Recommendations & Conclusions
11 items
4
Recommendation
Twenty-Fifth Report - Regulation of ene…
Acknowledged
The price cap is providing only very limited protection to households from increases in the wholesale price of energy. The price cap limits the rates suppliers can charge customers for the standing charge and for each unit of electricity and gas used. The level at which Ofgem sets the price …
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The price cap is providing only very limited protection to households from increases in the wholesale price of energy. The price cap limits the rates suppliers can charge customers for the standing charge and for each unit of electricity and gas used. The level at which Ofgem sets the price cap is largely driven by the wholesale price of energy. In winter 2021–22, prices in the wholesale market were six times their normal level, and by the summer of 2022 were ten times the normal level. In August 2022 Ofgem announced that the price cap for a typical customer paying by direct debit would rise to £3,549 a year in October 2022, from £1,971 in April
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Government response AI summary
The government agrees and states that the price cap reflects the real cost of supplying energy. It notes that the Energy Price Guarantee (EPG) supersedes the cap as the main consumer price protection until March 2024, and it is developing a new approach to consumer …
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HM Treasury
1
Conclusion
Twenty-Fifth Report - Regulation of ene…
Acknowledged
On the basis of a report by the Comptroller and Auditor General, in July 2022 we took evidence from the Department for Business, Energy & Industrial Strategy (the Department) and the Office of Gas and Electricity Markets (Ofgem) on the regulation of energy suppliers.1 This report is based on evidence …
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On the basis of a report by the Comptroller and Auditor General, in July 2022 we took evidence from the Department for Business, Energy & Industrial Strategy (the Department) and the Office of Gas and Electricity Markets (Ofgem) on the regulation of energy suppliers.1 This report is based on evidence collected up to July 2022 and does not take into account September’s announcements of an Energy Price Guarantee to support UK households, or the Energy Bill Relief Scheme to support UK businesses.2 Our snapshot assessment of Ofgem’s regulatory approach and capability still applies, however.
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Government response AI summary
The government agrees with the Committee’s recommendation and details ongoing work to improve market stability and limit the risk of high mutualised costs falling to customers, including changes to licence conditions and enhanced assessment process for supply licence applications.
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HM Treasury
9
Conclusion
Twenty-Fifth Report - Regulation of ene…
Acknowledged
Ofgem told us that issues began to emerge with the financial resilience of new entrants in 2018 and in response it decided first to stop firms who did not have a resilient business model from entering the market, and then determine the ongoing requirements that suppliers already in the market …
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Ofgem told us that issues began to emerge with the financial resilience of new entrants in 2018 and in response it decided first to stop firms who did not have a resilient business model from entering the market, and then determine the ongoing requirements that suppliers already in the market would have to meet. In July 2019, Ofgem started carrying out a qualitative assessment of information provided by potential new entrants. Ofgem introduced new requirements for existing firms in January 2021, including a new financial responsibility principle that made it a legal requirement for suppliers to manage costs that would be mutualised in the event of supplier failure.13 Ofgem told us that with hindsight requirements should have been tighter, but said that it took a long time to raise requirements for firms already operating in the market because it had to balance the need to keep companies financially resilient with ensuring that there was sufficient diversity in the market. This included making sure that the market attracted new entrants and developed new and changing tariffs. It explained that getting this balance right meant that the nature of Ofgem’s ongoing monitoring requirements was a controversial topic within the sector and the length of negotiations reflected the complexity of discussions.14
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Government response AI summary
The government acknowledges the need for resources at Ofgem, noting an additional three staff for retail compliance. However, they indicate resource allocation is complex, with some funding earmarked for specific activities.
