“Ofgem’s failure to effectively regulate the energy supplier market has cost households an estimated £2.7 billion – £94 per household – and the cost will increase when the future of Bulb is settled, according to the Public Accounts Committee (PAC). Urgent action is needed to ensure that all customers who use prepayment meters or do not pay their bill directly, such as residents of park homes, will receive their £400 of energy support.
What is more, the PAC suggested Ofgem was not fit for purpose with regard to new responsibilities it was taking on.
In its new report PAC said Ofgem “did not strike the right balance between promoting competition in the energy suppliers market and ensuring energy suppliers were financially resilient”. After problems emerged in 2018 Ofgem took a year to tighten requirements for new suppliers and three years for existing suppliers.
The PAC said the price cap was providing little protection for consumers against energy prices that were high and “get significantly worse through 2023”. The position of vulnerable customers in particular is “unacceptable”. The price cap is intended to ensure that energy suppliers were not making unfair profits and does not cap the energy bills paid by households. It should be reviewed, the committee said.
Dame Meg Hillier MP, Chair of the Public Accounts Committee, said: “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. The PAC wants to see a plan, within six months, for how Government and Ofgem will put customers’ interests at the heart of a reformed energy market, driving the transition to Net Zero.” The PAC said industry insolvency and closure processes (supplier of last resort) kept customers on supply but “came at significant financial cost and some disruption”. It warned “Energy suppliers are still under significant financial strain as a result of the ongoing volatility in the wholesale market and the risk of further exits is high” and said Ofgem and BEIS should review the processes.
The PAC also wants Ofgem to set out its plans to monitor and balance levels of competition and resilience in the energy supplier market, particularly once government intervention in the energy market recedes, which could enable greater competition than is currently possible.
Is Ofgem fit for purpose?
More broadly, the Committee warned it was not convinced that Ofgem yet has the skills and capacity to regulate the energy supplier market.
Ofgem has asked to grow its 1,400 staff because it is taking on responsibility for regulation of the carbon capture and storage and nuclear sectors as well as new schemes like the boiler upgrade scheme. The regulator wants to take a different approach to regulating the energy retail to make it more like banking regulation.
But the PAC said the move “is a very big shift which will require different skills and resources”. Ofgem has asked for more powers to take on the new role but “Some stakeholders note that Ofgem already has extensive powers but does not always use them. For example, Ofgem has not ensured that all suppliers have a customer supply continuity plan in place, setting out how energy supplies for their customers will be managed if the company fails.”
The Committee said it was concerned that neither BEIS nor Department and Ofgem “ have a clear vision of how the energy retail market will work in the best interests of customers during the transition to net zero”. It noted that BEIS is redesigning market arrangements for electricity and new forms of regulation could be required to enable suppliers to offer innovative products and services that support the achievement of net zero. It wants BEIS and Ofgem to outline to the Committee within six months how they will “ensure that they put the short and long-term interest of customers at the heart of their thinking around the transition to net zero, and how they will manage any trade-offs.”
Read the full report here