Insights ¦ Debt strategy A ‘reset’ and ‘reform’ for customers in debt

Key Take Aways

• The energy sector is experiencing unprecedented levels of debt due to the recent energy crisis, necessitating bespoke rather than generic solutions.
• A potential debt relief scheme, targeting vulnerable consumers, could involve a £0.5 to 1bn fund aimed at resetting accumulated debt and restoring financial stability.
• The current handling of debt by energy suppliers is inconsistent, highlighting a need for standardised standards, including a proposed ‘debt guarantee’ and ‘debt outcome’.
• An emphasis on proactive, empathetic support and tailored communication is essential to improve customer experience, especially for vulnerable households.
• The sector recognises the importance of preventing debt build-up through regulatory adjustments and incentives that promote responsible market behaviours.
• Long-term affordability remains a challenge; collaborative efforts with government are required to develop sustainable, equitable strategies.
• The rise of energy debt impacts the entire system, including higher bills for non-in-debt consumers, indicating a need to internalise the external costs associated with unpaid bills.
• The energy market’s design features (e.g., essential service, low switching flexibility, limited credit checks) exacerbate debt issues compared to other industries.
• Improvements in debt standards include standardising ability-to-pay assessments and expanding third-party support via charities and consumer organisations.
• Better collaboration with consumer groups and charities is identified as critical, including clearer authorisation processes and improved referral pathways.
• Efforts are underway to reform debt management practices, prioritising customer-centric approaches and long-term sustainability over blunt recovery tools.
• Stakeholder consultations will inform the development of guidelines around debt prevention, support, and recovery, with key responses expected by spring 2025.

Key Statistics

• Energy debt and arrears have increased by 91% over the past two years.
• Nearly three-quarters of energy debt (£3.82bn) is held by customers not on repayment plans.
• The average debt for those in debt has increased by over 50% in two years.
• The value of energy debt and arrears in the most recent data reached record highs, with £3.82bn outstanding.
• 69% of consumers who received supplier support reported satisfaction with the assistance provided.

Key Discussion Points

• The sector’s unique market features, such as low disconnection rates and minimal credit checks, heighten the risk of debt accumulation and restrict market competition for indebted consumers.
• The potential for establishing a debt relief scheme to directly reduce debt for the most vulnerable households, with a focus on affordability and fairness.
• The importance of standardising ability-to-pay assessments and enhancing transparency to ensure sustainable repayment plans.
• Recognition of the need for a customer-centric approach that provides proactive, tailored support to vulnerable consumers in debt or at risk.
• The role of trusted third parties, such as charities and consumer organisations, in facilitating support and advocating for customers.
• The proposal for a ‘debt guarantee’ to clarify what consumers can expect from suppliers in hardship situations.
• The necessity of creating an equitable balance between preventing debt and ensuring fair recovery practices.
• The objective to prevent unnecessary or problem debt from forming, through regulatory and incentive-based reforms.
• The consideration of lessons from other sectors and countries to inform best practices in credit management and debt prevention.
• The emphasis on refining billing accuracy, default tariffs, and improving debt recovery processes alongside preventative measures.
• The importance of stakeholder engagement and consultation to refine policies, with an emphasis on fairness, timeliness, and long-term sustainability.
• The sector’s recognition that coordinated action across government, regulatory bodies, and industry is crucial to effectively address systemic debt issues.

Document Description

This article presents Ofgem’s strategic approach to address rising energy debt within the UK sector, focusing on ‘resetting’ the debt accrued during the recent crisis and ‘reforming’ debt management practices to promote consumer-centric, sustainable solutions. It outlines proposed initiatives such as debt relief schemes, standardised debt standards, enhanced collaboration with consumer groups, and regulatory reforms aimed at prevention, support, and fair recovery. Stakeholder engagement and consultations are integral to refining these proposals, which aim to create a resilient, fair, and customer-focused energy market while safeguarding all consumers’ interests.