Recommendations & Conclusions
5 items
8
Conclusion
Twenty-Fifth Report - Regulation of ene…
Deferred
In the decade after it was opened to competition, the UK energy supplier market consisted of six large energy companies and a similar number of smaller suppliers. Since 2010, smaller companies have entered the domestic energy supplier market in greater numbers.11 Ofgem told us that a small number of energy …
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In the decade after it was opened to competition, the UK energy supplier market consisted of six large energy companies and a similar number of smaller suppliers. Since 2010, smaller companies have entered the domestic energy supplier market in greater numbers.11 Ofgem told us that a small number of energy suppliers took advantage of customer loyalty to generate profits of up to 8%, equivalent to nearly £250 on top of the cost of energy. In 2016 it had therefore decided to prioritise opening up the energy market to new suppliers, in order to increase competition. We noted that there was a consensus between Ofgem and the Department about the need to increase competition in the market, but questioned the Department as to whether it should have foreseen the consequences. The Department told us that there was ultimately a trade-off between maximising levels of competition, and ensuring maximal resilience, and that managing the trade-off for the benefit of customers was the role of Ofgem. It also told us that, while hindsight suggested that the balance between competition and resilience should have been set in a different place, in its view the decision to create competition in the market was right.12
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Government response AI summary
Ofgem is looking to put in place new policies to create a more stable market and will write to the Committee within six months, including proposals for an industry-wide minimum requirement for capital reserves, and other measures to try to minimise the number of supplier …
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HM Treasury
17
Recommendation
Twenty-Fifth Report - Regulation of ene…
Deferred
Ofgem told us that, in its view, the price cap had been a huge benefit for customers and had done a lot of good for them over the last six months, and that while the price cap could not stop rising energy prices, it had “mitigated them somewhat”. It explained …
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Ofgem told us that, in its view, the price cap had been a huge benefit for customers and had done a lot of good for them over the last six months, and that while the price cap could not stop rising energy prices, it had “mitigated them somewhat”. It explained that the price cap had prevented suppliers from immediately being able to put up their prices in response to the increases in wholesale prices, which meant price rises were staggered, helping customers to manage them.38 It also explained that, more broadly, the price cap limited suppliers’ profit margin to 2%, whereas in 2015–16 some suppliers were charging margins of up to 8%.39 However, between the price cap’s introduction in 2019 and April 2022, a typical customer’s bill nonetheless increased by 78%, from £1,105 per year to £1,971. The subsequent 80% increase in the price cap to £3,549 in October will mean it 33 Q 59; C&AG’s Report, para 1.6 and 2.6, Figure 3 34 C&AG’s Report, para 1.7 35 Qq 21, 88 36 Q 56; C&AG’s Report, para 2.14 37 Ofgem, Ofgem updates price cap level and tightens up rules on suppliers, Press release, 26 August 2022 38 Qq 21, 55 39 Q 59 14 Regulation of energy suppliers will have increased 221% between 2019 and October 2022.40 We asked the Department whether it had considered introducing a cap on the amount that customers pay on their overall bills rather than the profits that suppliers could make. The Department told us that this would create a crisis elsewhere in the energy system, and that it would require an “almost complete reinvention of the way our energy market works”.41 Ofgem told us that it had to reflect costs in the setting of the price cap, but that the Government had put in place a series of measures, such as the Energy Bill Support Scheme, as a way of mitigating those rises as best it could. We also asked the Department if anything more could be done to support businesses that are not protected by the price cap and find they cannot afford their energy bills. The Department
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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
18
Recommendation
Twenty-Fifth Report - Regulation of ene…
Deferred
Ofgem told us that the price cap had not been sufficiently adaptable to the “once in a generation change” in wholesale prices during the winter of 2021–2022.43 We asked Ofgem whether it had considered the possibility of high wholesale energy prices in designing the price cap. Ofgem told us that …
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Ofgem told us that the price cap had not been sufficiently adaptable to the “once in a generation change” in wholesale prices during the winter of 2021–2022.43 We asked Ofgem whether it had considered the possibility of high wholesale energy prices in designing the price cap. Ofgem told us that it had envisaged that there would be changes in wholesale costs, and put in place what it thought would be sufficient mitigations, including considering reducing the enforcement of the price cap in extreme circumstances. But it recognised that these mitigations had not considered the scale of the changes that had been seen in the energy market, or the circumstances in winter 2021–22.44
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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.
