NAO publishes report on the energy supplier market

The National Audit Office (NAO) published its report, The energy supplier market, on 22 June 2022. It sets out the facts on the recent exit of energy suppliers and evaluates the roles of Ofgem and the Department for Business, Energy & Industrial Strategy in the events leading to those exits¹.

Between July 2021 and May 2022, 29 energy suppliers failed, affecting nearly four million households in the UK¹. The NAO reports that the total number of domestic suppliers went from 12 in December 2010 to 23 in May 2022, with a peak of 70 suppliers in mid-2018, and that by September 2021 new entrants held around 40% of the market share¹. A separate Business, Energy and Industrial Strategy Committee report, published on 26 July 2022, gives the same figure of 29 collapsed suppliers in Great Britain, with a combined market share of nearly four million customers, more than 10%, and records 24 suppliers left in the market as of May 2022².

The NAO states that the price paid by a typical customer buying energy by direct debit at the price cap rose by 78%, from £1,105 per year in the winter of 2018-19 to £1,971 in the summer of 2022¹. The Committee report records that 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 £2,017². It also records that by December 2021 wholesale gas prices had increased by 500% compared with February 2021 levels².

The NAO's conclusion is that Ofgem could not have prevented the increase in wholesale prices in 2021 from significantly affecting consumers, but did not do enough in the preceding years to ensure the supplier sector was resilient to external shocks¹. It says Ofgem allowed many suppliers to enter the market and operate with weak financial resilience, and failed to imagine a scenario of sustained volatility in energy prices, leaving a market where the risk largely rested with consumers¹. The Committee report states 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 suppliers².

"Ofgem and BEIS ensured that the vast majority of consumers faced no disruption to their energy supply when their provider failed. However, by allowing so many suppliers with weak finances to enter the market, and by failing to imagine that there could be a long period of volatility in energy prices, Ofgem allowed a market to develop that was vulnerable to large-scale shocks."

The Committee report sets out the sequence of regulatory changes: Ofgem introduced new entry criteria from June 2019 following the Supplier Licensing Review, and in March 2021 introduced a requirement for companies to have a Customer Continuity Plan, or living will². It records that the principle did not come into force until January 2021². Bulb Energy, which served around 1.6 million households, was placed into Special Administration in November 2021, the first use of that regime². The Government spent £0.9 billion in 2021-22 to maintain supply to Bulb's customers and budgeted a further £0.92 billion for 2022-23².

Why it matters for households

The costs of supplier failure are recovered through a levy on energy bills, so households that never chose a failed supplier still pay towards the transfers. The Committee report puts Ofgem's latest estimate of the total cost to billpayers of the 29 failures at £2.7 billion, around £94 per customer². It records that the summer 2022 price cap included an additional network charge of £68 per customer to cover Supplier of Last Resort levy costs². The NAO notes that the sheer number of failures means a significant additional cost on every bill at a time when wider cost increases are already causing major financial challenges for many households¹.

For a household's energy independence, the practical point is continuity of supply rather than choice of supplier. The NAO found that Ofgem operated the Supplier of Last Resort process effectively and ensured households faced no disruption to supply¹. The Committee report describes how customers of a failed supplier are moved to a new one through a competitive bidding process, with the new supplier taking on the cost of buying their energy and protecting their credit balances². Where a larger supplier fails, the Special Administration Regime applies instead, with an administrator running the company and government funding maintaining supply until a buyer is found or customers are transferred².

What happens next

The Committee report records that on 3 May 2022 Oxera, an economics and finance consultancy, published a review commissioned by Ofgem evaluating the regulator's role in the collapse of the retail market². On 7 July 2022 Ofgem launched a consultation asking stakeholders whether the existing fixed charge on electricity bills covering supplier failure costs should be replaced with a usage based alternative². The NAO says Ofgem has recognised it must quickly improve its capacity to oversee the financial resilience of individual suppliers and the sector as a whole, and that Ofgem and the Department must ensure the market recovers while facilitating a longer-term transition¹. The Committee report carries recommendations to government, to which the Government has two months to respond².

Sources2 cited

1. The energy supplier market - NAO report, nao.org.uk
2. Energy pricing and the future of the energy market - Business, Energy and Industrial Strategy Committee, publications.parliament.uk