CHECK AGAINST DELIVERY
Thank you to Emma and Energy UK for inviting me here today.
This time last year I spoke to the Energy UK conference in the midst of the COVID-19 crisis.
Again, I do want to thank those who work in the industry for supporting customers through the challenges that the pandemic brought.
Today we face a different but big challenge for our industry, with rising gas prices.
I want to start by thanking industry, Government, NGOs and Energy UK again for the way we have worked together to support customers through this period.
As we come out of the pandemic, as global demand has risen, we have seen a rise in gas prices that is unprecedented in scale, pace and duration.
Prices are 6 times higher than a year ago and have more than doubled in the last month.
Yesterday was a remarkable day with prices rising to nearly 10 times the level of last year before falling back.
Global factors are at play and clearly if these include geopolitics, they are well above Ofgem’s pay grade.
National Grid have reported in its winter outlook reports this morning that supplies of electricity and gas are sufficient to meet peak demand scenarios.
While we are confident in this assessment, Ofgem has been working with industry and government to manage the impact of gas price rises which are putting undoubted strain on customers and on the supply companies that serve them.
Earlier the Secretary of State laid out the three principles governing our response which we fully support.
Let’s start with our collective role.
We all need to be fully focussed on the needs of our customers, particularly the most vulnerable, just as we were during the start of COVID.
This is undoubtedly a worrying time for them.
With those customers and industry in mind, there are three areas I want to focus on today:
- The impact of the recent gas price changes on household and business bills.
- How we manage through the changes we are seeing in the retail market.
- The implications of these changes for our future energy strategy.
On the first, the greatest concern we hear from customers is around increases they face in their bills.
Indeed, customers have already seen an increase in the price cap of £139 at the start of this month.
For millions of households, the price cap has played its part in mitigating the consequences of current gas prices.
But it is designed to reflect fair costs and therefore will need to adjust over time to reflect the recent changes to fuel costs.
It is hard to predict how long gas prices will stay high, but we do expect continued significant upward pressure on prices as a result.
Our message to customers who are worried about paying their energy bill is to contact your supplier to access the help and support that is available.
I know that even in these challenging times, energy suppliers will want to support the most vulnerable customers and I’m grateful to Energy UK and to the industry for the voluntary commitments we have put in place.
Equally, Ofgem has clear licence conditions that require suppliers to do so.
Ofgem is also seeking ways in which we can help directly.
For example, 50% of our redress fund, paid through enforcement action against poor company behaviour, will be earmarked to provide emergency credit for customers.
We have also agreed with BEIS that those customers of suppliers who have exited the market will still be eligible to access the Warm Home Discount.
Even with the support we already have in place, this will be an extremely difficult time for all customers in Britain as these new costs are ultimately passed through to bills.
Ofgem stands ready to work with government, NGOs and the industry to find ways to mitigate some of the worst impacts of any future price change on customers – particularly the most vulnerable customer groups.
We believe that there is an imperative to do so, just as there was with the COVID crisis.
The implications of the change in the gas price for companies as well as consumers have been stark.
Therefore, I want to turn to the second thing I wish to focus on - how we manage through the problems we are seeing in the supply market.
Already this year we have seen 12 companies exit the market this year causing change and disruption for over 2 million customers.
Given the continued volatility in the market, it is likely that more suppliers will exit the market and I appreciate the difficulties for those working in those companies and for their customers.
Ofgem’s safety net has worked.
When companies exit the market, households can be confident that they will be moved to a new energy provider, remain on supply and have their credit balances protected.
Although moving to a new supplier in this way is disruptive and, for some, will involve a change in bills, all affected domestic customers are protected by the price cap.
Ofgem will continue to work closely with the wider industry and Government to manage any further supplier exits, and to protect customer interests when this happens.
One thing I do want to emphasise though is that we are and will be examining the behaviour of companies impacted by the gas price change.
There has been incredible and fantastic work across the industry to manage these changes.
However if we do see sharp and unethical practices we will use the full extent of our powers, as will our colleagues in the Insolvency Agency and wider government agencies to tackle this.
In addition to managing the situation we are facing today, we need to understand and react to the consequences of the gas price changes for the energy market we operate in.
The energy market has worked well historically for customers. We saw an end to the highly concentrated market we had in the 2000s and greater competition and innovation have helped to keep prices lower and improve customer service.
The price cap, which was introduced almost three years ago, has also played its part.
