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Financial resilience in the energy retail market

Rules that licensed energy suppliers have to follow about how they operate and how we make sure that they are not taking unnecessary financial risk.

Our role and responsibilities

It is important that households and businesses have a secure energy supply and trust that their energy supplier is resilient to changes in the market, such as a sudden increase in energy prices.

Energy is an essential service, and we have strict rules to make sure that customers are protected if their supplier goes out of business. However, if an energy supplier goes out of business this can cause disruption in the energy market and the costs can be added to household bills. We want a resilient market that attracts long-term investment that will benefit consumers.

Read how we plan to build a consistent approach to financial resilience for our current and future energy system in our strategy and priorities.

Maintaining financial resilience in the retail market

Energy suppliers must put their own capital at risk and make sure they are not relying on their customer’s money to fund their business.

Financial Responsibility Principle

All energy suppliers must have sufficient financial resources as part of their energy licence conditions. They must also operate responsibly. This helps to lower the likelihood of energy suppliers going out of business. It also lowers the cost to consumers should an energy supplier leave or exit the market.

Minimum Capital Requirement

All energy suppliers who supply energy to homes must have a minimum amount of financial buffer so that they are resilient to changes in the energy market. This is called a ‘common minimum capital requirement’. This requirement helps to lower the risk of suppliers going out of business during uncertain times, for example when energy prices went up in 2021.

Ringfencing of Renewables Obligation  

Suppliers who supply energy to homes must set aside these funds from other financial resources as part of their energy licence conditions. Read more about the Renewables Obligation scheme.  

Customer Credit Balances

Suppliers must not overly rely on customers money to fund their business. We may tell suppliers to set aside customer credit balances from other financial resources in certain circumstances. This means that if an energy customer’s account is in credit, their supplier will still have the money to repay in a timely manner.

Decisions on the rules suppliers should follow

Read how we added requirements into the energy licence to:

Monitoring and supervising energy suppliers

We continuously monitor the financial positions of suppliers to understand levels of risk in the energy market.

At the same time, we supervise and engage with suppliers individually to further our understanding of their business models and approach to risk management. We expect suppliers to be the first line of defence by monitoring and assessing their business specific risks.

Our approach to monitoring and supervising the retail market is based around three essential principles:

  • risk based, focused on the areas which are the greatest risk to consumer interests
  • proportionate, tailored to the size of firm and business model and the impact of a possible failure on consumers
  • forward-looking, to ensure ongoing financial resilience and proactive risk management as the landscape evolves

Information for gas and electricity supply licensees

If you have an energy supply licence you need to follow certain rules and principles to be able to run your business responsibly. These include:

  • milestone assessments
  • the Operational Capability Principle and the Financial Responsibility Principle
  • Minimum Capital Requirement
  • Ringfencing of Renewables Obligations

We can tell suppliers to ringfence some or all of their customer credit balances in certain circumstances.

Milestone assessments

Licensed energy companies must pause the onboarding of new domestic customers as they reach the 50,000 and 200,000 customer milestones for each of their relevant gas and electricity supply licences. At these stages we undertake an assessment to check a supplier’s operational capacity before they can be allowed to resume onboarding new customers. Read about our decision on strengthening milestone assessments and additional reporting requirements and the accompanying guidance.

The Operational Capability Principle and the Financial Responsibility Principle

Licensed energy companies must make sure they have systems and processes in place so that they can serve their customers effectively, mitigate risks and comply with their legislative and regulatory obligations. They must also have sufficient control over the assets they rely on to run their businesses such as their premises, facilities, and staff.

This is called ‘The Operational Capability Principle’.

Companies with an energy licence must also act in a financially responsible manner and manage their business specific risks appropriately. This means that they have the financial resources to withstand sudden changes in the market.

This is called ‘The Financial Responsibility Principle’. Read what companies need to do to follow these principles in the Operational Capability and Financial Responsibility principles guidance.

These principles are supported by our ongoing supervisory cycle. This cycle gives us information about risk and risk management among companies. We gather information in the following ways.

Annual Adequacy Self Assessments

The Annual Adequacy Self-Assessment (AASA) allows us to understand the specific situation of each company. We use it to analyse and assess the company’s ability to manage risk over a long period.

Licensed companies must report to us on their financial and operational adequacy. From March 2025, companies involved in domestic supply will also have to report on their compliance with the Capital Floor and Capital Target.

Stress Testing

Stress tests are part of our assessment to check the financial resilience of licensed companies. We test companies against different price shock scenarios.

The number of times and how often we stress test depends on the size of the company and the impact of a possible failure.

Monthly Financial Responsibility Principle (FRP) Request for Information (RFI)

Alongside proactive self-reporting and stress testing, licensees must submit responses to the monthly Financial Responsibility Principle RFI.

Minimum Capital Requirement

Licensed energy companies who supply energy to domestic customers must meet a Capital Target of £115 of adjusted net assets per dual fuel equivalent customer, with a Capital Floor of zero pounds. Adjusted net assets describes the types of capital that are more likely to be able to absorb losses so that companies are more resilient to sudden changes in market conditions.

Licensed companies that do not meet the Capital Floor in the conditions of their licence may be subject to enforcement action.

If they do not meet the Capital Target, they may be subject to transitional measures. They will need to agree a plan with us setting out how they will build up their capital to meet the target.

Ringfencing of Renewables Obligations

Licensed electricity suppliers who supply homes must have money set aside to be able to pay towards the Renewables Obligation (RO) scheme. This scheme supports the deployment of renewable electricity generation in Great Britain and Northern Ireland. Licensees must set aside these funds by holding Renewables Obligation Certificates (ROCs), protecting equivalent funds in one or more ‘RO Credit Cover Mechanisms’ or a combination of the two.

More details and guidance are on the Ringfencing of RO receipts page.

Power to Direct the Ringfencing of Customer Credit Balances

It is important that suppliers are not over reliant on Customer Credit Balances to fund their business. We can tell energy companies to separate some or all of their Customer Credit Balances from other financial resources in certain circumstances, unless it is not in the consumer interest.