Recommendations & Conclusions
8 items
2
Recommendation
Twenty-Fifth Report - Regulation of ene…
Accepted
Ofgem did not strike the right balance between promoting competition in the energy suppliers market and ensuring energy suppliers were financially resilient. During the 2010s, Ofgem focused on attracting new firms to the sector to increase competition and reduce costs to consumers. Issues first began to emerge with the financial …
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Ofgem did not strike the right balance between promoting competition in the energy suppliers market and ensuring energy suppliers were financially resilient. During the 2010s, Ofgem focused on attracting new firms to the sector to increase competition and reduce costs to consumers. Issues first began to emerge with the financial resilience of new entrants in 2018 but Ofgem did not tighten requirements for new suppliers until 2019, and for existing energy suppliers until 2021. Ofgem acknowledges that it should have tightened requirements earlier, but has found it complex to negotiate with the sector the appropriate balance between competition and resilience. In December 2021, Ofgem published an action plan on financial resilience and in April 2022 it published proposals on measures such as ring-fencing customer credit balances and Renewables Option payments. Many energy firms support Ofgem’s measures to improve financial resilience, and some would support even more stringent measures. Others, however, are concerned that Ofgem’s reforms could lower competition and lead to bigger bills. Ofgem accepts there are trade- offs it needs to consider between resilience and competition and is developing a framework to help it manage these. Recommendation: Ofgem should write to the Committee within six months setting out how it will 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.
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Government response AI summary
The government agrees and states that Ofgem is developing new policies to create a more stable market, including proposals for an industry- wide minimum requirement for capital reserves. Ofgem is not proceeding with earlier proposals to ringfence customers’ credit balances but is instead consulting on …
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HM Treasury
3
Recommendation
Twenty-Fifth Report - Regulation of ene…
Accepted
We are not convinced that Ofgem yet has the skills and capacity it needs to take a more proactive role in regulating the energy supplier market. Ofgem has around 1,400 staff and has submitted a bid to HM Treasury asking for more resources to carry out its functions. This is …
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We are not convinced that Ofgem yet has the skills and capacity it needs to take a more proactive role in regulating the energy supplier market. Ofgem has around 1,400 staff and has submitted a bid to HM Treasury asking for more resources to carry out its functions. This is partly because Ofgem is beginning to administer the Department’s boiler upgrade scheme and is also taking on responsibility for regulation of the carbon capture and storage and nuclear sectors. In response to the 6 Regulation of energy suppliers energy supplier crisis, Ofgem also plans to change its approach to regulating the retail energy market to make it more like the regulation of financial banks. Moving from a reactive model, where Ofgem works mainly with firms determined as being at risk, to a model where all firms operating in the market are assessed and tested, is a very big shift which will require different skills and resources. Ofgem believes it may also need more powers to carry out this role effectively. 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. Recommendation: Ofgem should write to the Committee as part of its Treasury Minute response setting out how much it has increased its capacity to regulate the energy supplier market and what additional activities it is undertaking as a result. As part of this, Ofgem should also set out which suppliers have customer continuity plans in place and its assessment of the quality of these.
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Government response AI summary
The government agrees and describes increasing Ofgem's retail compliance staff, though it notes budgetary limitations. It highlights Ofgem's enforcement actions and the creation of a financial resilience compliance team. It also mentions a current market compliance review into supplier BCPs, with planned improvement action plans.
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HM Treasury
5
Recommendation
Twenty-Fifth Report - Regulation of ene…
Accepted
It is unacceptable that many vulnerable customers, on top of having to pay higher energy prices, face extra challenges working with energy suppliers and accessing benefits designed to help people with their energy bills. Vulnerable customers are most exposed to the rise in energy prices and some also face additional …
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It is unacceptable that many vulnerable customers, on top of having to pay higher energy prices, face extra challenges working with energy suppliers and accessing benefits designed to help people with their energy bills. Vulnerable customers are most exposed to the rise in energy prices and some also face additional costs. Many vulnerable customers rely on prepayment meters, whose tariffs are typically 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. In addition, some vulnerable customers are not covered by the price protection available to other customers, or able to easily access the benefits available. For example, those who use district heating Regulation of energy suppliers 7 systems are not covered by the price cap. The Department is unable to explain how it will 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. Recommendation: The Department and Ofgem should urgently review the support that government has committed to providing to vulnerable households in relation to energy supplies and assess where administrative issues might prevent support being provided in a timely manner. It should, as part of the Treasury Minute response, update the Committee on their findings and how they are addressing them.
