Energy retail being ‘micromanaged’ by BEIS and Ofgem

After a lack of oversight resulted in the collapse of dozens of energy suppliers in 2021, “the pendulum has swung too far” in the opposite direction and the retail sector is now being “micromanaged” by the government and Ofgem, the boss of Green Energy UK has lamented.

The company’s founder and chief executive Doug Stewart was responding to Shell’s recent announcement of a strategic review of its domestic retail businesses in the UK, the Netherlands and Germany.

Shell acquired the UK business as First Utility in 2018 as part of a strategic pivot towards electricity generation and retail. The company was rebranded as Shell Energy Retail the following year.

In contrast to the wider group, which is expected to reveal record annual profits of more than £30 billion later this week, Shell Energy Retail has made significant losses in recent years, with its latest accounts showing total losses of almost £220 million over 2020 and 2021.

Commenting on the current state of the energy retail market, Stewart asked: “Is this an industry that’s viable?”

“Scottish and Southern Electricity sold their retail business to Ovo (in 2020). Check what their share price has done since.

“Shell have announced they’re reviewing Shell Energy, their retail offering, in this country, the Netherlands and Germany. They’re not looking at it in America and they’re not looking at it in Australia, so clearly it’s something to do with policy and regulation.”

Although the global energy crisis was the “catalyst,” Stewart said the numerous suppliers that went under in late 2021 were already “bust long before the price of energy went up”.

With consumers being pushed to pick their supplier primarily on the basis of price, a lack of regulatory oversight allowed companies to attract new customers by using credit balances to run at a loss and undercut their rivals, Stewart said.

Stewart said he petitioned Ofgem to address this issue and is critical of the regulator’s work during the tenure of its former chief executive, Dermot Nolan, who “presided over a very, very poor regulatory regime and gave too much away on the back of government policy.”

He said Ofgem is now rightly trying to address its previous failings but added: “I think the pendulum has swung too far and they’re overregulating us now.”

He went on to say: “What we’ve got at the moment is a regulator who has been beaten up by every single quarter of government and the media, from the energy select committee down to the National Audit Office saying they were asleep at the wheel.

“They were implementing government policy, by the way, and no one’s been too critical of the government,” he remarked.

Stewart said the price cap, which was originally introduced as a back stop to protect disengaged customers from being ripped off by companies exploiting their inertia, now determines how all suppliers operate their businesses, including their margins and how they buy energy. They now have to “hedge in line” with the quarterly price cap periods “otherwise we’re out of step”.

He likewise criticised the new Market Stabilisation Charge, which requires companies gaining customers to make payments to the losing supplier if wholesale prices fall significantly.

“We are currently micromanaged by BEIS or Ofgem or both, and I don’t think that’s a healthy industry,” he added. “And I think that those that are thinking of leaving it are a reflection of that.”

Stewart said the current level of interference is “beyond the pale,” adding: “It’s out of control and it’s the wrong kind of interference.” Although the industry is now getting the stress tests he has been asking for since 2012, he said “we’re not getting the right sort of stress tests on the right sorts of people”.

He said the “20-odd suppliers” that remain are not given any credit for surviving the crisis and are instead being “dragged through the grinder to make sure we’ve done the job properly”.

At the same time, Stewart said Ofgem has still failed to address the “moral hazard” of allowing suppliers to use consumer’s money to run their businesses: “There’s still loads and loads of money out there that belongs to consumers on the balance sheets of electricity suppliers. We do not take upfront payments. We never have and we always bill in arrears.”

He said he is “definitely” in favour of ring-fencing customer deposits because “consumer deposits were the reason that we had all those people unprofitably running their businesses using consumer capital. That’s got to end and it’s not ending fast enough for me”.

In November, Ofgem announced it was rowing back on plans to require all suppliers to ring-fence customers’ credit balances, saying this should only happen if companies fail to meet other financial resilience requirements it is introducing.

Stewart said one of the biggest unresolved problems in the industry is how to protect vulnerable customers who are unable to afford their bills.

He said this issue could possibly be addressed through the creation of a social tariffs, perhaps subsidised from taxes, but suggested the government has missed a trick with its approach to Bulb, which was brought into its special administration regime in late 2021 and recently sold on to Octopus Energy.

Instead, Stewart said the government “should have put all the vulnerable people into Bulb and they should have supplied energy at an affordable price and left middle England to pay the market rate which they can afford to do”.

He said this would allow suppliers sufficient revenues to invest in innovation and provide a quality service to customers: “Right now, we’re all fighting a rear-guard action against extremely high wholesale prices. That will stop and we will get creative again. But we need to be able to control our own margins and we’re not allowed to do that.”