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Energy companies are hoarding nearly £2 billion of customers’ cash amid the cost of living crisis, The Telegraph can disclose.
Gas and electricity suppliers are raising customers’ direct debit payments even when they are thousands of pounds in credit, an investigation has found.
Some companies have been accused of using the money as a cheap source of finance whilst many British households struggle to make ends meet.
On Monday Christine Farnish, a former board member of Ofgem, the energy regulator, criticised the watchdog for allowing firms to behave in this way.
Writing exclusively for The Telegraph, Ms Farnish – who quit earlier this year in a row over changes to the way the energy price cap is set – said: “Energy firms are allowed to put their metaphorical hand into a customer’s pocket and use advance customer payments to fund their own businesses.
“It’s my guess that hard-pressed families have no idea that part of their energy direct debits are used to provide cheap financing for their supplier, rather than actually paying for energy consumed.”
Energy bills have nearly doubled over the last year, going from an average of £1,277 a year in Oct 2021 to £2,500 currently. The true cost is even higher, but is being held down by government support.
Bills have surged as the war in Ukraine has led to higher prices for gas, which is used to generate about a third of Britain’s electricity.
Customers have been encouraged to cut their energy usage to save money. However, some providers have increased some users’ direct debits even if they are in substantial credit, an investigation found.
The Telegraph is aware of more than a dozen households whose energy companies have put up their monthly payments automatically, even though they are more than £1,000 in credit.
One customer, who handed EDF more than £2,300 for energy she has not yet used, said she had barely turned her heating on this winter but still faced an increase in payments. After being contacted by reporters at The Telegraph, the company apologised and lowered the customer’s payments.
This advance payment is almost the same as the average household’s annual energy bill under the Government’s cap.
The revelation comes as customers face a huge increase in energy costs, with some households saying they can no longer afford to heat their homes.
The Telegraph analysed companies’ most recent financial statements and used their “deferred income” as a proxy for customer credit balances, where no more granular detail was given.
This same methodology was used in a recent report from analysis firm Oxera, commissioned by Ofgem and published on the watchdog’s website. Reporters also obtained information from well-placed industry sources.
Centrica, the owner of British Gas, held around £588 million of money that customers had paid in advance. Whilst it is the highest figure for any company, Centrica has stated that it “ringfences” these funds, so the money is not used as working capital.
The Telegraph found that many firms, including Octopus and Ovo, held more than £100 million in customer credit. Shell held £45 million.
Octopus said it does not use customer credit balances to fuel growth, but admitted that it does use some money to offset the bills that other customers have run up but are yet to pay.
Shell uses customer credit balances as working capital, but said it does not rely on them and has access to the funding it needs from other sources.
There are no rules preventing companies from using customers’ cash to keep their businesses running. In November, Ofgem said it thinks “allowing suppliers to use some of their customer credit balances for innovation, operating cash and hedging but not for riskier spending, like funding unsustainable growth, is the right balance”.
However, the Oxera report – which examined how well Ofgem is regulating the energy market – found that many of the energy firms that have collapsed since last summer relied on customer credit balances to fuel growth.
Several, including Avro and Utility Point, were so dependent on the money customers paid in advance that at points it accounted for more than 80 per cent of the firms’ total assets.
Ofgem has now said firms must raise the alarm if customer credit balances account for more than half of their total assets – the point at which they are seen to be overstretched.
None of the companies whose credit balances are disclosed in this article exceeded this threshold.
The credit that British households build up with energy firms is protected if the firms collapse, but the cost of these failures is added to the energy bills of all British households.
The collapse of 28 firms is predicted to have added £2.7 billion to UK energy bills – the equivalent of £94 per customer. It has also cost the taxpayer £6.5 billion to bail out Bulb.
A spokesman for Ofgem said it consulted widely on its reforms, which strike “the balance between improving the energy retail sector’s resilience, keeping costs down for customers and encouraging innovation as we transition to home-grown cheaper energy”.
It added: “Much of the feedback and analysis concluded that completely ringfencing credit balances would remove a large piece of working capital that would keep prices down for customers. Customers can still request their credit balance back from their supplier at any given time.”
