Britain’s energy market regulator should have introduced tougher rules much earlier to ensure the financial resilience of household suppliers, Ofgem’s former chief executive has said.
Dermot Nolan, who headed Ofgem for six years until February 2020 and was in post during a dramatic expansion of the British energy retail market, said that with the “benefit of hindsight”, he would have implemented “stronger licence conditions earlier” for both existing and new suppliers.
Ofgem’s supervision of Britain’s crisis-hit energy retail market has come under scrutiny as seven suppliers who provide gas and electricity to 1.5m households have folded in the past seven weeks. In March this year there were 49 suppliers, according to Ofgem.
While the industry has been battered by record wholesale energy prices, some consumer groups and large energy companies have suggested there was a disaster waiting to happen in the industry and there should have been closer examination by the regulator of suppliers’ business models.
No household has been left without energy supplies as a result of the crisis but it is expected that consumers will end up with a collective tab approaching £1bn, if not more, as the costs of picking up customers from failed businesses can be spread across all bills.
In an interview with the Financial Times, Nolan said he thought the crisis had been caused by the extreme rises in wholesale electricity and gas prices in recent months and some companies “gambling” and taking a “very risky position that this price rise would not occur”.
“There are absolutely legitimate questions about whether Ofgem should have acted much earlier to stop this,” said Nolan, who is now director at the consultancy Fingleton.
“I suspect in some ways, perhaps looking back with the benefit of hindsight, I might have gone for stronger licence conditions earlier,” Nolan said, although he was less convinced the energy sector should have the same level of “intrusive” regulation as the UK’s banking sector, as some commentators have suggested, given that the failure of one energy supplier doesn’t necessarily cause system-wide risk.
Nolan clarified he was not speaking on behalf of the regulator but the recent market ruptures had given him cause to “reflect”.
Ofgem in 2019 introduced tighter rules for new suppliers entering the market, including having to prove they had sufficient funds to trade for a year and directors were required to detail past criminal convictions and business failures. At the start of this year, the regulator also toughened rules for existing businesses.
But there has been criticism from analysts and those remaining in the market that the rules were introduced too late and there was insufficient scrutiny of whether some companies could withstand a wholesale market price shock.
Gillian Cooper, head of energy policy at non-governmental organisation Citizens Advice, said on Monday that “the current chaos in the energy market just adds to the case for stronger regulation to protect consumers”.
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Chis O’Shea, the chief executive of Centrica, which owns British Gas, warned in July that he suspected some suppliers “must be trading whilst insolvent” and were using customers’ funds to meet other financial obligations.
There has also been scrutiny in recent weeks of how much money the owners of some suppliers were taking out of their businesses while they were racking up hefty losses.
Some smaller suppliers have also blamed the annual energy price cap, introduced by Ofgem in 2019 at the behest of Theresa May’s government, for the market turmoil.
Nolan said he “did not think about a situation where the price cap was the cheapest tariff in the market” — the cap is currently around £550 below the cost of buying energy on the wholesale markets for a household. But he insisted the policy was not to blame for the current turmoil, rather it was down to some suppliers’ business models and the wholesale price surge.
During Nolan’s tenure, the number of suppliers in the British market ballooned from around 24 at the end of 2013 to a peak of more than 70 in 2018, as new entrants saw an opportunity to ride falling wholesale markets in 2015-16 and undercut large incumbent companies that had high cost bases and outdated technology.
“By and large I think the competition has yielded lower costs for consumers,” Nolan added. “On service it’s been mixed, you’ve had some very poor service by new entrants but you’ve also had some extremely good service by some of the new entrants as well.”
Ofgem declined to comment.
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