Source · Select Committees · Public Accounts Committee
Recommendation 9
9
Acknowledged
Ofgem told us that issues began to emerge with the financial resilience of new entrants...
Conclusion
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
Government Response 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.
Government Response
Acknowledged
HM Government
Acknowledged
3.2 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. However, retail compliance is one of several priorities including the price control work, the drive to net zero and policy work following the retail failures. In addition, a proportion of the budget comes from BEIS and is funding for specific activity that cannot be diverted to other areas. 3.3 Over the last three years, Ofgem’s compliance and enforcement teams have broadened their approach to tackle emerging issues as quickly as possible and better manage licensee behaviour, including through a greater use of alternative action and Orders. In this time Ofgem has issued over 60 Orders to suppliers as part of successful action on over 80 supplier cases with penalty/redress payments of over £37.5 million, out of a broader figure of over £300 million across all regulated parties. 3.4 During 2022, Ofgem engaged suppliers in areas including financial resilience, stress testing, asset control and launched a series of market compliance reviews. These activities, and associated compliance engagements, are ongoing but have already initiated enforcement action against TruEnergy, Foxglove, UK Energy Incubator Hub, Utilita and Scottish Power. Ofgem has consulted on, and implemented, several changes to further protect consumers including modifications to licence conditions for new entrants and where suppliers reach certain milestones, updates to the financial responsibility and operational capacity principles, and additional measures for reducing potential supplier failure and better protecting consumers money. 3.5 Ofgem has continued to strengthen its compliance and enforcement capacity with 60 Full Time Equivalent staff in position as of 30 September 2022. 3.6 In terms of customer continuity plans, since June 2022 Ofgem has created a financial resilience compliance team with recruitment underway. This team has compliance, enforcement, energy and financial skill sets and are currently undertaking reviews of ‘fit and proper’, ‘asset control’ and ‘financial resilience’ resulting from financial stress testing scenario 13 monitoring. They liaise closely with Ofgem enforcement and financial monitoring teams to ensure escalated compliance and enforcement activity occurs as and when necessary. 3.7 On supplier business continuity plans (BCPs), Ofgem has already requested information related to all domestic supplier BCPs as part of a current market compliance review into customer service and complaints arrangements (due to be published early in the new year). These are currently being assessed for quality and suitability and Ofgem is planning to put in place improvement action plans where the review identifies any areas of concern. Ofgem will keep the Committee apprised of the results of this review.