Third Report - Energy pricing and the future of the Energy Market

We recommend that Ofgem implements the recommendations of the Oxera report in full to ensure that it has the proper frameworks for defining consumer interests and competition. We call on Ofgem to carry out rigorous quantitative impact analysis to underpin … Read more We recommend that Ofgem implements the recommendations of the Oxera report in full to ensure that it has the proper frameworks for defining consumer interests and competition. We call on Ofgem to carry out rigorous quantitative impact analysis to underpin regulatory reforms and to make these publicly available for scrutiny. Ofgem must take urgent steps to improve the quality of its governance and the effectiveness of its Board by proactively challenging decisions made within the organisation, ensuring it has the necessary information and sufficient time to vigorously deliberate issues and make evidence-based decisions. Show less

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We call on Ofgem to make full and proper use of its enforcement and compliance powers to clamp down on rule breaking by suppliers, particularly relating to customer service standards. Ofgem should work with the Government to ensure it has … Read more We call on Ofgem to make full and proper use of its enforcement and compliance powers to clamp down on rule breaking by suppliers, particularly relating to customer service standards. Ofgem should work with the Government to ensure it has the necessary complement of qualified staff working on its enforcement and compliance teams. We ask Ofgem to provide us with a detailed strategy on how it will improve its enforcement and compliance activity to effectively protect customers, and the timelines within which this will be achieved. We expect that from this financial year onwards, and on an annual basis, Ofgem provides a memorandum to this Committee, which includes a breakdown of the allocation of its resources and a summary of the enforcement and compliance action it has taken in response to rule breaking by energy suppliers. Show less

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We call on the administrators of Avro Energy to request that the Insolvency Service consider bringing action against the former Directors of Avro Energy specifically and to update us on what, if any action, can be taken to recover customers’ money.

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We recommend that the Government urgently publishes its long-delayed Strategy and Policy Statement for Ofgem to guide the regulator on how to manage the political and distributional trade-offs intrinsic to its responsibilities and clarify the split of responsibilities between Ofgem … Read more We recommend that the Government urgently publishes its long-delayed Strategy and Policy Statement for Ofgem to guide the regulator on how to manage the political and distributional trade-offs intrinsic to its responsibilities and clarify the split of responsibilities between Ofgem and BEIS. Show less

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We recommend that the Government and Ofgem reform the Supplier of Last Resort process so that the costs are more fairly recouped whether through general taxation or energy bills.

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We recommend that the Government implements a hedging strategy at Bulb Energy. In the meantime, we ask that the Government provides us with detailed analysis of the cost implications for BEIS and the taxpayer of its decision not to purchase … Read more We recommend that the Government implements a hedging strategy at Bulb Energy. In the meantime, we ask that the Government provides us with detailed analysis of the cost implications for BEIS and the taxpayer of its decision not to purchase hedges to date. Show less

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We recommend that, given the size of Bulb, the costs of the Special Administration Regime are paid through general taxation, as opposed to recouping the costs from already stretched energy bills. The Government should undertake a review of the Special … Read more We recommend that, given the size of Bulb, the costs of the Special Administration Regime are paid through general taxation, as opposed to recouping the costs from already stretched energy bills. The Government should undertake a review of the Special Administration Regime to consider how to reduce the cost exposure to the taxpayer in future, and report to this Committee within the next six months on the lessons learned and any required reforms. We suggest, as a minimum, that the Treasury guidance is amended to make it clear that energy suppliers in the Special Administration Regime are presumed to be permitted to hedge. (Paragraph 96) Reforms to the supplier market Show less

