Source · Select Committees · Public Accounts Committee
Recommendation 9
9
Accepted
Ofgem identified financial risks during Octopus sale, now monitoring company's resilience.
Conclusion
In October 2022, Ofgem reviewed the proposed sale deal to assess whether Octopus had suitable financial and operational capabilities to ensure consumers’ interests were protected. As part of its review, Ofgem concluded that there was a risk that Octopus’s systems and processes were not robust enough to handle the scale of new customers. It also identified risks around Octopus’s low levels of investor support and rapid growth which had meant that it had a weaker financial position compared with other large suppliers. It concluded that while Octopus could manage the operational risks identified, the financial risks were more difficult to assess. We therefore asked Ofgem whether it had sufficient information on the financial suitability of Octopus. Ofgem told us that it had examined key areas of the Octopus business, including whether the company could cope with the operational changes of taking on Bulb, such as having sufficient capacity within its systems and processes to handle the scale of the new customers. Ofgem told us that it still had questions about whether Octopus could cope operationally but said that it was subject to ongoing monitoring. Ofgem told us that while the sale posed some risks, its view was that there would inevitably be risks with almost any transaction within the current energy market. It explained that it was continuing to monitor the financial performance of the company and Octopus’s progress to be in a more financially resilient position, and that “we are satisfied with what we are seeing”.13 We similarly asked Octopus how it would ensure that the temporary taxpayer funding was repaid and the risks surrounding this. Octopus told us that the ringfencing of Bulb meant that any profit and cash generated would remain in Bulb. Octopus also explained that, in the event of any losses and Bulb needing funding, it was for the Octopus Energy Group to fund it. We asked Octopus how the wider Octopus Energy Group was performing. Octopus responded that i
Government Response Summary
The government agrees with the committee's observation and confirms that Ofgem has implemented a package of measures since 2021 to strengthen supplier financial resilience and improve the retail energy market, including capital adequacy requirements from Q1 2025, and that Ofgem and DESNZ will continue to monitor the impact of these changes.
Government Response
Accepted
HM Government
Accepted
2.1 The government agrees with the Committee's recommendation. Recommendation implemented 2.2 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. 2.3 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. 2.4 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. 2.5 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. 2.6 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 2.7 The department and Ofgem have provided the Committee with regular updates on this work, including via Treasury minutes.