Ofgem, Britain’s energy regulator, yesterday warned Britain’s big six gas and electricity suppliers that it would launch a full investigation unless action was taken to ease new credit restrictions on 250,000 small businesses. The power companies have told some of these customers that they must pay their energy bills seven months in advance. Small business organisations have voiced concern that this could push many into bankruptcy. 

Ofgem said that in addition to its own inquiry, it could refer the industry to the Competition Commission if suppliers did not act voluntarily to relax the new harsher payment terms. An Ofgem spokeswoman said that Alistair Buchanan, its chief executive, had asked the companies — EDF Energy, British Gas, SSE, ScottishPower, E.ON and RWE npower — to come up with detailed guidance that would provide relief for small firms struggling because of the downturn. He proposed that the Energy Retail Association, which represents the companies, work with the Major Energy Users Council to resolve the problem. “Ofgem will continue to monitor the situation,” the spokeswoman said.

Despite sharp price falls in the wholesale electricity markets in recent months, energy companies have started to apply tough new conditions to shield themselves from the impact of the 40,000 corporate insolvencies expected in the UK this year.

The Federation of Small Businesses (FSB) said that recession-hit companies had been finding it increasingly difficult to secure contracts from suppliers without big deposits and other restrictions.

Nick Campbell, an energy trader at Inenco, a consultancy, said that British companies were having to pay up to £350 million in advance for their energy and that sectors heavily exposed to the downturn, such as brickmaking, had been hit particularly hard.  Part of the problem has been that trade credit insurers, which pay the bills of companies entering insolvency, are increasingly rejecting applications for new energy-supply contracts.

“The credit constraint is a problem for the whole economy, including the energy markets,” Mr Campbell said. “Just as the banks may restrict lending even though interest rates are at all-time lows, suppliers and credit insurers are keen to limit exposure to risky sectors.

“Companies also face a variety of obstacles before even entering a supplier agreement. These can include a six-month deposit and use of margin accounts.”

The FSB estimates that in recent months one million small businesses have been contacted by their energy companies and informed of more restrictive credit conditions, and a quarter of these were being forced to pay money in advance. EDF, ScottishPower, E.ON and British Gas are among the suppliers to have tightened their payment arrangements.

EDF acknowledged that tougher credit conditions were hampering customers. It said that it was “actively engaged at all levels to find acceptable credit solutions for all parties”.

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