Energy watchdog Ofgem has been accused of creating an industry on “shaky foundations” that has seen a number of utilities collapse.
All bill payers are each paying about £94 more to cover the £2.7 billion cost of losing 28 suppliers, which collapsed after wholesale prices surged.
The National Audit Office (NAO) said Ofgem has allowed a market to develop that is vulnerable to large shocks.
The regulator said it was already addressing the issues raised.
Meg Hillier, Chair of the Public Accounts Committee, said: “Ofgem’s approach has created an energy market on shaky foundations. As a result, many companies simply collapsed under the shock of energy price hikes.
“Once again, it is the public who must pay for the mistakes of those charged with protecting them. This is unacceptable.”
The consequence of last year’s shock was that 2.4 million customers automatically switched to a competitor when their own provider collapsed. Typically they had to pay an additional £30 a month for the duration of their original contract, according to Citizens Advice, as they were switched to a more expensive plan.
What’s more, the cost of those failures totaled £2.7billion – a bill shared among all billpayers in the UK, not just those of the failed businesses. This comes before considering the potentially multi-billion dollar burden that could inflict on households as a result of the collapse of Bulb Energy, which is in special administration.
The NAO said Ofgem has opted for a “low-bar” approach to allow new domestic energy suppliers to enter the market to encourage competition and customer choice after the market was dominated by six major companies.
The regulatory authority then introduced stricter rules for new entrants from 2019, but not for existing suppliers until 2021.
As a result, many suppliers lacked the financial resilience to deal with the sixfold increase in wholesale prices over the last year, the NAO said.
“By allowing so many players with weak finances to enter the market and not realizing that there could be a long period of volatility in energy prices, Ofgem has enabled the development of a market that is vulnerable to large shocks,” said Gareth Davies, Head of the NAO.
“Consumers have borne the brunt of supplier disruptions at a time when many households are already under significant financial strain as their bills have soared to record highs. A supplier market needs to be developed that really works for consumers,” said Mr Davies.
Ofgem is making changes after a review it commissioned came to many of the same conclusions.
“We are already working hard to address all the issues raised,” said a spokesman for the regulator. “While the one-off global energy price shock would have led to market exits under any regulatory framework, we already knew that Ofgem’s suppliers and financial resilience regime were not robust enough.
“While no regulator can or should guarantee that companies will not fail in the future, we will continue to take a holistic approach to further strengthen the regulatory system and ensure a fair and resilient market for consumers that keeps costs fair as we evolve away from fossil fuels and towards affordable, green, domestic energy.”
The NAO said concerns had been raised that Ofgem’s reforms could limit new market entrants and innovative ideas going forward.
A typical household gas and electricity bill – governed by the energy price cap in England, Wales and Scotland – has risen sharply and is now around £2,000 a year.
Analysts at Cornwall Insight have predicted the bill could reach around £3,000 a year this winter.
Add Comment