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Ofgem should publish detailed proposals that will ensure energy suppliers have a higher level of capital adequacy in the future which is in line with growth. Financial stress testing and monitoring of suppliers’ risk management strategies should be conducted by … Read more Ofgem should publish detailed proposals that will ensure energy suppliers have a higher level of capital adequacy in the future which is in line with growth. Financial stress testing and monitoring of suppliers’ risk management strategies should be conducted by Ofgem as standard. Where individual or systemic problems are identified, Ofgem should work proactively with suppliers to resolve them. We recommend that Ofgem upskills its workforce to ensure it has the appropriate expertise to implement these provisions in an effective and proportionate manner. We ask Ofgem to publish a plan on how it intends to do this. Show less

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Ofgem must publish a more robust impact analysis of its proposals for energy suppliers to ringfence customer credit balances. We expect the impact analysis to be based on evidence received from suppliers following an information request so that it is … Read more Ofgem must publish a more robust impact analysis of its proposals for energy suppliers to ringfence customer credit balances. We expect the impact analysis to be based on evidence received from suppliers following an information request so that it is underpinned by facts, rather than assumptions. The analysis should include comparisons of Ofgem’s preferred option with alterative options. It should be transparent and explicit about the implications of the proposal on energy bills and competition in the market, as well as the cumulative impact of this proposal and the other measures Ofgem is taking to boost resilience in the market. This analysis should be shared with this Committee with enough time for scrutiny before a final decision is taken by Ofgem and include an explanation of how Ofgem has balanced our priorities as set out above. Show less

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We found consensus from across the sector that the Government should bring forward legislation to increase the frequency of the Renewables Obligation payments. We ask the Government to set out the reasons for repeated delay and failure in this area … Read more We found consensus from across the sector that the Government should bring forward legislation to increase the frequency of the Renewables Obligation payments. We ask the Government to set out the reasons for repeated delay and failure in this area in its response to this report. Show less

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We recommend that the Government brings forward legislation to increase the frequency of Renewables Obligation payment deadlines. The Government and Ofgem should work together to implement this change in a way that provides a suitable period of adjustment for suppliers. Read more We recommend that the Government brings forward legislation to increase the frequency of Renewables Obligation payment deadlines. The Government and Ofgem should work together to implement this change in a way that provides a suitable period of adjustment for suppliers. Show less

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We call on the Government to consider the introduction of a social tariff for the most vulnerable customers and a relative tariff for the rest of the market, to be introduced once wholesale energy prices have stabilised. We ask the … Read more We call on the Government to consider the introduction of a social tariff for the most vulnerable customers and a relative tariff for the rest of the market, to be introduced once wholesale energy prices have stabilised. We ask the Government and Ofgem to report its findings on the above issues within nine months of the date of this report. Show less

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We recommend that the Government brings forward regulation of third-party intermediaries. Regulations should ensure that third-party intermediaries encourage customers to switch not just on price, but also on customer service standards and other factors. The regulations should also ensure that … Read more We recommend that the Government brings forward regulation of third-party intermediaries. Regulations should ensure that third-party intermediaries encourage customers to switch not just on price, but also on customer service standards and other factors. The regulations should also ensure that third-party intermediaries are transparent about the services offered and the suppliers that they work with, provide an explanation of remuneration and access to advice and redress for customers. The regulations need to be future proofed for the significant role that third-party intermediaries are expected to play in the transition to net zero. Show less

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In order to deliver the Government’s target of a zero carbon electricity system by 2035, we further recommend that greater consideration is given to smart tariffs in the revised Energy Retail Market Strategy. Specifically, we ask the Government to consider … Read more In order to deliver the Government’s target of a zero carbon electricity system by 2035, we further recommend that greater consideration is given to smart tariffs in the revised Energy Retail Market Strategy. Specifically, we ask the Government to consider how time of use tariffs can be supported while the necessary system reforms are being carried out. Consideration should also be given as to how to support the energy supplier market in engaging different customer groups in net zero and ensure sufficient protections are in place for vulnerable customers. (Paragraph 163). 80 Energy pricing and the future of the energy market Support for households Show less

