Oxera, an economics and finance consultancy, published a review on 3 May 2022, commissioned by Ofgem, evaluating the regulator's role in the collapse of the retail energy market1. The review found that the regulator repeatedly overlooked red flags in suppliers' financial arrangements and business models1.
The context is set out in a later House of Commons Business, Energy and Industrial Strategy Committee report, published on 26 July 2022, which states that between July 2021 and May 2022, 29 energy suppliers in Great Britain collapsed, with a combined market share of nearly four million customers, more than 10%1. As of May 2022, 24 suppliers were left in the market; eight suppliers had a market share above 5%, three above 1% and the remaining 13 had less than 1%1. The committee said it found "overwhelming consensus that the collapse of 29 energy retailers between July 2021 and May 2022 could have been mitigated through robust regulation of suppliers"1.
The committee report traces the regulatory timeline. In November 2016, GB Energy, which served 160,000 customers, became the first supplier to fail in almost ten years1. Following the Supplier Licensing Review, Ofgem introduced new entry criteria from June 2019, and in March 2021 it introduced a requirement for companies to have a Customer Continuity Plan, or living will, to safeguard customers if their supplier fails1. The committee noted that the principle did not come into force until January 20211.
The cost of supplier failures has been passed to billpayers. Ofgem's latest estimate of the total cost to billpayers of the 29 suppliers that failed as a result of the crisis was £2.7 billion, around £94 per customer1. In February 2022, Ofgem confirmed its decision to add the Supplier of Last Resort charge to the unit costs of domestic gas bills1. On 7 July 2022, Ofgem launched a consultation requesting stakeholder views on whether the existing fixed charge on electricity bills of supplier failure costs should be replaced with a usage based alternative1.
The largest single failure was Bulb Energy, which served around 1.6 million households and was placed into Special Administration in November 2021, the first use of the Special Administration Regime1. The Government spent £0.9 billion in 2021-22 to maintain supply to Bulb's customers and budgeted a further £0.92 billion for 2022-231.
"We found overwhelming consensus that the collapse of 29 energy retailers between July 2021 and May 2022 could have been mitigated through robust regulation of suppliers."
Why it matters for households
The review concerns the regulatory framework that sits behind energy supplier failures and the Supplier of Last Resort process, under which a failed supplier's customers are moved to a new supplier through a competitive bidding process1. The costs of that process, including purchasing the new customers' energy and protecting their credit balances, can be passed on to customers through a levy on energy bills1. Ofgem's estimate put the total cost of the 29 failures at £2.7 billion, around £94 per customer1.
For a household, the practical effect is that the cost of a supplier's failure can appear on bills even where the household did not choose that supplier. The committee report notes that the summer 2022 price cap included an additional charge in network costs of £68 per customer to cover Supplier of Last Resort levy costs1. The financial resilience rules that apply to suppliers, and the licensing and failure regime that governs entry and exit, are the mechanisms through which that risk is meant to be managed.
The committee report also records that the energy price cap, which Ofgem sets by calculating how much it costs an efficient supplier to provide energy to a customer, is reviewed once every six months to reflect changes in underlying costs such as the wholesale cost of gas1. On 1 April 2022, Ofgem increased the price cap by 54% for 22 million customers, taking default tariff bills from £1,277 to £1,971 per year and prepayment meter bills from £1,309 to £2,017 per year1.
What happens next
On 22 June 2022, the National Audit Office published a report, The energy supplier market1. On 7 July 2022, Ofgem launched a consultation on whether the fixed charge on electricity bills for supplier failure costs should be replaced with a usage based alternative1. The committee report was published on 26 July 2022, with recommendations to government; the Government has two months to respond1.
Sources1 cited
- Energy pricing and the future of the energy market - Business, Energy and Industrial Strategy Committee, publications.parliament.uk