Ofgem moving ‘way too fast’ on financial resilience

Octopus Energy’s regulation director has slammed Ofgem proposals to introduce minimum capital requirements for energy retailers, accusing the regulator of failing to properly assess the impact on the market.

Rachel Fletcher was speaking to Utility Week following the statutory consultation on measures to improve financial resilience published last November. In the document Ofgem axed plans to require all suppliers to ringfence their customers’ credit balances and proposed the introduction of a minimum capital requirement for all domestic suppliers.

The capital adequacy requirement would be brought in over a number of years in recognition that the sector is currently under-capitalised and operating in a volatile economic environment.

As such it proposed setting a shorter-term target for domestic suppliers to have net assets of £110-220 per domestic customer by end of March 2025, with suppliers required to submit transition plans showing clear “staging posts” or increments for how they intend to reach that target.

Yet Fletcher, who previously worked for the regulator for more than a decade, told Utility Week that Octopus had major concerns about Ofgem’s plans.

She said: “We think Ofgem is moving way too fast in what is a very important area of policy making. They’ve swung the bat so fast that they’ve missed the ball.

“The direction of travel towards some kind of prudential regime is one that we would support, and has got more credibility than requiring all suppliers to ringfence credit balances.

“But the capital adequacy proposals that Ofgem has put on the table so far are not ready for implementation. We are not confident that they’re appropriate, or effective.”

Fletcher highlighted the inadequate levels of hedging amongst the suppliers who failed in 2021 and said Ofgem’s proposals “don’t give any confidence that this issue will be nipped in the bud”, adding that Ofgem had “not properly assessed the cost of the proposals to customers or their impact on competition”.

She added: “Because they’ve just jumped straight from very high level consultation to statutory consultation they’ve not done any sophisticated analysis of the different ways in which suppliers finance their business and manage risk.

“So the proposals on the table are very, very unclear on exactly how Ofgem is going to go about assessing whether companies have or have not met their requirements. That’s not good for customers – and why we are worried about the effectiveness of the proposals.

“It’s not good for investors either because pretty much every supplier  – even those like Octopus Energy which have a very robust financial position – will be sitting with a huge degree of uncertainty about whether or not Ofgem will consider they are properly capitalised.

“If we want to make the retail sector attractive to investors again, the prudential regime should only be introduced once it can provide clarity on these matters.”

Responding to the comments, an Ofgem spokesperson said: “Our proposal to introduce a capital adequacy requirement effectively protects consumer interest in the long term, through ensuring suppliers operate with enough of a reserve to weather shocks.

“While there have been mixed reactions from stakeholders and these are difficult decisions, we are confident these measures will bring overall benefit to the industry, to ensure greater supplier resilience in a timely manner, and prevent further exits from the market on the scale we have seen last year.

“We are confident these reforms will cost customers less, and that they maintain the fine balance between financially resilient suppliers and driving competition and innovation, which consumers benefit from.”

Fletcher is not the only senior industry figure to raise concerns about Ofgem’s proposals.

Richard Hall, chief energy economist at Citizens Advice, said that Ofgem’s discretionary approach to ringfencing “worries” his organisation as it relies heavily on the regulator’s ability and willingness to identify problems and step in.

He further warned of a schism between energy retailers as companies present wildly different views on how to handle credit balances.

He said: “Suppliers are quite split on this. Several have approached us for meetings and discussions to put their case for what they think the solution should be.

“In some cases they want something tougher than what Ofgem is proposing and don’t think it’s going far enough, others think it’s going too far and some are essentially saying Ofgem’s broadly got it right.

“So suppliers aren’t really speaking with a single voice on this issue. There’s a range of views out there.”