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We are gravely concerned by the latest forecasts from industry experts that the price cap will increase to £3,244 in October 2022 and £3,363 in January 2023. This will have very serious consequences for households across the country, particularly those … Read more We are gravely concerned by the latest forecasts from industry experts that the price cap will increase to £3,244 in October 2022 and £3,363 in January 2023. This will have very serious consequences for households across the country, particularly those that are on low incomes, in fuel poverty, and in vulnerable circumstances. The Government’s May 2022 support package is welcome but will now be eclipsed by the scale and longevity of the price increases, and we are concerned that public funds are still not being targeted adequately enough to those who need it the most. We urge the Government to provide an immediate and better targeted update to its support package that aligns with the expected scale of price increases. Show less

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We recommend that the Government ensures there are sufficient safeguards in place for tenants to benefit from the Energy Bills Support Scheme. We recommend that the Government pays the scheme via a negative standing charge to mitigate the risk of … Read more We recommend that the Government ensures there are sufficient safeguards in place for tenants to benefit from the Energy Bills Support Scheme. We recommend that the Government pays the scheme via a negative standing charge to mitigate the risk of prepayment customers not redeeming their vouchers and to ensure it reduces the costs of energy for customers in debt. Show less

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While the Government committed to publishing a Fairness and Affordability call for evidence over a year ago, this is yet to materialise. This is a vital piece of work which will need to address how to allocate energy policy costs … Read more While the Government committed to publishing a Fairness and Affordability call for evidence over a year ago, this is yet to materialise. This is a vital piece of work which will need to address how to allocate energy policy costs in a way that incentivises cost-effective decarbonisation while avoiding harmful impacts on vulnerable groups, particularly in the context of continuing rises in wholesale gas prices. It is also an important opportunity to review the impact that standing charges have on vulnerable customers, particularly those using prepayment meters. Show less

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We recommend that the Government urgently publishes its overdue Fairness and Affordability call for evidence, particularly in the context of rising energy prices. We recommend that the review includes a distributional analysis of the impact that recovering policy costs from … Read more We recommend that the Government urgently publishes its overdue Fairness and Affordability call for evidence, particularly in the context of rising energy prices. We recommend that the review includes a distributional analysis of the impact that recovering policy costs from electricity and gas bills has on vulnerable customers and considers moving legacy policy costs to general taxation. Any reapportioning of policy costs from electricity to gas bills must be accompanied by mitigating negative impacts on fuel poor and vulnerable consumers. The review should also include an assessment of the impact that standing charges have on vulnerable customers, and whether these charges are appropriate for customers using prepayment meters. Show less

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Ofgem should require energy suppliers to take a pro-consumer approach to payments and debt collections. We urge Ofgem to take swift and firm action in response to suppliers breaching the Ability To Pay licence conditions and ensure that suppliers promote … Read more Ofgem should require energy suppliers to take a pro-consumer approach to payments and debt collections. We urge Ofgem to take swift and firm action in response to suppliers breaching the Ability To Pay licence conditions and ensure that suppliers promote a range of debt repayment options. Show less

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We recommend that the Government develops a scheme to help vulnerable customers accelerate the repayment of debt that has accrued as a result of the energy pricing crisis, for example, by matching the contribution made by customers through the Fuel … Read more We recommend that the Government develops a scheme to help vulnerable customers accelerate the repayment of debt that has accrued as a result of the energy pricing crisis, for example, by matching the contribution made by customers through the Fuel Direct scheme. We also recommend that Ofgem publishes data on the levels of debt in the market on a quarterly basis. We ask Ofgem to update and publish its analysis on the levels of bad debt it expects energy suppliers to accrue this winter after accounting for further increases to the price cap and the Government’s support package announced in May 2022. Show less

