Ofgem launches new proposals to strengthen energy market and protect consumers

25 Nov 2022 02:07 PM

Ofgem is today launching a new package of reforms designed to bolster consumer protection and ensure energy suppliers are more resilient to market shocks. 

The proposals include the introduction of capital adequacy requirements – which will help reduce the risk and cost of supplier failures. Ofgem will also be requiring suppliers to ringfence Renewable Obligation receipts and monitoring closely the use of credit balances. Today’s proposals look to protect current and future energy consumers by reducing the risk of future supplier failures and the associated costs and disruption.  

These policies are further steps as part of Ofgem’s overall reforms to create a more stable and viable market in the interests of both consumers and suppliers.  

These Statutory Consultations come on the back of robust review findings announced earlier in the week by the regulator, asking 17 energy companies to drive up standards for consumers. They also build on the work the regulator has done over the last year to ensure suppliers have robust business models and their directors are fit and proper for the role, to minimise the risk of supplier failure, which comes at a cost to consumers.  

Jonathan Brearley, Ofgem’s Chief Executive, said:  

“The energy crisis has had a profound impact on the sector, its business models, our approach to its regulation, and the way we think about risk.  

“These proposals will provide protections, checks and balances for consumers, suppliers and the entire sector to create a more stable market. We want suppliers to be able to be innovative and dynamic, while also making sure they are financially stable, and that customers’ money is protected.  

“This is a delicate balance and while Ofgem want well capitalised businesses that can weather price fluctuations, we also don’t want to block the market for new suppliers or force suppliers to sit on lots of capital they could be investing in innovative ideas. We are seeking views across the industry, recognising the different business models' suppliers have, on whether we have struck the right balance between resilience and competition.  

“Ultimately, we have a responsibility as a sector to ensure we are protecting consumers’ interests by making sure our financial regulations are as robust as they can be. At a time of extremely high energy bills, that responsibility is more important than ever. I accept that there are very different views across the industry, but I encourage all retailers to work with us to move the sector to a more vibrant and resilient position.” 

Today’s proposals include: 

• Building on work already done, ensuring suppliers are even more financially secure, to protect consumers – this will be achieved by setting a minimum amount of capital that suppliers must hold so the regulator can be reassured they can withstand future shocks 
• Preventing suppliers from using the Renewable Obligations money that they hold on behalf of others – requiring suppliers to ‘ringfence’ the money needed to buy renewable energy 
• Stamping out the misuse of credit balances – reinforcing rules on how all domestic providers use customer balances. If they are found to be reckless, further action will be taken, via Ofgem’s Enhanced Financial Responsibility Principle. 

Ofgem will also be making further policy changes to protect consumers and help ensure that there is a fair and resilient market:   

• EBIT (Earnings before interest and taxes) - a review of this aspect of the Price Cap to ensure a fair rate of return on suppliers' investments while keeping profits reasonable. The allowance is currently set at 1.9% and we are looking to make changes so the margin continues to be appropriate for customers and suppliers alike, over a wide range of market conditions. A variable rate may be adopted to take into account changes in energy market prices 
• Market Stabilisation Charge – these are proposals to extend this temporary measure designed to reduce the risk of supplier failure by sharing out some costs and risk between suppliers. This therefore encourages suppliers to buy enough energy in advance, or “hedge”, on behalf of their customers    
• Balancing Services Use of System – updating the price cap to reflect changes in the way charges are recovered from electricity network users, from a half-hourly variable price to a flat rate based on volume. 
• Price Cap Programme of Work – stakeholders will have the opportunity to input on Ofgem’s priorities for updating elements of the cap to ensure it continues to protect consumers 

The new raft of proposed reforms is the cornerstone of Ofgem's work in the retail market, aiming to support Ofgem’s vision for transforming the retail energy sector to be one that is performing better amidst the volatility in the market today, is more financially resilient with higher standards across the board, and reforms pricing regulation to be fair. 

Ofgem will be seeking a range of feedback on all aspects of the consultations from sector stakeholders and beyond, and it is anticipated reform of these policy areas will be published in Spring 2023. 

This is all part of the wider work Ofgem is doing to protect consumers and stabilise the market.