admitted that it had acted 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, not protecting customers against poorly run businesses.
“That’s what dominated thinking at the time,” said Jonathan Brearley, who was appointed Ofgem chief executive in February 2020, speaking to a committee of MPs last week. “It’s my view that we should have combined that with greater financial resilience.”
In March last year, months before the surge in gas prices, Ofgem said it was “concerned that some suppliers may use customers’ surplus credit balances to fund otherwise unsustainable business practices”.
“It is within the gift of every player in the industry to hold themselves to a higher standard,” O’Shea said. “I think we have an interest at Centrica in making sure our industry is beyond approach.”