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HM Treasury
11
Conclusion
Twenty-Fifth Report - Regulation of ene…
Acknowledged
Ofgem’s proposals have drawn a range of reactions from stakeholders across the sector.17 We received written evidence from suppliers who told us that they welcomed aspects of Ofgem’s proposals to improve financial resilience, such as raising capital adequacy requirements and ring-fencing customer credit balances.18 Some suppliers told us that there …
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Ofgem’s proposals have drawn a range of reactions from stakeholders across the sector.17 We received written evidence from suppliers who told us that they welcomed aspects of Ofgem’s proposals to improve financial resilience, such as raising capital adequacy requirements and ring-fencing customer credit balances.18 Some suppliers told us that there was scope for the reforms to be more ambitious. For example, SSE and E.ON suggested that Renewables Obligation payments should be made more frequently to reduce the costs that would need to be recovered from bill payers via a levy if a supplier fails.19 Some suppliers acknowledged, however, that there was a risk that Ofgem’s reforms could raise costs to consumers. We asked Ofgem about the suggestion from Octopus Energy that ringfencing supplier credit balances could add £15 per year to the bill of every UK customer. Ofgem accepted that asking companies to hold more capital could result in “a pressure on bills” and may increase costs to consumers. It explained that it considered that this was necessary to avoid the cost of supplier failures.20 Ofgem explained that it was developing a framework for assessing how its policies and regulations affect the balance of these trade-offs to allow it to simultaneously increase competition, reward customers for using their energy carefully and encourage innovation.21 Ofgem skills and capacity
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Government response AI summary
Ofgem has already introduced a number of changes to improve market stability and limit the risk of high mutualised costs falling to customers, including changes to licence conditions, an enhanced assessment process for supply licence applications, the Financial Resilience Action Plan, and new requirements on …
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HM Treasury
13
Conclusion
Twenty-Fifth Report - Regulation of ene…
Acknowledged
Ofgem’s headcount was approximately 1,400 in July 2022. This is higher than the 1,246 total staff Ofgem employed on average through 2021–22, and an increase of around 72% from the 816 total staff it employed during 2017–18.25 It had submitted a bid to HM Treasury asking for more resources to …
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Ofgem’s headcount was approximately 1,400 in July 2022. This is higher than the 1,246 total staff Ofgem employed on average through 2021–22, and an increase of around 72% from the 816 total staff it employed during 2017–18.25 It had submitted a bid to HM Treasury asking for more resources to carry out its functions. It told us that this was driven by three factors, only one of which was changing its regulatory regime for the retail energy market to be more proactive, based on the approach to regulation of the financial sector. Ofgem explain that it had also asked for more resources to enable it to implement 17 C&AG’s Report, para 3.15 18 RES 0002, SSE Energy Solutions, 11 July 2022; RES 0009, EDF, 11 July 2022; RES 0007, Centrica 11 July 2022; RES 0005, E.ON, 11 July 2022; RES 0004, Octopus Energy, 11 July 2022. 19 RES 0002, SSE Energy Solutions 11 July 2022; RES 0005, E.ON, 11 July 2022 20 Q 70; RES 0004, Octopus Energy, 11 July 2022 21 Qq 65, 75 22 Qq 100–101 23 Q 32 24 Qq 32, 52 25 Q 100; Ofgem, Annual Report and Accounts 2021–22, HC 489, July 2022 and Ofgem, Annual Report and Accounts 2017–18, HC 1107, June 2018 12 Regulation of energy suppliers new government schemes, such as the Department’s boiler upgrade scheme, and to take on regulatory responsibility for new areas, such as carbon capture and storage and new nuclear power plants.26
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Government response AI summary
The government acknowledges the need for resources at Ofgem, noting an additional three staff for retail compliance. However, they indicate resource allocation is complex, with some funding earmarked for specific activities.
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HM Treasury
14
Conclusion
Twenty-Fifth Report - Regulation of ene…
Acknowledged
We asked Ofgem whether it was able to deliver its plans for regulating energy suppliers using its existing legislation. Ofgem told us that it was testing its existing powers to assess whether it needed additional powers. For example, it explained that it may need more supervisory powers to allow it …
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We asked Ofgem whether it was able to deliver its plans for regulating energy suppliers using its existing legislation. Ofgem told us that it was testing its existing powers to assess whether it needed additional powers. For example, it explained that it may need more supervisory powers to allow it to undertake direct checks on companies it believed were not complying with regulations.27 Some stakeholders told us that they agree that Ofgem needed to be provided with the powers necessary to operate the new regime. For example, Centrica, E.ON and Citizens Advice highlighted Ofgem’s lack of authority over administrators brought in to manage insolvent firms.28 Other stakeholders however noted the risks of extending Ofgem’s powers. Octopus Energy in written evidence highlighted the burden suppliers face producing the significant volume of information Ofgem now requires.29 We received written evidence from Energy UK that told us the energy license already had an extensive range of terms and conditions and there is scope for Ofgem to make more use of existing powers, before adding more.30 For example, Citizens Advice told us that Ofgem had not enforced its own requirements that all suppliers develop a customer supply continuity plan that sets out how its customers will be managed in the event of the supplier failing. Citizens Advice explained that only one of the 20 suppliers that failed before November 2021 had such a plan.31 We asked Ofgem how many of the 26 suppliers left in the market had a customer supply continuity plan in place. Ofgem was unable to give us an exact number, but told us that having a plan was not the issue, but the quality of the plan and ensuring that it was able to stand up to scrutiny. It explained that it was therefore carrying out a customer service compliance review to look at the plans in detail.32 26 Q 100 27 Qq 72–73; C&AG’s Report, para 3.20 28 RES 0007, Centrica plc, 11 July 2022; RES 0006, Citizens Advice, 11 July 2022; RES 0005, E.ON 11 J
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Government response AI summary
The government acknowledges the need for resources at Ofgem, noting an additional three staff for retail compliance. However, they indicate resource allocation is complex, with some funding earmarked for specific activities.
