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Ofgem’s “regulatory failures” cost billpayers £2.7bn

The energy watchdog was “too slow” to prevent supplier bankruptcies, MPs said.

By Harry Clarke-Ezzidio

Failures in planning and regulation at Ofgem have come “at a considerable cost to billpayers”, MPs have warned.

Ofgem regulates Britain’s fragile retail energy market, in which various suppliers have gone bust in recent months and customers are paying record high bills – even following government intervention to cap prices. The watchdog must “urgently learn lessons” from its failures to protect customers from the “volatile” energy market, the public accounts committee (PAC) warned in a report released on Sunday (13 November).

As wholesale gas prices have soared over the last year 29 consumer energy providers have gone bust, affecting over four million customers. Throughout the 2010s Ofgem had a “low bar” for new suppliers entering the market and the regulator “did not undertake detailed scrutiny of… applicants’ financial situation”, meaning that many unfit energy providers were allowed to market their services, the PAC report said.

This problem was apparent from as early as 2018, and Ofgem, the report notes, was “too slow to act”; it only tightened requirements placed on new suppliers in 2019, and for existing ones in 2021. The cost of covering for bankruptcies caused by Ofgem’s “failure to effectively regulate” the market has cost the taxpayer £2.7 billion, equivalent to around £94 per customer.

“Energy suppliers are still under significant financial strain as a result of the ongoing volatility in the wholesale market,” the PAC report said, noting the effect that the Russian invasion of Ukraine has had on global energy prices. “And the risk of further exits is high.”

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The Labour MP Meg Hillier, chairwoman of the PAC, 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.”

Customers will suffer continuously high bills as a result of Ofgem’s poor regulation and planning, Hillier added: “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.”

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Ofgem’s problems extend beyond its poor oversight over providers, the report said. Its procedures for how suppliers deliver energy to some of the country’s most vulnerable customers are “unacceptable”.

The regulator introduced a price cap in 2019 to limit how much suppliers could charge customers for their services, in an attempt to negate profiteering incentives in the sector, but the report says this is “providing only [a] very limited protection to households from increases in the wholesale price of energy”.

This has had a disproportionately negative effect on households with lower incomes. Vulnerable customers, who are more likely to rely on top-up prepayment meters for their energy, face a double burden: of having both a higher price cap than those on fixed tariffs (because it costs more for suppliers to operate their meters), and of feeling any increases in the price cap immediately. The price cap has been raised on every possible occasion since winter 2020.

The PAC’s report is not the first time MPs have questioned Ofgem’s capability. Earlier this year the Business, Energy and Industrial Strategy (BEIS) Committee concluded that Ofgem had proved “incompetent as the regulatory authority”.

In a similarly damning vein, the PAC concluded: “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.” The committee said it would like to see a plan from Ofgem and the government within six months, outlining how they will “put customers’ interests at the heart of a reformed energy market, driving the transition to net zero”.

Perhaps the biggest challenge facing the energy supplier market will be the push towards net-zero greenhouse gas emissions, to limit global warming, as the industry looks to move towards domestic and renewable sources of energy. There are fears that the bad precedent Ofgem has set could be repeated the next time the market shifts. “We note the challenge that will be involved in designing and regulating the energy system during the transition to net zero,” the committee wrote in its recommendations, “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.”

Ofgem said in a statement that protecting customers “has always been and continues to be” its core focus, adding that while the sector remains “volatile” this winter “the market is now in a much more resilient position, partly due to robust steps we’ve taken to reduce the risk of future supplier failures and to raise the bar on entry for new suppliers.” It added: “We will continue to evolve how we regulate the market as Britain shifts away from imported fossil fuels to an independent, secure and homegrown energy system.”

[See also: Wes Streeting: “After a decade of decline, Labour will make the NHS fit for the future”]