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Government response AI summary
The government agrees and outlines existing schemes like the Energy Bills Support Scheme (EBSS) and the Energy Price Guarantee (EPG) to support vulnerable households. It also details efforts to ensure those with traditional prepayment meters receive vouchers, and alternative funding for those not eligible for …
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HM Treasury
6
Recommendation
Twenty-Fifth Report - Regulation of ene…
Accepted
We are concerned that the Department and Ofgem do not yet have a clear vision of how the energy retail market will work in the best interests of customers during the transition to net zero. The UK is seeking to transform its energy generation system away from gas, towards domestic …
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We are concerned that the Department and Ofgem do not yet have a clear vision of how the energy retail market will work in the best interests of customers during the transition to net zero. The UK is seeking to transform its energy generation system away from gas, towards domestic and renewable sources of energy. The Department is looking at the appropriate market arrangements for electricity in the future as the UK transitions to net zero. New forms of regulation could also be required to enable suppliers to offer innovative products and services that support the achievement of net zero, such as by encouraging households to consume electricity at times of lower demand. The Department is revisiting its Energy Retail Market Strategy to take account of the lessons from recent months, and aims to publish a revised strategy once the market has stabilised. We note the challenge that will be involved in designing and regulating the energy system during the transition to net zero. But it will nonetheless be essential that the Department and Ofgem seek an appropriate balance between measures to control cost, improve resilience and encourage innovation in the interests of consumers. Recommendation: The Department and Ofgem should, within six months, write to us to outline how they will, on an ongoing basis, 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. 8 Regulation of energy suppliers 1 Ofgem’s regulation of the energy supplier market
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Government response AI summary
The government will work with consumer groups and industry from April 2024 to consider the best approach to consumer protection, including different forms of targeted discounts, as part of wider retail market reforms. Ofgem has developed a consumer interest framework (CIF) which is currently undergoing …
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HM Treasury
7
Conclusion
Twenty-Fifth Report - Regulation of ene…
Accepted
We asked Ofgem how it ensured the needs of customers were considered in the event of an energy supplier failing. Ofgem told us that the SOLR and SAR processes had three main priorities: ensuring everyone was kept on supply; ensuring customers’ credit balances were protected; and ensuring disruption to customers …
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We asked Ofgem how it ensured the needs of customers were considered in the event of an energy supplier failing. Ofgem told us that the SOLR and SAR processes had three main priorities: ensuring everyone was kept on supply; ensuring customers’ credit balances were protected; and ensuring disruption to customers was minimised. It noted that the SOLR process had not been designed to run for 29 companies in such a short space of but that it had held up really well. It also said that, “by and large” customers kept their supply and their credit balances were transferred, but recognised that there was more work to be done to ensure that customers who were in debt to failed suppliers were treated fairly and reasonably.9 It explained that it was considering other factors which might reduce the costs to customers in the event of future failures, but that these could require legislative change. We questioned Ofgem about the likelihood of future supplier failures. Ofgem told us that it did not think that it would be right for it to speculate on this, but noted that the energy market was still facing a period of high and volatile prices, and the risk was high. It explained that, of the 26 suppliers still left in the market, it was “quite possible” that there would be further exits.10 5 Q 27; C&AG’s Report, para 13 6 Qq 45–46; C&AG’s Report, para 2.8, Figure 8 7 C&AG’s Report, para 2.15 8 C&AG’s Report, para 11 9 Q 37, 40, 44 10 Qq 33, 72, 78–79 10 Regulation of energy suppliers Balancing competition and supplier resilience
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Government response AI summary
Ofgem and BEIS continue to work closely to ensure consumers are protected in the event of energy supplier failures through the SoLR and SAR processes, and have already introduced changes to licence conditions, assessment processes, and monitoring of financial resilience.
