Ofgem’s growth duty is a symptom of the mess we’re in

Ofgem’s number of statutory responsibilities has hit 15 with the extension of the growth duty. Writing for Utility Week, Hill & Knowlton London managing director of public affairs Tara Singh posits that the regulator's ever-increasing list of duties is a symptom, not a cure, to the mess we are in.

In January, the government extended the growth duty to Ofgem. This came three months after introducing another new duty, to deliver net zero, and also ironically coincided almost to the day the government closed a review of regulatory red-tape. In truth, Ofgem has been steadily accumulating statutory responsibilities since market liberalisation, with a new duty appearing on average every four years and the running total now hitting almost 15. The escalating quantity of competing objectives aptly, if depressingly, illustrates the ideological disarray of UK energy policy. A new growth duty is a symptom, not a cure, to the mess we are in.

At the dawn of market opening, Thatcher’s government focused on economic efficiency and the gradual introduction of competition. Famously the first regulator, Professor Stephen Littlechild, saw economic regulation as a transitory tool because “competition is indisputably the most effective – perhaps the only effective means – of protecting consumers against monopoly power. Regulation is not a substitute for competition. It is a means of holding the fort until competition comes.”

In Phase 2 – from Labour’s election in 1997 – Ofgem’s existing duties were supplemented with a principal objective to protect the interests of consumers “wherever appropriate by promoting effective competition”. This was the beginning of the now embedded cross-party view that government and Ofgem could direct the market to deliver consumer objectives, instead of simply enabling consumer preferences to be revealed by market competition. However, Ofgem primarily remained a competition watchdog – at least until prices began in post 2008.

This third chapter in the British energy saga was defined by the emerging energy trilemma: the political desire to balance and integrate energy affordability, security, and the move to low carbon energy. Ofgem’s duties expanded to include reducing greenhouse gas emissions and ensuring a stable supply of energy. Meanwhile, the competing demands of the trilemma saw every political action leading to future compensating reaction: energy suppliers were first required to fund weather dependent renewable power (initially to meet EU Directives), followed soon after by Capacity Market obligations (to pay for the on-demand generation required to integrate the weather dependent renewables). Suppliers were required to deliver social tariffs, then increasingly complex energy efficiency schemes, and finally smart meters – all paid for through presumed “excess” profits. As schemes got more complex, smaller suppliers below scheme thresholds became increasingly artificially competitive, leading to a blossoming of sub scale, poorly financed “challengers” which collapsed to spectacular effect during the post Covid, post Russia / Ukraine spike in UK energy prices. Whilst politicians tinkered annually with new interventions, competition policy was explicitly downgraded, with a 2010 amendment to Ofgem’s original duties requiring it to consider “any other manner” to “protect” consumers interests “whether or not it would promote competition”.

For a brief period, between 2010 and 2015, the new Conservative / Liberal Democrat Coalition government re-emphasized competition and switching, and even considered stripping back Ofgem’s statutory duties to focus solely on economic regulation. But by 2018 the new Conservative prime minister Theresa May legislated for a mass-market Default Tariff Cap (“price cap”) – an idea originally proposed by then Labour Leader Ed Miliband and decried by David Cameron as a communist plot. The May government change in heart was announced mid election via the Daily Mail, implemented without a proper Impact Assessment and introduced despite explicit warnings from the Competition and Markets Authority that such a measure was anti competitive. And thus Phase 4 was born: the world we now live in, where Ofgem and suppliers face a plethora of conflicting statutory duties to which growth has now, apparently, been added as the priority de jure.

This chaotic rag-bag of random duties has unfortunate real world consequences. Energy suppliers are legally obligated to deliver energy efficiency obligations whose complexity varies massively by customer base and geography (and fined if they fail to do so), but there is one standard allowance under the domestic price cap.

Suppliers are legally obligated to install smart meters across an increasing proportion of their customer base (and fined if they fail to do so), but consumers are not legally required to accept them, and suppliers are constrained from offering attractive financial offers by the set smart meter allowance in the price cap.

Suppliers are obligated to consider ”ability to pay” in its widest possible sense (far beyond the original protected groups of the elderly and the disabled)– and now effectively banned from installing prepayment meters – but are restricted from the ability to recover bad debt costs by the constraints of the price cap and given not additional funding by government.

In short, previous ideological regimes have been smashed uncomfortably together, with not only Ofgem but regulated suppliers required to make awkward and unpredictable trade-offs as a result. It has also become increasingly difficult for energy suppliers to manage or predict government policy, increasing cost and risk. Such a situation tends to penalise innovation, growth and pro-consumer outcomes – the very opposite of the situation any growth duty is nominally trying to solve for.

So if not a growth duty, what should politicians be doing instead? In my view, the path forward demands not incremental adjustments but a bold reimagining of regulatory responsibilities.

Suppliers should be re-entrusted with the core task of delivering energy safely and efficiently, potentially – recognising the political weather – with a regulated rate of return (sorry, Professor Littlechild, my heart is with you but the politicians are not). All other responsibilities and obligations should be reallocated to governmental or local authority bodies, better placed to manage and fund the inherent trade-offs such an approach requires. Given the financial constraints faced by many local authorities, this process could still potentially involve some financial contributions from suppliers. However, such contributions should be flat fees explicitly included within the price cap. Further, any such levies should be paid for equally by gas and power customers, thereby avoiding the current situation whereby the cost of government obligations – funded on electricity bills – makes the greener fuel ironically the more expensive one.

In conclusion, a radical regulatory reset is urgently need. A stripped back approach would both better protect consumers, and free suppliers to compete on the innovative services required to deliver net zero, from heat pumps to smart EV charging.

Only by unravelling the complex web of duties that currently ensnares the energy sector can we hope to create a system that is transparent, cost-efficient and serves the needs of consumers and the planet alike.