Source · Select Committees · Public Accounts Committee
Recommendation 2
2
Accepted
Require Ofgem and Department to outline steps promoting energy market competition and financial resilience.
Conclusion
Ofgem’s failure to ensure that energy suppliers were financially resilient resulted in costs to energy consumers and taxpayers when these energy companies failed. To encourage new suppliers into the market and encourage price competition and innovation, Ofgem took a ‘low bar’ approach to licencing new retail energy suppliers. Between 2010 and May 2022, at least 73 new energy suppliers entered the market. However, over the same period, at least 65 suppliers exited the market. Between July 2021 and May 2022, 29 energy suppliers (including Bulb) failed, affecting nearly four million households. This has resulted in an estimated cost of £2.7 billion to use the SoLR process to transfer customers over to new energy suppliers, in addition to the estimated cost of £3.02 billion of taxpayer funding for placing Bulb in SAR and supporting its wholesale energy requirements up until 31 March 2023. Government expects to recover £2.96 billion of the taxpayer funding for the Bulb process from Octopus in September 2024. If Octopus repays the £2.96 billion in full, the government will be left with an estimated shortfall of £246 million (including a charge for accrued interest) which the government expects to recover from energy consumers. Ofgem asserts that it has introduced measures to test the financial resilience of energy suppliers and the standard of service they provide more effectively, and that these will apply to all suppliers in future. Ofgem considers 6 Bulb Energy that monitoring and assessing the financial and operational resilience of suppliers is the best means to address the risk of supplier failure and hence reduce the burden on taxpayers and energy consumers. But this needs to be balanced with the need to promote healthy competition between suppliers. Recommendation 2: By the end of the year, Ofgem and the Department should write to the Committee, setting out the steps they are taking to promote healthy competition in the energy market while only granting licences t
Government Response Summary
The government states that Ofgem has implemented a package of measures since 2021 to strengthen supplier financial resilience, including customer credit balance ringfencing and capital adequacy requirements taking effect by Q1 2025. Ofgem is also undertaking a Non-Domestic Market Review and published a statutory consultation in December.
Government Response
Accepted
HM Government
Accepted
The government agrees with the Committee's recommendation. Recommendation implemented As set out in the Energy Security Plan 2023, the government will deliver an energy retail market that works better for consumers, is more resilient and investable, and supports wider energy system transformation. This includes creating a market that is better prepared for future wholesale price volatility and better able to shield consumers from the costs of supplier failure. At the same time, a return to competition and profitability for well-run suppliers that offer value for consumers. Since 2021 Ofgem has implemented a package of measures to strengthen the financial resilience of retail energy companies. These reforms will benefit consumers by ensuring a better balance of risks between supply licensees and consumers and, in doing so, reduce the likelihood and cost of widespread failures. A resilient, profitable, investable market is also essential for sustainable competition, where energy retailers have incentives to innovate in the pursuit of net zero and receive a reasonable profit as they drive up consumer service standards. Ofgem has introduced: • Enhanced licence application process and milestone assessments • Rules to require licensees to have sufficient control of their assets to reduce costs for consumers in the event of insolvency. • Enhanced monitoring of supplier finances including stress testing, a proactive reporting framework of Trigger Points, and Annual Adequacy Self-Assessments. • Renewable Obligation receipts ringfencing • Licence modifications to direct Customer Credit Balance ringfencing in certain circumstances • Capital adequacy requirements, including a common minimum capital requirement, due to take effect from Q1 2025, with the Capital Floor, Target, and associated compliance framework. Ofgem and the Department will continue to work closely to monitor the impact of these changes and identify the need for any further measures to improve the financial resilience of suppliers. Ofgem is currently undertaking a Non-Domestic Market Review which includes the market conditions faced by business customers. Ofgem published their statutory consultation on 7 December in alignment with government’s own consultation on expanding business access to redress. Both consultations will close at the end of January 2024 and Ofgem and DESNZ are in constant communication to ensure results are shared and acted upon in a timely manner The department and Ofgem have provided the Committee with regular updates on this work, including via Treasury minutes.