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'Failure': 3 damning findings about Ofgem's regulation of the energy market

PICTURE POSED BY A MODEL File photo dated 08/01/22 of a person holding an energy bill. Ofgem's failures to effectively regulate energy suppliers as far back as 2018 have
Ofgem's failures to effectively regulate energy suppliers as far back as 2018 have 'come at a considerable cost' to households, a watchdog has said. (PA)

As gas and electricity bills have spiralled, energy regulator Ofgem has faced growing criticism for its role in the cost of living crisis over the course of the year.

Now a new report by a House of Commons committee has accused Ofgem of a long-standing “failure to effectively regulate the energy supplier sector” - something that has come at a “considerable cost to billpayers”.

Here, Yahoo News UK sets out three damning findings by the Public Accounts Committee (PAC), which released the report on Sunday.

Regulatory failings have cost each customer £94

The PAC said the regulatory problems date back to 2018, when Ofgem had a “low bar” for licensing new energy suppliers entering the market. There was a lack of “detailed scrutiny of their finances,” the report said.

It added Ofgem “did not tighten requirements for new suppliers until 2019, and for existing energy suppliers until 2021”.

Some 29 energy suppliers have subsequently failed since July last year, affecting about four million households.

And customers have been left to pick up the £2.7bn cost of the failures - through their energy bills - at an extra £94 per household. This is a cost that will “very likely increase”, the PAC said.

A 221% increase in the ‘price cap’

Ofgem’s energy price cap limits the rates suppliers can charge customers for the standing charge - the fixed daily amount a household has to pay for access to energy - and for each unit of gas and electricity used. The cap is mainly driven by the wholesale price of energy which, of course, has risen enormously.

Its most recent price cap, announced in August, meant the average annual energy bill would have risen to £3,549 from 1 October, up from £1,277 at the start of the year.

Protesters outside the Ofgem HQ in Canary Wharf London. Ofgem has confirmed an 80.06 percent rise in the energy price cap, sending the average household's yearly bill from GBP 1,971 to GBP 3,549 from October. Picture date: Thursday August 25, 2022.
Protesters outside Ofgem's HQ in Canary Wharf following its price cap announcement in August. (PA)

This was so high that the government was forced to step in with its Energy Price Guarantee, superseding the price cap. The scheme, which will end in April, is currently subsidising every household’s energy bill so they are capped to an average £2,500.

And the PAC made light of the ineffectiveness of the price cap: “Ofgem considers the price cap to be a huge benefit for customers, and that it has made a substantial difference over the last six months in managing price rises.

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“However, the price cap was brought in to ensure that energy suppliers were not making unfair profits and does not cap the energy bills paid by households.

“Since the cap was introduced [in January 2019], a typical customer’s energy bill has risen by 221% and is predicted to further increase in 2023.”

Vulnerable customers left exposed

The PAC said the position of vulnerable customers, who pay higher energy prices, was “unacceptable”.

The report said: "Many vulnerable customers rely on prepayment meters, whose tariffs are typically more expensive than those paid by direct debit because the systems used to run them cost more which Ofgem reflects in the cost of energy."

It added other groups are disproportionately affected. "For example, energy provided through district heating systems, where heat is distributed to surrounding homes from a central source, is not covered by the price cap and customers are therefore not protected from price rises."

What has the PAC and Ofgem said about the report?

Labour MP Meg Hillier, chair of the PAC, said: “It is true that global factors caused the unprecedented gas and electricity prices that have caused so many energy supplier failures over the last year, at such terrible cost to households, but the fact remains that we have regulators to set the framework to shore us up for the bad times.

“Problems in the energy supply market were apparent in 2018 - years before the unprecedented spike in prices that sparked the current crisis, and Ofgem was too slow to act.

"Households will pay dear, with the cost of bailouts added to record and rising bills."

MP Meg Hillier speaks in a fringe event on the fourth day of the Labour Party annual conference at the Brighton Centre in Brighton. Picture dated: Tuesday September 24, 2019. Photo credit should read: Isabel Infantes / EMPICS Entertainment.
'Too slow to act': Meg Hillier on Ofgem. (PA)

The PAC said in its report that Ofgem "must urgently learn lessons to protect customers and prevent them from having to foot the bill in the event of any future failures". It called for a plan to be issued within the next six months on how it intends to protect customers going forward.

In a statement to Yahoo News UK, Ofgem said: “Protecting consumers has always been and continues to be our core focus. In May 2022, Ofgem commissioned and published in full an independent review of our actions and we are implementing all the recommendations. This and other reports recognised where Ofgem could have gone further and faster on market reform and covered many of the same issues and recommendations as the PAC report.

“The sheer scale and pace of this once-in-a-generation global energy price shock meant supplier failures were seen all over the world. However, the Supplier of Last Resort scheme [which guarantees continued energy supply when a customer's provider fails] acted as a vital safety net for British consumers, ensuring they continued to receive energy when their supplier failed and kept their credit balances. This safety net inevitably incurred costs."

It also claimed "the market is now in a much more resilient position, partly due to robust steps we’ve taken to reduce the risk of future supplier failures and to raise the bar on entry for new suppliers".