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Regulator to clampdown on profiteering energy firms

Emma Lunn
Written By:
Emma Lunn

Ofgem CEO Jonathan Brearley says energy companies shouldn’t pay shareholder dividends until the energy crisis eases off.

Writing for the Sunday Times yesterday (16 July 2023), Brearley set out the regulator’s expectations for energy firms as the UK comes out of the energy crisis which began in 2021 when a number of small energy firms went bust. The situation worsened when Russia invaded Ukraine in February 2022, with Brearley saying the UK has “seen an energy crisis genuinely unprecedented since at least the 1970s”.

Brearley said: “Over the last four years, energy suppliers made large losses of around £4bn due to a mixture of unsustainable market competition, Covid, and price volatility in 2021/22. This meant Ofgem, as the energy regulator, had to move quickly to keep the market solvent and protect consumers from the cost and disruption of supplier failures. The price cap is designed to allow efficient suppliers to recover reasonable costs and no more than that.”

The energy price cap sets a maximum price that suppliers can charge customers for each kilowatt hour (kWh) of energy they use, limiting the amount of profit they can make. It isn’t a maximum bill, however, and currently stands at £2,074 a year for the typical household. It has fallen back from the record high of £3,549 last year, although this was over-ridden by the Government’s energy price guarantee of £2,500 a year.

Brearley said: “To ensure fair cost recovery, earlier this year we allowed suppliers to recover costs incurred through the market turbulence of previous years. This cost recovery, alongside the usual regulated profit margin, means suppliers are likely to make significant profits this year.”

Brearley said that energy firms needed to recover costs and to make reasonable profits for there to be a “sustainable and competitive market” for consumers.

However, he wrote to suppliers last week to say that the sector must now reciprocate the unprecedented support customers of the sector were given by taxpayers when wholesale prices increased rapidly. Brearley said this means ensuring falling prices are passed on to consumers and also stepping up to deliver excellent customer service, in particular to the most vulnerable.

Brearley added: “Equally, those companies that are not yet sufficiently financially resilient should not pay dividends until they have the financial resources in place to deal with future price shocks.

“All companies need to work hard to avoid the costs that hit all energy customers in the event they go bust. Customers deserve a stable and financially resilient energy market, and we will take action against any company that pays out to their shareholders while taking unnecessary financial risks.”

Ofgem is poised to act and quickly adjust the price cap if it sees undue rewards across the sector as prices fall and profits return.

Looking ahead, Brearley said the regulator was working with the Government to explore reforms to price controls that could retain price protection but with greater flexibility and resilience for consumers.

He concluded: “In the long-term, as we look to a world where energy markets are likely to continue to be volatile, we will need to find new solutions that both keep the lights on and ensure consumers get a reasonable deal.”