Ofgem has proved “incompetent as the regulatory authority” according to a new report from the Department of Business, Energy and Industrial Strategy (BEIS) select committee.
The Energy pricing and the future of the Energy Market report finds that suppliers were allowed to enter the market without access to sufficient capital or acceptable business plans, and were run by individuals without relevant expertise.
“The regulator enabled poorly capitalised suppliers to be overly reliant on customer credit balances and operate with inadequate hedging, leaving the market ill-equipped to absorb wholesale price increases,” states the report, which can be read in full here.
“The rules that were in place were not enforced and Ofgem did not understand the business models of the suppliers it is mandated to supervise.”
Additionally, the government prioritised competition over effective market regulation, overlooking Ofgem’s lack of supervision of the energy market.
“While the unprecedented rise in global gas prices would have resulted in market exits under almost any regulatory system, we have been clear and transparent about the fact that suppliers and Ofgem’s previous financial resilience regime were not robust enough. This contributed to some of the supplier failures since August 2021,” Ofgem stated in response to the report.
“No regulator can, or should, guarantee companies will not fail in a competitive market but we are working hard to reform the entire market, as well as closely scrutinising and holding individual energy suppliers to account, to further strengthen the regulatory regime. We’re pleased the committee has recognised the major scale and reach of these reforms which are already driving positive change across the market on behalf of customers.”
‘Customers are picking up the tab for chaos’
The report follows the collapse of 29 suppliers between July 2021 and May 2022 against a backdrop of record high wholesale energy prices, driven by a gas crisis that has been exacerbated by the Russian invasion of Ukraine.
Through the Supplier of Last Resort (SoLR) mechanism, 2.4 million customers from 28 of these collapsed suppliers have been placed with a new company. This is expected to add £2.7 billion (£96 per customer) to energy bills.
Bulb – Britain’s seventh largest supplier – was too big for the SoLR mechanism, and therefore became the first energy supplier to be placed into the Special Administration Regime. Currently, the continued support of Bulb is expected to cost at least £2 billion. Whilst some of this cost will be recovered through the sale of the company, remaining costs are to be recovered through a levy on energy bills.
“Today’s report underlines what we already know: customers are picking up the tab for chaos in the energy market,” said Gillian Cooper, head of Energy Policy at Citizens Advice.
“Citizens Advice repeatedly sounded the alarm on Ofgem’s failures which contributed to this mess, and we’re glad to see they’ve beefed up their rules in response. With huge hikes to bills expected this autumn, the government needs to be ready to act again. It must also overhaul the process for managing supplier failures so families are better protected in the future.”
The cost of these supplier collapses has added to already surging energy bills for consumers, with the price cap jumping by 54% at the beginning of April, to £1,971.
With wholesale prices still high and continuing to rise, the energy price cap is expected to increase to £3,244 in October and remain elevated following this. Research from Cornwall Insight for example suggested it would grow further to £3,363 for Q1 2023.
The BEIS select committee welcomed the government’s May 2022 support package – which includes £400 for households in October funded through a windfall tax on oil and gas companies – but said that it is no longer sufficient to respond to expected price increases come October.
Similar concerns have been raise by those throughout the energy sector, with trade association Energy UK recently calling on the government to rollout more help for consumers, arguing that the problem is now “too big for any industry to meet”.
Key recommendations to bolster energy market regulation
The select committee’s report lays out eight core recommendations for strengthening the energy market. These include;
- Improving Ofgem’s regulatory oversight, its decision making processes, the use of its powers and the quality of its governance
- The regulator proactively reporting to the select committee on how it is ensuring effective accountability and transparency, explaining key decision and policy concerns on an ongoing basis
- Ofgem should also regularly report to BEIS on how it is meeting its duties and inform ministers of any risks associated with government strategy
- The government should publish its long-delayed Strategy and Policy Statement for Ofgem, clearly delineating the responsibilities between the regulator and BEIS
- Ofgem should publish proposals on a capital adequacy regime and monitor suppliers’ risk management strategies
- It should upskill its workforce to implement its regulatory reforms effectively and proportionately
- The regulator should publish a more robust impact analysis of its proposals for suppliers to ringfence customer credit balance and be explicit about the implications of this on energy bills and competition, consider the cumulative impact of its reforms
- Finally, the government should bring forward legislation to increase the frequency of Renewable Obligation payments and ensure the Energy Retail Market Strategy is focused on net zero, rather than switching
“We wholeheartedly welcome the Committee’s conclusions that significant reform of the supplier market is needed, particularly at a time where spiralling energy bills are expected this winter,” said So Energy co-founder Simon Oscroft in response to these recommendations.
“In particular, we welcome the Committee’s calls on Ofgem to publish more robust analysis ahead of key upcoming decisions such as their customer credit ringfencing proposals. We also support the Committee’s recommendation to undertake an immediate review of the costs and benefits of the current price cap to inform decisions about its operation and to consider whether a social tariff would better protect vulnerable customers than the current arrangements.”
Energy efficiency and eying a social tariff
The report highlights a number of additional areas where policy support could make a difference to supporting customers, not least further support for energy efficiency measures. This would be the most cost-effective and quickest way to reduce Britain’s dependence on gas and lower bills.
“The absence of a home insulation programme is an unacceptable gap in policy that must be rectified. We reiterate our previous calls for the Government to implement urgent, far-reaching, and long-term measures to retrofit the UK housing stock,” the report notes.
Beyond this, the government should immediately update the support on offer for consumers, in particular those who are on low incomes, the fuel poor and the vulnerable, including developing a scheme to support customers to accelerate the repayment of energy debt created by the energy crisis.
The select committee has called on government to publish its overdue Fairness and Affordability call for evidence, alongside moving legacy policy costs to taxation and assessing whether standing charges are appropriate for prepayment customers.
In June, the Climate Change Committee also called for moving legacy policy costs into general taxation, which could both help reduce bills for those on the lowest incomes and support heat decarbonising by shifting subsidy costs from electricity.
Ofgem should work with suppliers ahead of winter to identify prepayment customers that are at risk of self-disconnection and offer to convert them to credit mode, continued the select committee’s report.
Finally, it notes that the design of the price cap has contributed to market instability. The Energy Bill included the provision to extend the price cap beyond 2023, but neither the government nor Ofgem has evaluated the costs and benefits of such a move, or considered alternative forms of price protection, the report states.
The government should look into other forms such as a social tariff for the most vulnerable customers and a relative tariff for the rest of the market.
