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Energy regulator ‘incompetent’ over supplier failures and price cap design

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26/07/2022
Ofgem has been branded ‘incompetent’ by a group of MPs following a raft of supplier failures, while its design of the energy price cap has also been criticised. Ultimately, this has all led to billpayers picking up the tab.

Between July 2021 and May 2022, 29 energy suppliers collapsed.

In total, 2.4 million customers were moved from 28 failed energy companies to new suppliers, adding £2.7bn (£96 per customer) to energy bills.

Bulb was placed in special administration and the government’s continued support of the seventh largest energy supplier is expected to cost at least £2bn.

The Business, Energy and Industrial Strategy (BEIS) committee’s damning report stated that the collapse of the energy supplier market “could have been mitigated through more robust regulation”.

The group of MPs added: “Ofgem has proved incompetent as the regulatory authority of the energy retail market over the last decade.”

They explained that Ofgem allowed suppliers to enter the market “without ensuring they had access to sufficient capital, acceptable business plans, and were run by individuals with relevant expertise”.

The report further stated that Ofgem “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”.

They added the government “prioritised competition over effective market regulation” and “overlooked Ofgem’s lack of supervision of this essential market”.

However, they did note that Ofgem is going ahead with a major package of regulatory reform “to address its previous shortfalls and boost suppliers’ financial resilience”.

Energy price cap

The influential group of MPs also targeted the energy price cap, stating that its design “contributed to market instability and resulted in suppliers subsidising customers” which was not its intended purpose.

The energy price cap is a limit on the unit rate and standing charge that energy suppliers can charge, but its not a limit on a customer’s bill. Amid soaring wholesale energy costs, the price cap is forecast to rise to £3,244 in October, and above £3,300 in the New Year.

It is expected to be extended beyond 2023 but the BEIS committee wrote that “neither the government nor Ofgem has evaluated its costs and benefits or considered alternative forms of price protection, including a social tariff”.

As such, they urge the government to consider alternative forms of price protection, including a social tariff for the most vulnerable customers and a relative tariff for the rest of the market.

It added that the impact of the energy price crisis on households is “ongoing and severe” and “is likely to cause an unacceptable rise in fuel poverty and hardship this winter”.

While the MPs welcomed the £37bn cost of living support package, they said it is “no longer sufficient to respond to expected price increases come October”.

“The government must immediately update its support, targeting this at customers who are on low incomes, fuel poor, and in vulnerable circumstances, and develop a scheme to support vulnerable customers to accelerate the repayment of energy debt resulting from this crisis,” they wrote.

The government is also urged to assess whether standing charges are appropriate for prepayment customers and should work with suppliers to identify vulnerable prepayment customers at risk of self-disconnection and offer to convert them to credit mode to maintain their supply.

But to conclude, they said that ultimately, the UK “needs to reduce its dependence on imported gas”.

“Energy efficiency is the quickest and most cost-effective way to reduce gas demand and lower energy 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”, they stated.

‘Better protection for the future’

Gillian Cooper, head of energy policy at Citizens Advice, said: “Today’s report underlines what we already know: customers are picking up the tab for chaos in the energy market.

“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.

“Ofgem in turn needs to hold energy companies to account so people aren’t being chased by debt collectors or pushed onto prepayment meters when they can’t keep up with bills.

“In the longer term, the best way the government can protect people from high energy prices is to invest in making homes more energy efficient.”

‘Regime not robust enough’

An Ofgem spokesperson said: “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.

“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.

“We commit to working closely with the committee, government and industry to make sure the balance of trade-offs across the board are carefully considered so that customers are prioritised throughout the current crisis and they have access to the government support they’re entitled to. We are also working with all parts of government and industry on the long-term solution to the energy crisis by moving us away from imports of expensive gas towards a more secure, reliable, home-grown energy system.”

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