Read full response →
HM Treasury
15
Conclusion
Twenty-Fifth Report - Regulation of ene…
Acknowledged
Energy customers are either on non-default tariffs, where they have made an active choice about their energy tariff, usually fixing it at a certain rate, or on default tariffs, where they are more likely not to have done so. Since 2019, the government has capped the price per unit of …
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Energy customers are either on non-default tariffs, where they have made an active choice about their energy tariff, usually fixing it at a certain rate, or on default tariffs, where they are more likely not to have done so. Since 2019, the government has capped the price per unit of gas and electricity for customers on standard default tariffs. In 2018, the Department determined that bills should be capped following findings from the Competition and Markets Authority that 70% of customers of the six largest energy firms were on expensive default tariffs and customers were paying £1.4 billion more per year than they would be in a fully competitive market. The price cap limits the rates suppliers can charge for the standing charge (the portion of customers’ bills incurred regardless of the amount of gas and electricity used) and for each unit of electricity and gas used. It does not cap individuals’ total bills, which depend on how much energy they use. The price cap also does not cover the energy costs of businesses.33
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Government response AI summary
The government will develop a new approach to consumer protection in energy markets, which will apply from April 2024 onwards, including options such as social tariffs, as part of wider retail market reforms.
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HM Treasury
16
Conclusion
Twenty-Fifth Report - Regulation of ene…
Acknowledged
Ofgem sets the price cap every six months by calculating how much it costs an efficient supplier to provide gas and/or electricity to a customer.34 Ofgem told us that, when setting the cap, it had to reflect the cost at which suppliers buy the energy in the wholesale market. It …
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Ofgem sets the price cap every six months by calculating how much it costs an efficient supplier to provide gas and/or electricity to a customer.34 Ofgem told us that, when setting the cap, it had to reflect the cost at which suppliers buy the energy in the wholesale market. It explained that in winter 2021–22 prices were six times their normal level, and by the summer of 2022 were ten times the normal level.35 In May 2022 Ofgem estimated that the price cap for a typical customer paying by direct debit would rise to around £2,800 a year in October 2022, from £1,971 in April 2022. Ofgem told us that, as a result of energy prices continuing to increase, it expected prices to rise even further.36 In August 2022 Ofgem announced that the energy price cap would increase to £3,549 per year from 1 October 2022. Ofgem warned that while the market remained too volatile to allow it to make projections, the market for gas in winter means that prices could get “significantly worse through 2023”.37
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Government response AI summary
The government acknowledges the committee's recommendation regarding the price cap and states that they will develop a new approach to consumer protection in energy markets from April 2024 onwards, including considering options such as social tariffs.