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HM Treasury
10
Conclusion
Twenty-Fifth Report - Regulation of ene…
Accepted
Following the supplier failures that occurred in 2021, Ofgem implemented further measures to strengthen the financial resilience of the market. In December 2021 Ofgem published an action plan on financial resilience that set out how Ofgem would improve its collection and reporting of information on suppliers, and also introduced stress …
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Following the supplier failures that occurred in 2021, Ofgem implemented further measures to strengthen the financial resilience of the market. In December 2021 Ofgem published an action plan on financial resilience that set out how Ofgem would improve its collection and reporting of information on suppliers, and also introduced stress tests to assess how robust suppliers would be to shocks.15 Subsequently, in April 2022 Ofgem published proposals to ring-fence customer credit balances and Renewables Obligations payments (which are made by suppliers that do not source a sufficient proportion of their energy from renewable sources), to reduce the scope for suppliers to operate with unsustainable business models and lower the cost consumers would have to pay if a supplier fails.16 11 C&AG’s Report, para 1.10 12 Qq 22–23, 25 13 Q 23; C&AG’s Report, para 3.7 and 3.9 14 Qq 23, 27, 75 15 C&AG’s Report, para 3.11; Ofgem, Action plan on retail financial resilience, 15 December 2021 16 C&AG’s Report, para 3.13; Ofgem, Renewables Obligation (RO) | Ofgem and Ofgem, Update to December Action Plan: Customer Credit Balances and Renewables Obligation protection, 14 April 2022 Regulation of energy suppliers 11
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Government response AI summary
Ofgem has already introduced changes to improve market stability, including changes to license conditions, an enhanced assessment process for supply licence applications, introduction of the Financial Resilience Action Plan, and new requirements on asset ownership.
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HM Treasury
12
Recommendation
Twenty-Fifth Report - Regulation of ene…
Accepted
Ofgem told us that in order to undertake the functions being asked of it and to “play the role we want to play” in the sector, it would need different resources and different skills in future.22 It explained that its past approach to regulating the energy sector had largely been …
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Ofgem told us that in order to undertake the functions being asked of it and to “play the role we want to play” in the sector, it would need different resources and different skills in future.22 It explained that its past approach to regulating the energy sector had largely been reactive, in that it had worked mainly with companies identified as being under stress. It told us that it was changing its regulatory approach so it would assess the financial resilience and business management of every company and then respond accordingly.23 Ofgem told us that the decision to change from a reactive model that looked at individual cases to a model similar to that in banking, where all firms are regularly monitored and assessed, was a “very big shift” that would require Ofgem to build its staff, skills and systems. Ofgem had already spent some time working with the Bank of England to identify the changes it needed to make and the skills this would require.24
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Government response AI summary
Ofgem has undertaken a prioritisation exercise to flex resource where possible and in November 2022 approved an additional three full time equivalent staff for Retail Compliance focusing on financial resilience. Target implementation date: January 2023
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HM Treasury
21
Recommendation
Twenty-Fifth Report - Regulation of ene…
Accepted
We asked Ofgem what it was doing to support vulnerable customers. Some stakeholders criticised Ofgem’s decision to add the SOLR cost levy to the electricity standing charge when customers cannot influence this cost by reducing their energy usage. Ofgem told us that it was examining the impact on different groups …
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We asked Ofgem what it was doing to support vulnerable customers. Some stakeholders criticised Ofgem’s decision to add the SOLR cost levy to the electricity standing charge when customers cannot influence this cost by reducing their energy usage. Ofgem told us that it was examining the impact on different groups of vulnerable customers of spreading the cost of supplier failures across the standing charge and the volumetric charge. It explained that it was also working closely with government on the package of support available to customers.50 In May 2022, as part of its package of measures to help households during the cost of living crisis, the Government announced that all UK energy customers would receive £400 of support with their energy bills from October 2022 through an expansion of the Energy Bills Support scheme.51 We asked the Department how it would ensure that this support reached the customers it was intended to help, particularly those with prepayment meters. The Department told us that “a large fraction” of customers who use prepayment meters would receive the payment automatically and that it would adopt this approach this where possible. It told us that where this was not possible, it had worked through what the right option would be to ensure that customers still benefited from the support available, including whether to use vouchers similar to those used in other schemes for customers on prepayment meters. It explained that it thought that it had a wide enough range of options to ensure that all prepayment customers to access the same benefit as others.52
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Government response AI summary
The government is using all the levers available to make sure that vulnerable customers benefit from the energy support available, including the Energy Bills Support Scheme (EBSS) and the Energy Price Guarantee (EPG).
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HM Treasury