By combining Ofgem's latest data on customer credit with their recent market debt figures, BFY analysis shows domestic suppliers faced a £1.6bn shortfall to the target cash reserve in June 2024 - an increase of £1.4bn from 12 months before.
This is mainly driven by growing market debt reaching another all-time record of £3.7bn (which we’ve covered here), having increased by £1.1bn since Q2-23.
Suppliers continue to face a significant shortfall in net balances
The latest data published on customer credit balances highlights the continuing cash challenge faced by domestic energy suppliers. Market debt exceeded the credit balances of domestic customers by £0.7bn at the end of June 2024. This is the second quarter in a row that suppliers face a negative net cash position.
We estimate ~5m Direct Debit customers had a debit balance at the end of June. The debit balance position associated with these customers is not included in the reported data, but we estimate it to be between around £300m - indicating a deficit of up to £1.0bn.
The net cash position is seasonal, and should improve as credit balances increase over summer. But the data for Q2-24 is worse than Q2-23, when suppliers had a positive cash position. This highlights the increasingly difficult 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 £1.6bn shortfall to the target cash reserve. This is an increase of £1.4bn in the past 12 months – driven by growing market debt.
This does not suggest suppliers are short of their cash coverage targets. Instead 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 Matt Turner or Rachel Littlewood.
Ian Barker
Managing Partner
Ian shapes the BFY vision and inspires our team to bring it to life, while remaining central to complex client engagements in Strategy, Commercial, and Operations.
View Profile