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Ofgem ‘failed to act against unfit energy suppliers’

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Written by: Emma Lunn
09/12/2021
Inaction by the energy regulator left the market vulnerable to this year’s spike in wholesale prices and resulted in consumers facing a multi-million pound bill, according to Citizens Advice.

A report by the charity found that mistakes and missed opportunities left the energy market in a precarious position when gas prices surged in 2021.

Since the rise in prices, 26 suppliers have collapsed with more being added to the casualty list almost every week.

This has impacted 4 million households and left consumers with a bill of £2.6bn – plus the £1.7bn of taxpayer money set aside for Bulb. Citizens Advice says this will cost the average household about £94.

The charity’s report details multiple instances in which the regulator did not act on evidence of rule-breaking and scaled back enforcement activity even as concerns grew.

For example, as customer service declined in the three years before the crisis, Ofgem only opened one formal customer service investigation. It hasn’t made use of its powers to stop a supplier taking on new customers in relation to customer service concerns since February 2019.

In early 2021, Ofgem introduced new supplier monitoring, financial checks, and protections for customers of collapsed suppliers. Yet only one of the 20 suppliers that failed from August to mid-November 2021 had a Customer Continuity Plan required under these new rules.

In the four years before the crisis (2017-2021), as firms began failing and supplier conduct worsened, the number of people working on enforcement at Ofgem fell by 25%.

Citizens Advice says regulatory failings led to a culture of non-compliance, with slow or missed action in response to evidence of licence breaches and on issues including accurate billing, access to phone lines for customers, and offering prepayment options.

As new suppliers entered the market from 2010 to 2019, Citizens Advice raised repeated concerns about poor practice and financial viability. It called as early as 2013 for a formal review of the licensing regime that accredits new suppliers.

But no review took place until 2018 – with Ofgem only tightening the rules on new entrants in 2019, after 11 supplier failures. It took a further two years to introduce new rules for firms already in the market. Poor practice was rife, with many companies showing clear evidence of financial unsustainability, including firms run out of the owners’ living rooms and kitchens.

Long before this year’s crisis, there was evidence of financial weakness, with a number of suppliers reliant on customer credit balances for working capital. Ofgem’s own analysis showed suppliers held a total of £1.4bn in surplus credit in 2018.

Analysis suggests some consumer balances were excessive. People who contacted Citizens Advice for support, after their supplier failed, had average credit balances of £353, with some customers saying their energy supplier was holding more than £1,000 of their money. According to Ofgem, an average bill payer needs only £150 in credit to cover typical winter usage.

Citizens Advice says lessons must be learned, with changes to how the market is regulated. The charity is calling for an independent review of the causes of the market collapse, including Ofgem’s approach to compliance and enforcement, and its reforms to ensure companies are fit to trade

It also wants a new ‘consumer duty’ making companies accountable for the outcomes their customers experience and action by the government and Ofgem to protect consumers from unnecessarily steep increases to bills to pay for supplier failures.

Dame Clare Moriarty, chief executive of Citizens Advice, said: “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.

“It’s now clear that reform is needed – and this isn’t just about avoiding another crisis. 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.”

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