UK households will pay £2.7bn to cover cost of failed energy suppliers, says NAO

Billpayers were hit by a 54% energy price spike in April (Andrew Matthews/PA) (PA Wire)

UK households will collectively pay an extra £2.7bn to cover the costs of 28 energy suppliers that have gone bust, according to a damning report by the National Audit Office.

It means each household faces paying an average of £94 more on their bills, adding to massive increases resulting from soaring gas and electricty prices and rises to food, fuel and other essentiuals.

Years of failings by energy regulator Ofgem were partly to blame for the bill increases, the NAO found.

Consumers face being hit with yet more costs when the bill finally comes in for the collapse of Bulb, the biggest supplier to get into trouble this year.

Bulb was considered too big to fail and was bailed out by the government, with £1.9bn of public money currently earmarked to cover the costs.

While soaring wholesale gas and electricity prices had been the catalyst for a crisis that has pushed suppliers over the edge, Ofgem’s actions had increased the risks to consumers, the NAO said.

NAO head Gareth Davies said that Ofgem had allowed suppliers with weak finances to enter the market and had failed to foresee that there could be a period of sustained high energy prices.

That allowed a market to develop that was “vulnerable to large-scale shocks," he said.

He added: "Consumers have borne the brunt of supplier failures at a time when many households are already under significant financial strain, having seen their bills go up to record levels. A supplier market must be developed that truly works for consumers."

The NAO found that Ofgem’s system for transferring 2.4 million customers to new suppliers had worked well with the “vast majority” of people experiencing no disruption to their gas and electricity. However, it still added to household bills.

Citizens Advice had warned for a decade about the risks posed by allowing dozens of inexperienced companies without strong financials to set themselves up as energy suppliers.

The charity’s chief executive said the report underlined “serious failures” by Ofgem.

“It’s totally unacceptable that suppliers entered the market without proper checks and that customers were landed with a multi-billion pound bill as a result,” said Citizens Advice chief executive Dame Clare Moriarty.

Government had instructed Ofgem to boost competition in the energy market in an attempt to break the stranglehold of the Big Six suppliers.

The regulator has conceded that the approach it took was too lax, that more stringent criteria should have been in place and that consumers had lost money as a result.

Dame Clare added: “Ofgem has started to beef up its rules; it now needs to make sure companies stick to them.

“The government must also play its part in protecting customers when their supplier collapses.

“That means overhauling the system to reduce the costs from future failures and end harsh debt collection practices from administrators.”

The set-up of a price cap brought in by the government in 2019 has also been highlighted as a contributing factor in the recent chaos.

Ministers had intended the cap to protect consumers and prevent suppliers making excessive profits while hiking household bills.

However, the cap helped to ensure the demise of suppliers who were unable to pass on rising costs to customers.

Most at risk were smaller suppliers and those that had failed to properly hedge against the risk of rising prices.

Before the end of the year more than two dozen had collapsed. The price cap was increased to a record £1,971 in order to account for soaring wholesale energy costs. A further increase to as much at £3,000 for the average home is expected in October.

Ofgem said it accepted the NAO's findings, and is working to fix the problems raised.

"While the once-in-a-generation global energy price shock would have resulted in market exits under any regulatory framework, we've already been clear that suppliers and Ofgem's financial resilience regime were not robust enough," it said.

"While no regulator can, or should, guarantee companies will not fail in the future, we will continue to take a whole-market approach to further strengthen the regulatory regime, ensuring a fair and robust market for consumers which keeps costs fair as we move away from fossil fuels and towards affordable, green, home-grown energy."