A £9.1bn bill for failed regulation of the UK energy sector, at £2.6bn for supplier exits and £6.5bn for the Bulb bailout, should be enough to prove that Britain’s energy policy is broken. But a year on and Ofgem does not seem much closer to working out how to fix it for the long term.
The regulator last week published a new set of proposals to “strengthen the energy market and protect consumers”. Where once the watchdog emphasised the promotion of competition between suppliers as the best way to protect consumers from high prices, now it says protecting “current and future energy consumers” means reducing the risk of corporate failures with their accompanying costs and disruption.
This makes sense given everything that has happened over the past 18 months, with undercapitalised suppliers failing at considerable cost to everyone else in the market. But while it seems that preventing supplier collapses is now the guiding principle of Ofgem’s policy, what is not yet clear is how to ensure that policy best serves consumers.
At the heart of the debate is a decision about ringfencing customer balances, which have been used by some suppliers to finance their working capital needs on the cheap. As recently as June, Ofgem’s chief executive was on record saying some suppliers were using them like an “interest-free credit card” and that under its plans, the watchdog would ensure that all suppliers had enough working capital to run without putting consumers’ credit balances at risk.
Five months later and, instead, Ofgem has concluded that forcing suppliers to hold balances separate would “represent over insurance” and “add unnecessary costs to consumers”.
Now Ofgem is proposing other measures that help protect against risky practices by providers. It is planning to proceed with rules to ringfence payments relating to renewables obligations, for example. It is going to introduce marketwide capital requirements, although detail is still scant on exactly what these will look like. If Ofgem reckons a supplier’s finances look shaky, it has proposed a power to force them to ringfence. And in the end, consumers’ credit balances will always be honoured — it is just that the cost will be mutualised across the rest of the market.
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But it is hard to conclude that Ofgem has avoided introducing more stringent protections on consumer credit balances for any reason other than that they could create real problems for some big suppliers. Incumbents such as British Gas, backed by Centrica, are rich enough that they can function without dipping into customer balances. But upstart providers — some of them now quite sizeable — have arguably used them to fund the growth that has allowed them to take on the industry’s traditional Big Six.
If the problem is that imposing ringfencing requirements would put those suppliers at risk, declining to introduce them looks a lot like a statement from the regulator that they are now too big to fail. And while some of the moral hazard problem — where providers are not accountable for the business decisions they take — can be addressed through capital requirements, Ofgem is following what Investec analyst Martin Young calls a “softly-softly approach with a long glide path to an unspecified capital requirement”.
The other issue, as Adam Bell of consultancy Stonehaven points out, is that Ofgem is regulating for the current crisis where uncertainty and volatility prevail and not for a market where normality — and competition — starts to return.
At the moment, incumbents are rewarded for hedging by a mechanism that stops challengers nabbing their customers as wholesale prices start to fall. But at some point it will cease to make sense to insulate large providers from greater price competition. Continuing to protect them in such circumstances would look like unduly conservative preservation of the status quo at the expense of innovation and competitive challenge.
Given that we are still in the throes of energy market turmoil, perhaps it makes sense to focus on stability now and how to achieve a well-functioning, competitive energy market for the long term later. But at some point, we will need bright ideas about how to do that.
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