Ofgem accused of bringing energy market ‘to its knees’

Ofgem has been threatened with legal action by a number of small suppliers which said they no longer have confidence in the regulator and have demanded redress for what they deem as its failings.

In a letter written by Jo Gilbert, the former chief operating officer of the recently failed PFP Energy, Ofgem was accused of helping to bring the energy market “to its knees” and criticised for the way it has regulated the industry throughout the early stages of the coronavirus pandemic and the recent industry crisis brought about by soaring wholesale gas prices.

The scathing 10-page document is a formal complaint written on behalf of a number of small retailers including PFP, Green (in administration), UK Energy Incubator Hub (formally Euston Energy), Utility Point (in administration) and Neon Reef.

The letter raised 13 separate issues – covering, among other things, the price cap, support offered to retailers during the pandemic and the regulatory requirements placed on them – along with 55 questions they want the regulator to answer.  It labelled the shift towards principles-based regulation as a “noose” around the neck of energy suppliers.

The price cap and profit margins 

One of their main concerns is the impact regulation has had on suppliers’ ability to make a profit. Ofgem was accused of regulating the market in a way that presents suppliers making no profit as a “fair price”, quoting comments made by chief executive Jonathan Brearley as evidence.

“No regulator should be allowed to regulate in a way that allows for no profit to be made by privately owned businesses and this being exemplified by the head of the regulator as ‘we are making sure companies charge a fair price’,” the letter said.

It highlighted the effect the price cap has had on energy wholesalers, suggesting the “substantially below water price cap” has caused them to withdraw their hedges.

“To be able to ‘hedge’ a supplier must have a relationship with a counterparty in order to secure the contracts. These businesses in turn will have their own hedging strategy to provide the contracts they have committed to but will speculate as they recognise there is an opportunity to make significant profits.

“Ofgem were made aware at the beginning of this energy crisis that counterparties were withdrawing their hedges, leaving suppliers exposed. Ofgem is also aware this is not a one off. Having asked Ofgem to step in to support with this, nothing has been done.”

The letter additionally took aim at the way the price cap is set. It labelled the cap, introduced in 2019, as a “political tool” to try to show consumers they are being protected.

It said because the price cap is not set by an independent third party or validated by one, Ofgem has been able to use it for “political gain rather than for what it was intended.”

Support during the pandemic

The letter criticised Ofgem for failing to provide support to retailers during the pandemic, noting the expectation that suppliers would not chase debts from consumers and provide them with discretionary credit. It referenced the short-term network deferral scheme introduced last spring, describing the 8% interest rate it came with as “extortionate”.

“The issue of no direct support was raised time and again to Ofgem, and it was only when energy suppliers spoke directly to BEIS that the initial network deferral scheme was even considered,” it said.

“Even when suppliers were calling for a second or extended network deferral scheme, Ofgem decided no further support was necessary by what we’ve learnt to be a closed forum that was unknown to most suppliers and with a backdrop of government providing support to others until October 2021.”

It said Covid-related bad debt was not incorporated into the price cap for more than a year.

‘A never-ending list of changing regulations’

Another area of scrutiny was the way Ofgem applies regulation. The letter claimed suppliers have faced millions of pounds in costs every year due to “forced regulatory changes”.

“Significant programmes of regulatory change contribute to the inability to make profits for energy suppliers and many times changes are put in place without quantifiable evidence they are worthwhile and without consumer engagement.”

The letter questioned whether consumers “actually want” initiatives such as opt-in or opt-out automatic switching.

It continued: “Ofgem is viewed as dictating to private businesses a never-ending list of changing regulations that have fundamental impacts and cost consequences and if they don’t like them then tough. There is no joined up approach as to how regulations are managed within Ofgem, how much regulation is requested from suppliers at any one time. Suppliers are expected to meet all timescales, irrespective of whether this is even possible to achieve and irrespective of how much it costs.”

Regarding the move to principles-based regulation, the letter lamented the fact suppliers are asked to interpret often “unclear, outdated and complex” regulations.

“The change to principal (sic) based regulation has served as a noose around the neck of energy suppliers, which should have had the opposite effect. Suppliers are asked to interpret what are often very unclear, outdated and complex regulations, and when Ofgem is asked to provide support in terms of what should be delivered or where systems don’t allow for such complexity, no guidance is given. It is felt this is so Ofgem can enact financially penalties should it so wish.”

The letter closed by accusing the regulator of contributing to the energy market “being brought to its knees”.

“We implore you Ofgem to act immediately. In-line with Ofgem’s formal complaints procedure, we expect all of the points and questions raised in this letter to be formally addressed within 20 working days.

“Please be advised that legal counsel is being sought on these matters and we expect full financial redress for Ofgem’s failings. Ofgem cannot and should not be allowed to continue to regulate in this manner with no accountability or consequence.”

Utility Week contacted Ofgem for a response and while the regulator would not comment directly on the letter, it pointed to a speech made by its chief executive at Energy UK’s most recent conference.

In his speech Jonathan Brearley said what the sector faced in the energy market today “has shown that we need to go further”.

He added: “Although the gas price rise is unprecedented today we will need to plan on the basis that shocks like this could happen again.

“Therefore, Ofgem, with industry and the government, will need to build an energy market that is more resilient to shocks like this in the future. This is likely to mean an approach to regulation which is more focussed on the business models that enter and operate in our energy market, and on the risk they carry.

“We will also examine the consequences for the wider design and implementation of the price cap.”