Question of whether there needs to be a more interventionist approach should not be too hard to crack
Wednesday was a good day for the business select committee to announce an inquiry into the crisis in the retail energy market, and why so many suppliers – 26 at the last count – have failed. Citizens Advice has just provided MPs with a perfect pre-read: a quietly devastating analysis of the “catalogue of errors”, as it puts it, committed by Ofgem, the regulator.
The report is an excellent counterblast to the self-serving official narrative that says mass collapses appeared out of a clear sky, and that “unprecedented” spikes in the prices of gas were the sole culprit. Nobody, of course, doubts that the surges in wholesale markets triggered the crisis, but the story is more complicated.
The relevant question is whether Ofgem should have been prepared for possible upsets, and whether more rigorous policing of the retail market would have saved consumers a few hundreds of millions of pounds. Citizens Advice offers compelling evidence that the answer to both questions is: yes.
In its statutory role as consumer champion in the retail energy market, the body seems to have been warning the regulator for years about the dangers of allowing so many undercapitalised firms – “some being run out of owners’ living rooms and kitchens” – to enter the market. As long ago as 2013, it called for a formal review of the licensing regime.
“Many [companies] have been lightly capitalised, often with few signs of external funding and an apparent dependence on credit balances to provide their working capital,” says the report. “Few were profitable or had any reasonable prospect of becoming so.”
Ofgem eventually did review the rules on new entrants – but not until 2018, with tighter conditions applying the following year. By then, another 45 new companies had been given licences to trade in the 2015-18 period; and new rules for existing suppliers only arrived in 2021.
The picture adds to the impression that Ofgem, under political pressure to show it was promoting competition, was happy to welcome any Johnny-come-lately wishing to have a punt.
Note, too, Ofgem’s account that it flagged concerns about Avro Energy, the biggest supplier to fail before Bulb fell over, on 10 occasions between 2018 and 2021 as the company expanded to more than 500,000 customers.
Under the industry’s “mutualisation” rules that effectively dump the costs of corporate failures on to bills, Avro’s failure alone is expected to cost consumers £679m.
The total industry-wide bill stands at £2.6bn, on Citizens Advice’s estimate, or £94 per household. That is why the role in the crisis of Ofgem matters.
The regulator obviously could not have been expected to run a zero-failure regime, but it was still astonishing to read its former chief executive Dermot Nolan candidly concede to the FT a few weeks ago that he “did not think about a situation where the price cap was the cheapest tariff in the market”.
That, surely, represents a basic failure of regulatory imagination: commodity markets have always been prone to wild price swings. Rather like the bank regulators in the Noughties, the models never tested for extreme shocks.
The business committee’s inquiry is wider than just Ofgem, but the question of “whether there should be a more interventionist approach from the regulator” should not be hard for MPs to crack.
Next Taylor Wimpey boss would do well to ape predecessor’s approach
Pete Redfern, one of the FTSE 100’s longest serving bosses, says he’ll be laying down his trowel at housebuilder Taylor Wimpey next year. This news comes days after Elliott Management was reported to be building a stake in the firm. Are these developments connected?
Actually, almost certainly not. Redfern has been in post for almost 15 years, so his plea that it’s time for a break, and then something different, rings true. He might have skipped off earlier if Covid hadn’t turned up to sow confusion in the sector.
On the pandemic front, he got two things right. First, he tapped shareholders for £500m to bag more land while prices were temporarily depressed. A few shareholders grumbled but, 18 months later, the timing looks excellent. Prices have more than recovered.
Second, he declined to join the industry chorus lobbying Rishi Sunak for an extension to the stamp duty holiday in England and Northern Ireland at the start of this year. Demand for houses was already strong and the chancellor should allocate resources to where they are most needed, Redfern argued.
Shockingly, Sunak ignored the advice and extended the holiday. It was a ridiculous decision that probably cost the Treasury the thick end of £2bn. One hopes Redfern’s successor can similarly see the wider picture, even when the chancellor doesn’t.