In July, the BEIS Select Committee published a damning report into Ofgem’s performance, committed to greater oversight of the regulator, and made a series of recommendations, to both the Government and Ofgem, to improve retail energy market regulation.
Government gives the Committee the brush off
In its response to the Committee’s report, the Government has largely brushed off the Committee’s recommendations – while the Committee has the power to require actions of Ofgem, it has no such powers in respect of the Government, and even where recommendations obliged Ofgem to increase engagement with the Government, it appears not to welcome it.
For example, the Committee has instructed Ofgem to “start regularly and proactively reporting to the Department on how it is meeting its duties and to inform Ministers of any risks associated with the delivery of Government strategy” and asked BEIS and Ofgem to review, update and publish a new Framework Document within six months of the date of its report. The Government’s response was to refer to the Review of Energy Regulation announced on 8 September alongside the various price support measures, and to say that Ofgem and BEIS currently provide quarterly reports to BEIS’ Performance & Risk (P&R) Committee, which is a delegated committee of BEIS’ Executive Committee.
It goes on to say that “BEIS is currently working with Ofgem to review and update the joint BEIS-Ofgem framework document. This will be done in line with Managing Public Money guidance, and we intend to publish this in due course” – hardly an enthusiastic response to the Committee’s request for greater transparency and engagement. (Although in its response, Ofgem says that this Framework should be published by December 2022.) Similarly it brushes off the request for the “long-delayed” Strategy and Policy Statement for Ofgem to be urgently issued with a comment that it will look at it after the Review of Energy Regulation is completed, a Review about which next to no information has been made public.
The Committee recommended that the Government enters into hedging agreements in respect of the Bulb exposures, that it provides the Committee with detailed analysis of the cost implications for BEIS and the taxpayer of its decision not to purchase hedges, and that the costs of the Bulb Special Administration regime should be recovered from taxpayers rather than being added to bills. The Office for Budget Responsibility now believes these costs will be £6.5 billion, so recovering them through bills would place a significant additional burden on energy consumers (as well as being somewhat perverse in the context of the current universal subsidy for domestic consumers). In response the Government refused, saying that the hedging decision is consistent with official guidance, and it has no plans to review the cost recovery strategy because it has “worked well” in the past.
“The power purchasing strategy employed by the joint energy administrators has been scrutinised by both BEIS and HMT and is consistent with Managing Public Money guidance. The strategy is kept under close and constant review in the context of market developments. As this analysis is confidential and sensitive, it will not be included in the government response,”
– Department for Business, Energy & Industrial Strategy
One area in which some progress has been made, is that of reducing energy waste, however the substantive announcements on this have come since the publication of the Government’s response to the Committee’s report, and following a change in personnel: the Committee’s report was issued when Boris Johnson was Prime Minister, the Government’s response came under the premiership of Liz Truss, and now of course there is an entirely new team again under Rishi Sunak. Each time the Secretary of State for BEIS was replaced. The Government has recently announced an additional £6 billion of funding from 2025 to 2028, in addition to the £6.6 billion provided in this Parliament, alongside the creation of a new “Energy Efficiency Taskforce” with the intention of reducing the UK’s final energy consumption from buildings and industry by 15% by 2030 against 2021 levels.
Overall, the Government’s attitude to the report was pretty unsatisfactory. While action has been taken on affordability, this was not in response to anything the Select Committee had recommended, but was prompted by wider public pressure. On areas in which the public is unlikely to get excited, but which are nevertheless important to the public interest – oversight of Ofgem and the handling of the Bulb situation, the Government was extremely dismissive of the Committee’s ideas.
Ofgem is clearly stung by the Committee’s criticisms but appears to be complying with its instructions
As an independent regulator subject to Parliamentary oversight, Ofgem is not able to dismiss the Committee in the same way the Government has. Its response is therefore more accommodating, and Ofgem has committed to the various new reporting obligations imposed by the Committee.
“We accept that there have been significant problems in the way Ofgem operates and we support the majority of the report’s conclusions and recommendations. However, we do not accept that the characterisation of incompetence or negligence applies to the current board. The longest-standing member of the current board has been in post since May 2018 and the CEO was appointed in 2020. Since that time Ofgem has undertaken a significant programme of work to reform governance and the board has undertaken its duties to implement appropriate governance seriously and diligently, including by actively challenging and supporting the organisation and its executive leadership,”
In response to the criticisms of poor governance and admissions, particularly by former CEO Dermott Nolan, that Board decisions had been countermanded by operational teams, Ofgem has appointed a General Counsel to lead governance and revisions to board guidance “to ensure that all matters requiring board decision-making or steer are raised with the board in a timely manner”.
In a previous blog, I described how the Committee intends to extend its oversight into more operational matters, instructing Ofgem to re-do its impact assessment on its proposals for the ring-fencing of consumer credit balances, and to report back to the Committee with the updated analysis, with “enough time for scrutiny before a final decision is taken”. Ofgem agreed to do this. Subsequently a new consultation into its financial resilience plans has been launched including the updated impact assessment.
Retail market – and its regulation – needs radical reform
The retail energy market needs to be radically reformed if it is to function correctly, and to do this, BEIS needs to have a new vision for what the market is for. The Government seems to view suppliers as the energy equivalent of GPs – gatekeepers to the energy system who, by virtue of the fact the “own” the end user (consumer/patient) relationship, should be responsible for a wide range of ancillary activities. For GPs this often means providing health education, identifying cases of potential child abuse, supporting firearms licence applications, various types of data collection and so on. For suppliers, this includes distribution of welfare (the Warm Homes Discount), arranging home improvements (the Energy Company Obligation), collecting green taxes, and acting as the network companies’ agent, intermediating between them and the consumer.
At the same time, energy suppliers are more or less prevented from earning profits despite not being regulated monopolies. The price cap was implemented because of a false perception that suppliers were earning excess profits – simply looking at their accounts was enough to know that wasn’t true – but it embedded a narrative that suppliers are greedy profiteers, something that persists despite the failure of 30 suppliers in the past couple of years. (Part of the problem is that oil and gas producers have been earning excess returns in the past year, and they are also referred to as “energy companies”.)
The Government and Ofgem complain that suppliers are not innovative. They also note that consumers are typically dis-satisfied with their experience with suppliers. But neither is a surprise when profit margins are tight or negative – suppliers spend as little as possible on operations resulting in a poor consumer experience, and are reluctant to allocate money to innovation since there is no room for failure in a low margin environment…failed innovations cost money suppliers cannot afford to lose.
To make the market work it needs to change – non-supply activities should be moved to other parts of the market, and suppliers need to be able to earn decent returns. But at the same time there need to be effective consumer protections, and, as I have said before, the FCA Principles would be a good place to start. Once there is a new vision for the market, then there needs to be a new vision for its regulation.
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