Written evidence submitted by Ofgem (WIN0050)
- Gas and electricity prices, while lower than last winter’s unprecedented peaks, remain far higher than pre-crisis levels, leaving millions of households and businesses struggling to pay their energy bills alongside other cost of living pressures.
- Ofgem acted fast when the energy crisis hit, to stabilise the situation and protect consumers. For example: ensuring customers of failed energy suppliers were transferred smoothly to other suppliers; assisting government in designing and delivering its energy bill support schemes; strengthening regulation of financial risks in the sector to reduce the risks and costs of supplier failure; and moving from a six monthly to a quarterly price cap to increase resilience.
- Ofgem is taking further action as we approach another tough winter: introducing robust new rules to ensure prepayment meters are not installed when it is not safe for the customer; driving up standards such as ease of customers contacting suppliers; and ensuring energy suppliers are providing appropriate support to customers who are struggling with their energy bills.
- The regulator is closely monitoring the situation, including the rise in energy bill arrears and debts. Working with the Ombudsman and Citizens Advice, along with a range of consumer groups and charities, to ensure we get timely information on the pressures facing customers, Ofgem will quickly identify and tackle issues as they arise, including any poor practice by energy suppliers.
- As markets (hopefully) continue to stabilise and new regulations restore resilience to the sector, Ofgem will review the various policies put in place during the crisis to ensure the right balance is struck to establish a well-functioning and competitive market that offers a fair deal to consumers on prices and delivers better service standards as the country transitions to a net zero energy system.
What role did the UK grid play in the high domestic prices of winter 2022-23?
- The Energy System Operator (ESO, currently part of National Grid) balances the GB electricity system: matching generation and demand to keep the network within safe operational limits. To do this ESO has access to a range of balancing services that can either bring on additional demand or turn it down.
- In total, for the fiscal year 22/23, ESO spent a record £4.1bn balancing the electricity system: matching generation and demand, and keeping the network within safe operational limits.
- The most significant driver of recent high balancing costs is the high price of gas. Balancing costs are closely linked to the wholesale price due to the need for the ESO to instruct gas-powered plants to switch on, or to increase output. As gas prices rose, the costs to balance the system therefore also rose as gas plants bought fuel at historically high prices to respond to system needs.
- As new low carbon resources are constructed, new network capacity is needed to connect them to the grid and ensure their output can reach centres of demand. There is a balance to be struck in how much network is built – building enough network to transport all the electricity generated on the windiest day would be extremely expensive and not optimal, so constraints in the system are inevitable.
- Instances of constraint are likely to continue to increase over time, as more wind farms connect in remote areas of GB and attempt to share or rely on the limited capacity available in the network. Ofgem is actively considering, with the Department for Energy Security and Net Zero, whether reforms to the current system could reduce the costs of managing the system, while facilitating the major investments needed at pace to meet decarbonisation targets.
Figure 1: Costs of energy and constraint payments incurred by the ESO by calendar year, compared to day ahead energy prices
What more could have been done to prevent price shocks being passed to consumer bills?
- The retail energy price cap delayed and smoothed the impact of high energy prices on households. However, Ofgem assesses that the price cap also carries costs for consumers and contributed to a lack of resilience in the sector. Ofgem shifted the price cap from six monthly to quarterly updates to make it more resilient in the face of continued market volatility – this has helped to restore stability to the market and ensures price falls are more quickly passed onto consumers.
- There is a trade-off between price stability and resilience – the more that prices are constrained by regulation, the more suppliers will struggle to manage price shocks, increasing risks of supplier failures which can be costly to energy consumers.
- Ofgem can help to ensure ‘fair prices’ for consumers but cannot tackle the challenge of affordability. The government offered unprecedented support last winter to consumers through the Energy Price Guarantee, Energy Bill Support Scheme and targeted payments for consumers on means-tested benefits, pensioners in receipt of the Winter Fuel Payment and consumers with disabilities. Ofgem helped to design and deliver these schemes, monitoring energy suppliers to ensure that suppliers provided payments in line with the scheme intent.
