PAC: Ofgem failures “come at considerable cost to energy billpayers” 

In a report today the Public Accounts Committee calls on the Department for Business, Energy and Industrial Strategy and Ofgem to say how they will make “the energy retail market work in the best interests of customers during the transition to net zero” after finding that failures at the energy regulator have come “at a considerable cost to billpayers”.  

Since July 2021, 29 energy suppliers have failed, affecting around 4 million households. Customers have been left to pay the £2.7 billion cost of supplier failures. This means an extra £94 per household, a cost that will very likely increase. The Committee found that this was due to “Ofgem’s failure to effectively regulate the energy supplier market”.  Ofgem “did not strike the right balance between promoting competition in the energy suppliers market and ensuring energy suppliers were financially resilient”.  Despite problems with the financial resilience of energy retailers emerging in 2018 Ofgem did not tighten requirements for new suppliers until 2019, and for existing suppliers until 2021. By this point wholesale gas and electricity prices increased to unprecedented levels. 

The price cap “is providing only very limited protection to households from increases in the wholesale price of energy”, and Ofgem expects prices could “get significantly worse through 2023”. The Committee says BEIS and Ofgem should “review the costs and benefits of the price cap from a consumer’s perspective” to inform decisions about the future of energy price controls. The position of vulnerable customers, who already pay higher energy prices, is “unacceptable”.  

Dame Meg Hillier MP, Chair of the Public Accounts Committee, said: “It is true that global factors caused the unprecedented gas and electricity prices that have caused so many energy supplier failures over the last year, at such terrible cost to households. But the fact remains that we have regulators to set the framework to shore us up for the bad times.  

“Problems in the energy supply market were apparent in 2018 - years before the unprecedented spike in prices that sparked the current crisis, and Ofgem was too slow to act. Households will pay dear, with the cost of bailouts added to record and rising bills. The PAC wants to see a plan, within six months, for how Government and Ofgem will put customers’ interests at the heart of a reformed energy market, driving the transition to Net Zero.” 

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PAC report conclusions and recommendations:  

5.                  Ofgem’s failure to effectively regulate the energy supplier market has cost households an estimated £2.7 billion, with further costs expected. Prior to 2019, Ofgem’s approach to licensing new energy suppliers used a low-bar for new entrants and it did not undertake detailed scrutiny of licence applicants’ financial situation. Ofgem’s current best estimate of the cost of the 28 suppliers that have exited the market is £2.7 billion, which equates to around £94 per customer. These costs are being recovered from customers through a charge on their energy bills. Government spent £0.9 billion running Bulb Energy during 2021-22 and budgeted an additional £1 billion for 2023-23. The final cost to customers of government support for Bulb Energy will not be known until it is sold or exits the market by other means. The SOLR and SAR processes ensured that customers did not experience a discontinuation of their supply, but they came at significant financial cost, and some disruption. Energy suppliers are still under significant financial strain as a result of the ongoing volatility in the wholesale market and the risk of further exits is high.  

Recommendation: Ofgem and the Department should review the SOLR and SAR processes to ensure that they have learned the lessons from recent experiences and report back to the Committee as part of their Treasury Minute response on what action they are taking as a result.   

6.                  Ofgem did not strike the right balance between promoting competition in the energy suppliers market and ensuring energy suppliers were financially resilient. During the 2010s, Ofgem focused on attracting new firms to the sector to increase competition and reduce costs to consumers. Issues first began to emerge with the financial resilience of new entrants in 2018 but Ofgem did not tighten requirements for new suppliers until 2019, and for existing energy suppliers until 2021. Ofgem acknowledges that it should have tightened requirements earlier, but has found it complex to negotiate with the sector the appropriate balance between competition and resilience. In December 2021, Ofgem published an action plan on financial resilience and in April 2022 it published proposals on measures such as ring-fencing customer credit balances and Renewables Option payments. Many energy firms support Ofgem’s measures to improve financial resilience, and some would support even more stringent measures. Others, however, are concerned that Ofgem’s reforms could lower competition and lead to bigger bills. Ofgem accepts there are trade-offs it needs to consider between resilience and competition and is developing a framework to help it manage these.   

Recommendation: Ofgem should write to the Committee within six months setting out how it will monitor and balance levels of competition and resilience in the energy supplier market, particularly once government intervention in the energy market recedes, which could enable greater competition than is currently possible.  

