MPs ‘not convinced’ Ofgem has skills for bank-style regulation

A heavyweight committee of MPs has said it is ‘not convinced’ Ofgem has the ‘skills and capability’ to undertake the more ‘proactive’ regulation of energy suppliers that the watchdog is moving towards.

In a new report on regulation of energy suppliers, published today (Sunday), the House of Commons Public Accounts Committee (PAC) says the number of staff employed by Ofgem has increased by 72% over the last five years from 816 in 2017-18 to approximately 1,400 in July.

Ofgem told the PAC that it has submitted a bid to the Treasury for more resources to enable it to discharge new responsibilities, including the administration of the government’s new boiler upgrade scheme and regulation of the carbon capture and storage sector.

In addition, Ofgem also plans to change its approach to regulating the retail energy market to make it more like the regulation of financial services companies, including banks.

This would involve assessing and monitoring the financial resilience and business management of every supplier rather than reacting to companies identified as being under stress.

‘Moving from a reactive model, where Ofgem works mainly with firms determined as being at risk, to a model where all firms operating in the market are assessed and tested, is a very big shift which will require different skills and resources,’ the report says.

However the committee concludes that it ‘not convinced’ that the energy regulator has the skills and capacity it needs to take a more proactive role in regulating the supplier market.

The MPs call on Ofgem to set out in a letter how much it has increased its capacity to regulate the energy supplier market and the resulting additional activities it is undertaking.

The committee also found that the cost of bailing out failed energy suppliers, estimated at £2.7bn by the National Audit Office last summer, was due to Ofgem’s ‘failure to effectively regulate the energy supplier market’.

The report concludes that Ofgem did not ‘strike the right balance’ between promoting competition in the energy supply market and ensuring individual suppliers were financially resilient.

It says Ofgem’s approach to licensing new energy suppliers used a ‘low-bar for new entrants’ and the watchdog did not undertake detailed scrutiny of licence applicants’ financial situation.

Looking longer-term, the committee expresses concern that the BEIS (business, energy and industrial strategy) department and Ofgem do not yet have a ‘clear vision’ of how the energy retail market will work in the best interests of customers during the transition to net zero.

The PAC’s chair, Dame Meg Hillier, said: “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.

“The PAC 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.”