Ofgem Blamed for Errors That Led to Energy Suppliers Going Bust: Can we trust the regulator?

Unless you’re with one of the UK’s larger energy suppliers, there’s a good chance that your energy company went bust this year. Legions of energy consumers found that their smaller, eco-friendlier, and more competitively priced energy suppliers have been forced out of business. As a result, many have been transported to a larger energy supplier like British Gas, and are now paying rates that far exceed what they signed on for when they last compared energy tariffs. 

Now, energy companies are placing the blame squarely on the energy regulator Ofgem. The watchdog has been accused of being asleep while on duty, and of even being a driving factor behind the circumstances that led to dozens of energy suppliers going bust. This has shaken consumer trust in the regulator as the industry and consumers alike navigate a complicated and uncertain energy market.

Why did more than 25 energy suppliers go bust?

To answer this question, we first need to look at how the energy market in the UK is run. 

For most of our nation’s history, the UK’s energy networks have been run by the state. However, in 1986, Margaret Thatcher’s Conservative government instigated the privatisation of the energy market. A measure that came into full effect in 1990. 

Since then, the energy sector has been virtually left to the whims of the markets, with private companies taking advantage of a sector with relatively low barriers to entry and profits to be made. 

Subsequent Labour and Conservative governments did relatively little to regulate this free market, although the energy watchdog Ofgem was created in 2000. In 2019, former Prime Minister Theresa May instigated the Energy Price Cap as a measure for preventing ‘rip off’ energy prices. 

An unprecedented surge in wholesale energy prices in the wake of the pandemic gave rise to an energy market crisis that exacerbated the problems that were already inherent in the market. Energy companies (especially smaller suppliers) operate on razor-thin margins. That is, after all, their USP when compared to larger suppliers.

The surge in wholesale energy costs led to an inability to cover operational expenses\. Unable to pass the increase in costs to the consumer because of the price cap, suppliers of all shapes and sizes were left with no choice but to stop trading.

What is Ofgem blamed for?

You may be wondering how Ofgem could be blamed for a rise in wholesale energy costs. According to consumer watchdogs and energy industry insiders, the energy regulator could, and should, have done more to crack down on rule-breaking suppliers.

Many smaller energy companies had been operating on precarious finances long before the surge in wholesale energy costs, with many operating completely unhedged. Many were reliant on the credit balances of their customers to stay afloat. And while this was a distressingly common practice, Ofgem only took action against one supplier. 

How is this affecting the energy providers?

Energy providers have been hit hard by the crisis. Even those that have remained operational still face high overhead costs and a lack of uptake from consumers who are waiting for the market to stabilise before switching. 

Bulb, one of the UK’s largest renewable energy suppliers has had to be temporarily nationalised to prevent the market from plunging into further chaos. On Wednesday 8th of December, an inquiry was opened by a panel of lawmakers whose job is to hold the government to account. They will look into the future of the market and energy pricing. However, it’s unlikely that households will be able to enjoy cheap energy for the foreseeable future. 

The cost of the energy market crisis and the subsequent collapse of suppliers is estimated by Investec Bank Ltd. to be around 3.2 billion. A cost that will inevitably have to be borne by unhappy consumers. 

What could have been done to protect the energy suppliers?

Industry experts and consumer groups state that the current crisis could have been averted had Ofgem been more rigorous in its regulation of the market. Citizens Advice reportedly warned Ofgem multiple times about suppliers operating on precarious finances, and does not believe that the regulator took sufficient action. 

Clare Moriarty, Citizens Advice’s chief executive said:

“Recent wholesale price rises would have been hard to handle in any circumstances, but they need not have led to the collapse of a third of companies in the market,” stating that the current crisis happened “in large part because Ofgem missed multiple opportunities to regulate the market and tackle rule-breaking by suppliers”.

Kathryn Porter, energy consultant at Watt-Logic concurs that in a free market it is the job of regulators to protect the interests of consumers and take direct action when private companies are poorly run, accusing Ofgem of being “asleep at the wheel”. 

“If we’re to believe the government’s narrative that only badly run suppliers have gone bankrupt, then what on earth has Ofgem been doing allowing half of the market to be badly run?”. 

How is Ofgem going to defend itself?

Ofgem is currently working with the energy industry to find ways to mitigate the impacts of further wholesale price rises on the industry, including raising the Energy Price Cap more frequently than the current six-month increments. 

Barriers to entry must also be significantly raised, with stricter capital requirements for suppliers. It has also stated that changes must also be made to the ways energy companies buy energy in advance.

Can we trust Ofgem after this news?

Energy consumers are facing the prospect of higher prices and a market with markedly less choice in the immediate future. Understandably, consumer trust has been heavily shaken in the energy industry and its slumbering watchdog. 

Time will tell whether the government and its regulator will be able to intercede on behalf of energy consumers enough to restore faith in the market. While the new measures suggested by Ofgem are welcome, many worry that they may prove too little, too late. 

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