Ofgem

Ofgem
Parent organization	UK

The Office of Gas and Electricity Markets (Ofgem), supporting the Gas and Electricity Markets Authority (GEMA), is the government regulator for the electricity and downstream natural gas markets in Great Britain. Ofgem was formed by the merger of the Office of Electricity Regulation (OFFER) and Office of Gas Supply (Ofgas) in November 2000.

Responsibilities

The Office of Gas and Electricity Markets is responsible for:

• working with government, industry and consumer groups to deliver a net-zero economy, at the lowest cost to consumers;
• stamping out sharp and bad practice, ensuring fair treatment for all consumers, especially the vulnerable; and,
• enabling competition and innovation, which drives down prices and results in new products and services for consumers.

CMA investigation

In June 2014 Ofgem announced a Competition and Markets Authority (CMA) investigation into the trading practices and competitiveness of the country's "Big Six" energy companies: Centrica, SSE plc, RWE npower, E.ON, Scottish Power and EDF Energy. The investigation, which took two years, followed a referral by Ofgem to the competition regulator:

"There is near-unanimous support for a referral and the CMA investigation offers an important opportunity to clear the air. This will help rebuild consumer trust and confidence in the energy market as well as provide the certainty investors have called for," Ofgem CEO Dermot Nolan in announcing the investigation.

In August 2016 Ofgem said that it would implement the CMA's recommendation that suppliers should be required to provide the details of customers who have been on expensive tariffs for three years or more to rival suppliers. Ofgem also said that it would impose an interim price cap on customers using pre-payment meters.

Allegations of abuse of power

In September 2018, The Guardian published a report claiming that two Ofgem experts had been independently threatened with criminal sanctions if they publicly revealed information. Ofgem allegedly invoked section 105 of the Utilities Act 2000, designed to protect national security, relating to concerns about energy meters and renewable heat incentive projects.

Protect, formerly Public Concern at Work, has been helping both of the Ofgem whistleblowers, and has intervened in one of the ongoing legal cases.

The body’s chief executive, Francesca West, said:

“The whole of the UK energy market – that’s more than 600,000 workers – are currently being held to ransom over Section 105 of the Utilities Act, and threatened with a prison sentence if they speak up over wrongdoing. It is utterly shameful.

“Our society needs whistleblowers to speak up, to stop harm. But we also need organisations to be honest, open and operate legally.”

Market Stabilisation Charge

In May 2022, Ofgem was reported to be altering the parameters of the Market Stabilisation Charge (MSC), which it introduced in February 2022 in response to supplier volatility.

The MSC means suppliers are required to pay part of the wholesale energy losses caused when it acquires a new customer to the losing supplier. This only comes into effect when the wholesale power price falls considerably below the level assumed in the price cap.

When it was introduced, the regulator said this was designed to stop energy companies taking disproportionate financial risks, and ensure suppliers who had purchased energy in advance aren’t penalised, whilst protecting consumers' ability to benefit from switching to cheaper tariffs.

It came into effect on 14 April 2022, but has yet to be activated as wholesale power prices have not fallen far enough.

From 31 March 2022 to 14 April 2022, Ofgem further consulted on the MSC, announcing two technical changes to the parameters used in the calculation methodology yesterday (16 May).

These include changing the trigger point, reducing it from when prices fall 30% below the level of the wholesale price assumed by the current level of the price cap, to 10%.

Secondly, the percentage the losing supplier is reimbursed is being changed, increasing from 75% of the cost of the energy beyond the trigger point, to 85%. The cost of energy bought for that customer will be assumed to match the price cap methodology.

“Our approach is to set the parameters at the minimum intervention that we judge would allow an efficient and well-managed supplier to finance its business and make prudent hedging decisions,” Ofgem wrote in its decision.

“We have assessed this through considering the profitability of a notional supplier with 5 million customers that has hedged prudently at 100% of its projected sales covered by the price cap. This is not a precise science, not least because we cannot know what future prices will do, and so we have sought a balanced outcome across our scenarios.”

The move has faced some criticism, including from Martin Lewis, the Money Saving Expert, who wrote on twitter that “staggeringly [Ofgem] aims to effectively STOP firms undercutting the price cap...”.

Ofgem has rebuffed the claim, saying the reforms to the retail market, including these changes to the MSC are designed to make it more resilient and protect customers.

“We are making these changes to make the MSC more robust given the increased volatility in the wholesale gas market since Russia’s invasion of Ukraine,” the regulator said in a statement provided to Current News.

“This will reduce the risk of additional costs to consumers from supplier failures. It ensures that suppliers can buy electricity and gas needed to supply their customers confident that they will be reimbursed if they are undercut by other suppliers if wholesale prices fall.

“This will make sure competition is sustainable, make the market more resilient, and reduce the risk of supplier failure, which all customers pay for.”

Throughout 2021, 27 suppliers collapsed and Bulb entered special administration, and over the first few months of this year Whoop Energy, Xcel Power Ltd and Together Energy shuttered. Criticism was launched against some of these suppliers, for failing to sufficiently hedge and selling power at below market rates, this left them vulnerable to surging power prices towards the end of 2021 and into the beginning of 2022 as gas prices hit record highs.

The cost of placing the customers of the collapsed companies with new suppliers through the Supplier of Last Resort mechanism has further increased bills, with analysis from Cornwall Insight in December suggesting it had already added £2.4 billion, or £90 per household.

In April, the price cap was increased by 54% to £1,971, predominantly due to high wholesale gas prices but inclusive of the costs of supplier collapses. Recent research from Cornwall Insight suggests the price cap could hit £2595.19 for the upcoming winter period.

Along with the announcement of the changes to the MSC, Ofgem launched a consultation into whether the default tariff price cap should be set every three months, instead of every six yesterday. This too was met with some criticism, with fuel poverty charity National Energy Action suggesting this would lead to an increase in bills in the middle of winter, further straining consumers struggling with the rising price cap.

While the MSC is currently set to run till September 2022, Ofgem anticipates it will be extended out until 31 March 2023. It will launch a further consultation in June, that will assess this extension along with other elements of the MSC calculation.

 

Related Document

Title	Type	Publication date	Author(s)	Description
Document:Antidote to Privatisation is Public Ownership	Report	19 September 2022	Prem Sikka	"The report recommends progressive taxation and democratisation of corporations, so that they serve the interests of communities and people rather than just shareholders and executives. It recommends that essential industries, such as energy, be brought into public ownership. It shows that there is very little cost associated with bringing energy, and other essential industries, into public ownership."

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References

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