Nolan: Failed suppliers have no right to complain

Former Ofgem chief executive Dermot Nolan has told Utility Week he has no sympathy for suppliers who exited the market because they failed to hedge properly.

Nolan, who headed the regulator between 2014 and 2020 said it was reasonable to expect companies to be hedging in line with the price cap formula. He said he saw no justification in loosening the cap this winter purely to ease the pressure on retailers but accepted that “ultimately costs will have to filter through”.

He said he had been against moves towards prudential regulation for the energy retail sector during his tenure at Ofgem. However, he warned that the current wave of supplier failures, amidst a surge in wholesale gas prices, may herald such a step.

He also discussed the Supplier of Last Resort (SoLR) process, which he said had so far supported customers but was “never designed for an environment where the price cap is the cheapest tariff”.

He told Utility Week: “I have huge sympathies for the workers and the customers of these failed suppliers but, as an owner, if you have committed to a fixed tariff and you haven’t hedged accordingly, then you don’t really have any right to complain.

“The question is, going forward, should the regulator and government get very specific about risk? Maybe we should have done that in the past  – there are pros and cons to that.”

Nolan, now a director at consultancy Fingleton, said under his leadership, Ofgem had discussed adopting similar oversight of the energy retail as exists in the financial sector.

He added: “Apart from a couple of the incumbents, most other stakeholders weren’t keen on that direction, hence there were the licence conditions put in last year, which are supposed to require you to be able to manage risk. I thought the direction of that might be sufficient but perhaps it hasn’t been. But I don’t know precisely how the rules were implemented.”

He said that if such a move was deemed necessary it would be “quite a step” and might require a “substantial increase in Ofgem’s size”. As an example, he pointed to the Financial Conduct Authority’s headcount of c4,000 versus Ofgem’s c1,200 employees.

He said: “That level of scrutiny would be very resource intensive. But maybe it’s necessary. Though I still believe it’s very difficult to have that level of intervention for an energy company.”

Nolan said the SoLR process, which has managed the forced transfer of more than three million customers over the past five years, had stood up well to the current challenges but predicted it would come under much greater pressure.

He said: “We were able to keep the costs down (in the past) because there were a number of offers. The problems come when only one supplier bids. I think inevitably the bids will be higher for these ones, which is regrettable. But you need a SoLR process, there’s no way round that.”

The SoLR process itself is “slightly tricky in terms of incentives”, Nolan added.

“What you don’t want is for the SoLR to get in the way of that natural flow of assets being bought and sold in a competitive market. You could say that the SoLR process introduces a distortion because a big firm could just suit tight, rather than acquiring a smaller firm and instead pick up the customers more cheaply on SoLR.”

On whether he expected Ofgem to find itself in the position of forcing a retailer to become a SoLR he said it had “never been tested” but was feasible. However, he warned this could leave Ofgem open to a legal challenge from the anointed SoLR.

Discussing calls for early adjustments to the price cap to account for the exponential increase in costs to suppliers, he said: “I don’t agree with loosening the price cap in the interim but ultimately costs will have to filter through and the fact is we are going to be paying more for our energy for a while now. The question is whether you bring that in in a staged way.”

As part of our Energy Reset campaign, Utility Week is calling for the government to abandon plans to introduce opt-out automatic switching for energy.

Asked whether the current crisis represented the death knell for auto-switching, Nolan replied: “Competition of the future will still be on price but there will be other factors, including access to services and other aspects. An auto-switcher that just factors in price probably isn’t going to work. If there are more dimensions to the offer, how does the auto-switched factor that in?”