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How British Gas ‘weaponised’ its older customers in the energy war

Older couple with energy bill - monkeybusinessimages/iStockphoto
Older couple with energy bill - monkeybusinessimages/iStockphoto

British Gas may be the country’s biggest energy supplier – but it can hardly claim to be the best-loved.

The Centrica-owned company has lost roughly half of its once 15m-strong customer base to rivals over the past decade, and a ranking of suppliers by Citizens Advice puts it at eighth with a rating of 2.9 stars out of 5.

Along with competitors, British Gas has also been criticised in the past for charging long-serving customers more than new ones – a hated tactic known as the “loyalty penalty”.

But now Chris O’Shea, Centrica’s boss, is attempting to recast his company as an unlikely consumer ally as he goes to war with rivals and regulators over the thorny issue of what happens to customer funds when suppliers collapse.

In recent months, the chief executive has pushed for changes that would force energy companies to safeguard customer credit balances, ensuring the money cannot be used for day-to-day spending by unscrupulous firms.

So vociferous has his campaigning been that he has clashed publicly with Ofgem, the industry regulator, which he says is failing to learn the lessons of the energy crisis.

When Ofgem rowed back on plans to introduce balance ring-fencing last month, O’Shea accused the watchdog of an “abdication of responsibility”.

“If and when a large supplier fails, the recklessness of the decision not to address this issue will be clear for all to see,” he said.

O’Shea claims the matter is entirely straightforward: Responsible companies should not tap customer funds to prop up their balance sheets.

But smaller rivals insist the matter is more nuanced than this – and that Centrica’s intentions are not as benevolent as they appear.

One boss of a rival firm claimed British Gas was trying to “weaponise its older customers” against rivals.

The company, created after Margaret Thatcher privatised British Gas in 1986, suffered for years under the Government’s energy price cap as it squeezed revenues and prompted complaints from executives.

But profits have surged this year as energy prices have rocketed in the wake of the Ukraine war, with Centrica’s gas production and electricity generating businesses both performing strongly.

It is also better-capitalised than it has been for some time, after a huge cash injection following the sale of its US business, Direct Energy. In 2021, Centrica’s free cash flow surged from £1bn to £3.8bn – including £2.6bn from the Direct Energy deal.

The company’s net cash position stood at £316m at the end of June compared to a negative £3bn at the end of 2020.

And in the wake of the energy crisis, British Gas has taken on more than 700,000 customers as smaller rivals collapsed under pressure.

O’Shea has railed against the circumstances behind these failures, arguing that some businesses were allowed by Ofgem to handle customer money irresponsibly.

Ofgem formally proposed ring-fencing consumer balances over the summer, following market chaos in which 30 suppliers were felled by surging gas and electricity prices.

Many of these businesses were relying on customer balances to fund day-to-day activities – meaning that when they collapsed, there was no money left to honour the balances of customers who were in credit.

Avro Energy, which supplied 590,000 households, was found to have become highly dependent on customer balances for everyday spending. It collapsed owing creditors £250m and costing bill payers £680m, according to Citizens Advice.

But at the moment there are no rules barring energy suppliers from using customer funds in this way.

Worse still, existing rules have left bill payers to pick up the tab under a process known as “mutualisation”. This is where the costs of honouring credit balances, and other fees incurred by suppliers who inherit customers from failed rivals, are spread across all households, pushing bills up.

Ofgem’s solution was simple. It suggested that energy companies should be forced to keep customer credit balances – where they were positive – in a separate account that could not be tapped easily, ensuring the money would be safe if a business goes under.

The watchdog said this would stop suppliers from using the cash “like an interest-free credit card”.

But last month the regulator changed course, ditching the proposal and provoking O’Shea’s wrath.

“This feels like an abdication of responsibility by a regulator not focusing on the right things,” he said.

Other suppliers see things differently. During an inquiry by MPs this year, Octopus Energy and Ovo Energy both argued that forcing companies to ringfence customer balances would only push up their costs – and household bills – with little overall benefit to consumers.

They claimed that even well-run companies tended to be owed more by their customers than vice versa for most of the year. Rachel Fletcher, director of regulation of Octopus, said this can be the case for nine out of 12 months.

Requiring suppliers to ring fence credit balances would create a need to raise extra money to cover those in debit, resulting in higher bills for everyone, she told MPs on the business select committee.

Fletcher also suggested that companies which have higher numbers of customers who pay by direct debit – such as Octopus – would be worse affected. So-called legacy companies including British Gas have millions more customers who pay by “standard credit”, where customers receive a bill and then settle it themselves.

Many of these customers tend to be older people who prefer to settle using cheques.

And because this form of payment is seen as riskier than direct debits, suppliers are allowed to charge customers more – typically over £100 extra per year.

“This is why we are very concerned that the issue of credit balances, as responsibly applied by companies like ours, is not blown out of proportion, because the alternative is to charge customers extra,” Fletcher said.

Those paying by standard credit are more likely to be in negative balance more often than not, meaning there would be no need for a company to ring fence their balance, according to Investec energy analyst Martin Young.

He says there are good reasons to support ring fencing of customer balances, after lax scrutiny of supplier finances allowed smaller energy companies that were not prepared for market shocks to set up in the first place.

But equally, Young believes Ofgem’s softly, softly approach may be well-founded if there is a risk that pushing through new rules too quickly could tip more suppliers over the edge.

Centrica insists that ring fencing will solve many of the energy market’s problems at a stroke, exiling irresponsible firms that have “no business” being in the energy market in the first place.

With Ofgem still consulting on its final decision, O’Shea is hoping to change minds. Whether he can win back customer hearts is another question entirely.