Energy debt reaches another all-time high

Ofgem has now published their Q4 view of domestic debt in the energy industry and once again it makes for concerning reading.

The material increase in the levels of unsecured debt to £2.3bn is a real worry and while falling prices are a welcome trend, suppliers need to get back in control by focussing on the factors that will reduce long term harm.

The headlines are stark:

• Total debt value is up 56% YoY, and up 6% on last quarter
• Accounts in debt are up 6% YoY, down 3% on last quarter
• Average debt balances are up 47% YoY, and up 10% on last quarter

Worryingly, the growth sits almost entirely in accounts in debt with no arrangement in place:

• Total debt value without an arrangement now stands at £2.3bn, up 72% YoY and 8% on last quarter
• Accounts without an arrangement are up 27% YoY, and up 1% on last quarter
• Average balances are up 35% YoY, and up 75% on last quarter

When you then note that accounts in debt with an arrangement have actually fallen (-13% YOY, -9% since last quarter) the problem facing suppliers becomes clearer.

Interestingly, the number of accounts in an arrangement where the repayment is through a prepayment meter actually increased (albeit more slowly than the year before) despite the ban on the force fitting of meters which came into force in Feb'23. Prepay now makes up 57% of all arrangements (780k meters) from 47% (700k meters) in Q4 22.

Whilst elective installs do happen, it’s reasonable to assume smart PAYG mode switching is propping up the growth we’ve seen over the last 12 months. This will vary significantly across suppliers with some being more comfortable with the governance and due diligence embedded in their processes than others.

The fact therefore that the drop in arrangements sits entirely in ‘other arrangements’, along with the spike in overall numbers we saw in Q2 23, suggests more arrangements are failing as customers struggle to keep up with previous commitments. This could point to hastily agreed payment plans at the beginning of the crisis, which would suggest either customers not willing to engage or suppliers not succeeding with their support for customers struggling with affordability.

So what’s the outlook? Well prices are dropping, which is good news, but with an average price drop of ~£250 YOY, and average outstanding balances of £2.2k for those not on arrangements, prices normalising at this point can surely only arrest the trend of growth – it won’t resolve the huge numbers now sat on suppliers’ balance sheets.

When so much is down to macro factors, suppliers need to focus on doing what they can control well. This means really driving genuine customer engagement to start gaining control of the £2.3bn of unsecured debt across the industry. However there also needs to be a pragmatic approach to repayment. Time and skill is needed to truly understand the individual customer circumstances to make payment arrangements sustainable and avoid the yo-yo cycle of failures which in the long run does more harm to both customers and suppliers.

If you'd like to know more about energy debt, and how you can support customers, contact Rachel Littlewood.