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HM Treasury
19
Conclusion
Twenty-Fifth Report - Regulation of ene…
Acknowledged
The NAO found that the vast majority of costs resulting from supplier failures was to make up the difference between what suppliers of last resort (SOLRs) could charge consumers under the cap and the cost of purchasing energy on the wholesale market.45 To address this lack of adaptability, in May …
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The NAO found that the vast majority of costs resulting from supplier failures was to make up the difference between what suppliers of last resort (SOLRs) could charge consumers under the cap and the cost of purchasing energy on the wholesale market.45 To address this lack of adaptability, in May 2022 Ofgem set out its preferred position to introduce quarterly, rather than six-monthly changes to the cap. It explained that this will allow suppliers to adjust their prices more frequently to reflect prices in the wholesale market. Ofgem noted that some customers really welcome more frequent changes in the price cap, but others really do not like it. In the longer term, Ofgem told us it may need to continue to adapt the price cap to the changing market and that it may also need to reconsider how it is structured in light of net zero.46 In August 2022, Ofgem announced that it would update the energy price cap every quarter rather than every six months, noting that the change would help provide the stability needed in the energy market and reduce the risk of further large-scale supplier failures.47 Vulnerable customers
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Government response AI summary
The government acknowledges the committee's recommendation regarding the price cap and states that they will develop a new approach to consumer protection in energy markets from April 2024 onwards, including considering options such as social tariffs.
Read full response →
HM Treasury
20
Conclusion
Twenty-Fifth Report - Regulation of ene…
Acknowledged
We were concerned that some energy customers have been disproportionately affected by the energy crisis. For example, we noted that some vulnerable customers rely on prepayment meters but it costs more to administer the cost of energy paid by prepayment than by direct debit, which is reflected in the prices …
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We were concerned that some energy customers have been disproportionately affected by the energy crisis. For example, we noted that some vulnerable customers rely on prepayment meters but it costs more to administer the cost of energy paid by prepayment than by direct debit, which is reflected in the prices these customers pay. Some vulnerable 40 C&AG’s Report, para 2.14; Ofgem, Ofgem updates price cap level and tightens up rules on suppliers | Ofgem, Press release, 26 August 2022 41 Qq 87–89 42 Q 59 43 Q 21 44 Q 60 45 C&AG’s Report, para 3.23 46 Qq 55, 59–60 47 Ofgem, Ofgem confirms changes to the price cap methodology and frequency ahead of new rate to be announced later this month, Press Release, 4 August 2022 Regulation of energy suppliers 15 customers are therefore having to cope with the increase in wholesale prices this year, while at the same time also paying extra on top of that due to their method of paying for energy.48 Other groups of customers have also been disproportionately affected by the crisis. For example, energy provided through district heating systems, where heat is distributed to surrounding homes from a central source, is not covered by the price cap and customers are therefore not protected from price rises.49
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Government response AI summary
The government acknowledges that some energy customers have been disproportionately affected by the energy crisis and states it is using all available levers to ensure vulnerable customers benefit, highlighting the EBSS and alternative funding.
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HM Treasury
22
Conclusion
Twenty-Fifth Report - Regulation of ene…
Acknowledged
We also asked the Department how it would ensure that customers still benefited if they were not the direct billpayers, for example those who live in park homes or in rented accommodation where the rent included bills. The Department recognised that this was an issue that it needed to address, …
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We also asked the Department how it would ensure that customers still benefited if they were not the direct billpayers, for example those who live in park homes or in rented accommodation where the rent included bills. The Department recognised that this was an issue that it needed to address, and that it had included some possible solutions as part of its consultation on the scheme. But it noted that the customers affected represented less than 1% of the market, and that it had a solution for ensuring that 99% of customers were able to benefit from the scheme. The Department committed to using all the levers available to it to make sure that customers were able to benefit from the support available to them, but that “we have to be realistic: we may not be able to guarantee that in every single case”. It told us that if it could not ensure that all customers received and all landlords passed on the £400 benefit then it would consider how to provide support for “the most- difficult-to-access-groups” through one of the other types of support available, such as the Household Support Fund.53 48 Qq 15–16, 21 49 Q 53; Department for Business, Energy & Industrial Strategy, Guidance: Heat networks, Updated 11 April 2022 50 Q 9; C&AG’s Report, para 2.6 51 GOV.UK, Millions of most vulnerable households will receive £1,200 of help with cost of living, May 2022; GOV. UK, Energy Bills Support Scheme explainer 52 Qq 9–10 53 Qq 9–11 16 Regulation of energy suppliers The future of the energy retail market
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Government response AI summary
The government acknowledges the issue of ensuring all customers benefit from energy support, particularly those not direct billpayers, and states it is using all available levers to ensure vulnerable customers benefit, highlighting the EBSS and alternative funding.
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HM Treasury