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MPs have questioned whether the energy regulator, Ofgem, is fit to police the industry after it was blamed for costing British households billions of pounds as a result of suppliers going bust.
Politicians on the powerful public accounts committee said Ofgem had failed to govern the sector “at a considerable cost to billpayers” in a damning report into the regulation of energy suppliers.
The regulator was blamed for failing to prevent the collapse of 29 energy suppliers since July 2021, affecting about 4 million households. The failures cost consumers an estimated £2.7bn, or an extra £94 each, through a charge on their bills to recover the cost of managing customers’ transfers to a new supplier.
That figure does not include the billions the government has spent in bailing out Bulb Energy, which was by far the largest supplier to collapse, with 1.5 million customers. Bulb was snapped up by rival Octopus Energy late last month after nearly a year in a government-handled administration.
A wave of suppliers has collapsed during the energy crisis because of a surge in wholesale gas prices last year, which was then exacerbated by Russia’s invasion of Ukraine in February. The MPs’ report accused Ofgem of being “too slow to act” to ensure suppliers were financially resilient, even before the crisis.
The regulator had attempted to increase competition by opening up the energy market to new suppliers. However, the introduction of a cap on energy bills under Theresa May’s government, combined with a surge in wholesale gas prices, exposed the weakness of many companies’ balance sheets.
Dame Meg Hillier MP, chair of the committee, 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.”
She added: “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. The committee wants to see a plan, within six months, for how government and Ofgem will put customers’ interests at the heart of a reformed energy market, driving the transition to net zero.”
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The committee said it is “not convinced that Ofgem yet has the skills and capacity it needs to take a more proactive role in regulating the energy supplier market”. The report showed Ofgem, led by chief executive Jonathan Brearley, has increased the size of its workforce from 816 staff in 2018 to 1,400 now and has asked the Treasury for more resources.
The committee made a series of recommendations including a review of the “supplier of last resort” process, which ensures continuity of supply when a supplier fails.
It also wants Ofgem to show how it has increased its capacity to assess suppliers’ financial risk and called for a review of its price cap.
The cap has been sidelined by the energy price guarantee, a policy introduced by Liz Truss to limit the average household bill at £2,500 for six months. However, Ofgem’s price cap will come back into force for those not receiving further support from April.
Ofgem said: “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 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.
“Looking ahead to this winter, prices remain volatile, however 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. And our proactive compliance reviews have dug deep into the practices of all energy suppliers, enabling us to demand improvements where they have been found lacking.”