Octopus and Ovo said customers owe them more money than they owe to customers, and that those in credit can withdraw their funds at any point.
A spokesman for EDF said that the company did not “use credit balances to fund our business growth” and that the regulator had recently concluded there “were ‘no significant issues’ with the way it manages its customers’ direct debit calculations”.
Energy firms ‘have complete control and are earning interest on my money’
When Stacey Dickens saw her energy direct debit had risen to £500 a month, her first reaction was panic.
Despite it being winter, the business executive still has not turned on the central heating and has been using hot water bottles and a fire to keep warm.
Her house in Skipton, north Yorkshire, is old and draughty, so throughout autumn she had been taking steps to keep her consumption down – or so she thought, until she saw money being taken from her bank account at the end of November.
But when she contacted her supplier EDF, the situation became more confusing. Ms Dickens discovered she was more than £2,300 in credit – almost the same amount as the current energy cap, which is supposed to equate to the average annual bill. Why, then, had her monthly direct debit gone up again from £300 a month to more than £500?
The customer service agent replied that prices had risen and asked for a reading, which she was unable to provide because she was calling from her parents’ house.
She told them the bill increase did not make any sense, given that she effectively had many months usage in her account. But the company would not reconsider, instead telling her she should get a smart meter, which increased her frustration further.
“They’ve got all these recorded messages about turning off the lights, closing the doors, have a shorter shower,” she told The Telegraph.
“I’m doing all of that, but it’s not making no difference whatsoever because they are not basing the bill on how much I use but a forecast that is ridiculously out. I asked them to give the credit back, but they weren’t receptive at all”, said the 41-year-old.
After being contacted by The Telegraph, the company apologised and lowered her payments to £200 a month.
A spokesman said: “We’re sorry that estimated meter readings were used instead of Ms Dickens’ actual meter readings, which led to a further direct debit increase. We have now corrected this and have contacted Ms Dickens to say sorry, and to arrange setting her monthly payments at the right amount.”
But despite this resolution, the investigation by The Telegraph has found evidence that what happened to Ms Dickens is not an isolated example. More than a dozen people in credit to a tune of more than £1,000 each have had their direct debits increased by their energy companies.
Whilst it makes sense that the amount of money sitting in customers’ accounts will fluctuate during the year, with less energy being used in the summer and more in the winter, the issue of how companies are using the money has been the focus of some criticism.
Ofgem has highlighted the potential for “customer harm” and asked whether firms are sufficiently resilient if they are dependent on their users’ money.
In June, Jonathan Brearley, the organisation’s chief executive, said some companies were using the money “like an interest-free credit card”.
Last year, Ofgem consulted on the idea to ringfence consumer money – an apparently sensible move, given either the taxpayer or energy customers generally end up footing the bill if a company goes bust.
Surprisingly, given Mr Brearley’s earlier comment, the watchdog decided to scrap the idea in November, concluding that it would be “untargeted”.
The chief executive of Centrica said the decision was “reckless” and an “abdication of responsibility by the regulator”. Unlike most energy firms, the company keeps customer credit balances in a separate account.
Documents published by Ofgem show that, in November 2021, energy companies held £3.2 billion of customer money between them. However, many firms that were sitting on large sums of customer money have since collapsed, and Ofgem has refused to disclose how much is held by the remainder.
However, the Telegraph investigation has now found that the figure stands at close to £2 billion, with the true figure probably much higher because it includes companies that only publish figures from the spring, when customer credit balances are at their lowest.
Ofgem has said it will ask firms to report their customer credit balances each month and reserves the right to act if the figure exceeds half of the company’s total assets.
“Instead of a complete ban, we’re setting a threshold to avoid suppliers overly relying on these credit funds,” it said in a statement. “Should suppliers not comply with our financial resilience rules, we are leaving open the chance to instruct individual suppliers to ringfence customer credit balances.”
But although this might be of some comfort, for customers like Ms Dickens an energy company sitting on substantial funds seems to be unfair.
“They have complete control and are earning interest on my money,” she said. “It’s almost £2,500 – I could put that in an ISA and earn money on it instead. I can cushion this – but for some people, especially [around] Christmas, it could be the final straw.”