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It is unacceptable that prepayment customers, who are often moved to a prepayment meter because they cannot afford their energy bill, pay more for their energy than direct debit customers. We recommend that Ofgem addresses this differential, for example by … Read more It is unacceptable that prepayment customers, who are often moved to a prepayment meter because they cannot afford their energy bill, pay more for their energy than direct debit customers. We recommend that Ofgem addresses this differential, for example by reinstating the Safeguard Tariff for prepayment customers, to ensure that they pay no more than direct debit customers for their energy. This would be a temporary measure while the Government consults on the operation of a social tariff. Show less

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We recommend that Ofgem urgently improves its data collection on self-disconnection and publishes this on a more frequent basis. We ask Ofgem to conduct an impact analysis on how expected increases to the price cap this winter will affect customers … Read more We recommend that Ofgem urgently improves its data collection on self-disconnection and publishes this on a more frequent basis. We ask Ofgem to conduct an impact analysis on how expected increases to the price cap this winter will affect customers at risk of self-disconnection. We call on Ofgem to review the existing Ability To Pay framework to determine whether further, immediate action is needed to address an increase in self-disconnection come October. We also ask Ofgem, ahead of this winter, to work with suppliers to help identify vulnerable prepayment customers who are at risk of self-disconnection, for example those who have high energy demand due to the use of medical equipment and offer to convert these users to credit mode to maintain their supply. Show less

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We call on Ofgem to enforce its New and Replacement Obligation in the supplier licence. We recommend that the Government makes it mandatory for all prepayment households to have a smart meter installed urgently, irrespective of supplier, so that 82 … Read more We call on Ofgem to enforce its New and Replacement Obligation in the supplier licence. We recommend that the Government makes it mandatory for all prepayment households to have a smart meter installed urgently, irrespective of supplier, so that 82 Energy pricing and the future of the energy market it is easier to identify when customers are struggling to maintain supply and provide emergency credit. We recommend that Ofgem and BEIS set a target to end all self- disconnections by the end of the smart meter roll out (end of 2025). Show less

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We reiterate our previous views that the Government should implement urgent, far- reaching, and long-term measures to replace the Green Homes Grant scheme that provides the energy efficiency supply chain with confidence of enduring demand and ends the stop-start policy … Read more We reiterate our previous views that the Government should implement urgent, far- reaching, and long-term measures to replace the Green Homes Grant scheme that provides the energy efficiency supply chain with confidence of enduring demand and ends the stop-start policy approach in this area once and for all. We urge the Government not to divert funds from other energy efficiency schemes to pay for this. (Paragraph 217) Conclusion Show less

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With the worst yet to come, the consequences of the energy price crisis and wider cost-of-living crisis on customers, and energy suppliers, is still to be seen. The extent of these challenges cannot be dealt with by BEIS or Ofgem … Read more With the worst yet to come, the consequences of the energy price crisis and wider cost-of-living crisis on customers, and energy suppliers, is still to be seen. The extent of these challenges cannot be dealt with by BEIS or Ofgem alone. The Prime Minister himself stated the Government’s response to this pressing situation needs to be treated with the same level of seriousness as the Covid-19 pandemic. The responsibility to deal with this crisis spans across multiple Government departments and the Government needs to galvanise the resources and expertise at its disposal. This will require ministerial leadership and a cross-departmental taskforce. We recommend that the Government urgently sets up a cross-departmental taskforce, like the Brexit taskforce, to respond to the energy price crisis and wider cost-of- living. This taskforce should meet regularly to support Ofgem and other arms of the Government to do the work necessary to provide the best possible outcomes for consumers and stabilise the energy supply market. (Paragraph 221) 84 Energy pricing and the future of the energy market Show less

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Until June 2019, Ofgem granted energy suppliers a licence to operate in the market without ensuring they had access to sufficient levels of working capital, an acceptable business plan, or were run by individuals with relevant expertise. Ofgem’s delay to the Supplier Licensing Review was unacceptable and inexcusable which, if …

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The lack of ongoing requirements for suppliers operating in the market allowed thinly capitalised companies to rely on customers’ money to fuel business growth and operate with either no hedging or inadequate hedging against future energy prices. These companies took substantial risks to undercut responsible suppliers. The new rules put …

