Ofgem CEO, Jonathan Brearley, has today written to all domestic energy suppliers to warn them they must learn the lessons of the energy crisis as the retail sector is forecast to return to profit after five years of losses.
In the letter, he tells the sector’s CEOs that energy regulator Ofgem is ready to act against suppliers that do not yet have sufficient capital if they use profits for paying dividends above recapitalising.
After a period where suppliers have largely made losses due to difficult trading conditions, the price cap has now dropped, and the price of wholesale energy, while still well above pre-crisis levels, is much lower than over the last two years. This means the sector is likely to return to profit this year and suppliers can recoup some of the losses from recent years.
But while Ofgem has always been clear that reasonable profits are essential for a sustainable and well-functioning sector, the letter makes clear that financial resilience must be prioritised.
The letter also reminds suppliers that the energy regulator and government moved quickly to stem losses and protect consumers when prices were rising sharply, including with swift amendments to the price cap rate and methodology where suppliers were suffering higher than expected costs. And multi-billion-pound subsidies were provided for consumer bills from the public purse.
Now, as prices come down and profits return, Ofgem expects suppliers to act responsibly and in the interests of their customers and will act to amend the price cap rate and methodology to ensure that it continues to fairly reflect costs as market conditions change.
The letter also details how Ofgem’s reforms have shored up the sector to ensure it is more resilient, supportive and responsive than before the energy crisis and that there will be no return to the risky behaviours of the past.
Jonathan Brearley, CEO of Ofgem, told suppliers in an open letter today:
“An energy sector where companies can make a reasonable profit is important to create a sustainable and competitive market for consumers. However, a return to the practices we saw before the energy crisis isn’t on the table – suppliers must reciprocate the support the sector was given by consumers and taxpayers when wholesale prices increased by behaving responsibly as prices fall and profits return.
“The energy market has changed. Ofgem has introduced major changes to the market, and we need suppliers to learn the lessons of the energy crisis and play their part by making sure they’re financially robust, can absorb potential losses and are meeting our new capital requirements. I expect no return to paying out dividends before a supplier has met those essential capital requirements.
“We will closely monitor the situation, including to make sure that the market is operating competitively on price alongside customer service and innovative products, and to make sure that suppliers are meeting their obligations to the most vulnerable.”
No regulator of a competitive market could, or would want to, guarantee a zero-failure regime. But suppliers running at a loss for long periods of time leads to poor customer service, lack of consumer choice and, ultimately, supplier exits which leads to extra costs and disruption for consumers.
Alongside the warning on financial stability and profits, the letter outlined several other steps Ofgem is taking, including:
- Assessing whether the market stabilisation charge is still needed - under current market dynamics, it is soon expected to fall to zero.
- Reassessing the costs and benefits of the ban on the ‘acquisition only’ tariffs.
- Consulting on a new consumer standards framework with a focus on the needs of vulnerable customers and those in financial difficulty.
- Monitoring developments to see if Ofgem’s expectations of a return of price competition for customers, alongside competition on service standards and innovative products, are met. As a first step, we are asking suppliers to clearly publish all their domestic tariffs to provide customers and third-party intermediaries with complete transparency
- Expecting suppliers to resource themselves appropriately to meet their obligations on government schemes such as the smart meter rollout and ECO home insulations.
- Reviewing operating costs, which form a significant component of standing charges
Last week, following a round table discussion held at Number 11 between the Chancellor Jeremy Hunt and utility regulators, Ofgem and HMT confirmed:
- Ofgem is moving ahead with plans to ensure that pre-payment meter customers pay no more than those on direct debit, to take effect once Government support expires in April 2024.
- Ofgem will ensure all suppliers are passing falling prices onto consumers, keeping the price cap formula under review to ensure that it mirrors the costs facing suppliers. (The new lower cap from 1 July will reduce a typical annual household energy bill by £426).
- Ofgem will strengthen protections and support for the vulnerable by mandating the Code of Practice on prepayment meters.
- Ofgem is ensuring that suppliers can offer Additional Support Credit (ASC) to PPM customers in need.
- Ofgem will act against suppliers that have over-charged business customers and publish our review of the non-domestic market this Summer.
Notes to editors
Earlier this year, Ofgem set out clear expectations through a statutory consultation about the amount of money that an energy company must retain (capital adequacy requirements) before any dividends are paid to shareholders. This is so that companies are protected against market volatility and can also invest sufficient money into the business in order to provide the best service to customers during what is an extremely difficult time for bill-payers. This consultation closed on 6 May 2023. The decision is planned for later in Summer.
There are still some suppliers who need to build capital following the crisis, and so shouldn’t be returning dividends until they do so. The final Capital Adequacy Requirements will go to Ofgem Board later this month.