Read full response →
HM Treasury
23
Conclusion
Twenty-Fifth Report - Regulation of ene…
Deferred
The UK government aims to reduce greenhouse gas emissions to achieve net zero emissions by 2050.54 In April 2022, the Government set out its plans to reduce the UK’s vulnerability to international oil and gas prices, and accelerate the UK’s progress to net zero, by reducing the UK’s dependence on …
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The UK government aims to reduce greenhouse gas emissions to achieve net zero emissions by 2050.54 In April 2022, the Government set out its plans to reduce the UK’s vulnerability to international oil and gas prices, and accelerate the UK’s progress to net zero, by reducing the UK’s dependence on imported oil and gas and moving towards domestic sources of power, such as renewables.55 The Department told us that this shift was the longer-term underlying solution to challenges relating to energy security. Ofgem also told us that it wanted a retail market that could cope in a world where the country has more renewables and more energy storage, and where it was asking customers to buy and sell energy in different ways, such as flexing the times they use electricity to match times when demand is lowest.56 Overall Ofgem wanted to achieve: a fair price for energy for consumers; a resilient energy market; a low-cost transition to a net-zero; and an improvement in service standards for customers.57
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Government response AI summary
The government agrees with the general aims and commits to work with consumer groups and industry to consider the best approach to consumer protection in the energy market from April 2024, as part of wider retail market reforms, and notes Ofgem's existing consumer interest framework.
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HM Treasury
25
Conclusion
Twenty-Fifth Report - Regulation of ene…
Deferred
In July 2021, the Department published its Energy Retail Market Strategy for the 2020s, which set out its vision for a retail market which enabled net zero. In December 2021 the Department announced it needed to refresh the strategy to take account of the lessons from recent months and launched …
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In July 2021, the Department published its Energy Retail Market Strategy for the 2020s, which set out its vision for a retail market which enabled net zero. In December 2021 the Department announced it needed to refresh the strategy to take account of the lessons from recent months and launched a call for evidence with the aim of publishing a new strategy once the market had stabilised.60 The Department told us that in order to deliver net zero, it needed to ensure the energy system supported innovation whilst balancing resilience, flexibility and cost. We therefore asked the Department and Ofgem how they intended to manage the transition towards renewable energy sources.61 Ofgem recognised that it would be important to consider how best to influence changes in customer behaviour. It explained that, for example, people would need to be rewarded for 54 Department for Business, Energy & Industrial Strategy, Net Zero Strategy: Build Back Greener, October 2021 55 Department for Business, Energy & Industrial Strategy, British Energy Security Strategy, April 2022 56 Qq 61–62, 99 57 Q 102 58 C&AG’s Report, Figure 1; Ofgem, What drives wholesale electricity prices in Britain?, 15 July 2016 59 Qq 96, 99 60 C&AG’s Report, para 3.17 61 Qq 2–4, 61, 99 Regulation of energy suppliers 17 being willing to charge their electric vehicles at different times, such as when the wind is blowing or when demand is low. It committed to working with the Department in addressing this issue. Ofgem also told us that in the future customers are likely to use and be charged for energy differently, for example through more flexible tariffs, and that this might require different forms of pricing regulation.62 62 Qq 61, 99 18 Regulation of energy suppliers
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Government response AI summary
The government will work with consumer groups and industry to consider the best approach to consumer protection in the energy market from April 2024 as part of wider retail market reforms, while Ofgem has developed a consumer interest framework (CIF) as a basis for any …
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HM Treasury