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Ofgem failures ‘come at a considerable cost’ to households – watchdog

Ofgem’s failures to effectively regulate energy suppliers as far back as 2018 have “come at a considerable cost” to households, the spending watchdog has said.

Despite problems with the financial resilience of energy retailers emerging in 2018, Ofgem did not tighten requirements for new suppliers until 2019 or for existing suppliers until 2021, by which point wholesale gas and electricity prices had increased to unprecedented levels, the Public Accounts Committee (PAC) said.

Some 29 energy suppliers have failed since July last year, affecting around four million households.

Customers have been left to pick up the £2.7 billion cost of the failures at an extra £94 per household, a cost that will “very likely increase”, the PAC said in a report.

The committee concluded this was due to “Ofgem’s failure to effectively regulate the energy supplier market”, adding that the regulator “did not strike the right balance between promoting competition in the energy suppliers market and ensuring energy suppliers were financially resilient”.

It found the price cap was “providing only very limited protection to households from increases in the wholesale price of energy”, noting that Ofgem expected prices could “get significantly worse through 2023”.

The Department for Business, Energy and Industrial Strategy (BEIS) and Ofgem should “review the costs and benefits of the price cap from a consumer’s perspective” ahead of making decisions about the future of energy price controls.

PAC said the position of vulnerable customers, who already pay higher energy prices, was “unacceptable”.

And it said it was not convinced that Ofgem “yet has the skills and capacity it needs to take a more proactive role in regulating the energy supplier market”.

PAC chairwoman Dame Meg Hillier said: “It is true that global factors caused the unprecedented gas and electricity prices that have caused so many energy supplier failures over the last year, at such terrible cost to households, but the fact remains that we have regulators to set the framework to shore us up for the bad times.

“Problems in the energy supply market were apparent in 2018 – years before the unprecedented spike in prices that sparked the current crisis, and Ofgem was too slow to act.

“Households will pay dear, with the cost of bailouts added to record and rising bills.

“The PAC wants to see a plan, within six months, for how Government and Ofgem will put customers’ interests at the heart of a reformed energy market, driving the transition to net zero.”

Rocio Concha, director of policy and advocacy at Which?, said a “long-term” solution to mounting energy costs is clearly necessary.

“While additional support and the energy price cap guarantee provided short-term relief for many households, it is clear we need a long-term solution to soaring bills,” she said.

“The Government and regulator must urgently carry out a wide-ranging review of energy pricing – including the price cap – to build a fair and affordable system for consumers.

“The Government must also develop a programme to rapidly improve the insulation of homes – as this will help to reduce people’s energy costs for years to come.”

An Ofgem spokesman said: “The sheer scale and pace of this once-in-a-generation global energy price shock meant supplier failures were seen all over the world.

“However, the Supplier of Last Resort scheme acted as a vital safety net for British consumers, ensuring they continued to receive energy when their supplier failed and kept their credit balances. This safety net inevitably incurred costs.

“Looking ahead to this winter, prices remain volatile, however the market is now in a much more resilient position, partly due to robust steps we’ve taken to reduce the risk of future supplier failures and to raise the bar on entry for new suppliers.

“And our proactive compliance reviews have dug deep into the practices of all energy suppliers, enabling us to demand improvements where they have been found lacking.

“We will continue to evolve how we regulate the market as Britain shifts away from imported fossil fuels to an independent, secure and homegrown energy system.”