Written evidence from Ofgem (UKR0094)


Ofgem is Great Britain’s independent energy regulator.

We work to protect energy consumers and facilitate the transition to a net zero energy system, with particular protections for vulnerable people.

We are responsible for:

We operate in a statutory framework set by Parliament. This establishes our duties and gives us powers to achieve our objectives.

The government is responsible for setting the policy for the energy sector and proposing any changes to this statutory framework. We have a clear role to play to support policy issues such as decarbonisation and we need to operate within this framework. We do not direct overall policy in the sector. However, where we think there are important policy gaps that affect consumers, we can call this out.

We regulate only where necessary to protect consumers’ interests and we carefully consider whether any regulatory requirement we propose is proportionate. We carry out investigations into company behaviour when we believe they may have breached a condition of their licence, or the requirements of consumer protection, or competition legislation.

The energy system is undergoing fundamental change as the country transitions to net zero – and faces huge short-term challenges from high prices. Taken together, this makes it more important than ever that Ofgem has the right duties, is able to work effectively with Government and other regulators, and that our performance is adequately scrutinised by Parliament. We therefore welcome this inquiry and the opportunity to respond. In many cases important action has been taken recently to address the issues covered by this inquiry. In other cases, Ofgem and/or the Government is committed to do more. We would welcome the opportunity to discuss this further with the committee, either through this inquiry, or beyond.

Please note that Ofgem has additionally contributed to the joint response from the UK Regulators’ Network. The UKRN is a network formed by 13 of the UK’s sectoral regulators with three main objectives: to improve the consistency of economic regulation across sectors, deliver efficiency of regulation, and to improve understanding of how independent economic regulation works in the interests of consumers, markets, investment and economic performance. Ofgem’s CEO Jonathan Brearley previously served as UKRN CEO, a role which is rotated among the members to provide leadership and oversight of the network’s work.

  1. Are UK regulators being given a clear job to do?

1.1.                     Ofgem has a clear purpose: to protect the interests of current and future energy consumers. Delivering on that purpose is complex, and we need to consider multiple factors to ensure customers benefit from delivering fair prices, good standards of service including reliable energy supplies, and a decarbonising energy system. Government and Parliament provide Ofgem with specific duties to guide our work. For example, the recent Energy Act gave Ofgem a legal duty to protect consumer interests in the delivery of the UK’s net zero target. We welcome this new duty, which ensures we can prioritise support of the energy sector investments such as expanded electricity networks needed to deliver net zero.

1.2.                     These investments also support economic growth more broadly, a goal which the Government intends to formalise with its planned regulatory growth duty.

1.3.                     In addition to our statutory duties, DESNZ is due to publish a Strategy and Policy Statement, setting out in detail the issues which it would like Ofgem and others to prioritise and the factors we should take into account in our regulatory work.

1.4.                     The Government has also recently announced a Review of Economic Regulation of the energy, water and telecoms sector, which offers the opportunity for a rationalised set of duties for the main economic regulators based around the four goals of supporting customers, promoting growth, promoting competition, and protecting the environment.

1.5.                     We are engaging constructively with Government on the Review, and the goal of ensuring our regulation remains fit for purpose in protecting consumers and supporting both the economy and decarbonisation.

  1. Is the right balance being struck between the responsibilities of regulators and those of the Government, particularly where there are political or distributional trade-offs that need to be resolved? Are regulators appropriately independent of government? Is the right balance being struck between strategic and political input from government and preserving the operational independence of the regulators?

2.1.                     We believe that the UK’s model of independent regulation is important to give investors confidence to make long term investments, insulated from short term political interference.

2.2.                     However, Ofgem recognises that the transition from an energy system based on fossil fuels to net zero means the regulator will need to work much more closely with Government to deliver the best outcomes for consumers in Great Britain. It is our assessment that this can be managed through close collaboration without undermining Ofgem’s independence from Government.

2.3.                     For example, the creation of the Future System Operator requires work from Ofgem to set up the framework and regulation around it, but ultimately requires the legislative change provided by the Energy Act. Developing regulations and legislation in tandem requires closely working with colleagues in the Department for Energy Security and Net Zero, but we are clear that independent decision making within Ofgem remains vital.