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Oxera’s review of Ofgem’s performance to regulate the retail market raised serious and fundamental questions about the regulator’s ability to carry out its primary duties. We agree with its findings that Ofgem has no proper frameworks for defining and measuring what consumer interests are or what effective competition means, and …

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Even when matters of poor practice and potential breaches of licence conditions were directly reported to Ofgem, the regulator repeatedly failed to use its enforcement powers in any meaningful way. This was at the expense of customers who Ofgem is mandated to protect. Telephoning a supplier to tell it to …

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Whilst we have been reassured by Jonathan Brearley that changes are being made to the governance, leadership, and performance of Ofgem we remain deeply concerned that such negligent behaviour was able to take place for so long. If Dermot Nolan was still in post, we would be calling for his …

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Avro Energy improperly used customers’ money, including siphoning off customers’ cash to different businesses in the directors’ names, issuing loans to the directors, and paying poorly performing executives an unreasonably high salary. We were disappointed by the admission from Ofgem’s former CEO, Dermot Nolan, that the regulator was oblivious to …

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We further call on the Government to review whether regulators such as Ofgem should be given new powers to bring enforcement action for unfit conduct by energy company directors given the very limited scope for The Insolvency Service to do so. We consider this to be particularly important for energy …

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We expect Ofgem, as the independent regulator, to clearly outline to Ministers and Parliament the risks and consequences associated with the delivery of Government objectives. We do not believe that Ofgem properly raised the risks to Government, or Parliament, that a deregulatory approach to promoting competition could severely undermine the …

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More significantly, we are concerned by the Government’s apparent lack of understanding of the extensive failings of the regulator and the consequences that this would have on the market in the event of any demand or supply-side shocks. 76 Energy pricing and the future of the energy market While we …

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We would encourage more robust lines of communication and a clear delineation of responsibilities between Ofgem and BEIS to ensure transparency and effective scrutiny.

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We require Ofgem to start regularly and proactively reporting to the Department on how it is meeting its duties and to inform Ministers of any risks associated with the delivery of Government strategy. We ask the Department and Ofgem to review, update and publish a new Framework Document within six …

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We recognise that this Committee has an important role in the scrutiny of Ofgem’s activity. We expect the regulator to be carrying out its core functions and delivering on its duties. It is neither feasible nor appropriate for Parliament to scrutinise, in real time, all aspects of Ofgem’s decision-making. However, …

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We are concerned that the costs of the Supplier of Last Resort process, which has been added to regressive standing charges on electricity bills, has increased affordability challenges for the most vulnerable customers, at the most difficult time. This is wrong. We welcome Ofgem’s recognition of the impact that regressive …

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The Supplier of Last Resort process ensured that customers of failed energy companies maintained their supply. However, customers carried the risk of failure, while suppliers exited facing minimal costs, and in some cases, even made a financial return. Suppliers of last resort raised pressing concerns about administrators of Energy pricing …

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We support the National Audit Office’s recommendation that the Government and Ofgem review and subsequently update the Supplier of Last Resort process to address the problems that arose over the last year, including delays in the transfer of customer information by administrators which prevented the retrieval of credit balances, the …

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The Special Administration Regime has been used for the first time to deal with the failure of Bulb Energy, leaving taxpayers exposed to billions of pounds worth of costs. The decision not to implement a hedging strategy may have led to the sale of Bulb being less desirable and significantly …

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We support Ofgem’s objective to ensure energy suppliers are well-capitalised and prudently run. If its plans to introduce a capital adequacy regime and improve its monitoring of suppliers’ approach to risk management are executed effectively, these measures could reduce the moral hazard in the market and the cost of mutualisation, …

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Our first priority is to ensure that customer credit balances are protected, so that in the event of a supplier failure, customers are always able to recover the credit 78 Energy pricing and the future of the energy market they have built up. Our second priority is to ensure that …