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7.                  We are not convinced that Ofgem yet has the skills and capacity it needs to take a more proactive role in regulating the energy supplier market. Ofgem has around 1,400 staff and has submitted a bid to HM Treasury asking for more resources to carry out its functions. This is partly because Ofgem is beginning to administer the Department’s boiler upgrade scheme and is also taking on responsibility for regulation of the carbon capture and storage and nuclear sectors. In response to the energy supplier crisis, Ofgem also plans to change its approach to regulating the retail energy market to make it more like the regulation of financial banks. Moving from a reactive model, where Ofgem works mainly with firms determined as being at risk, to a model where all firms operating in the market are assessed and tested, is a very big shift which will require different skills and resources. Ofgem believes it may also need more powers to carry out this role effectively. Some stakeholders note that Ofgem already has extensive powers but does not always use them. For example, Ofgem has not ensured that all suppliers have a customer supply continuity plan in place, setting out how energy supplies for their customers will be managed if the company fails.   

Recommendation: Ofgem should write to the Committee as part of its Treasury Minute response setting out how much it has increased its capacity to regulate the energy supplier market and what additional activities it is undertaking as a result. As part of this, Ofgem should also set out which suppliers have customer continuity plans in place and its assessment of the quality of these.  

8.                  The price cap is providing only very limited protection to households from increases in the wholesale price of energy. The price cap limits the rates suppliers can charge customers for the standing charge and for each unit of electricity and gas used. The level at which Ofgem sets the price cap is largely driven by the wholesale price of energy. In winter 2021-22, prices in the wholesale market were six times their normal level, and by the summer of 2022 were ten times the normal level. In August 2022 Ofgem announced that the price cap for a typical customer paying by direct debit would rise to £3,549 a year in October 2022, from £1,971 in April 2022. It expects prices could get significantly worse through 2023. Ofgem considers the price cap to be a huge benefit for customers, and that it has made a substantial difference over the last six months in managing price rises. However, the price cap was brought in to ensure that energy suppliers were not making unfair profits and does not cap the energy bills paid by households. Since the cap was introduced, a typical customer’s energy bill has risen by 221% and is predicted to further increase in 2023. Ofgem is moving from updating the price cap every six months, to every quarter, which would make the cap more adaptable to the market but means more frequent price changes for customers.   

Recommendation: Within the next six months, the Department and Ofgem should review the costs and benefits of the price cap from a consumer’s perspective to inform decisions about the future of the price controls in the supplier market, including the energy price guarantee.  

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9.                  It is unacceptable that many vulnerable customers, on top of having to pay higher energy prices, face extra challenges working with energy suppliers and accessing benefits designed to help people with their energy bills. Vulnerable customers are most exposed to the rise in energy prices and some also face additional costs. Many vulnerable customers rely on prepayment meters, whose tariffs are typically more expensive than those paid by direct debit because the systems used to run them cost more which Ofgem reflects in the cost of energy. In addition, some vulnerable customers are not covered by the price protection available to other customers, or able to easily access the benefits available. For example, those who use district heating systems are not covered by the price cap. The Department is unable to explain how it will ensure that all customers who use prepayment meters or do not pay their bill directly, such as residents of park homes, will receive their £400 of energy support.   

Recommendation: The Department and Ofgem should urgently review the support that government has committed to providing to vulnerable households in relation to energy supplies and assess where administrative issues might prevent support being provided in a timely manner. It should, as part of the Treasury Minute response, update the Committee on their findings and how they are addressing them.  

10.              We are concerned that the Department and Ofgem do not yet have a clear vision of how the energy retail market will work in the best interests of customers during the transition to net zero. The UK is seeking to transform its energy generation system away from gas, towards domestic and renewable sources of energy. The Department is looking at the appropriate market arrangements for electricity in the future as the UK transitions to net zero. New forms of regulation could also be required to enable suppliers to offer innovative products and services that support the achievement of net zero, such as by encouraging households to consume electricity at times of lower demand. The Department is revisiting its Energy Retail Market Strategy to take account of the lessons from recent months, and aims to publish a revised strategy once the market has stabilised. We note the challenge that will be involved in designing and regulating the energy system during the transition to net zero. But it will nonetheless be essential that the Department and Ofgem seek an appropriate balance between measures to control cost, improve resilience and encourage innovation in the interests of consumers.  

Recommendation: The Department and Ofgem should, within six months, write to us to outline how they will, on an ongoing basis, ensure that they put the short and long-term interest of customers at the heart of their thinking around the transition to net zero, and how they will manage any trade-offs.