'Fail': 3 damning findings on Ofgem's regulation of the energy market

‘Fail’: 3 damning findings on Ofgem’s regulation of the energy market

Ofgem’s failures to effectively regulate energy suppliers as far back as 2018 have “come at a considerable cost” to households, a watchdog has said. (PA)

As gas and electricity bills have risen, energy regulator Ofgem has faced growing criticism for its role in the cost of living crisis over the year.

Now a new report by a House of Commons committee has accused Ofgem of a long-term “failure to effectively regulate the energy supply sector” – something that has come at a “significant cost to bill payers”.

Here, Yahoo News UK sets out three damning findings by the Public Accounts Committee (PAC), which released the report on Sunday.

Regulatory failings have cost each customer £94

The PAC said the regulatory problems date back to 2018, when Ofgem had a “low level” of licensing new energy suppliers entering the market. There was a lack of “detailed scrutiny of their finances”, the report said.

It added that Ofgem “did not tighten requirements for new suppliers until 2019 and for existing energy suppliers until 2021”.

Around 29 energy suppliers have subsequently failed since July last year, affecting around four million households.

And customers have been left to pay the £2.7bn cost of the faults – through their energy bills – at an extra £94 per household. This is a cost that is “very likely to increase,” the PAC said.

A 221% increase in the “price ceiling”

Ofgem’s energy price cap limits the prices suppliers can charge customers for the standing charge – the fixed daily amount a household must pay for access to energy – and for each unit of gas and electricity used. The cap is mainly driven by the wholesale price of energy which of course has risen enormously.

Its latest price cap, announced in August, meant the average annual energy bill would have risen to £3,549 from October 1, up from £1,277 at the start of the year.

Protesters outside Ofgem's headquarters in Canary Wharf London.  Ofgem has confirmed an 80.06 per cent increase in the energy price cap, sending the average household's annual bill from £1,971 to £3,549 from October.  Picture date: Thursday, August 25, 2022.

Protesters outside Ofgem’s headquarters in Canary Wharf following the price cap announcement in August. (PA)

This was so high that the government was forced to step in with its energy price guarantee and replaced the price ceiling. The scheme, which will end in April, currently subsidizes each household’s energy bill so that they are capped at an average of £2,500.

And the PAC played down the ineffectiveness of the price cap: “Ofgem believes that the price cap is a huge benefit to customers and has made a significant difference over the last six months in dealing with price rises.

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“However, the price cap was brought in to ensure that energy suppliers did not make unfair profits and did not limit the energy bills that households pay.

“Since the cap was introduced [in January 2019]a typical customer’s energy bill has risen by 221% and is predicted to increase further by 2023.”

Vulnerable customers are left vulnerable

The PAC said the situation for vulnerable customers, who pay higher energy prices, was “unacceptable”.

The report said: “Many vulnerable customers rely on pre-paid meters, whose tariffs are usually more expensive than those paid by direct debit because the systems used to run them cost more, which Ofgem reflects in the cost of energy.”

It added that other groups are disproportionately affected. “For example, energy supplied through district heating systems, where heat is distributed to surrounding homes from a central source, is not subject to the price cap and customers are therefore not protected from price increases.”

What have PAC and Ofgem said about the report?

Labor MP Meg Hillier, chair of the PAC, said: “It is true that global factors caused the unprecedented gas and electricity prices that have caused so many energy supplier failures over the past year, at such terrible cost to households, but the fact remains that we have regulators to set the framework to support us for the bad times.

“Problems in the energy supply market were evident in 2018 – years before the unprecedented price rise that triggered the current crisis, and Ofgem was too slow to act.

“Households will pay dearly, with the cost of bailouts adding to records and rising bills.”

MP Meg Hillier speaks at a fringe event on the fourth day of the Labor Party's annual conference at the Brighton Center in Brighton.  Image dated: Tuesday, September 24, 2019. Image should read: Isabel Infantes / EMPICS Entertainment.

“Too slow to act”: Meg Hillier at Ofgem. (PA)

The PAC said in its report that Ofgem “urgently needs to learn lessons to protect customers and prevent them from having to foot the bill in the event of future failures”. It called for a plan to be issued within the next six months on how it intends to protect customers going forward.

In a statement to Yahoo News UKOfgem said: “Protecting consumers has always been and continues to be our core focus. In May 2022 Ofgem commissioned and published in full an independent review of our actions and we are implementing all recommendations. This and other reports acknowledged where Ofgem could have gone longer and faster on market reforms and covered many of the same issues and recommendations as the PAC report.

“The sheer scale and pace of this once-in-a-generation global energy price shock meant that supplier failures were seen worldwide. However, the Supplier of Last Resort system [which guarantees continued energy supply when a customer’s provider fails] acted as an important safety net for UK consumers, ensuring they continued to receive energy when their supplier failed and maintained their credit balances. This safety net inevitably involved costs.”

It also claimed “the market is now in a much more resilient position, in part because of robust steps we have taken to reduce the risk of future supplier failures and to raise the bar for new suppliers”.

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