Source · Select Committees · Public Accounts Committee
Recommendation 20
20
Accepted
Insufficient financial regulation contributed to mass energy supplier failures amidst market volatility.
Recommendation
Between July 2021 and May 2022, 29 energy suppliers, including Bulb energy, failed in large part due to lack of financial resilience during periods of market volatility. We asked Ofgem whether the failure of Bulb meant that the energy market was not working as intended, and what could have been done to prevent the worst of the damage caused. Ofgem recognised that the energy market had been under “enormous stress” both domestically and internationally, with energy prices being 15 times what they were in August 2022 which had resulted in interventions across Europe. However, Ofgem suggested that the need for interventions may have been mitigated if there had been better financial regulation of energy companies in place. Ofgem told us it was developing a new system that would provide assurance that the retail energy sector was in a much stronger place. Meanwhile, Ofgem told us that energy companies were required to manage their risks through hedging against the price cap. The NAO report highlighted that this helps energy companies manage any risks from increasing wholesale energy prices. It also explained that it was monitoring the financial resilience of energy suppliers through the use of stress testing in which energy suppliers were financially assessed based on how the company would manage under different energy pricing scenarios. Ofgem also told us that it considered that ensuring suppliers were financially resilient remained the best way to prevent future mass energy supplier collapses.44
Government Response Summary
The government accepted the recommendation, stating it is already implementing a package of measures, including new capital adequacy requirements from Q1 2025, to strengthen the energy retail market's financial resilience and protect consumers.
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.