The energy supplier market – the National Audit Office’s view

The National Audit Office published its report on the energy supplier market on 14 June 2022. The report is worth reading for those with an interest in the market – it contains a thorough and comprehensive summary of the market and looks at how things currently stand and also how we arrived at this point. Its publishing is also timely, given the rate of supplier failures has slowed somewhat since the flurry which occurred during 2021.

The report sets out (with the use of some helpful graphics) some key facts and figures, focussing particularly on the recent spate of supplier failures. These include the following:

• Around 4 million customers have had their supply protected by virtue of the recent SOLR appointments and the Special Administration of Bulb Energy.
• Although still to be determined with any certainty, the total cost to customers of the recent supplier failures is estimated to be around £2.7billion (i.e. around £94 per customer (although this is a relatively small proportion of the overall increase to bills which customers have faced)).
• These costs of supplier failure are “likely to have been offset by some customers having cheaper bills in previous years because new entrants to the market increased competition”, although this past saving is unquantifiable with any certainty. It also means that some customers will be disproportionately affected by these costs if they were less proactive in the past in switching suppliers to obtain cheaper rates.
• The overall costs of the Special Administration of Bulb Energy won’t be known for some time due to a variety of reasons (such as, whether all or part of Bulb can be sold and, if so, at what price; what the wholesale energy price will have been for the duration of the Special Administration (the administrators have not hedged as it is contrary to government policy to do so)). Once those costs have crystallised though, the report highlights that they can be recovered via a future levy.

In terms of legal points raised, the report also reminds us that Ofgem has applied to court for a determination as to whether it and SOLRs can claim in the administrations of failed suppliers to try and mitigate the ultimate cost of these failures which will be borne by customers. The relevant points being considered are:

• Ofgem’s ability to make a claim in the insolvencies of energy suppliers for unpaid Renewables Obligation Certificate (ROC) liabilities; and
• the ability of SOLRs to make a claim against insolvent suppliers for the outstanding credit balances of customers who transferred to them and which the SOLR had to repay.

So, whilst a ruling in Ofgem’s and the SOLRs’ favour here may not lead to a huge cost saving for consumers, the outcome is nevertheless keenly awaited.

The report also looks at Ofgem’s role as regulator and analyses what things it could have done differently to mitigate some of the issues which the market has experienced to date. It also summarises the changes being considered by Ofgem to enhance its financial monitoring of suppliers and to reform the existing regulatory framework for suppliers (see paragraphs 3.11 – 3.14 of the report).

The report’s findings include the following:

• Ofgem initially took a “low bar” approach to entry to the market. This meant it did not scrutinise applicants’ financial circumstances as comprehensively as it could have done (see paragraph 3.5 of the report).
• The energy price cap was not properly stress-tested (see paragraph 3.24).
• The SOLR mechanism has worked, in that no customers have had their supply interrupted, but the costs of it have been significant.
• Some recommendations for future regulation of the market are contained in paragraphs 22 and 23 of the “Summary” section of the report. These include points such as properly stress-testing the price cap and reviewing its suitability as a means of price protection for customers. The report also recommends that Ofgem sets itself objectives against which it can measure its effectiveness as a regulator in the future.
• Some key quotes include:
  • “Before 2021, when suppliers had failed the process of reallocating customers to a new supplier had come at minimal cost to consumers. Accordingly, Ofgem’s regulatory regime was not designed to prevent supplier failure, rather to minimise the impact and disruption of any failure for customers” (paragraph 3.4).
  • “it allowed a market to develop that was vulnerable to large-scale shocks and where the risk largely rested with consumers, who would pick up the costs in the event of failure” (paragraph 20 of the “Summary”).
  • “Ofgem’s approach to licensing and monitoring suppliers combined with the SOLR process effectively meant that shareholders had nothing to lose from exiting the market” (paragraph 3.10).

Ultimately though, the report does recognise the challenge which Ofgem has in regulating the market so that it can overcome the short-term challenges presented by the current volatility of the wholesale market but also increase competition and facilitate net zero. It is also having to reassess its role and the nature of the regulation of the market at a time when it is firmly in the spotlight, due to the recent press attention the supplier failures have gained and also the cost of living crisis more generally.

So, how Ofgem overcomes these challenges will be very interesting to see, and it’s clear that it (and the market) could look very different in a few years’ time.

Ofgem, along with the Department, must also ensure the supplier market recovers from its current state, where high wholesale prices combined with the price cap has stifled some aspects of competition, and where ongoing volatility means many suppliers still face financial risks. But this recovery needs to facilitate a longer‑term transition of the supplier market to one that truly works for consumers and supports the achievement of net zero.

https://www.nao.org.uk/report/the-energy-supplier-market/