Energy pricing and the future of the energy market – Report Summary

Summary

Over the last year, an unprecedented increase in wholesale gas prices has placed significant financial strain on the energy retail market. Between July 2021 and May 2022, 29 energy suppliers in Great Britain collapsed. Through the Supplier of Last Resort (SoLR) process, since July 2021, 2.4 million customers were moved from 28 failed energy companies to new suppliers. This is expected to add £2.7 billion (£96 per customer) to energy bills. The Special Administration Regime was used for the first time following the collapse of Great Britain’s seventh largest energy supplier, Bulb Energy, in November 2021. The Government’s continued support of Bulb is expected to cost at least £2 billion. This may be offset by a sale of Bulb, but the Department for Business, Energy and Industrial Strategy (BEIS) has the power to recover any remaining costs through a levy on energy bills.

The collapse of the energy supplier market could have been mitigated through more robust regulation. Ofgem has proved incompetent as the regulatory authority of the energy retail market over the last decade. It allowed suppliers to enter the market without ensuring they had access to sufficient capital, acceptable business plans, and were run by individuals with relevant expertise. The regulator enabled poorly capitalised suppliers to be overly reliant on customer credit balances and operate with inadequate hedging, leaving the market ill-equipped to absorb wholesale price increases. The rules that were in place were not enforced and Ofgem did not understand the business models of the suppliers it is mandated to supervise. The Government prioritised competition over effective market regulation and overlooked Ofgem’s lack of supervision of this essential market.

Ofgem is proceeding with a major package of regulatory reform to address its previous shortfalls and boost suppliers’ financial resilience. While we support its vision for suppliers to be well-capitalised and prudently run, we are concerned that if measures are poorly designed and executed, they will risk further destabilising the market and distorting competition. We recommend that:

• Ofgem improves its regulatory oversight, its decision-making processes, the use of its enforcement powers, and the quality of its governance;
• Ofgem proactively reports to this Committee on how it is ensuring effective accountability and transparency and to explain key decisions and policy concerns on an ongoing basis;
• Ofgem regularly reports to BEIS on how it is meeting its duties and to inform Ministers of any risks associated with the delivery of Government strategy;
• the Government publishes its long-delayed Strategy and Policy Statement for Ofgem to clearly delineate responsibilities between the regulator and BEIS to ensure transparency and effective scrutiny;
• Ofgem publishes proposals on a capital adequacy regime and monitors suppliers’ risk management strategies as standard;
• Ofgem upskills its workforce to implement its regulatory reforms effectively and proportionately;
• Ofgem publishes a more robust impact analysis of its proposals for suppliers to ringfence customer credit balances and be explicit about the implications on energy bills and competition, and considers the cumulative impact of its reforms; and,
• the Government brings forward legislation to increase the frequency of Renewables Obligation payments and ensures its Energy Retail Market Strategy aligns with its net zero target, rather than a focus on switching.

Ofgem’s design of the energy price cap also contributed to market instability and resulted in suppliers subsiding customers; this was not its intended purpose. While the Energy Bill [HL] (2022) included provisions to extend the energy price cap beyond 2023, neither the Government nor Ofgem has evaluated its costs and benefits or considered alternative forms of price protection, including a social tariff. The Government should consider the introduction of a social tariff for the most vulnerable customers and a relative tariff for the rest of the market.

The impact of the energy price crisis on households is ongoing and severe, particularly in the context of the cost-of-living crisis and is likely to cause an unacceptable rise in fuel poverty and hardship this winter. With wholesale prices continuing to rise, the energy price cap is now expected to increase to £3,244 in October and remain elevated thereafter. While we welcome the Government’s May 2022 support package, it is no longer sufficient to respond to expected price increases come October. The Government must immediately update its support, targeting this at customers who are on low incomes, fuel poor, and in vulnerable circumstances, and develop a scheme to support vulnerable customers to accelerate the repayment of energy debt resulting from this crisis. The Government should publish its overdue Fairness and Affordability call for evidence, consider moving legacy policy costs to taxation, and assess whether standing charges are appropriate for prepayment customers. Ofgem must work with suppliers, ahead of this winter, to identify vulnerable prepayment customers at risk of self-disconnection and offer to convert them to credit mode to maintain their supply.

Ultimately, the UK needs to reduce its dependence on imported gas. Energy efficiency is the quickest and most cost-effective way to reduce gas demand and lower energy bills. The absence of a home insulation programme is an unacceptable gap in policy that must be rectified. We reiterate our previous calls for the Government to implement urgent, far-reaching, and long-term measures to retrofit the UK housing stock.