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The UK energy Ponzi scheme

Whatever the industry, get the regulations wrong and you have a recipe for disaster.  We all know this to our cost following the banking crash of 2008, which stems from round after round of deregulation since Thatcher and Reagan.  When regulators establish a framework that allows fraud, fraud is precisely what will occur.

It is with this lesson in mind that we need to question whether the people at Ofgem – Britain’s energy regulator – might be breathing something a little stronger than fresh air.  Why else would they establish a regulatory framework that forces the customers of prudent energy companies to pay for the losses incurred by customers of fraudulent companies?

According to Emily Gosden in the Telegraph:

“Energy companies are demanding Ofgem improve scrutiny of new suppliers, after the regulator proposed making them pick up the tab if a rival goes bust.”

The current row reflects a broader concern about the role of credit in an industry whose profit margins are increasingly tight.  At least until the UK has universal smart meter coverage, either customers have to pay at least a month in advance for their energy, or the companies must extend them at least a month’s credit on their bills.  Either way, there is a risk of default.  Traditionally, customers who default are processed through a long-established county court process.  But the rush of new companies entering the market raises concern about the lack of regulation of companies that demand advanced payment (i.e. credit) from their customers.

This is not merely the Big Six suppliers seeking excuses to prevent competition from challenger companies.  As Gosden notes:

“Doug Stewart, chief executive of small supplier Green Energy, has written to Ofgem objecting to the plan, and calling for it to introduce ‘stress tests’ on suppliers.

“Mr Stewart said that because companies were allowed to demand advance payment, a supplier could potentially keep offering unsustainably low prices, acquiring new customers to get more upfront payments to cover its losses, a model he said would be ‘not too far from a Ponzi scheme’.”

Insofar as the new Ofgem system allows unscrupulous traders to establish this kind of Ponzi scheme, we can be certain that sooner or later this is exactly what we are going to get.  The question is who should pay for it?  At present, Ofgem wants the customers of prudent energy companies to pick up the tab – effectively charging them twice (once in higher prices and once in compensation) for the entirely reasonable decision to stick with an established company with a realistic business plan.

Until technology catches up, perhaps the only workable solution for the time being will be Caveat Emptor!

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