Ofgem criticized for not going far enough in energy supply reform

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Ofgem was accused on Wednesday of not going far enough and fast enough with reforms designed to prevent a further slump in the UK retail energy market, which has seen 26 suppliers go bankrupt in just over four months.

The reaction from some of the big suppliers and analysts came after the regulator published plans to subject gas and electricity suppliers to further stress tests from January. But he admitted the exercise would be “straightforward” and “focused,” short of the bank-style forensic checks some of the biggest companies and think tanks had demanded.

The regulator has also proposed a series of measures to address criticism of its market surveillance, including a possible change in the energy price cap. They could see it reviewed every three months, instead of twice a year, or even more frequently if certain parameters were violated.

Alternatively, the regulator has suggested locking in the more than 15 million households whose bills are protected by the cap in six-month agreements with exit penalties to help suppliers reduce their risk. Currently, customers on this default tariff can switch providers at any time.

Many suppliers have criticized the price cap in its current form for exacerbating their difficulties because it does not allow them to pass on wholesale price increases quickly enough.

The regulator also said it would consult on tightening the rules to protect customer credits, accrued through direct debit payments, and prevent businesses from using them for other purposes.

One official admitted that given the time available to introduce the new stress tests, the exercises would be “nowhere near as complicated” as those “drawn from the banking model”.

Stress testing would initially involve several “what if” scenarios such as how a supplier might cope with extreme wholesale market volatility, a very cold winter, or a sudden increase in the number of customers unable to pay their bills, a. declared Ofgem. “We will learn lessons and adapt the design of these stress tests over time,” he added.

Chris O’Shea, managing director of Centrica, owner of British Gas, one of the biggest suppliers, said Ofgem’s reforms “a first step”. But he urged the regulator to commit “without delay” to bringing forward proposals that would force providers to reserve customers’ money and not use it for other purposes.

“Until that is done, we run the very unacceptable and very real risk of history repeating itself,” he added.

A senior executive at another major supplier was more scathing towards Ofgem, calling the reforms “a nibble on the edges” and “the bare minimum”.

Ed Birkett, head of energy and environment at the Policy Exchange think tank, said the “devil [would] be in detail of these new stress tests, ”but he urged Ofgem to ensure they mark a“ lasting change ”in the way it regulates the industry. He said he needs to learn “from the experience of the financial sector after the 2008 stock market crash”.

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He also called for a “full review” of the collapse of the market, noting that many players in the energy sector had for years voiced concerns to Ofgem about the financial stability of some suppliers.

The surge in wholesale gas and electricity prices since the summer revealed weaknesses in the business models of many suppliers, leading to a succession of collapses that affected 4 million customers.

Responding to criticism, Ofgem said it has consulted “with consumer groups, stakeholders and industry leaders. . . on our plans and there [was] clear support that we [were] To do.”


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