Profits expected this year in the retail energy market
As a result of volatile energy prices, most retail energy companies have made losses for the last two years. Some are expecting to return to profitability this year.
In April, we introduced enhanced financial responsibility principles, which come into effect on 31 May. The principles set out conditions that should be met before energy suppliers make non-essential payments, including dividends to shareholders.
Today, we’ve written to energy suppliers to explain our expectations. The overarching principle is that undercapitalised suppliers should not pay dividends – they should keep profits to build financial resilience.
Moving from loss to profit
The gas crisis in 2021 exposed financial weaknesses in the energy retail market. Having agreed fixed low-cost deals to attract more customers, some suppliers couldn’t afford to buy energy at high global gas prices. Many suppliers went bust and customer service standards fell.
Ofgem reformed the price cap so that:
- suppliers’ reasonable costs can be recovered more quickly
- when prices fall, customer bills fall sooner.
These changes are starting to have an impact and market conditions are more stable. We’re likely to see a return to suppliers making a reasonable profit.
A return to energy suppliers making a reasonable profit is where we need the market to be. A financially resilient sector will encourage investment and innovation, and deliver better outcomes for consumers.
A profitable and investible sector is better placed to ride out volatility in the future, while also more likely to be innovative and dynamic, providing energy at a reasonable cost and good customer service.
We will continue to track the profits of suppliers to ensure they are reasonable.
We have set out our proposed approach on how allowable earnings need to change in the default tariff cap. This is one of several changes we are making to ensure stability in the market and improve the financial resilience of the sector, including changes to the capital suppliers are required to hold to manage ongoing volatility.
Paying dividends: what we expect from suppliers
In April, we published our decision on strengthening financial resilience. This included an enhanced Financial Responsibility Principle and a market-wide obligation to ringfence Renewables Obligation receipts attributable to domestic supply.
The enhanced Financial Responsibility Principle requires suppliers to:
- Have sufficient capital and liquidity to meet reasonably anticipated liabilities
- Notify Ofgem when certain ‘triggers’ are met. Where this is the case, suppliers must give us advance warning before making any non-essential payments out of the business, including dividends.
When suppliers are contemplating paying a dividend in relation to 2023 and 2024 financial results, our expectations are:
- Suppliers should not make distributions to shareholders if after the distribution their capital position is below the level of capital judged sufficient by their board
- When judging the sufficient capital position, the board should take into account the supplier’s credible trajectory to meet prospective quantitative regulatory capital requirements (e.g. the capital target proposed)
- Suppliers in a negative net asset position should not make distributions. They should keep profits to build resilience
- If any supplier wishes to make shareholder distributions outside of this guidance, it should engage with us and expect a high bar to any exemptions.
In today’s letter to suppliers, we have explained why we would have serious concerns if undercapitalised suppliers sought to distribute profits to investors rather than building capital. This could create excess vulnerabilities to stress for a given supplier, impair its ability to deliver essential investments and high quality customer service, or impede its ability to manage responsibly costs that could be mutualised. Our expectations are consistent with Ofgem’s objective to protect energy consumers, and in line with licence conditions.
We are considering responses to our proposals to introduce common quantitative regulatory capital requirements from the end of Q1 2025. The letter explains that we are not seeking to bring that forward through the back door. Today’s temporary additional guidance covers the transition period until then.