Is 8.1 Billion too much for energy firms to hold of customer money?

Netexporter

And you can still have a quarterly in arrears account with some suppliers. You just pay the most for your energy, because getting stuff on tick isn't a cheap option.

MarzipanCrumble

I am with Octopus on a variable tarrif (I have problems with Octopus reading my SM2 meters - it is spasmodic).  Single user in 4 Bed Detached.  Was on a fix now on variable.  Advised by looking online account that DD should rise from £66 (both gas/elec) to £135 (varibale from July).  Did this.  Rather pay upfront and know not going into massive debt.  Yes, thinking of tracker but as had probs with my SM2'sbeing read not sure if appropriate.

I choose this - I can change my DD at any time with Octopus or even pay what I use each month (variable DD) so I am happy with the flexibility of payment options with Octopus 

Gerry1

rp1974 said:

It strongly suggests to me at least, that Ofgem could help here by making monthly variable DD the default payment method, which would prevent exactly the situation as presented here.

Exactly.  Even worse, dozy Ofgem still don't require that MVDD must be offered by all suppliers.  Ofgem's failings resulted in all customers having to pay higher standing charges following the collapse of around 30 suppliers.

Fixed DDs should still be available for those unable or unwilling to budget for themselves, but only on request.

the_lunatic_is_in_my_head

MattMattMattUK said:

dealyboy said:

It is paying in advance. How many of us pay in advance for things? I can only think of one, season tickets for travel, but then the effective unit travel price is discounted.

Insurance, one pays for a year in advance, travel, most subscription services are paid in advance, car tax, TV license, event tickets etc. 

The idea that everything should be paid for after the fact is why so many get into debt. 

Netexporter said:

How many of us pay in advance for things?

Petrol and diesel. You pay for it, then you use it. Food. You pay for it, then you eat it.

None of those are variable costs.

Metered water bills and phones bills are a more apt comparison which are paid for based upon how much you use after the fact.

Petrol and food obviously aren't fixed but once you pay, you own the stuff. 

[Deleted User]

dealyboy said:

It is paying in advance. How many of us pay in advance for things? I can only think of one, season tickets for travel, but then the effective unit travel price is discounted.

Maybe fixed DD payers should earn credit interest. Come on Suppliers up your game ... this is a free market.

Suppliers pay their wholesalers in advance of supply. If say a supplier has 1M customers with an average energy bill of £250 in December it will have to find £250M to pay its wholesaler up front. If this money has to be borrowed, we all end up paying for the borrowing costs. We should be careful what we wish for.

QrizB

the_lunatic_is_in_my_head said:

Credit balances should be completely ring fenced ...

If you want higher bills, yes.

MultiFuelBurner said:

Interest on 8.1billion at the moment is decent.

At £300 per customer and 5% interest, that's £15 per year per customer. So you might imagine that ring-fencing credit balances would result in bills increasing by £15 per year, or so.

That's roughly the same amount as the SoLR costs currently in the Ofgem cap, but those will fall out of the cap next year (assuming no more suppliers go bust). Swings nd roundabouts.

dealyboy said:

It is paying in advance. How many of us pay in advance for things?

Quite a lot of things, when you think about it.
Several of these things can be paid in installments but then cost more. Rather like the DD discount you get for paying for your energy by DD.

Xbigman said:

The best bit was the example of someone who 'unknowingly' built up £1100 of credit. So someone who doesn't bother to read their bills then.

There's no accounting for folk.

(Sorry for that pun, I'll get my coat.)

the_lunatic_is_in_my_head

Dolor said:

dealyboy said:

It is paying in advance. How many of us pay in advance for things? I can only think of one, season tickets for travel, but then the effective unit travel price is discounted.

Maybe fixed DD payers should earn credit interest. Come on Suppliers up your game ... this is a free market.

Suppliers pay their wholesalers in advance of supply. If say a supplier has 1M customers with an average energy bill of £250 in December it will have to find £250M to pay its wholesaler up front. If this money has to be borrowed, we all end up paying for the borrowing costs. We should be careful what we wish for.

Big companies are renowned for having favourable terms with suppliers, are the supply companies actually putting the cash down, do they have credit or any pay on consignment type of agreement?  

If they buy in advance and then the cap rises are they not benefiting from this without having to put the price below the cap for us (apparently the government did very well out of this concept with Bulb), I appreciate that works the other way too but as experts in their field they'll obviously be trying to avoid the latter and achieve the former.  

QrizB

the_lunatic_is_in_my_head said:

Big companies are renowned for having favourable terms with suppliers, are the supply companies actually putting the cash down, do they have credit or any pay on consignment type of agreement? 

No.

If you want to offer eg. a 12-month fixed-rate tariff, a prudent supplier will buy the energy for the next 12 months in advance on the markets. So they (for example) will pay 119p/therm today for gas that won't be delivered until Octoer 2024.

An imprudent supplier might choose to buy their gas on the month-ahead market instead, but (as we saw last autumn) will go bust if the market rises ...

born_again

dealyboy said:

It is paying in advance. How many of us pay in advance for things? I can only think of one, season tickets for travel, but then the effective unit travel price is discounted.

Maybe fixed DD payers should earn credit interest. Come on Suppliers up your game ... this is a free market.

 Igloo used to do that? I know one I used did, got 3% which was way above, many banks rate at the time.
Guess what they went bust.

Scot_39

the_lunatic_is_in_my_head said:

MultiFuelBurner said:

the_lunatic_is_in_my_head said:

MultiFuelBurner said:

Is 8.1 Billion too much for energy firms to hold of customer money?

It is if they go bust and we have to pay for it.  

Credit balances should be completely ring fenced, suppliers have the benefit of less customers in debt and customers have the benefit of not having to budget as much as they would on a variable DD.  

Beyond that what else are the supply companies doing with all this money?

Interest on 8.1billion at the moment is decent.

Should be over 8.1billion now as indicated fixed DD customers should go into winter win large credit balances.

I don't know if energy companies can earn interest on ring fenced money

I guess for the individual the interest on £300 isn't really much but for the big suppliers it adds up.

When Ofgem calculate the cap it's said profit is limited to 1.9%, are they considering aspects such as interest on credit balances?

If they are I guess we save a little bit now against a risk of paying for those go who bust later, if they aren't then it doesn't really benefit us with that regard. 

It's not a limit on final profits  - it's an allowance over and above nominal mutually agreed operating and variable in practice wholesale purchase costs.

And it's now 2.4% from Oct 1st afaik.

And it's on a financial accounting metric known as EBIT - earnings before interest and tax.

And despite the potential interest on that £8bn - many energy resellers are operating under high levels of  debt currently.

Due in large part to the Ofgem cap imposed as wholesale costs increased last year.

30 or so firms - large and small alike - so in debt - they collapsed.

And the interest on servicing that debt - does come out of the 1.9% / 2.4%.

And that's not good business investment return levels - and due to regulatory policy - a worsening one - as more customers - many with regulatory protection against being cut off - amass debts against the business  - sone reports say consumer energy debts trebled in last year.  

Which is another reason likes of Shell selling out.

Likes of Apple, Nike etc have regularly reported well over 10% EBIT in recent good years.