Source · Select Committees · Public Accounts Committee
Twenty-Fifth Report - Regulation of energy suppliers
Public Accounts Committee
HC 41
Published 13 November 2022
Recommendations
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 …
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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.
HM Treasury
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3
Accepted
We are not convinced that Ofgem yet has the skills and capacity it needs to...
Recommendation
We are not convinced that Ofgem yet has the skills and capacity it needs to take a more proactive role in regulating the energy supplier market. Ofgem has around 1,400 staff and has submitted a bid to HM Treasury asking …
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Government Response Summary
The government agrees and describes increasing Ofgem's retail compliance staff, though it notes budgetary limitations. It highlights Ofgem's enforcement actions and the creation of a financial resilience compliance team. It also mentions a current market compliance review into supplier BCPs, with planned improvement action plans.
HM Treasury
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4
Acknowledged
The price cap is providing only very limited protection to households from increases in the...
Recommendation
The price cap is providing only very limited protection to households from increases in the wholesale price of energy. The price cap limits the rates suppliers can charge customers for the standing charge and for each unit of electricity and …
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Government Response Summary
The government agrees and states that the price cap reflects the real cost of supplying energy. It notes that the Energy Price Guarantee (EPG) supersedes the cap as the main consumer price protection until March 2024, and it is developing a new approach to consumer protection in energy markets from April 2024 onwards.
HM Treasury
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5
Accepted
It is unacceptable that many vulnerable customers, on top of having to pay higher energy...
Recommendation
It is unacceptable that many vulnerable customers, on top of having to pay higher energy prices, face extra challenges working with energy suppliers and accessing benefits designed to help people with their energy bills. Vulnerable customers are most exposed to …
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Government Response Summary
The government agrees and outlines existing schemes like the Energy Bills Support Scheme (EBSS) and the Energy Price Guarantee (EPG) to support vulnerable households. It also details efforts to ensure those with traditional prepayment meters receive vouchers, and alternative funding for those not eligible for EBSS.
HM Treasury
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6
Accepted
We are concerned that the Department and Ofgem do not yet have a clear vision...
Recommendation
We are concerned that the Department and Ofgem do not yet have a clear vision of how the energy retail market will work in the best interests of customers during the transition to net zero. The UK is seeking to …
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Government Response Summary
The government will work with consumer groups and industry from April 2024 to consider the best approach to consumer protection, including different forms of targeted discounts, as part of wider retail market reforms. Ofgem has developed a consumer interest framework (CIF) which is currently undergoing user research.
HM Treasury
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12
Accepted
Ofgem told us that in order to undertake the functions being asked of it and...
Recommendation
Ofgem told us that in order to undertake the functions being asked of it and to “play the role we want to play” in the sector, it would need different resources and different skills in future.22 It explained that its …
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Government Response Summary
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. Target implementation date: January 2023
HM Treasury
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17
Deferred
Ofgem told us that, in its view, the price cap had been a huge benefit...
Recommendation
Ofgem told us that, in its view, the price cap had been a huge benefit for customers and had done a lot of good for them over the last six months, and that while the price cap could not stop …
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Government Response Summary
The government will develop a new approach to consumer protection in energy markets, which will apply from April 2024 onwards, including options such as social tariffs, as part of wider retail market reforms.
HM Treasury
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18
Deferred
Ofgem told us that the price cap had not been sufficiently adaptable to the “once...
Recommendation
Ofgem told us that the price cap had not been sufficiently adaptable to the “once in a generation change” in wholesale prices during the winter of 2021–2022.43 We asked Ofgem whether it had considered the possibility of high wholesale energy …
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Government Response Summary
The government will develop a new approach to consumer protection in energy markets, which will apply from April 2024 onwards, including options such as social tariffs, as part of wider retail market reforms.
HM Treasury
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21
Accepted
We asked Ofgem what it was doing to support vulnerable customers.
Recommendation
We asked Ofgem what it was doing to support vulnerable customers. Some stakeholders criticised Ofgem’s decision to add the SOLR cost levy to the electricity standing charge when customers cannot influence this cost by reducing their energy usage. Ofgem told …
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Government Response Summary
The government is using all the levers available to make sure that vulnerable customers benefit from the energy support available, including the Energy Bills Support Scheme (EBSS) and the Energy Price Guarantee (EPG).
HM Treasury
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Conclusions (16)
1
Conclusion
Acknowledged
On the basis of a report by the Comptroller and Auditor General, in July 2022 we took evidence from the Department for Business, Energy & Industrial Strategy (the Department) and the Office of Gas and Electricity Markets (Ofgem) on the regulation of energy suppliers.1 This report is based on evidence …
Government Response Summary
The government agrees with the Committee’s recommendation and details ongoing work to improve market stability and limit the risk of high mutualised costs falling to customers, including changes to licence conditions and enhanced assessment process for supply licence applications.
7
Conclusion
Accepted
We asked Ofgem how it ensured the needs of customers were considered in the event of an energy supplier failing. Ofgem told us that the SOLR and SAR processes had three main priorities: ensuring everyone was kept on supply; ensuring customers’ credit balances were protected; and ensuring disruption to customers …
Government Response Summary
Ofgem and BEIS continue to work closely to ensure consumers are protected in the event of energy supplier failures through the SoLR and SAR processes, and have already introduced changes to licence conditions, assessment processes, and monitoring of financial resilience.
