Ofgem publishes its decision on the Microbusiness Strategic Review

Introduction

Following its consultation launched in June 2021 aimed at addressing key harms faced by microbusinesses in the retail market, on 28 March 2022 Ofgem published its decision to implement a package of measures aimed at improving microbusinesses’ experience of the market (the “Decision”).

Microbusinesses make up an important segment of the retail energy market, having expenditure with the largest suppliers accounting for £4.2bn in 2021. However, microbusinesses have recently faced significant challenges due to the Covid-19 pandemic and increase in energy prices. As such, the Decision seeks to provide microbusinesses with a robust protection framework and key information to make suitable purchasing decisions going forwards.

Ofgem will be implementing changes in the following areas:

1. Strengthening supply licence conditions relating to provision of principal contractual terms, including Third Party Cost information.
2. Introducing a requirement on suppliers to work only with brokers who are part of a qualifying alternative dispute resolution scheme.
3. Prohibiting suppliers from requiring microbusinesses to give notice of their intention to switch (except for Evergreen Contracts).
4. Increasing the availability of information and guidance to improve awareness for microbusinesses as to how the market operates and their rights as consumers.

The changes are to be implemented over a 6- 8 month period this year. In this article, we summarise the new measures being delivered by Ofgem and timings for implementation.

1. Strengthening supply licence conditions relating to provision of principal contractual terms, including Third Party Cost information

The most substantial change announced by Ofgem is its decision to strengthen the rules around the provision of Principal Terms. Suppliers are required to ensure that Principal Terms are brought to the attention of the microbusiness consumer both pre-contract (in some form), which is the current obligation under SLC 7A.4, and post-contract (in written from). The Decision notes that this will ensure that key information about a new contract, including any brokerage costs, is always brought to the attention of the consumer.

Ofgem also clarified its interpretation of SLC 7A.4, confirming that it does not consider purely signposting a microbusiness during a sales call to a set of Principal Terms is sufficient to constitute bringing the Principal Terms to the attention of the microbusiness. Instead, suppliers and brokers agreeing supply contracts verbally must clearly explain the Principal Terms of the contract to the microbusiness before a contract is entered into.

Transparency around brokerage costs

The Decision states that information on brokerage (meaning all parties in receipt, or due to be in receipt, of payments or benefits in kind associated with Third Party Costs that form part of the supply contract) costs must be provided to microbusinesses via the Principal Terms for all supply contracts, and this information must be presented as a total cost in pounds/pence covering the duration of the supply contract. Ofgem notes that it expects information such as charges to be given due prominence alongside brokerage costs and other key information.

It should be noted that the licence modification drafting included with the Decision does not draw a distinction between when Third Party Cost information must be provided depending on whether a contract is entered into or has already been entered into. Ofgem notes that, in principle, it sees no reason why suppliers would not wish to provide information covering historic contracts where the supplier holds such information. This would therefore require suppliers to disclose brokerage costs to existing microbusiness consumers, where available, to aid their understanding of the payments they are/have been making.

These measures will take effect on and from 1 October 2022.

Cooling off period

While the introduction of a 1-14 day cooling off period was consulted on, following mixed responses Ofgem decided not to implement the cooling off period at this time.

2. Introducing a requirement on suppliers to work only with brokers who are part of a qualifying alternative dispute resolution (ADR) scheme

A new supply licence condition will be introduced requiring that suppliers work only with brokers signed up to a qualifying ADR scheme. The scheme will be funded by a fee levied on brokers signing up to the scheme and case fees.

Ombudsman Services has published information on their website in relation to how they will launch and operate the scheme, as well as an onboarding roadmap which sets out the process and timelines for implementation. Suppliers and brokers are encouraged to engage with these materials.

This measure will take effect on and from 1 December 2022.

3. Prohibiting suppliers from requiring microbusinesses to give notice of their intention to switch (except for Evergreen Contracts)

The third key change issued in the Decision is prohibiting suppliers from requiring microbusiness consumers to provide prior notice when terminating its supply contract (except in the case of Evergreen Contracts).

The rationale behind this change is to improve the ease with which microbusinesses can switch contracts by reducing the administrative burden on microbusinesses as well as suppliers and brokers. The Decision notes that retaining the Evergreen Contract exemption will typically allow suppliers to provide non-fixed term contract options at a lower cost to consumers than Deemed or Out-of-Contract rates.

This measure will come into force on 1 October 2022.

4. Increasing the availability of information and guidance to improve awareness for microbusinesses as to how the market operates and their rights as consumers

It is Ofgem’s view that improving awareness materials and information provision will significantly benefit consumers and complement the reforms noted above. Ofgem is working in partnership with Citizens Advice to update existing information and create new information which will be displayed on the Citizens Advice website. The information will focus on key information about the market as well as consumer rights and company obligations.

Next steps

The Decision highlights other on-going workstreams which will complement these measures and further improve microbusinesses’ experience of the energy market such as the Switching Programme Significant Code Review and market-wide half-hourly settlement.

Ofgem’s modifications to the supply licence are appended to the Decision and retail market participants should review these and put measures in place in order to comply with the new conditions.