A new Ofgem review looking at supplier licensing will focus on the financial management of supply companies. It says that “[sic] we are reviewing our approach to supplier licensing, to ensure that appropriate protections are in place against poor customer service and financial instability. This consultation sets out our proposals to strengthen the criteria we use to assess supply licence applications, and amend the process for applying for a licence. We intend to increase ongoing scrutiny and oversight of those already operating in the energy retail markets, and are seeking views on options for achieving this.”
Having worked for many years within the investment banking sector, this sounds like Ofgem have been talking to their counterparts in the Financial Conduct Authority (FCA). In the financial sector ‘capital adequacy’ (also called ‘regulatory capital’) regulations require an institution holds sufficient assets to cover their liabilities. Put simply, you must demonstrate you are able to service the risks you manage, with current regulation requiring capital reserves against market, credit and operational risks.
While a simple and sound principle, the overhead to compliance is considerable. The rules are complicated, and satisfying can require a basket of actions impacting the highest and lowest levels of an organisation. At the highest level, ideas of ownership and oversight must be embedded into the governance framework. Business strategies must be provided, and can be examined in great detail by the Regulator. The practicalities of measuring liabilities (risk) may drive the creation of new processes which must be ’fit for purpose’, all thoroughly documented. New risk measurement methodologies may be required, which have to be designed, tested and implemented. At the lowest level, calculations can involve very large data sets, owned by disparate parts of the institution. Demonstrating data is ’clean’ and fit for use can be an enormous exercise.
It is unlikely that Ofgem would go from a standing start to banking type overhead, but even relatively ‘lightweight’ rules will need be taken very seriously. For new entrants Initial Business strategies will get increased scrutiny, and may need to evidence an increased standard of financial planning. Once operating, standard market risk and credit risk assessments and reporting will be needed perhaps adopting established, standard methodologies from the banking sector. Managing cash is core to solvency, and the interaction between risk, future cashflow expectations and working capital may be a central focus.
But it’s not all downside. Regulatory Requirements should drive improved governance, business planning and risk management. Robust, scalable business strategies should be preferred. Transparent, timely risk measurement and communication supports active risk management, which will in turn support ongoing financial stability. Energy Potential is supportive of these changes. As experts in this area we can help suppliers ensure they have appropriate risk controls in place. If you would like to discuss how Energy Potential can help your business please contact Gary Huish at firstname.lastname@example.org
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