Energy debt rises again to £4.55bn, underlining gaps in current response

Domestic energy debt reached a record £4.55bn in Q4 2025, rising by ~£63m from the previous quarter, and an 18% year-on-year increase.

More than 3.6 million customers are now in debt or arrears, with average balances climbing to £1,266. Notably, 76% of this debt has no repayment arrangement in place, leaving the majority of customers without a structured pathway to resolve their arrears.

The evidence points to financial distress not being identified early enough. Customers are not just struggling with repayment, many are fundamentally unable to absorb the cost of energy.

Smart PPM data indicates that a significant number of households are attempting to self-manage arrears through unsafe behaviours such as self-disconnection.

Without systemic change, debt levels will continue to increase. Customers are falling into debt faster than the system can respond.

While broader relief measures remain important, there's also a clear need for sustained, targeted supplier engagement and earlier intervention. Suppliers should invest in understanding customer risk profiles and act on this insight at pace. At the same time, government action must go beyond short-term relief toward measures that deliver meaningful, system-wide impact.

Key insights from Ofgem’s latest data

The latest indicators highlight how embedded and severe the challenge has become:

• The industry debt book has expanded for 13 consecutive quarters, rising by an average of £209m per quarter, reflecting a structural affordability issue rather than short-term volatility
• Average debt balances rose 10% to £1,266, with electricity arrears reaching £1,773 and gas £1,512, demonstrating worsening financial stress
• Even customers with repayment arrangements hold significant debt (~£800 on average), up 12% year-on-year, suggesting repayment plans alone are not reducing overall balances
• The share of customers repaying debt via prepayment meters continues to decline, with Q4 2025 marking the lowest point in recent years

This likely reflects a combination of factors, including regulatory changes introduced in 2023, shifts in supplier behaviour toward longer-term repayment plans, and growing awareness of the risks of self-disconnection

A growing and structural challenge

Domestic energy debt has risen by 246% since 2020, with £3.4bn sitting without repayment arrangements

This suggests that current affordability assessments and debt pathways are no longer containing financial distress, instead allowing arrears to accumulate.

A growing population of “debt-locked” customers is emerging, with households stuck in a repayment loop. The affordability gap continues to widen, while supplier and government actions remain slow, unresponsive and insufficiently targeted.

Policy progress is not keeping pace

Regulatory and government actions have the right intent, but the timing and scale are not aligned to change the debt trajectory.

The aim of such interventions, rules and guidance is to shift from reactive debt management to proactive debt prevention and targeted relief.

In practice, current and planned actions are intended to:

1. Writing off a meaningful portion of accumulated debt
2. Reducing ongoing bill costs
3. Strengthening supplier responsibility for early intervention
4. Making repayment more manageable
5. Protecting vulnerable customers

Several measures are due to take effect from 2026, including:

1. Ofgem Debt Relief Scheme (DRS)

A ‘reset and reform’ programme intended to write off up to £500m of qualifying households’ (~195,000) historical debt. The aim is to reduce arrears for the most financially stressed households.

2. Energy Company Obligation (ECO)

From April 2026, ECO will no longer be charged via energy bills. The intention is to reduce structural bill costs, increase disposable income, and lower the risk of customers falling into debt.

3. Renewables Obligation (RO)

From 2026/27 through to 2028/29, the government intends to cover 75% of RO costs. This should reduce pass-through costs on bills, helping to alleviate bill pressure and slow debt accumulation.

4. Warm Home Discount (WHD)

Reopens in October 2026, providing eligible customers with a £150 one-off discount applied to winter energy bills. The aim is to reduce winter cost pressures and help prevent customers falling into arrears.

5. Citizens Advice (CA)

Provides access to a range of grants and benefits for qualifying households, supporting customers in managing and reducing their debt.

An opportunity for suppliers to act

As we move into the summer months, debt growth typically begins to slow. Lower consumption and improved affordability create an opportunity for suppliers to re-engage with customers and strengthen operations.

This is not about large-scale transformation, but about building a deeper understanding of customers and embedding more targeted, proactive approaches.

Debt is often a symptom of upstream process failures. Suppliers should focus on identifying where debt is created across the customer journey and introduce controls to detect early warning signs, such as changes in usage or payment behaviour, and act quickly.

While large-scale government intervention will ultimately shape the trajectory, suppliers remain on the front line today. There are still meaningful levers they can pull to improve outcomes.

Actions suppliers may want to consider

1. Strengthen operational fundamentals

Improve smart meter performance
Ensure commissioning is optimised at installation and post-install, with clear remediation triggers for meter health failures. Better use of smart data can also support earlier customer engagement and reduce the risk of debt forming.

Remove friction in the customer journey
Make it easier for customers to recognise debt risk, engage, and act. This could include simplifying contact journeys (e.g. one-click access, digital channels), and aligning payment plans more closely to affordability using smart and income data. Engagement should not be a one-off response to debt, but embedded as part of ongoing customer interaction.

Prioritise billing accuracy
Prevent avoidable debt by improving billing accuracy and transparency. This includes intervening before inaccurate bills are issued, increasing the use of actual reads over estimates, and simplifying bill formats so customers clearly understand what they owe and why.

2. Strengthen customer financial resilience

Increase proactive, affordability-based engagement
Develop a clearer understanding of the drivers of debt and tailor support accordingly. Stronger customer profiling and segmentation can help identify risk earlier and enable more meaningful conversations. Clear signposting to government support schemes should form part of this approach.

Enhance early intervention strategies
Move beyond basic segmentation to more dynamic, risk-based approaches that reflect changes in payment behaviour, consumption and broader economic pressures. This enables more targeted, timely intervention across large and growing debt portfolios.

3. Build long-term stability

Review buying and pricing strategies
Stress test hedging approaches, strengthen governance, and ensure pricing decisions are aligned to customer risk profiles. Clear communication is critical so customers understand price changes and how to respond.

Refresh customer propositions
Explore more flexible tariff structures that help smooth bill impacts, particularly where smart metering enables greater innovation. Propositions should be targeted and supported by clear, timely communication.

Use automation to improve engagement quality
Automate routine processes such as balance notifications, reminders and follow-ups to free up capacity for more meaningful, tailored customer interactions.

Invest in system resilience and decarbonisation
Strengthen systems to handle increased demand more efficiently, while continuing to invest in long-term capability. Where possible, link low-carbon solutions to tangible customer benefits and communicate these clearly.

Where next?

Domestic energy debt is not a new challenge, but it is an urgent one.

Without decisive, targeted action, debt will continue to rise, as it has for 13 consecutive quarters.

Suppliers that strengthen customer understanding, act earlier, and embed more targeted interventions will be best placed to slow the trajectory. Ultimately, reducing debt will depend on combining improved supplier action with more effective, timely and coordinated system-wide support.

To discuss what rising debt means for your organisation and where to focus next, contact Rachel Littlewood.