2.4.                     Close collaboration with the Government was also needed during the recent energy crisis, with joint interventions needed to stabilise the market, manage the exit of failed energy suppliers, and protect consumers from escalating energy prices. We recognise that some trade-offs, particularly major interventions to tackle fuel poverty, are best made by elected representatives.


  1. Does the Government provide too much or too little guidance to regulators in making decisions, particularly in deciding between different objectives and priorities?

3.1.                     We welcome ongoing work by the Government to provide guidance to Ofgem through the development of the Strategy and Policy Statement (SPS). The SPS for energy policy in Great Britain presents an opportunity for continued strategic alignment around important policy priorities and will help guide us in making decisions to support the transition to net zero, complementing the net zero duty for Ofgem.

3.2.                     The consultation on the proposed SPS clearly articulated desired policy outcomes and the shared responsibility of Government, Ofgem and the Future System Operator (FSO) in achieving them. If and when an SPS is designated, we will continue to work closely with Government and the FSO to work towards defined policy outcomes, alongside engaging consumers and industry participants in the process.

3.3.                     As we look to future work, Ofgem will necessarily need to prioritise and acknowledge that trade-offs may need to be made in order to deliver work with a finite resource. It will be necessary to consider how pursuing our new net zero and growth duties work alongside the SPS strategic priorities. We look forward to continuing dialogue with Government on this important issue, to ensure a clear, implementable outcome.

  1. Are the roles and remits of different regulators sufficiently discrete, or is there overlap and duplication? How effectively do regulators co-operate with one another, and how could this be improved?

4.1.                     While current roles and remits are sufficiently discrete, the changes to the energy market needed to reach net zero will require new business models, products and services, potentially creating overlaps between regulators.

4.2.                     Ofgem has concurrent powers along with the Competition and Markets Authority (CMA) to enforce competition law in the energy sector. Prior to exercising these powers Ofgem must agree concurrency with the CMA under the concurrency regulations, only one regulator can act in a particular competition case.

4.3.                     Our work with the UK Regulators’ Network seeks to address potential overlap and duplication, delivering efficiency and consistency of regulation. For example, we worked closely with colleagues in the Financial Conduct Authority, Ofcom and Ofwat during the cost-of-living crisis to set shared expectations across our regulated sectors on how companies should deal with customers in financial difficulty. We see UKRN and its working groups as vital to ensure coordination.

4.4.                     Similarly, where regulators run similar price control processes, for example Ofwat’s regulation of water companies and Ofgem’s regulation of electricity and gas networks, we share and take into account lessons learned. This work ensures that innovation and adaptation is embedded across sectors.

4.5.                     Ofgem additionally engages with countries around the world to learn more about their approach to and experience with energy regulation. This enables us to understand global best practice, inform our policy development and responses to urgent issues. This engagement takes place through bilateral relations, global initiatives such as the Regulatory Energy Transition Accelerator and the Council of European Energy Regulators.

4.6.                     Regulators’ roles and remits will always evolve and we will continue to work with Government and other regulators throughout the transition to ensure regulation stays efficient and fit for purpose.

  1. Do the UK’s regulators have the necessary skills, capabilities and expertise internally to perform the roles they have been given? If they do not, how could this be improved?

5.1.                     Ofgem regulates a rapidly changing sector. As such we need to develop new capabilities to ensure we can effectively protect consumer interests. We have in recent years established teams to strengthen the cyber resilience of the sector, to promote the digitalisation of the sector, to consider the implications of Artificial Intelligence, and to build our internal data management and insights capability.

5.2.                     In response to the instability of the energy crisis, we rapidly strengthened our ability to monitor and regulate financial risks in the sector, bringing in new senior staff, including a Director with experience of financial sector regulation to lead our work on financial resilience and controls, bringing additional highly relevant expertise to our operation. We have increased resourcing for this area generally, including an increase of roughly a third in our retail compliance and enforcement teams, to strengthen our ability to drive up standards and hold energy suppliers to account.

