Ofgem ignored repeated warnings over Avro Energy

Concerns about Avro Energy were raised with Ofgem by Citizens Advice on ten separate occasions in the three years before its collapse, the charity has revealed.

In a damning new report titled Market Meltdown, Citizens Advice accused Ofgem of making a “catalogue of errors” and failing to act against unfit energy suppliers for nearly a decade, leaving the market in a “precarious position” and consumers with a multi-million-pound bill.

As such the charity has made a series of recommendations for market reform in light of the recent turmoil, including an independent review of the causes of the market collapse and Ofgem’s approach to enforcement.

The report highlighted research by BFY Group which estimated that the total cost of supplier failures to billpayers since August this year will be £2.6 billion – a figure which does not include the £1.7 billion earmarked by the government for the administration of Bulb.

With 580,000 customers, Avro was the biggest ever retailer to go through the Supplier of Last Resort (SoLR) process when it failed in September.

The supplier was singled out by the consumer charity as being particularly significant, with Citizens Advice raising concerns to the regulator on multiple occasions as its customer base more than doubled between 2018 and 2021.

Specifically it warned Ofgem about customer service issues, debt recovery practices and a failure to respond to requests for information. Concerns were raised about the fact Avro continued to amass customers until its eventual failure, which according to BFY will cost consumers an estimated £679 million.

Elsewhere, the report slammed the regulator’s handling of enforcement action, going as far to suggest Ofgem allowed a “culture of rule breaking” in some areas.

It found evidence that back billing for energy used more than 12 months ago “remains rife”, with the charity helping at least 1,000 people affected by suspected non-compliant back bills in the past year.

It estimated these bills were £1,197 on average – totalling £1.32 million for Citizens Advice clients alone. However, it added, Ofgem has never taken formal enforcement action on its back billing rules, and last opened a formal investigation into accurate billing of domestic customers more than five years ago.

More evidence of rule breaking was found in relation to the requirement on suppliers with more than 50,000 customers to proactively offer prepayment and cash payment options. Further requirements were issued more recently for suppliers to provide additional support to customers in debt who are at risk of not being able to afford to top up their prepayment meter.

“Our analysis shows that suppliers have been repeatedly breaking these rules, and Ofgem has not opened a formal enforcement case into rules related to prepayment in the past 3 years,” the report said.

Customer service

The report criticised Ofgem for rarely using its powers to ensure better customer service, highlighting how it has not stopped a supplier taking on new customers in relation to customer service concerns since February 2019.

Citizens Advice noted that out of the 20 suppliers which failed before mid-November, only one had a “living will” or customer continuity plan. This, it said, likely contributed to delays in customers receiving final bills and refunds.

Furthermore, a freedom of information request revealed that despite record numbers of suppliers operating in the market, the number of Ofgem staff working on enforcement across all regulated companies fell by 25% between 2017/18 and 2020/21, before rising slightly in the year 2021/22.

Between 2017/18 and 2020/21, the number of staff working on compliance and monitoring rose by less than 5% and the total number of staff working across all regulatory functions at Ofgem rose by 1.5%.

Missed opportunities

Additionally, the report stated there were a number of missed opportunities over the last decade to reform the market. Between 2010 and 2019, as new suppliers entered the market, the charity raised repeated concerns about poor practice and financial viability.

In 2013, it called for a formal review of the licensing regime which accredits new suppliers. However, no review took place until five years later and even then Ofgem only tightened the rules on new entrants in 2019 following 11 supplier failures. It took a further two years to introduce new rules for firms already in the market.

Recommendations

In its conclusion, the report called for an independent review of the causes of the market collapse, including Ofgem’s approach to compliance and enforcement.

The report said this review should also consider the regulator’s policymaking processes to understand why action on licensing reform was delayed, despite risks being well known. Citizens Advice said changes should be made to ensure regulation can be more responsive in future.

It said a new consumer duty, similar to one being introduced by the Financial Conduct Authority, should be introduced in the energy sector to ensure good customer outcomes.

Other recommendations include Ofgem and government recovering the cost of SoLR levy claims over a longer period, more frequent Renewables Obligation (RO) payments and ensuring all suppliers pay a fair share of social and environmental costs, including for the Energy Company Obligation and Warm Home Discount.

Clare Moriarty, chief executive of Citizens Advice, said: “Energy customers are facing a multi-billion pound bill, in large part because Ofgem missed multiple opportunities to regulate the market and tackle rule breaking by suppliers.

“Recent wholesale price rises would have been hard to handle in any circumstances, but they need not have led to the collapse of a third of companies in the market. It’s now clear that reform is needed – and this isn’t just about avoiding another crisis.”

“If consumers lack confidence in the energy market, or feel they’re getting a bad deal, it will be even harder to transition to net zero. So reform is vital for the future as well as for avoiding the mistakes of the past.”

A spokesperson for Ofgem said: “Ofgem’s safety net has protected more than 4 million customers, moving them to new suppliers, ensuring they don’t need to worry about their energy supply and protecting their credit balances. In addition, the price cap is protecting millions more from the full impact of high gas prices this winter.

“However, we accept that the energy market needs reform and quickly – the current system was not designed for this sort of extreme market event.

“Building on the approach we set out in October at Energy UK and our subsequent open letter to industry, in the next few weeks we will be announcing changes that will demonstrate the seriousness with which we are tackling the pace of change needed, the concerns around the financial resilience of the market, as well as ensuring that fair prices are reflected through the price cap.”

A spokesperson for the Department for Business, Energy and Industrial Strategy (BEIS) said the price cap is “the best safety net” to protect consumers from excessive price hikes.

“To help consumers, we’ve launched an extra £500 million Household Support Fund for those most in need, on top of other schemes like the Warm Home Discount, which is being increased to £150 and extended to an extra 780,000 households, to support the most vulnerable,” they added.

BEIS Committee inquiry

In related news, the Business, Energy and Industrial Strategy Committee has announced it will commence an inquiry into rising energy prices and the resulting crisis in the retail market in early 2022. Topics for investigation will include: Ofgem’s performance in regulating and supervising suppliers; the functioning and performance of the energy price cap; and the cost to consumers of supplier failures, in particular, the fate of Bulb and the recovery of public funds.

Committee chair Darren Jones said: “Too many energy companies have been unable to weather the storm wreaked by surges in wholesale energy prices. Given the current state of the UK energy market and the impact on consumers of rising energy prices, it’s important we examine how the sector slipped into this crisis and what policy and regulatory measures will be necessary to fix it.

“In our inquiry, we will want to hear from energy bosses, from consumers, and from the government and Ofgem about the challenges facing the energy market. We will want to understand how far the energy price cap is able to protect consumers and examine questions of whether there should be a more interventionist approach from the regulator and tougher barriers placed on firms wishing to enter the energy market.”