When the costs of supplying energy go up or down, it ensures that suppliers only pass on legitimate costs to their customers.
While gas prices remain high, the cap will inevitably need to reflect them to allow suppliers to recover their costs, but it is still protecting millions of customers from the full impact and pace of the rising wholesale prices we are seeing today.
We accept that, as a result of the events of the past months, we will need to regulate the energy market differently.
What is clear is that when high gas prices hit, many suppliers simply could not cope with such a sharp sustained shock.
Ofgem has already been taking steps to make the market more resilient. We introduced requirements that limited the number of new entrants coming into the market from a peak of 18 in 2017, to just 2 last year.
We put in place new requirements on existing suppliers.
And we are working with BEIS to reduce the time taken to recover renewables levies from all suppliers.
However, what we face in the energy market today has shown that we need to go further.
Although the gas price rise is unprecedented today we will need to plan on the basis that shocks like this could happen again.
Therefore, Ofgem, with industry and the government, will need to build an energy market that is more resilient to shocks like this in the future.
This is likely to mean an approach to regulation which is more focussed on the business models that enter and operate in our energy market, and on the risk they carry.
We will also examine the consequences for the wider design and implementation of the price cap.
We know that we need to move at pace.
The increase in gas prices has put pressure on suppliers, and if prices subsequently fall fast, that will also bring its own challenges.
We will make sure that Ofgem is ready to address them.
There is a balance to be struck here and I do want to highlight the third principle laid out by the Secretary of State.
We need a diverse set of suppliers and do not want to lose the innovation, dynamism and customer value that successful challenger companies have brought to the market.
Over time, we need an energy market which is also fit to drive us towards net zero. That means not only a more resilient market, but one that can support customers through the remaining 30-year transition to a net zero economy.
Customer behaviour is key to getting to net zero and those who interact directly with customers are vital in that transition.
In summary we are up for the wider conversation that Emma and the Secretary of State highlighted this morning.
This brings me on to the third point I wish to cover today. The consequences of the changes we see in the gas market for our future energy strategy.
In particular, our plans for net zero and how we can protect customers from future gas price shocks.
The energy transition is at a critical moment.
With the phase out of coal we are heavily reliant on gas. Indeed, gas provides around 40% of our electricity, over half when the wind is not blowing, and provides 75% of our heating.
There will be several debates as to how we respond to future gas price shocks.
However, what is clear from the situation that the market finds itself in today, is that we need to diversify our sources of energy supply.
This does not mean giving up on the country’s climate goals but instead, as the Secretary of State and Emma have said, moving further and faster to pursue them.
Therefore, we the regulator are committed to supporting the Prime Minister’s pledge to make all our electricity generation low carbon by 2035 subject to security of supply and will work to make this possible.
With a more diverse market including more renewables, and dispatchable low carbon power sources such as nuclear, hydrogen and gas with carbon capture and storage, we will be better able to weather the economic shock we have seen in the past months.
Equally strong though, is the imperative that we make this transition at least cost while maintaining our security of supply.
We know from our own research, that a smarter, more flexible system will save billions of pounds a year.
Put simply, if we can control the time we charge our electric cars, if that same car battery can be a source of stability, we will need a smaller grid and fewer power stations.
In the coming months, Ofgem will lay out our ideas as to how we build an energy system that will help us do this.
In particular, this could mean expanding on the planned reforms in system governance, including a more local dimension and ensuring all markets deliver the flexible and efficient system we need.
Finally, Ofgem is changing too. For example, in recent weeks, as during COVID, we have needed to make some big decisions at a pace that many regulators would find uncomfortable.
We know that we will need to continue to do so.
We are already reforming ourselves to become more agile, responsive and quicker in our decision making and bringing in new skills.
This includes a focus on increasing our and the industry’s diversity and I am grateful to the work with Energy UK to pursue this goal. What we are seeing in the market today reinforces the need for this change.
So, in summary, Ofgem, industry and government have already demonstrated, through the COVID crisis, that we can respond in a way that protects customer interests and I’m sure we will continue to do so.
- Working together to support customers, particularly the most vulnerable, through the difficult price rises to come.
- Changing the energy market so it becomes more resilient, whilst continuing to offer dynamism, innovation and choice.
- Pursuing further and faster our net zero goals, not only for climate reasons, but to diversify our energy supply and protect ourselves from the risk of high gas prices in the future.
We Ofgem are ready to play our part.