5.3.                     In addition, Ofgem’s transformation programme is delivering improved flexibility to our operation, enabling us to quickly and effectively deploy staff, for instance to bring additional legal expertise to bear in a particular area, more quickly and effectively.

5.4.                     And our new Chair and board members have been recruited for their experience in a range of fields to bring independent oversight and support to Ofgem’s work. Coupled with improved governance processes, the board provides direction and accountability to Ofgem’s delivery against its roles and remits.

  1. Who should hold the regulators accountable for their performance against their objectives? What is the appropriate role of Parliament in performing this scrutiny role? How should the Government and the regulators themselves facilitate appropriate scrutiny and accountability of regulators? Are regulators sufficiently transparent about their own performance?

6.1.                     It is right that Ofgem remains accountable to the UK Parliament, along with Devolved Administrations where appropriate.

6.2.                     Formal scrutiny by Select Committees in both Houses is essential and welcome: Ofgem has recently provided both written and oral evidence to the Energy Security and Net Zero Committee, Public Accounts Committee and the Lords Environment and Climate Change Committee among others.

6.3.                     We strongly support the Government’s desire for regulators to be transparent and accountable across core duties. Ofgem lays its annual reports and accounts before Parliament, the Senedd and the Scottish Parliament, setting out clear reports on our performance and accountability, Parliamentary accountability and audit, and resource accounts. As set out in its consultation on growth duty statutory guidance, Government is considering introducing reporting under the growth duty to hold regulators accountable in their decision making and encourage sharing of best practice.

6.4.                     In addition, the Business Energy and Industrial Strategy Committee recommended that Ofgem provides annual updates on our approach to compliance and enforcement. We are happy to do so, and following changes to government departments, this will now be provided to the Energy Security and Net Zero Committee.

6.5.                     Through the gas crisis and energy transition the importance of this sector – along with Ofgem’s role – has never been clearer. Public scrutiny of our work, including through Parliament, is therefore more essential than ever, and we will continue to proactively engage to ensure effective oversight and challenge.

  1. What mechanisms and metrics could be used to hold regulators accountable on a regular and ongoing basis and to judge whether a regulator is performing well?

7.1.                     The Ofgem Board is ultimately accountable for the regulatory approach for energy, and this requires an objective and clear line of sight into critical areas of the organisation’s governance and performance. Given the volume of supplier failures in the UK retail energy market, the Board commissioned an Independent Review to analyse the root causes of, and learn any lessons from, these failures, with a view to shaping better regulation in the future.

7.2.                     As part of our ongoing commitment to transparency and accountability, Ofgem published the report in full and committed to implementing all the recommendations. This included a recommendation that Ofgem put in place a consumer interest framework and develop a framework for how effective competition is defined and measured.

7.3.                     These frameworks are supporting the development of new key performance indicators on delivery for consumers using the principles of fair pricing, quality standards, resilience and the low carbon transition.

7.4.                     The frameworks will also strengthen the impact assessments carried out when Ofgem makes a policy decision, helping to consistently and systematically assess the competition impacts of possible policy interventions including any trade-offs. These strengthened assessments provide clear information to support transparency and accountability.

7.5.                     All of Ofgem’s decisions are open to challenge, for example through appeal to the Competition and Markets Authority (CMA) or through judicial review. Ofgem’s price controls for electricity and gas networks are regularly referred to the CMA as part of the RIIO price control process and we welcome the additional scrutiny and oversight this provides.

7.6.                     Ofgem openly consults with stakeholders on its forward work programme annually and publishes its planned work programme in response to the consultation by 31 March each year. At the end of each delivery year Ofgem provides a comprehensive review of its performance within the Annual Report and Accounts where delivery against planned activities in our Forward Work Programme is reported on alongside a suite of key metrics that demonstrate the effectiveness of our regulations.

7.7.                     We will continue to develop our metrics to ensure they capture as effectively as possible Ofgem’s performance and the impact of our work. Given the breadth of sectors and duties regulators carry out, generic or universal metrics may not provide useful and accurate information to judge the performance of individual regulators. However, we remain open to working with the Committee, Government and colleagues to develop new mechanisms and metrics.


18 December 2023