The Stress Factor

With calls from Green Energy to introduce “stress testing” of new suppliers, we take a look at the reasons behind this call to action, what a stress test could look like, and where the energy industry can learn from other sectors as diverse as banking and the Premier League.

Ensuring that new entrants to the energy supply market are able to manage funds on behalf of their customers, meet collateral requirements, and ultimately operate on a solid financial footing is a sound concept. But where the call from Green Energy is specifically in response to a consultation from Ofgem surrounding credit balances and how these are protected in the event a supplier goes under, there is also a wider point too – it has taken a long while to get momentum behind significant numbers of new suppliers entering the market, and so it is crucial that this increased competitive environment is not only effectively regulated, but also continues to be encouraged.

In its current form, the regulatory environment already presents significant barriers to entry for potential new entrants, so it’s important that when we consider the viability of new checks we take a look at the effectiveness of those already in place, to ensure that the market can continue to remain competitive to consumers.

In terms of the proposed stress test, there are likely to be a number of challenges in in its implementation, without compromising the principles of an open market or increasing the barriers to entry. Whilst “stress testing” is common within industries such as Financial Services, it isn’t all about the money, as the challenges faced by other examinations such as the Premier League’s “fit and proper person test” have encountered challenges. If a test is solely based on capital reserves or credit lines, then many organisations with a parent organisation or corporate background will have a number of ways of passing these tests by demonstrating the appropriate paper and financial trails.

As found to the detriment of several of our nation’s football clubs, demonstrating that you have the required funds or working capital does not translate directly to financial stability and success. Any financial stress test needs to be delivered in coexistence with the existing code accessions and licence conditions currently policed by Ofgem, Elexon, the MRA and the other code administrators

Even the banking world, once cited for its control and transparency has now seen more than its fair share of horror stories. The reality being that if you present organisations with additional or onerous financial hurdles they will find ever more creative ways to bypass them.

Energy, more so than other utilities, carries some inherent risks around management of customers payment methods versus usage – understanding and monitoring the credit or debit on individual customer accounts any point in time is a key aspect of maintaining healthy portfolio and financial positions -so it’s important that all new entrants have the right controls in place from day one.

When it comes to stress testing, demonstrating deep pockets through a paper exercise could mitigate the risk of a supplier running into troubled waters, but would not remove, and would not address the ability of a supplier to effectively manage customer funds vs. the associated industry costs. A programme of structured education for new entrants as much as the addition of further barriers to entry is undoubtedly required.

Whatever happens to the regulatory landscape, it’s always going to be a challenge for new entrants to navigate. At ENSEK, we fully manage the end-to-end licensing, accreditation and compliance process for you, delivering a pre-accredited and licensed supply company with all the necessary back office software and services to take you from Controlled Market Entry through to maturity.

Interested? Give us a call on 0115 710 0180 or send us an email