Source · Select Committees · Public Accounts Committee
Recommendation 2
2
Accepted
Ofgem did not strike the right balance between promoting competition in the energy suppliers market...
Recommendation
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.
Government Response 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 new powers to direct ringfencing of credit balances, if needed.
Government Response
Accepted
HM Government
Accepted
The government agrees with the Committee’s recommendation. place new policies to create a more stable market. This includes proposals for an industry- wide minimum requirement for capital reserves, and other measures to try to minimise the number of supplier failures in future. Ofgem is not proceeding with earlier proposals to ringfence customers’ credit balances but is instead consulting on new powers to direct ringfencing of credit balances, if needed. Given the recent increase in energy prices and volatility, it is important that Ofgem considers whether the current earnings before interest and tax allowance continues to be appropriate for customers. It is in customers’ interests that the allowed return strikes a balance between near-term price protection and encouraging investment in the sector, which benefits customers in the longer term. Ofgem’s financial responsibility reforms are designed to ensure suppliers are prepared for growth and to meet their regulatory obligations, to increase accountability and incentivise responsible and appropriate behaviour from those in senior positions, and to strengthen Ofgem’s effective oversight of the market to ensure Ofgem can identify potential risks to consumers or competition and take timely action where appropriate.