Supplementary written evidence submitted by Jonathan Brearley, Chief Executive, Ofgem (following oral evidence session on 25 June 2025) (COE0087)

Thank you for providing the opportunity to set out more detail on our financial resilience regime for energy suppliers, including how we are ensuring that Capitalisation Plans are delivered and how they ultimately benefit consumers. Where Plans are not delivered by suppliers, they will be subject to additional regulatory measures including a ban on taking on any new customers.

Background and context to Capitalisation Plans

During the gas crisis, the importance of financial resilience was made clear. Between autumn 2021 and autumn 2022, 27 domestic suppliers became insolvent. We took immediate action to strengthen our approach to retail financial resilience and have since implemented a package of interventions. Our measures are set out in our recent Powering Trust: Protecting consumers through financial resilience1 report.

On 31 March 2025, the Capital Target and Capital Floor came into force. Suppliers with domestic customers must at all times meet a ‘Capital Floor’ (£0 Adjusted Net Assets) and have or be working towards a ‘Capital Target’ (£115 Adjusted Net Assets per dual fuel customer). The distinction between the Capital Floor and the Capital Target served two purposes.

First, it created an ongoing ‘capital buffer regime’, ensuring that a firm could fall below Capital Target to absorb losses whilst remaining compliant with license conditions by staying above the Floor. This is important because if suppliers were not allowed to ever fall below the Capital Target, they would in practice maintain capital well above the Target. This would significantly increase the capital held in the sector to above an optimised level, harming competition and passing unnecessary costs to consumers.

Second, given the position of the sector post-crisis, we anticipated that not all suppliers would be above the Capital Target by the day the requirements came into force. If the Target had been a ‘hard’ minimum, some suppliers would have been forced out of the market, or we would have needed to set the Capital Target level below our desired optimised level.

The aim of our regime is to balance two forces:

• It must be acceptable for some firms to fall below the Target from time to time, some of whom will successfully get back above, but some of whom will ultimately fail.
• Firms falling below the Target must face restrictions on their activity and behaviour to incentivise them to achieve the Target and to protect consumers from excessive mutualised costs in the event of failure.

To provide further incentives for suppliers to behave responsibly our regulations include a set of default Transition Controls that take effect where a supplier is below the Capital Target without a credible Capitalisation Plan agreed with us. These include a sales ban (prohibiting all sales, marketing, and customer acquisition activity) and a ban on non-essential payments (including making any payment, providing any loan, or transferring any asset to a third party unless it is legally required, operationally essential, or approved by Ofgem).

Where a supplier produces a Capitalisation Plan that we deem credible, some level of self- restrictions will generally apply. Most credible Plans would include at least some aspect of the default Transition Controls. For example, we do not expect paying dividends to be in the Consumer Interest while a supplier is below the Capital Target, as equity capital flowing out of the business makes it harder to meet the Target.

As detailed in our Powering Trust report, 20 suppliers out of 23 are above the Capital Target while the remaining three have agreed a credible Capitalisation Plan with Ofgem. We have been clear that these three suppliers have work to do and that challenges remain.

When will all suppliers be compliant and how does Ofgem monitor this?

For the reasons set out above, where a supplier which is not meeting the Capital Target but has an agreed Capitalisation Plan in place, it is not in breach of our license conditions (at least for that reason).

Decisions on the content and duration of Capitalisation Plans will be made on a case-by case-basis and there is not a one-size-fits-all approach. All Plans must be time bound with a defined end date, have sufficient supporting evidence and be of sufficient quality to enable Ofgem to assess compliance – or progress towards compliance. We worked with all suppliers below Target during 2024 to prompt action, and relevant actions already taken ahead of March 2025 were included in the Plans.

Plans must be time bound with a defined end date, have sufficient supporting evidence and be of sufficient quality to enable Ofgem to assess compliance – or progress towards compliance. Those suppliers are also subject to significantly greater scrutiny from our financial supervision team. This includes specific quarterly meetings to confirm that progress is in line with or goes above the submitted Plan and that milestones are met.

What would happen if a supplier was not compliant?

Our default Transition Controls, described above, would automatically take effect should a supplier fall below the Target without a Plan agreed. There may be limited circumstances (such as significant government policy changes, an economic downturn, or changes to the supplier’s business structure) where either the supplier or Ofgem needs to make amendments to the Capitalisation Plan and Ofgem set out a specific process by which this could occur. For suppliers with an agreed Capitalisation Plan who deviate from delivery of the agreed plan at any point, Ofgem may take enforcement action (in line with the Enforcement Guidelines and our statutory powers).

I trust that you find this additional perspective helpful as your committee continues its enquiry into bills for domestic consumers.

Yours sincerely,

Jonathan Brearley

Chief Executive

July 2025