How Ofgem is responding to the energy crisis
Ofgem Chief Executive Jonathan Brearley set out how we are working to make the retail energy market more resilient at the BEIS select committee yesterday (24th May 2022)
I know this is a very tough time for households struggling with their energy bills, coming when they are facing other big financial pressures at the same time.
As I laid out for the BEIS Select Committee, I am afraid to say conditions have worsened in the global gas market with Russia's invasion of Ukraine. This has heaped yet more increases and volatility onto an already strained market, with wholesale gas prices sometimes reaching over ten times their normal level. The price changes we have seen in the gas market are genuinely a once in a generation event not seen since the oil crisis in the 1970s.
Ofgem primary role is to support and protect consumers, and it is a role we take very seriously. We are doing everything we can to prevent any further costs being added to already high bills, to hold suppliers to account on supporting customers with payment problems, and directing them to available support.
While the picture remains uncertain and changeable, I do need to be clear about the likely price implications for October, both for customers and to ensure that government has the information it needs to support them. That is why I wrote to the Chancellor yesterday to give him our latest estimates of the price cap uplift. Unfortunately, we now estimate that this is likely to increase to around £2,800 a year on average.
I speak directly to customers on a very regular basis, and I know that this news, on top of the price rise in April, will be highly distressing, and I would encourage anyone having difficulties paying their bills to get in touch with their energy company to discuss the support available as soon as they can.
This is a moment for industry, and for Ofgem to redouble our efforts to ensure companies are fulfilling their obligations to consumers. That is why we have launched a series of rigorous compliance reviews, starting with a thorough assessment as to whether customer Direct Debits are being set appropriately. The review closed yesterday, and we are now analysing the results.
If we find evidence of suppliers not treating consumers fairly or complying with our rules, we will take swift action and make full use of our enforcement powers. Equally, we have heard concerns from consumer groups around charges. Therefore, we will review the allocation of the SOLR levy between standing and volumetric charges to ensure they are fair for all consumers, and will be coming forward with our thinking very soon.
We have also responded rapidly to this extraordinary crisis by making big changes to the regulatory regime alongside managing the implications of the gas crisis. We are in a very different place now, but there is a huge amount more to do.
There are three areas of reform we are focusing on:
- Addressing the economic model that allowed companies with little capital to enter the market by ring-fencing customer credit balances and renewables levies, preventing them being used as working capital, and significantly reducing the risk of this money being lost if a supplier fails.
- Introducing a much tougher approach to financial regulation to ensure that companies have the right governance, risk management and appropriate finances behind them.
- Adapting the price cap to allow it to adapt to the more volatile circumstances we find ourselves in.
I would like to emphasise that no regime can protect against any supplier failing, but the changes we are bringing forward are about reducing this risk and, crucially, ensuring that if it does happen there is minimum disruption and cost for consumers.
We are also clear that this crisis is not something the regulator and industry can resolve alone. Ofgem, NGOs and the energy sector will do all it can, working closely together to make sure we manage the implications of the price changes that are to come. However, the additional support needed for customers on affordability can only come from government, and I understand from our work with government that ministers stand ready and are prepared to do more.
Together I believe that we can shape a retail sector that is resilient and protects vulnerable consumers as best we can through the current crisis, and bridges to a future market that is far less subject to volatile international energy prices, but instead utilises cleaner, greener, home-grown energy.