A new phase for managing the COVID-19 crisis

Jonathan Brearley

Jonathan Brearley

Ofgem CEO
2nd June 2020
Areas covered:
Consumers
Row of houses
Since the COVID-19 crisis began in March, Ofgem’s response has been guided by our overriding objectives: protecting consumers, especially the vulnerable, ensuring secure energy supplies and maintaining the safety of customers and the workforce.

 

We worked with government and industry to help struggling prepayment customers stay on supply, especially those in financial distress or self-isolating. 

We also amended our regulations and reprioritised Ofgem’s work programme to allow the industry to focus its resources on the issues that matter most to customers.

I want to thank industry and front line energy workers in particular for working collaboratively with us and helping the UK meet its energy needs at this challenging time.

We are now entering a new phase of managing the COVID-19 crisis which will include easing of restrictions. However, the industry is likely to need to rely on different working practices for some time.  

We will be operating in a very different economic climate too. The Bank of England last month forecast that the British economy could shrink by 14% this year due to the impact of COVID-19. This is likely to lead to financial distress for many customers.

Therefore, Ofgem is planning the next phase of our response. In this phase, we will remain firmly focussed on customers’ needs and make sure that companies are able to adapt to their changing circumstances.

We are taking action in three areas:

  • the impact on energy prices, in particular the price cap
  • ensuring suppliers continue to help struggling customers
  • raising standards as we move closer to a business as usual regulatory framework

Prices

The price cap, which Ofgem sets, enables customers to benefit from the significant fall in wholesale energy prices in the wake of COVID-19.

Around 15 million households, or half the UK population, are protected by the default tariff and prepayment meter price cap, including some of the most vulnerable.

Ofgem updates the cap twice a year so that it reflects the underlying costs of supplying energy.

As a result of financial hardship, some business and household customers are likely to be unable to pay their bills. Therefore, bad debt costs energy companies incur may rise. Although there is a mechanism for bad debt costs within the existing price cap methodology, some suppliers have asked Ofgem to adjust for any potential increase in the future.

In our open letter today, we explain that we do not have sufficient evidence to justify this for our next 6 month price cap period starting in October. However, if, in the future, we see a significant increase in these costs we will take this into account. 

Overall, if the trend of lower wholesale energy prices continues, we expect households on default tariffs to see a meaningful reduction in prices over winter as a result of the next update of the cap.

Lower wholesale prices are also reflected by lower energy prices across the market and, in general, households could save over £300 by switching to one of these fixed deals today.

But those who are on a default deal and decide not to switch can be reassured that thanks to the price cap, they are paying a fair price for energy.

Ensuring suppliers continue to help struggling customers

Nonetheless, these are difficult times for energy consumers, with many households and businesses facing financial challenges. This in turn has impacts on the energy supply chain, which may experience cash flow issues that could have negative impacts on consumers.

To mitigate these short-term cash flow challenges and ensure that energy consumers continue to be offered the support and service they need, Ofgem asked energy networks to develop a targeted and proportionate support scheme in which network companies will consider requests from energy suppliers and shippers that may require more flexibility on their network charges.

The support schemes which we have set out in today’s open letter are intended as focused, time-limited and capped support for individual suppliers and shippers that need it and don’t have access to other forms of finance.

We expect companies to be ambitious in restoring their standards of customer service and business as usual activities as quickly as possible.

We accept that challenges and exceptions will remain, particularly when asking to be allowed into customers’ homes, and companies should follow government guidance at all times to ensure the safety of staff and customers.

We will publish guidance in the coming weeks setting out which regulatory requirements which we had temporarily eased in the wake of the crisis are being re-introduced.

Raising standards

As companies adjust to new working practices and the Government eases some restrictions on lockdown, companies’ operational capacity will increase.

We expect companies to be ambitious in restoring normal standards of customer service and business as usual activities as quickly as possible.

We will publish guidance in the coming weeks setting out which regulatory requirements which we had temporarily eased in the wake of the crisis are being re-introduced.

We accept that there will be challenges and exceptions, particularly when asking to be allowed into customers’ homes, and companies should follow government guidance at all times to ensure the safety of staff and customers.

Delivering for customers

The energy industry has played a key role in the national response to COVID-19 so far.

It has the opportunity to play a key role in Britain’s economic recovery too.

Huge investment is needed in low carbon forms of transport, heat and power generation to hit the net zero emissions target.

By doing the right thing by their customers, especially those in distress, in the difficult months ahead, companies can help maintain the public support needed to transform the country to a low carbon energy system.

Next month, Ofgem will be setting out its draft determinations for the next set of network price controls, which will help put Britain on the path to net zero at the lowest possible to cost to consumers.

So I urge the entire industry to live up to its responsibilities, to be bold and ambitious in helping to protect consumers today from COVID-19 and climate change in the future.