Energy suppliers could have to return an average of £65 to households under proposals to limit the amount of customer credit they can hold.
Ofgem is consulting on plans to ensure firms do not hold on to any more of their customers’ money than is absolutely necessary after finding that as much as £1.4 billion was held in surplus credit balances in October 2018.
Customers who pay by fixed direct debit pay the same amount each month based on their estimated consumption.
They typically build up a credit balance during the summer when their energy use is lower and then draw down on this credit during winter.
Suppliers should set the payments so that customers’ credit balance returns to £0 each year on the anniversary of when they started the payments.
However, many customers who pay by fixed direct debit are overpaying, resulting in surplus credit balances.
Ofgem said it was concerned that some suppliers could use the surplus credit to fund otherwise unsustainable business practices.
Under the “auto-refund” policy, suppliers would have to refund any credit balances for domestic customers paying by fixed direct debit above £0 each year on the anniversary of when they started their contract.
Ofgem chief executive Jonathan Brearley said: “These new proposals would ensure that suppliers are not holding onto more of customers’ money than absolutely necessary, potentially returning millions of pounds of customers’ money.
“This is an important step in making the retail energy market fairer for consumers at a time when many are facing financial hardship.”
The “auto-refund” proposal would stop surplus credit balances growing year on year but would not stop suppliers building up surplus credit balances during the year.
To address this risk, Ofgem is also proposing to introduce a credit balance threshold for all domestic suppliers.
The proposals would also reduce the amount of credit balances held when a supplier fails, reducing the cost to the market and ultimately consumers of covering these additional costs.
If confirmed, the proposals would be rolled out from 2022.
An Energy UK spokesman said: “Some suppliers already refund credit balances automatically so we now need to look in detail at Ofgem’s proposals.
“We look forward to working with them and our members to find an industry-wide best practice approach that supports customers and works for suppliers.”
Ed Dodman, director of regulatory affairs at the Energy Ombudsman, said the complaints handling body received more than 1,000 complaints about credit balance refunds in 2020 alone.
He said: “Just as people are expected to pay their energy bills on time, we think it’s fair to expect energy suppliers to do the same with refunds.
“We know from looking at complaints that suppliers can sometimes take too long to issue refunds, which can be stressful for consumers.
“We think Ofgem’s proposals will help to tackle the problem, setting clear expectations of suppliers and making sure consumers are treated fairly.”