Ofgem moves to shore up energy sector risk consolidating big firms’ market power
Much of the media attention concerning Ofgem’s raft of reforms yesterday will focus on its plans to crack down on rogue energy brokers ripping off small firms and improving suppliers’ customer service.
However, its most meaningful changes could be its new capital requirements for energy firms.
Suppliers are facing tightening financial rules from regulator Ofgem, which is desperate to avoid a repeat of the domestic energy crisis when 30 suppliers collapsed and the regulator was accused of being asleep at the wheel.
The crisis culminated in Bulb Energy collapsing into de-facto nationalisation for nearly a year before being snapped up by Octopus Energy, with the company being propped up on life support by regular transfusions of public funds.
Now, barriers to entry in the market are being raised to ensure suppliers stay solvent and can absorb future market shocks, with the latest measures set to require hefty net asset values from energy firms.
The watchdog has unveiled a new capital target for suppliers of £115 of net assets per customers, with a floor of zero pounds – to ensure suppliers are financially resilient.
The new rules will come in from March 2025, putting a ticking clock on suppliers to get their house in order.
While it can certainly be argued this is a classic case of closing the stable doors after the horse has bolted, it reflects Ofgem’s zeal to fix a market that was clearly not fit for purpose.
The news will also likely be welcomed by large scale energy firms, with hefty customer bases and often well-resourced parent companies, but it could prove to be more taxing for challenger suppliers.
Ofgem is hoping to reduce the role of poorly organised and limited scale suppliers from entering the market in a bid to avoid a repeat of past disasters, such as the collapse of energy supplier Arvo in 2021, run by a former non-league footballer, leaving 1.2million customers in limbo.
It’s a difficult balancing act.
This is why it opted against requiring full-scale ringfencing in customer credit balances, an issue that triggered a protracted industry row between Centrica and Octopus Energy, with multiple suppliers taking different sides over the issue.
Ofgem eventually opted for only partial ringfencing, chiefly around renewables payments, after lots of smaller scale suppliers warned that definitive distinctions between corporate finances and customer credit balances would jeopardise their operations and consolidate market leaders with more funds.
However, the latest moves could put more pressure on challenger firms – with 90 per cent of the energy market now consumed by six suppliers – and risks consolidating market leaders power.
Ironically, this is the very outcome the government sought to change when liberalising regulations in the industry nearly a decade ago.
The situation will only be exacerbated when Shell finally sells it retail arm – home to 1.5m customers – to one of several suitors, with British Gas owner Centrica, Octopus Energy and Ovo all reportedly circling.
It fundamentally risks undermining consumer choice, even as it now seeks to improve the operational performance of suppliers.
Ofgem will now need to be prepared for these reforms to face further scrutiny.