What’s the point of Ofgem?

This week saw the energy regulator baring its teeth as it lambasted retailers for failing to support vulnerable customers.

It had already issued provisional orders to Utilita and Scottish Power this month and in the update from its Market Compliance Review it gave just one supplier – British Gas – a clean bill of health.

Unsurprisingly, this has not gone down well with the companies concerned, several of whom have expressed their frustration to Utility Week.

One common criticism from these conversations was that Ofgem is talking tough to prove its relevance in the face of an existential crisis.

This has to be taken with a liberal sprinkling of salt in the circumstances and it goes without saying that it is vital to hold suppliers to account on their obligation to support vulnerable customers. However, it is also clear that Ofgem is badly in need of some positive headlines.

One that it definitely will not have welcomed was this week’s Financial Times story about the fallout of  its restructure, which led to an exodus of experienced staff and widespread demoralisation. The article is actually slightly out of date, given the restructure has largely finished. However, its impact is still being felt and for a team that weathered the Covid storm and then emerged straight into an energy crisis, morale has taken a beating.

There doesn’t appear to be much cause to hope things will get any easier for Ofgem in the coming months, with a government review into its role kicking off, continued scrutiny on the state of the retail market and a price control determination to be delivered.

And with government setting energy prices directly in the short term as well as dictating the agenda on wider market reform, there will be questions about what Ofgem’s role is going forward.

It’s not hard to see the review giving government enough ammunition to target Ofgem as responsible for many of the failings of the energy market and a convenient scapegoat. Of course, any great refresh would just see the re-birth of Ofgem in a different guise, simply because government doesn’t have the requisite skills to manage the energy sector.

However, there will be debate about the breadth of its remit and whether it is sensible to have the same regulator overseeing both retail and networks.

I would be concerned about any attempts to split these responsibilities out, not least because of the time it would take and the inevitable unintended consequences. While it has made mistakes – in failing to be rigorous enough on the retail market and arguably too rigorous on the network side – Ofgem remains a global gold standard of regulation and does appear to have learnt from past mistakes. It has deep experience of a fragmented market that will see a lot more interdependencies over the coming years. With a clear and consistent mandate from government it can help to marshall the energy sector as a whole towards its common goal of decarbonisation.

It will get a chance to frame this narrative with its final determinations on the business plans of electricity distribution networks in two months’ time. This is likely to still be couched in the language of a cost of living crisis but must see Ofgem increase its ambition on investment in enabling the take-up of low-carbon technologies. In the draft determinations, the regulator surprised many by using what it described as a “relatively conservative” future energy scenario for getting to net zero by 2050 as its standard across the business plans.

On 30 November Ofgem should be bold and back the networks to play a major part in accelerating the energy transition. This may well be misplaced confidence that the take-up of low-carbon technologies will match this ambition in the short term – but that is far preferable to a scenario where energy networks are painted as a blocker to net zero, even if it costs more.

If Ofgem wants to find its voice again, it must address head on the difficult questions around balancing the trilemma. It has to show leadership and vision and should be arguing the case that the cost of not investing in net zero far outweighs the alternative.

The role of the regulator in balancing the trilemma is just one of the sessions at the Utility Week Forum on 8-9 November. Find out more here.