‘Nanny Ofgem is missing the bigger picture’

Ofgem’s proposal to make energy suppliers repay surplus credit balances has received mixed reactions. Is the regulator cracking down on unsustainable business models or choosing short-term wins over a permanent fix for a broken market? Adam John asks what this latest crackdown says about the nature of regulation in energy retail.

“Ofgem and to be fair, the government, need to understand you can’t fix something that is broken by continually bashing it with a hammer”, says Chris Welby, former head of regulation at Bristol Energy.

Welby was writing in a blog which heavily criticised the regulator for its proposals to reform the way customer credit balances are managed. For Welby the proposals, which would see suppliers refund balances every 12 months, are another example of Ofgem “trying to treat the symptoms of an ailing market rather than addressing the root cause”.

Welby stresses that he fully supports customers getting a refund if they are paying in excess of what is required and adds that suppliers do return excess amounts either directly on request or by adjusting direct debit amounts to run down excess credits.

“However, Nanny Ofgem now seems to think customers can’t be trusted to look after their own affairs and is stepping in again,” he adds.

Speaking to Utility Week, Welby highlights how the regulatory landscape was initially set up to manage six large suppliers with “deep pockets” which needed to be managed as utilities. Times have since changed and suppliers are now much more retail-focused.

Yet with prescriptive regulation, Welby believes energy retailers are required to spread themselves too thin.

He explains: “It’s kind of difficult for players to differentiate themselves if they have this licence that requires them to be a jack of all trades to all customers. As a good example, it’s very difficult to be a niche pre-payment meter provider when all your competitors have an obligation to offer pre-payment meters.”

Piecemeal regulation

Peter Haigh, Bristol Energy’s former managing director, who was brought in by the council to help set up the supplier in 2015, questions whether it is really necessary to bring in new credit balance reforms. Adding further regulation, he believes, is not that helpful.

“I wouldn’t use the word nannying, because Ofgem do try to do the right thing, but it’s piecemeal. Customers have always had the right to have credit balances back, that’s enshrined in the licence”, says Haigh.

He continues: “I also have believed for many years that a review of the cash flows in the market and where money is tied up with Elexon, with DNOs, with gas distribution, or whoever it might be, would be an incredibly useful exercise. And how that might be made much more efficient.”

He would prefer Ofgem to consider a more principles-based approach to regulation, especially concerning newer entrants. This would involve fit and proper tests for directors, ensuring suppliers had a coherent business plan with sources of funding.

He adds: “And if they said ‘these are the principles that we are going to operate on as a retailer’, then Ofgem has got something to hold them to from the get go, rather than reverting to the licence. Secondly, it takes it up to that top level.”

Laura Sandys, chief executive of Challenging Ideas, believes in an insurance-based approach towards regulation, which she highlights in her recently published ReCosting Energy report. The report argues that insurance should be used to manage business failure risks that new companies pose to the system. New entrants could take out insurance as “learner drivers” that assesses their risk of failure.

She further explains: “We need to start employing insurance products to protect consumers rather than these large deposits which is wasted capital when risk can be assessed much more effectively by the insurance sector.

“Learner drivers would pay a higher premium until they showed that they were fit and delivering, risk would be progressively assessed through different metrics of suitability and companies would be driven to continually improve. It’s so strange that insuring for risk is almost non-existent in the energy sector.”

Moving towards risk-based regulation, says Sandys, would allow more business models to come through and reflect the changing nature of energy consumption and consumer preferences.

‘Heavy-handed’ regulation

Last year council-backed Bristol Energy followed its fellow municipal-owned supplier Robin Hood Energy and left the market. For Welby, his experience as head of regulation at Bristol highlights how “heavy-handed” regulation can stifle innovation.

“At Bristol Energy, the number of innovation projects and projects to improve customer experience were curtailed because our finite resource had to go into changing things to meet new regulations. It just gets in the way. So effectively every time Ofgem says we need to change this regulation, then resource has to go into that rather than trying to improve the business and make ourselves more attractive to customers,” he says.

However Paul Massara, former Npower chief executive, believes rather than stifling creativity, the regulatory landscape has allowed newer entrants to come in and flourish.

He explains: “Ofgem has encouraged innovation via the Sandbox and also via allowing transmission companies an innovation allowance. This has stimulated innovation and helped create a positive culture to work with smaller companies. There is still a long way to go on this, but it has been a helpful intervention.”

Ofgem itself is keen to stress it is working with industry and government to create regulation that stays ahead of market developments and does not distort them.

Anna Rossington, director of retail at Ofgem, says the regulator is working to deliver net zero at lowest cost, stamp out bad practice and to ensure fair treatment for all consumers.

She adds: “The retail energy market is undergoing far-reaching and exciting changes in Great Britain.

“Our regulation needs to stay ahead of market developments in a way that does not distort them. It must enable diverse approaches so we can foster more competition and innovation and support new market participants, while offering effective protection to all consumers.

“Some of our key work to enable competition and innovation in the energy retail market includes the faster and more reliable switching programme, guaranteed standards of performance on switching, monitoring suppliers’ performance and the supplier licensing review.”