British energy suppliers will be required to undergo financial stress testing from January as part of an effort by Ofgem to measure firms’ resilience against a range of scenarios in order to boost financial resilience in the sector.
Ofgem stated on Wednesday that where stress testing revealed weaknesses, it will agree to an improvement plan for companies to address any concerns, particularly where consumers were at risk.
The watchdog said that, in addition to the launch of financial stress testing for energy company’s, supplier boards will be required to undertake self-assessments of their management control frameworks and provide assurance to Ofgem, strengthen existing controls on “fit and proper” requirements, explore how best to tighten rules around the protection of credit balances and Renewables Obligation payments, consult on new financial licence requirements in Spring 2022 and consult on requiring suppliers to pause expansion until Ofgem can be satisfied that they are financially resilient to grow beyond certain milestones.
Ofgem expects the reforms to bolster risk management in the sector, protecting the interests of consumers and strengthening the resilience of the energy market in the process.
Elsewhere, Ofgem said it was also seeking views on whether to adapt the price cap methodology to ensure the price cap was better able to handle energy market volatility, whilst retaining its benefits for consumers as the current price cap methodology, whilst protecting consumers from price spikes, exposes suppliers to risks that were becoming “harder to manage” at times of high energy price volatility.