- The Energy Price Guarantee worked well in protecting all customers from the peak of energy prices. With energy bills remaining high, alongside other cost of living pressures, Ofgem stands ready to support the government with any further interventions to support households.
Figure 2: Price cap level and cost components, January 2019 to December 2023, and Energy Price Guarantee level, October 2022 to December 2023
How should energy companies respond if customers cannot pay their bills and what actions should they not have recourse to?
- Suppliers have an obligation to treat their customers fairly. The energy supply licence sets out a number of specific rules that suppliers must meet to support their customers, particularly those in vulnerable circumstances. While the regulator is working with suppliers to build on the good practice that exists, compliance and enforcement action provides a clear deterrent for poor behaviour.
- Suppliers have extensive obligations to support customers struggling to pay their bills. Suppliers must work with consumers to agree a payment plan they can afford, including reviewing previously agreed plans. Consumers can ask for: reviews of payments and debt repayments; payment breaks or reductions; more time to pay; access to hardship funds; advice on how to use less energy; and inclusion on the Priority Service Register if eligible. Ofgem expects suppliers to consider these requests carefully, including an individual customers’ circumstances, and to treat customers fairly at all times.
- For customers on Prepayment Meters, suppliers must take all reasonable steps to identify self-disconnections and offer appropriate support such as emergency credit, friendly hours credit, or additional support credit.
- Statute provides the right for suppliers to recoup debt through the installation of prepayment meters. However, suppliers may only do so where installation is deemed safe and reasonably practicable. Ofgem’s Code of Practice on Involuntary PPM, which we are incorporating into the energy supply licence, protects the most vulnerable consumers from PPM installation and introduces further safeguards for other groups. Customer disconnections are very rare.
- Ofgem does not advocate a complete ban on the use of prepayment meters: they are a useful and valued payment type for customers who want to control their energy spending and avoid getting into debt. Energy suppliers have a legal right to recover energy debts, and if they were unable to use prepayment meters, this could lead to more drastic action being taken such as bailiff action, property seizure, or disconnection. It would also lead to rising bad debt in the sector, which would have to be recovered in higher bills from paying customers.
- While the PPM Code of Practice provides important protections for consumers, Ofgem recognises that debt levels are a significant concern for customers and for suppliers. Ofgem has launched work with consumer groups and suppliers to examine the debt pathway for consumers and explore areas where suppliers could further support consumers in debt or at risk of debt.
Has Ofgem got its priorities right in addressing consumer protection?
- Ofgem is fully focused on our principal objective: to protect consumers’ interests now and in the future. Our 2023-24 Forward Work Programme set out a Consumer Interests Framework alongside our planned activities for the year that aim to deliver on those interests.
- We have been carrying out Market Compliance Reviews to assess how well energy suppliers have been meeting their obligations, and requiring improvements where suppliers fall short. These MCRs have covered key areas of consumer concern such as the setting of direct debits, supporting customers in payment difficulty, and treatment of vulnerable customers.
- Providing customers with good customer service is a critical part of an energy supplier’s role. In addition to ensuring compliance with existing rules, Ofgem has also considered the need for new rules. Specifically, Ofgem has recently issued a statutory consultation to introduce new requirements for suppliers to make it easier for domestic consumers to contact them and provide support for those struggling with their bills.
- For business energy consumers (the non-domestic sector), Ofgem has made immediate changes including working with industry to adapt the Retail Energy Code to avoid excessive delays and unreasonable requests for documentation during tenancy changes and urging suppliers to be more flexible with businesses who signed up for peak fixed rate prices. Ofgem is additionally consulting on:
- Introducing better complaint handling between suppliers and businesses – Ofgem’s non-domestic market review heard businesses did not always get the right level of customer service.
