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Ofgem proposes ways to help energy firms survive and safeguard customers

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25/11/2022
The independent energy regulator today issued a series of proposals for energy companies that it said would also help consumers by reducing the risk that their suppliers would go bust.

Ofgem is suggesting that suppliers be required to hold a minimum amount of capital in case the market slid into crisis; that the companies ringfence any renewable obligation receipts rather than use those funds; and that the watchdog would more closely monitor the use of credit balances to avoid misuse. (Some in the sector had called for the credit balances to be ringfenced by the suppliers.)

More than two dozen energy companies have failed during the current crisis, costing taxpayers an estimated £9.2bn.

Jonathan Brearley, Ofgem’s chief executive, said: “The energy crisis has had a profound impact on the sector, its business models, our approach to its regulation, and the way we think about risk. 

“These proposals will provide protections, checks and balances for consumers, suppliers and the entire sector to create a more stable market. We want suppliers to be able to be innovative and dynamic, while also making sure they are financially stable, and that customers’ money is protected.”

Protect customers but keep energy market healthy

Citing the need to maintain “a delicate balance”, Brearley said that while the regulator wanted “well-capitalised businesses that can weather price fluctuations, we also don’t want to block the market for new suppliers or force suppliers to sit on lots of capital they could be investing in innovative ideas.”

 At a time of extremely high energy bills, he added: “I encourage all retailers to work with us to move the sector to a more vibrant and resilient position.” 

Ofgem said it would update some of its policies as a way to help protect consumers and still keep a healthy energy market.

One of these policies is a review of the EBIT (earnings before interest and taxes) aspect of the 1.9% energy price cap to ensure a fair rate of return on suppliers’ investments while keeping profits reasonable. 

The regulator said a variable rate may be adopted to take into account fluctuations in market prices. And it suggested updating the price cap to reflect how fees are recovered from users of electricity networks, from a half-hourly variable price to a flat rate based on volume. 

Buy energy in advance

Ofgem also proposed a temporary Market Stabilisation Charge that it said would encourage companies to buy energy in advance as a hedge on price rises.

The regulator said it would seek feedback from stakeholders in the energy sector and others. It added that it hoped to publish any changes next spring.

Dissenting voices

Not everyone was pleased by the proposals.

Chris O’Shea, chief executive of Centrica, which owns British Gas, said a failure to ringfence customers’ credit balances amounted to an “abdication of responsibility.”

O’Shea said: “Customers would be appalled to learn their money was being used to fund day-to-day business activities, but that’s exactly what’s happening in some companies, and it undermines confidence in the market.”

‘Are Ofgem’s proposals in consumers’ interest?

Richard Neudegg, director of regulation at Uswitch.com, said: “It’s sensible to ensure that suppliers have sufficient financial backing to operate in a challenging energy market, but Ofgem must be careful it doesn’t add too many costs that ultimately have to be paid by consumers.

“Ofgem’s proposal to keep a protective ring around suppliers for another year comes at the detriment of potentially fewer fixed deals for customers below the Energy Price Guarantee. If wholesale prices fall, consumers may lose out.”

If the wholesale price keeps dropping, he said, “Ofgem’s so-called short-term stabilisation measures mean that suppliers have far less incentive to offer longer-term fixed deals below April’s Energy Price Guarantee average bill of £3,000.

“The energy market won’t be able to deliver for customers if competition and innovation is shut off indefinitely and the Government’s subsidies cannot be in place forever. This move raises questions as to whether Ofgem’s stabilisation proposals are in the best interest for consumers, at a time when people are already struggling.”

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