Domestic energy suppliers faced £1.9bn cash coverage deficit

By combining Ofgem's new data on customer credit with their recent market debt figures, our analysis shows domestic suppliers faced a £1.9bn shortfall to the target cash reserve in March 2024 - an increase of £1.1bn in the past 12 months.

This is driven by growing market debt, which we covered in a recent update, highlighting that domestic debt had reached another all-time high at £3.3bn. We expect this will continue to worsen in 2024.

Suppliers need to finance a significant shortfall in net balances

New data published on customer credit balances highlights the cash challenge faced by domestic energy suppliers. Market debt reached a level that exceeded the credit balances of domestic customers by £1bn at the end of March 2024, when combining this new data with Ofgem’s market debt figures.

We also estimate 4m Direct Debit customers had a debit balance at the end of March. The debit balance position associated with these customers is not included in the reported data, but we estimate it to be between £300m and £500m - suggesting a deficit of up to £1.5bn.

This is a seasonal position, and will improve as credit balances recover through summer, but it highlights the working capital challenges faced by suppliers through the year.

In 2023, Ofgem introduced new rules that require suppliers to hold a cash reserve of at least 20% of gross credit balances. These rules followed the wave of energy supplier failures in 2021 – many of whom overly relied on customer cash as risk-free working capital, and ultimately cost customers over £2bn to recover the cash shortfall through energy bills.

Our analysis of the two separately reported market data suggests a £1.9bn shortfall to the target cash reserve. This is an increase of £1.1bn in the past 12 months – driven by growing market debt.

While this doesn’t suggest suppliers are short of their cash coverage targets, it demonstrates the size of the challenge to ensure robust capital adequacy ahead of the wider financial resilience rules taking effect in 2025. However, not all suppliers will be impacted by the same extent, based on their Direct Debit policies for target credit balance profiles, and the management of their debt book.

For more on the implications of this analysis, and the upcoming changes to financial resilience rules, contact Rachel Littlewood.