How Ofgem can restore trust in the energy market
Spiralling energy bills, soaring household debt, and geopolitical uncertainty have plagued Ofgem’s attempts to reform the energy market and clean up the sector after an industry crisis which saw 30 suppliers collapse.
Capital adequacy rules, ringfencing renewable payments, and a new code of conduct for prepayment meters reflect a regulator eager to stabilise the sector and shelter customers and businesses from future market shocks.
Yet, the energy price cap remains persistently high, while the escalating conflict in Israel is only the latest thing to wobble wholesale markets and cause gas prices to spike.
With so much else consuming media headlines, you may have missed that Ofgem is on the verge of a new chairman – with Mark McAllister approved by Westminster’s Energy Security and Net Zero Committee following a grilling from its panel of MPs last week.
The current serving chair for the Office for Nuclear Regulation was bullish with the committee, arguing that Ofgem would learn the lessons from the market crisis, and that he would even be prepared to change the chief executive Jonathan Brearley if necessary.
With McAllister’s appointment now set to be rubber-stamped by government, City PM has made a five-point list for the incoming chair in his bid to improve Ofgem and strengthen the energy sector.
1) Help reform the grid
Prime Minister Rishi Sunak has signalled his intention to reform the approval process for new energy projects as the government scrambles to meet its targets for decarbonising the electricity grid.
National Grid’s electricity system operator has proposed a series of reforms to ensure that projects which are ready first are offered connections, including milestone requirements for developments in the queue.
These moves will require the support of Ofgem, which will have to greenlight the plans next month.
It is essential Ofgem does its bit to kill zombie projects and help new credible developments connect to the grid.
2) Rally the industry this winter
Customers will continue to face ultra-high energy bills this winter – roughly 50 per cent above pre-crisis levels, with specialists Cornwall Insight not expecting costs to ease any time soon.
With households pressed under a historic tax burden and the state’s coffers depleted from last year’s intervention and the pandemic, further support packages this winter are highly unlikely.
To this end, it is essential the industry comes up with its own solutions to shield vulnerable customers and ensure it maintains the trust of the public.
Everything from support funds, social tariffs, and standing charges must now be under Ofgem’s microscope.
3) Ditch the price cap
Insufficient hedging and a lack of fiscal prudence were the key drivers of the energy crisis in 2021, which saw 30 suppliers collapse.
Ofgem has rightly been criticised for its lack of oversight and for barriers to entry being so low into the market – and has sought to reform the industry accordingly.
However, it is undeniable that the price cap prevented suppliers from passing on vast wholesale costs to wealthier customers to help protect their business as gas prices began to rise.
Leaving the price cap in place risks further damage from the next major challenge the industry faces, regardless of how financially responsible suppliers are.
Ofgem must lobby the government to remove the mechanism and find a new way to protect customers who could otherwise be on the hook for the next crisis.
4) Boost competition in the market
As it stands, the energy market competes on little other than price – with a new Big Six establishing its dominance of the sector.
Over 90 per cent of the market is now dominated by half a dozen energy firms.
Ofgem should seek to shift the emphasis from switching, and enable new innovations by changing the terms of licensing for energy firms.
Adam Bell, ex-head of energy at BEIS and now head of policy at Stonehaven, released an excellent report last month on fixing the retail market – encouraging Ofgem to enable more bespoke offerings, such as deals just for charging electric vehicles and time-of-use options for tariffs.
Ofgem could open the market up to new innovators in a much more sustainable way if it permitted more creativity, providing a real challenge to the bigger players.
5) Build a better media strategy
The energy retail market is fundamentally unappealing.
Profits are effectively capped below two per cent, and profit-taking is so challenging that suppliers such as Shell with 1.5m customers recently abandoned the sector – selling up to Octopus Energy.
Yet, the perception remains that suppliers are swimming in earnings and squeezing customers.
While there are definitely reasons to hammer energy firms, such as poor customer service and the scandal of forced prepayment meter installations on vulnerable households, the truth is this a strained sector still recovering from a crisis.
Ofgem needs to adopt a more front foot approach with the media and explaining the challenges suppliers face if it wants to fix the energy market – and deflate empty populism.