- Extending micro business protections to all businesses so energy bills spell out what is being paid to energy brokers plus allowing businesses to resolve disputes through a redress scheme.
- Creating better guidance over ‘deemed contract rates’ between customers who have not yet agreed contractual terms with a supplier to avoid problems like overcharging.
- As set out above Ofgem acted quickly to protect consumers throughout the crisis. As the crisis took hold and prices rose to record levels, a key priority was to stabilise the sector. Ofgem needed to take steps such as the market stabilisation charge to boost resilience of the market participants. We are confident that these measures were in consumers’ interests: reducing the risks of costly energy supplier failures and helping to restore market confidence.
- As prices have eased and resilience has grown, Ofgem recognises the need to keep these interventions under review - a balance must be struck between the need to protect suppliers from shocks, and the need to restore a competitive market that offers a fair deal to consumers on prices. We welcome the recent return of competition to the retail market and will be reviewing the market stabilisation charge and other measures introduced during the crisis to make sure that they continue to serve the interests of energy consumers.
How effective is the Government’s approach towards supporting the sector and delivering a functioning energy market?
- The government offered unprecedented support last winter to consumers through the Energy Price Guarantee, Energy Bill Support Scheme and targeted payments for consumers on means-tested benefits, pensioners in receipt of the Winter Fuel Payment and consumers with disabilities. This vital support amounted to bill reductions of £78.2bn across 2022-23 and 2023-24. Throughout the energy crisis, Ofgem has worked closely with government to help deliver these support schemes to both domestic and non-domestic customers.
- As the energy market stabilises and competition returns, there are areas where Ofgem believes the government could help deliver a better functioning market. For example, Third Party Intermediaries in the energy industry, like energy brokers and price comparison websites, who play a key role in the market, could be regulated to better protect customers; and access to the Energy Ombudsman could be expanded to include business energy customers.
- Ofgem also welcomes the government’s Call for Information to better identify domestic consumers who are not direct customers of domestic suppliers. This includes residents at mobile parks, care homes, homes above business premises and others where the owner of the property contracts for energy supply, as a business customer. Ofgem is keen to work with government to see how to collectively better support these customers to get the protections they need, even though they do not contract directly with licenced suppliers.
- More generally, Ofgem welcomes continued ongoing collaboration with Government – we are more effective working together to protect consumers and facilitate the transition to net zero.
Is the legislative framework on pricing controls suitable for protecting consumers?
- Parliament legislated for a retail energy price cap in 2018 which Ofgem implemented from the beginning of 2019.
- The price cap has largely achieved is intended effect of preventing price exploitation of inactive customers and driving incumbent suppliers to improve their efficiency. It also smoothed bills during the crisis and has ensured that price falls are passed on quickly to households.
- But the energy crisis has also revealed some risks and costs of the price cap: it undermines resilience in the sector, adds to capital requirements and costs, and requires interventions such as the market stabilisation charge that may limit competition. It is also unlikely to be compatible with the more flexible energy market we expect in future.
- We are exploring whether there is an alternative that could retain price protection for consumers but with greater flexibility and resilience, in order to inform consideration of the future of price cap policy by the government.
- In the short-term, Ofgem will continue to monitor and adjust the price cap to ensure that it continues to deliver fair prices to consumers – specifically:
- Keeping the price cap formula under review to ensure it mirrors the costs facing suppliers and does not over-reward suppliers as prices fall. This will include examining areas where suppliers were allowed to recover costs from last year to understand whether a similar ‘benefit’ has been created in current market conditions which should be recovered for consumers.
- Continuing to develop our plans to levelise pre-payment meter tariffs, so that PPM customers pay no more than those on direct debit, which we intend to take effect once Government support expires in April 2024.
- And, as above, reviewing the market stabilisation charge and other protections put in place during the crisis to ensure they continue to serve the interests of consumers.
 An international comparison of the cost of energy support packages - Office for Budget Responsibility (obr.uk)