New energy companies face tougher tests to reduce failures

Smaller energy suppliers hoping to break into the market will have to pass tougher tests, following a string of company collapses.

Regulator Ofgem said it was raising the bar to entry to "minimise the impact" of supplier failure on consumers.

Firms will have to prove they have sufficient funding and can provide proper customer service.

Over the past six months 11 small energy firms have failed, including Brilliant Energy, Our Power and Gen4U.

The new tests will be rolled out from June.

Citizens Advice, which first called for a review of supplier licensing in 2013, said the new rules were "good news for consumers".

Ofgem's new tests will ask applicants for an energy supply licence to:

• Demonstrate they can adequately fund their operations for the first year

• Show their intentions to provide proper level of customer service

• Show that directors, shareholders and senior managers are "fit and proper" to hold a licence

Ofgem said consumers had benefited from competition in the energy market over the past decade in the form of lower prices, improved customer service standards and increased choice. However, it added, many of the suppliers which had failed over the past 18 months had "provided a poor level customer service".

The regulator's executive director of consumers and markets, Mary Starks, said the aim was to "protect consumers while also ensuring they enjoy the benefits of increased competition and innovation that successful new firms entering the market bring".

"Applying new requirements on suppliers entering and operating in the market will aid us to weed out those that are underprepared, under-resourced and unfit. This will help minimise the risk of supplier failure and help drive up standards for consumers."

Trade association Energy UK, which said "a couple" of its members had been among those to go under, welcomed the new rules.

Chief executive Lawrence Slade said: "We want to see a future retail market where competition thrives and customers benefit from increased choice and service, and aren't left picking up the tab when suppliers with unsustainable business models fail."

Ofgem also announced it would begin consulting in the summer on proposals to raise the standards of existing suppliers and review the arrangements in place for when a supplier fails.

Citizens Advice chief executive, Gillian Guy, said the regulator was right to turn its attention to the issue of poorly performing suppliers already in the market.

"Ofgem needs to take steps to identify those companies not delivering for their customers or that may be in financial difficulty and examine if its current approach to resolving problems it identifies is the right one."