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The design of the energy price cap has contributed to recent instability in the supplier market. Ofgem failed to properly stress test its design against a range of scenarios or consider how it interacted with its other regulations. The methodology forced suppliers to subsidise customers, which was clearly not the …

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We welcome more frequent calculations of the price cap if this stabilises the supplier market amid current market conditions. However, Ofgem’s cost benefit analysis of its proposed move to quarterly price cap updates did not consider the impact that further price rises in January 2023 could have on vulnerable customers, …

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Ofgem should update the cost benefit analysis of its proposal for a quarterly price cap, so it reflects the risk of prices increasing this January, in order for Ofgem, the Government, and Parliament to fully understand the potential impacts for vulnerable customers.

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The Energy Bill [HL], which was introduced to Parliament on 6 July 2022, included provisions to extend the energy price beyond 2023, but it will not change how the price cap functions. Neither the Government nor Ofgem has undertaken an evaluation of Energy pricing and the future of the energy …

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We ask Ofgem to undertake an immediate review of the costs and benefits of the energy price cap to inform decisions about its operation and alternative forms of price protection.

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The Government’s failure to regulate third-party intermediaries in combination with Ofgem’s failure to regulate energy suppliers led to third-party intermediaries promoting energy suppliers with flawed business models and unsustainable pricing. We are concerned that third-party intermediaries did not pay sufficient regard to understanding customers’ needs and ensuring customer service standards.

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The previous Energy Retail Market Strategy was primarily driven by the objective to accelerate switching rates. The collapse of energy retailers demonstrated the flaws of this approach. The revised retail strategy will need to develop a market that differentiates not just on price, but on the services offered by suppliers. …

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The Department and Ofgem must urgently update the Energy Retail Market Strategy so that the supplier retail market aligns with our net zero target; this must include interim milestones and high-level principles about the role suppliers will play in achieving net zero.

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We note some delivery risks in ensuring the Energy Bills Support Scheme reaches vulnerable customers this winter, including certain types of tenants, customers using legacy prepayment meters, and those who are in debt to their energy provider.

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Energy prices are expected to increase to unprecedented levels and the Government’s May 2022 support package will no longer offset the significant increases for households. A considerable number of households will struggle to pay their energy bills and will be at risk of accruing large sums of debt to their …

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We are concerned by reports that self-disconnection is already at a record high, and this is before the expected, unprecedented rise to the energy price cap this winter. Ofgem only collects partial data on self-disconnection and does not have a sufficient understanding of the risks facing prepayment customers come October.

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Replacing legacy prepayment meters with smart prepayment meters is crucial to protecting vulnerable customers in the coming months because they allow suppliers to identify customers who are at risk of self-disconnection and provide immediate support. Yet we are hearing reports that once again Ofgem is not enforcing its rules which …

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Energy efficiency is the quickest and most cost-effective way to reduce gas demand and lower household energy bills. The absence of a home insulation programme is an unacceptable gap in policy that must be urgently rectified. Since wholesale prices rose following July 2021, tens of thousands of homes could have …

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A systemic failure in regulation left the energy supply market, and ultimately taxpayers, more exposed when the global wholesale energy crisis began. Some energy supplier businesses were allowed to behave in an entirely unacceptable way, without any consequence for their actions. The Government prioritised competition over effective market supervision, failing …

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The energy price crisis is putting continued strain on the remaining suppliers in the market. At the same time, Ofgem is proceeding with a programme of major regulatory reform with the objective to reverse its previous litany of shortcomings and shore up the financial resilience of the market. However, if …

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The impact of the energy price crisis on households is ongoing and severe, particularly in the context of other considerable inflationary pressures, and is likely to cause an unacceptable rise in fuel poverty and hardship this winter. With wholesale Energy pricing and the future of the energy market 83 prices …

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