Ofgem has to review the administration process for suppliers, with households set to foot a £2.7bn bill to clean up the energy market, warned a leading Westminster body of MPs.
In its report into energy regulations, the Public Accounts Committee (PAC) argued the supplier of last resort process, which has ferried millions of customers from fallen firms to surviving suppliers, and the special administration regime which housed Bulb Energy for 11 months, had to be reassessed.
It has called on BEIS and Ofgem to come up with an action plan to reform the process.
PAC argued that while both systems “ensured that customers did not experience a discontinuation of their supply,” the schemes came at a “considerable financial cost” with the risk of further exists from the energy market still high.
The cost of compensating suppliers for taking on new loss-making customers amid soaring wholesale costs climbed to £2.7bn for the nearly 30 suppliers that exited the market over the past 15 months.
This equates to around £94 per customer, with these costs being clawed back from customers through a charge on their record energy bills.
While soaring gas prices and the constraints of the price cap were key factors in the market crisis, PAC argued Ofgem’s approach to licensing new energy suppliers was too lenient and failed to take sufficient scrutiny of licence applicants’ financial situation.
Meanwhile, the Government has spent £900m on Bulb Energy since it fell into administration, and budgeted an additional £1bn for 2023-23.
However, the final cost to customers of Government support for Bulb Energy could climb to £4bn before it is offloaded to Octopus.
This is due to the lack of hedging for its energy supplies – although the exact figure will not be known until it is sold or exits the market by other means.
Ofgem reforms too late to ease crisis
PAC also argued Ofgem failed to strike the right balance between promoting competition and ensuring suppliers were financially resilient.
It criticised the watchdog for not tightening entry conditions for new firms until 2019 , with Ofgem spending focusing instead on attracting suppliers to the sector to boost competition and reduce costs for customers.
Ofgem has recognised it needs to ensure the resilience of suppliers and has brought in fit and proper person rules, financial stress tests, market stabilisation charges to discourage switching, and quarterly price caps.
It is currently assessing potential options such as ringfencing customer credit balances and renewable option payments.
PAC has asked Ofgem to write to the committee within six months, setting out how it will monitor and balance levels of competition and resilience in the energy supplier market.
Commenting on the findings, an Ofgem spokesperson said: “The supplier of last resort scheme acted as a vital safety net for British consumers, ensuring they continued to receive energy when their supplier failed and kept their credit balances. This safety net inevitably incurred costs.
“Looking ahead to this winter, prices remain volatile, however the market is now in a much more resilient position, partly due to robust steps we’ve taken to reduce the risk of future supplier failures and to raise the bar on entry for new suppliers. And our proactive compliance reviews have dug deep into the practices of all energy suppliers, enabling us to demand improvements where they have been found lacking.”
Dame Meg Hillier, MP and chair of PAC, said: “Problems in the energy supply market were apparent in 2018 – years before the unprecedented spike in prices that sparked the current crisis, and Ofgem was too slow to act. Households will pay dear, with the cost of bailouts added to record and rising bills.
“The PAC wants to see a plan, within six months, for how Government and Ofgem will put customers’ interests at the heart of a reformed energy market, driving the transition to Net Zero.”