Households will be paying energy firms a combined £1.3bn in annual charges to help suppliers recover bad debt from 1 April.
A new report from the Warm This Winter campaign also casts doubt on the effectiveness of the charges in actually helping customers struggling with their bills. [1]
Energy firms were already able to charge £842m a year on bills for bad debt allowances, but from 1 April 2024 Ofgem has ruled that an additional £735m can be charged (or £28 per household per year). The amounts are offset by a £275m adjustment to the bad debt charges incurred after the Covid pandemic.
The combined impact of these charges varies depending on the bill type with prepayment meter customers paying the least at £25.17 per household per year. Direct debit customers pay £38.96 a year on these charges while standard credit customers are hit hardest paying £129.71.
The report also reveals that “debt-related costs” consist of three main elements: bad debt write offs, debt related administrative costs and working capital. It appears unclear if these write offs will come off customers’ accounts, or if they are written off on supplier income statements while the debt is sold to debt collection agencies.
In addition, the debt related administrative costs and working capital include recouping the costs of the moratorium on involuntary prepayment meter installations. The moratorium was brought in after it was found energy firms were breaking into vulnerable people’s homes to force them onto a prepayment meter.
Firms can also claim for the administrative costs to suppliers from dealing with customers in debt, despite other allowances in the price cap enabling them to cover operating costs. The allowances also allow firms to claim for the day-to-day costs of customer arrears and using the money to cover the period between an energy firm incurring costs and receiving customer payments.
The news has been met with concern from consumers, with new polling from Opinium finding that over half (55%) of the public oppose energy firms using money raised through the additional £28 per household being spent on debt administrative costs. [2]
The public felt that around half (48%) of the money raised from the £28 debt charge should be spent writing off household energy debt of the customer accounts of those most in need.
Fiona Waters, spokesperson for the Warm This Winter campaign commented:
“Energy bill payers are quite rightly up in arms about these additional costs which look like they do nothing to reduce the debt of ordinary people but instead help energy companies pursue those who simply can’t pay.
“It’s yet another outrageous rip off caused by our broken energy system, where ordinary people are expected to foot the bill all the time whilst energy giants bank billions and their bosses live in the lap of luxury.
“We need long term solutions such as expanding homegrown renewable energy and a mass programme of insulation to bring down energy bills for good so UK families no longer find themselves in debt through no fault of their own and are hounded for payments.”
A spokesperson for the End Fuel Poverty Coalition, said:
“The recovery of energy debt led to the forced prepayment meters scandal in 2023 and customers are still paying the price for energy firms’ poor practices.
“Rather than hit hard pressed households with higher standing charges, we need to see a longer-term approach to solving the energy debt mountain, such as an industry wide Help To Repay scheme.
“If Ofgem persists in implementing this charge, the very least they can do is ensure it is used to write off debts from customer accounts and isn’t spent on hiring debt collection agencies.”
Policy expert and report author Richard Winstone, added:
“Ofgem produced over 350 pages of documentation to reach a conclusion that will cost the public hundreds of millions of pounds extra this year with no clear benefit for consumers. They pack their documents with complicated jargon and formulae, yet they could not find room for a simple explanation as to how this money will actually benefit those struggling with their energy bills.
“Throwing money at suppliers and hoping they do the right thing is what has led to record profit levels from the likes of British Gas at a time when customer service standards are at their lowest for a decade and customer debt is at its highest. Ofgem either needs to stop increasing the cost to consumers or start creating regulation that ensures suppliers use the additional funds for specific, consumer-benefitting, purposes.”
Jan Shortt, General Secretary of the National Pensioners Convention, commented:
“As always, it is the customer that pays, not the shareholders or energy industry who are currently making the biggest profits for years. Sustainable and affordable energy sources are a must and the regulator should consider how it can protect customers from this unacceptable level of levy when everyone is still struggling with high energy bills.”
ENDS
[1] “An overview of the additional debt related costs”, Richard Winstone / Warm This Winter, March 2024. Full report available to download.
[2] Public opinion polling from Opinium who interviewed 2,000 people between 15 and 19 March 2024. Results were weighted to be representative of the UK population.
55% oppose using the money to cover admin costs, 25% support, 20% don’t know.
48% figure is based on respondents choosing a range of percentages to be used to write off debt. The figure includes the responses from 16% who felt none of the money should be used in this way, 16% felt all of the money raised should be used in this way.