8
Conclusion
Deferred
In the decade after it was opened to competition, the UK energy supplier market consisted of six large energy companies and a similar number of smaller suppliers. Since 2010, smaller companies have entered the domestic energy supplier market in greater numbers.11 Ofgem told us that a small number of energy …
Government Response Summary
Ofgem is looking to put in place new policies to create a more stable market and will write to the Committee within six months, including proposals for an industry-wide minimum requirement for capital reserves, and other measures to try to minimise the number of supplier failures in future.
9
Conclusion
Acknowledged
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 …
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.
10
Conclusion
Accepted
Following the supplier failures that occurred in 2021, Ofgem implemented further measures to strengthen the financial resilience of the market. In December 2021 Ofgem published an action plan on financial resilience that set out how Ofgem would improve its collection and reporting of information on suppliers, and also introduced stress …
Government Response Summary
Ofgem has already introduced changes to improve market stability, including changes to license conditions, an enhanced assessment process for supply licence applications, introduction of the Financial Resilience Action Plan, and new requirements on asset ownership.
11
Conclusion
Acknowledged
Ofgem’s proposals have drawn a range of reactions from stakeholders across the sector.17 We received written evidence from suppliers who told us that they welcomed aspects of Ofgem’s proposals to improve financial resilience, such as raising capital adequacy requirements and ring-fencing customer credit balances.18 Some suppliers told us that there …
Government Response Summary
Ofgem has already introduced a number of changes to improve market stability and limit the risk of high mutualised costs falling to customers, including changes to licence conditions, an enhanced assessment process for supply licence applications, the Financial Resilience Action Plan, and new requirements on asset ownership.
13
Conclusion
Acknowledged
Ofgem’s headcount was approximately 1,400 in July 2022. This is higher than the 1,246 total staff Ofgem employed on average through 2021–22, and an increase of around 72% from the 816 total staff it employed during 2017–18.25 It had submitted a bid to HM Treasury asking for more resources to …
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.
14
Conclusion
Acknowledged
We asked Ofgem whether it was able to deliver its plans for regulating energy suppliers using its existing legislation. Ofgem told us that it was testing its existing powers to assess whether it needed additional powers. For example, it explained that it may need more supervisory powers to allow it …
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.
15
Conclusion
Acknowledged
Energy customers are either on non-default tariffs, where they have made an active choice about their energy tariff, usually fixing it at a certain rate, or on default tariffs, where they are more likely not to have done so. Since 2019, the government has capped the price per unit of …
Government Response Summary
The government will develop a new approach to consumer protection in energy markets, which will apply from April 2024 onwards, including options such as social tariffs, as part of wider retail market reforms.
16
Conclusion
Acknowledged
Ofgem sets the price cap every six months by calculating how much it costs an efficient supplier to provide gas and/or electricity to a customer.34 Ofgem told us that, when setting the cap, it had to reflect the cost at which suppliers buy the energy in the wholesale market. It …
Government Response Summary
The government acknowledges the committee's recommendation regarding the price cap and states that they will develop a new approach to consumer protection in energy markets from April 2024 onwards, including considering options such as social tariffs.
19
Conclusion
Acknowledged
The NAO found that the vast majority of costs resulting from supplier failures was to make up the difference between what suppliers of last resort (SOLRs) could charge consumers under the cap and the cost of purchasing energy on the wholesale market.45 To address this lack of adaptability, in May …
Government Response Summary
The government acknowledges the committee's recommendation regarding the price cap and states that they will develop a new approach to consumer protection in energy markets from April 2024 onwards, including considering options such as social tariffs.
20
Conclusion
Acknowledged
We were concerned that some energy customers have been disproportionately affected by the energy crisis. For example, we noted that some vulnerable customers rely on prepayment meters but it costs more to administer the cost of energy paid by prepayment than by direct debit, which is reflected in the prices …
Government Response Summary
The government acknowledges that some energy customers have been disproportionately affected by the energy crisis and states it is using all available levers to ensure vulnerable customers benefit, highlighting the EBSS and alternative funding.
22
Conclusion
Acknowledged
We also asked the Department how it would ensure that customers still benefited if they were not the direct billpayers, for example those who live in park homes or in rented accommodation where the rent included bills. The Department recognised that this was an issue that it needed to address, …
Government Response Summary
The government acknowledges the issue of ensuring all customers benefit from energy support, particularly those not direct billpayers, and states it is using all available levers to ensure vulnerable customers benefit, highlighting the EBSS and alternative funding.
23
Conclusion
The UK government aims to reduce greenhouse gas emissions to achieve net zero emissions by 2050.54 In April 2022, the Government set out its plans to reduce the UK’s vulnerability to international oil and gas prices, and accelerate the UK’s progress to net zero, by reducing the UK’s dependence on …
24
Conclusion
The wholesale price of electricity is set by the cost of the type of power that most recently met the peak demand for energy. This means the wholesale price is often determined by the cost of gas even at times when renewables or other sources are generating large parts of …
25
Conclusion
Deferred
In July 2021, the Department published its Energy Retail Market Strategy for the 2020s, which set out its vision for a retail market which enabled net zero. In December 2021 the Department announced it needed to refresh the strategy to take account of the lessons from recent months and launched …
Government Response Summary
The government will work with consumer groups and industry to consider the best approach to consumer protection in the energy market from April 2024 as part of wider retail market reforms, while Ofgem has developed a consumer interest framework (CIF) as a basis for any future policy development.