Citizens Advice has accused Ofgem of a “catalogue of errors” that has left consumers with a multi-billion-pound bill due to the collapse of suppliers.
In a new report, the consumer group has said Ofgem made mistakes and missed opportunities that left the market in a precarious position.
This meant suppliers were in a vulnerable position when gas prices surged in 2021, with 25 suppliers collapsing following this spike. This includes; Zog Energy, Social Energy Supply, Neon Reef, Omni Energy, MA Energy, Zebra Power, Ampoweruk, Bluegreen Energy Services, Goto Energy, Pure Planet, Colorado Energy, Daligas, ENSTROGA, Igloo Energy, Symbio Energy, Hub Energy, Green Network Energy, Simplicity Energy, Avro Energy, Utility Point, People’s Energy, PfP Energy and MoneyPlus Energy.
In total, over four million households saw their supplier exit the market, and a bill of £2.6 billion – excluding the £1.7 billion of taxpayer money set aside in relation to Bulb's special administration. On average, the collapses will cost households around £94, Citizens Advice has warned.
In a statement provided to Current±, Ofgem said: “we accept that the energy market needs reform and quickly - the current system was not designed for this sort of extreme market event. Building on the approach we set out in October at Energy UK and our subsequent open letter to industry, in the next few weeks we will be announcing changes that will demonstrate the seriousness with which we are tackling the pace of change needed, the concerns around the financial resilience of the market, as well as ensuring that fair prices are reflected through the price cap.
“We welcome the opportunity to work alongside all consumer groups, including Citizen Advice, as well as the Government and the energy industry to make the changes needed as we all share the same objective to protect energy consumers now and in the future.”
Citizens Advice’s report outlines a number of times it believes Ofgem should have used its enforcement powers to manage supplier behaviour. This includes declining customer service over the past three years, noting that the regulator only opened one formal customer service investigation during this period.
Ofgem has not used its powers to stop a supplier taking on new customers due to customer service concerns since February 2019.
Another example given is the regulator's introduction of new supplier monitoring in 2021, which saw more stringent financial checks put in place. But of the 20 suppliers to fold between August and mid-November, only one has a customer continuity plan as required under these new rules.
Between 2017 and 2021, the number of people working on enforcement at Ofgem actually fell by 25%, the report claims, further stating that regulatory failings led to a culture of non-compliance, with slow or missed action in response to evidence of licence breaches.
Citizens Advice has also outlined missed opportunities for reform of the energy market, including the introduction of a formal review of the licensing regime that accredits new suppliers. The charity has been calling for such since 2013.
Finally, the report has examined the use of customer money to prop up ailing firms. A number of suppliers were reliant on customer credit balances for working capital, with Ofgem’s analysis showing suppliers held a total of £1.4 billion in surplus credit in 2018.
Customer balances were "excessive", according to Citizens Advice’s analysis, with the average credit balances of those contacting the charity following the collapse of their suppliers sitting at £353. Ofgem states that an average bill payer needs only £150 in credit to cover typical winter usage.
“Energy customers are facing a multi-billion pound bill, in large part because Ofgem missed multiple opportunities to regulate the market and tackle rule breaking by suppliers. Recent wholesale price rises would have been hard to handle in any circumstances, but they need not have led to the collapse of a third of companies in the market,” said Clare Moriarty, chief executive of Citizens Advice.
“It’s now clear that reform is needed - and this isn't just about avoiding another crisis.”
Avro Energy case study
Citizens Advice used collapsed supplier Avro Energy as a case study for the errors it perceives in the energy market.
On ten separate occasions between 2018 and 2021, the charity raised concerns with Ofgem about the company. During this period its customer base grew from 210,900 to 590,000.
In 2018, Citizens Advice issued a formal letter to Ofgem about its concerns around potential breaches of licence conditions by Avro. In the subsequent three years, the charity continued to raise multiple concerns regarding the company’s conduct on transfer blocking, billing errors and poor customer service.
Avro Energy collapsed in September, owing creditors £250 million and leaving consumers with a £679 million bill. This includes £30,000 the company was ordered to pay by Ofgem for failing to comply with Standard Licence Condition 5 in June.
Administrator reports following the supplier shuttering show that it had not hedged, and was instead relied on credit balances to fund its day-to-day operations, Citizens Advice said.
Citizens Advice has called for an independent review into the cause of the market collapse, including Ofgem’s approach to compliance and enforcement.
Additionally a new “consumer duty” – similar to that being introduced by the Financial Conduct Authority – should be brought in. This would make companies accountable for the outcomes their customers experience.
Further action should be taken by both government and Ofgem to protect consumers from unnecessarily steep increase to bills to pay for supplier failures.
“If consumers lack confidence in the energy market, or feel they're getting a bad deal, it will be even harder to transition to net zero. So reform is vital for the future as well as for avoiding the mistakes of the past," added Moriarty.
The report follows Ofgem confirming that mutualisation of the Renewable Obligations has been triggered, as the continued turmoil in the energy supplier sector leaves a shortfall of £218,300,151.73. Of the 28 companies who failed to meet their payment deadlines, 25 have ceased to trade.
High power prices have been driven by shortages of gas throughout Europe creating market volatility. Analysis from Cornwall Insights suggested that average gas prices in October 2021 ranged between three to five times higher than 2019 and 2020, depending on the contract.
With Britain still relying on gas for 34.5% of the electricity mix in 2020, this has had a dramatic knock-on impact on electricity prices, for example, day-ahead wholesale prices averaged at £126.14/MWh in Q3 2021, up 69% from the previous record of £74.85/MWh set in just the previous quarter, according to EnAppSys.
By the end of Q3, the breakeven price of gas was £140/MWh – £195/MWh, almost double the price at the start of the quarter.
This has had an impact on other electricity market costs as well, including the Balancing Mechanism, which saw costs increase 294% year on year for September to November according new analysis from consultancy LCP. These costs will result in higher Balancing Services Use of System (BSUoS) charges, which are passed onto suppliers and ultimately consumers.
Energy users have been largely protected from the spikes by the energy price cap, which is currently set at £1,277 for default tariffs and £1,309 for prepayment customers. In November, Ofgem announced it was to consult on the price cap in light of the number of supplier collapses.
An Ofgem spokesperson said its “top priority is to protect energy consumers and we understand the challenges households and businesses are facing in light of the unprecedented increase in global gas prices.
“Ofgem’s safety net has protected more than 4 million customers, moving them to new suppliers, ensuring they don’t need to worry about their energy supply and protecting their credit balances. In addition, the price cap is protecting millions more from the full impact of high gas prices this winter."