Ofgem has been ‘extraordinarily risk-averse’

Ofgem has been accused of agonising over regulatory decisions following the publication of its strategy to tackle the ongoing energy crisis.

In a letter to the sector last week, chief executive Jonathan Brearley set out a series of actions it is taking in response, including a holding consultation on whether the methodology for setting the energy price cap should be adjusted to ensure it properly reflects the increased costs and risks that have fallen on suppliers.

Adam Bell, the former head of energy strategy at the Department for Business, Energy and Industrial Strategy and current head of policy at management consultancy Stonehaven, said the regulator has generally been too slow to respond to change.

Speaking to Utility Week, he said: “It’s all the sorts of reforms which are necessary for the future system which Ofgem seems to agonise over, in some cases for years.

“Certainly, they are hard choices but to a degree one of the reasons it takes them so long to think about these things is because they want to be absolutely sure they are right before doing anything. I can sympathise with that because you don’t want to mess up the energy system.”

Bell said Ofgem needs to find ways, as they have done with the regulatory sandbox, of testing out proposals in the real world without “repeated cycles of consultations and evidence gathering”.

He said: “The problem is they have been extraordinarily risk-averse to a degree which I think is unhelpful.”

Ellen Fraser, energy retail partner at Baringa Partners, said her firm’s initial analysis that there may be as few as 10 suppliers left in the market at the end of the winter created a “strong response”, both from those who agreed and from Ofgem and government who said the number “was not helpful”. She still believes that is where the market is heading.

She added: “Would rapid action have caused a different result? Given any interventions need to be well thought through, knee-jerk reactions won’t help and several suppliers were already very close to failing. Probably not if we are honest, because we’d still be in the analysis phase of planning the intervention.

“And given that Kwasi Kwarteng was clear that the price cap will not move, Ofgem has limited options. However, rapid action on a few other related topics would perhaps have given more confidence that Ofgem really understands the severity of what’s happening.”

One industry source described Ofgem as being “painfully slow”.

They said: “They started meeting with senior industry representatives a couple of months ago to share ideas on how to handle the current situation.

“As an example, one request that was made was to frequently monitor the financial health of suppliers, as they did for banks in the financial crisis, to get a much better view of who was likely to fail and when. That would have allowed the industry to plan more effectively for SoLR (supplier of last resort) events.

“However, Ofgem have been slow to move forward – or at least slow to share progress with suppliers citing concerns over confidentiality.”

They added: “I did wonder whether Ofgem really understood how serious the situation was. The appeared to be listening to energy suppliers concerns but just weren’t moving quickly enough in response.”

Alarmingly for the regulator, the source said: “My sense is that the energy industry has lost faith in Ofgem. Suppliers are so frustrated by meetings which generate lots of promises of action but none of them are moving quickly enough.’’

However, Simon Ede, a vice president in Charles River Associates’ energy practice, said he is reluctant to criticise the regulator over the speed of its response to the current crisis.

He explained: “Ofgem have to balance a complex mix of different interests right now, from those in the most disadvantaged situations right through to multinational corporations. We know there’s not going to be a uniform view among industry stakeholders.

“There’s clearly a need to triage the current situation but there is also a strong argument to use this moment to have a structural and deeper strategic think about what kind of retail energy market we need by 2030. So, yes, in some areas move quickly, but at the same time in other areas good public policy needs rigour and sometimes therefore time.”

Bell similarly acknowledged the difficult position Ofgem finds itself in.

“My overall assessment is that they continue to recognise that they need to reform the market to make it compatible for net zero, but they also recognise they need to demonstrate the robustness of the market tin the short term to improve consumer confidence.

“In doing that I think they’ve struck quite a precarious balance between those two. It’s not clear to me that they’ve got it right. What it does absolutely show is Ofgem has been historically too slow to think about some of these issues, especially around fit and proper person requirements. The regulatory regime hasn’t moved fast enough to keep up with the changing times.”

While Ofgem did not respond directly to the comments, the regulator did refer back to a recent speech made at Energy UK’s conference by Brearley where he said: “We are already reforming ourselves to become more agile, responsive and quicker in our decision making and bringing in new skills.

“This includes a focus on increasing our and the industry’s diversity and I am grateful to the work with Energy UK to pursue this goal. What we are seeing in the market today reinforces the need for this change.”