The complex case of mounting energy sector debt, and how to solve it

E.ON Next and Stonehaven have recently published a report, ‘Rebuilding Trust – how we can tackle energy debt through greater understanding’, which looks at how to solve the crisis that has taken hold of the sector, with the key recommendation to make better use of existing government data to identify those most financially at risk and provide targeted support and debt relief.

How did we get here?

In any market, retailers provide goods or services to their customers and receive payment in return. When a customer struggles to pay, debt builds up on their account, sometimes with access to the goods or services being cut off.

For an essential service, such as energy, it can be much more complex when a customer slips into debt.

Heating your home and keeping the lights on after dark are, unsurprisingly, essential and protected services. As such, energy suppliers must continue to buy and supply energy and pay network charges and environmental and social policy costs on the customer’s behalf, regardless of the customer’s financial situation. This means, when a customer gets into energy debt, the supplier must foot the bill – as supply must remain connected.

There has always been a certain level of debt in the energy market. However, the ongoing energy and cost of living crises have resulted in significant increases in the   number of customers who are struggling to pay.

The Rebuilding Trust report estimates the total amount of outstanding bills in the market is nearing £6 billion. This is unsustainable; and we need to urgently investigate and introduce mechanisms to remove the debt concern for financially vulnerable customers who cannot afford to pay for their consumption.

This could be through: supporting the reduction of energy consumption through energy efficiency or green technology measures, such as batteries (which when combined with time of use tariffs enable customers to buy and store energy when it is cheapest) or through targeted energy bill support such as a social tariff.

Finding a better way

To influence energy demand, the Rebuilding Trust report recommends developing a new, third-party regulated, Safeguarding Score based on three sets of indicators: personal data including financial capacity and health, energy use and property data. By collating the data, it would, for the very first time, be possible to specify why and how each household may be vulnerable.

With much of this data already held across Government departments, collating it would be an administrative task – not an impossible one.

This new method would help move the sector away from the current binary approach of being either “vulnerable” or “non-vulnerable”. Instead, suppliers would receive an indication of financial resilience and contributing factors. This would allow for a more gradual approach to support interventions, ensuring the right people receive the right support at the right time.

The adoption of a safeguarding score would unlock the ability for the industry to administer better targeted support, where it is needed most, through measures such as an enhanced rebate or social tariff, improved targeting of the Energy Company Obligation (ECO), and funding of green technologies for financially vulnerable customers.

No-one wins when energy debt spirals out of control. Vulnerable customers are left stressed and concerned, while energy suppliers are left to pick up the network and generation costs - which can, in turn, have a knock-on affect on energy pricing for us all. 

There is an urgent need to curb this historic and burgeoning level of debt, and government departments may hold the key to establishing a better way. By using existing government held data in a considered, measured and meaningful way, suppliers will be able to better understand customers and their needs – to provide targeted support and early interventions to avoid future debt crises in the future.

It is vital we find a way to help those who need it most. It is equally important those with the means to settle their bills are doing so.  But the complexity of affordability isn’t a short-term issue. We must look at the whole system and make improvements to make energy affordable on an enduring basis.

Opinion piece by Ramona Vlasiu, Chief Operating Officer at E.ON Next. First published by Utility Week.