Ofgem published an open letter on 7 July 2022 launching a review of how the costs of supplier failure are recovered, and in particular whether that recovery takes place through standing charges or unit rates1. On 18 August 2022 the regulator issued its decision, concluding that it would not direct industry parties to make changes to the methodology1.
The review examined the balance between fixed and usage-based recovery of the costs left behind when suppliers collapse. Ofgem said that while some low consuming users, some of whom may be vulnerable, might benefit from change, there are a number of higher consuming users including vulnerable users that would pay more1. It took the view that retaining the current methodology would protect users with greater energy needs, such as disabled users and users with electric heating in areas off the gas grid1.
"As a result, we will not be directing industry parties to make changes to the methodology."
The costs in question are substantial. 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 customer, according to a House of Commons Business, Energy and Industrial Strategy Committee report published on 26 July 20222. That report records 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%, leaving 24 suppliers in the market as of May 20222.
The committee report also sets out how the charges have been applied. In February 2022, Ofgem confirmed its decision to add the Supplier of Last Resort charge to the unit costs of domestic gas bills2. The summer 2022 price cap included an additional charge in network costs of £68 per customer to cover Supplier of Last Resort levy costs2. The committee described the 7 July 2022 consultation as requesting stakeholder views on whether the existing fixed charge on electricity bills of supplier failure costs should be replaced with a usage based alternative2.
| Date | Development |
|---|---|
| 7 July 2022 | Ofgem open letter launching review of how supplier failure costs are recovered1 |
| 26 July 2022 | BEIS Committee report published, citing £2.7 billion total cost to billpayers2 |
| 18 August 2022 | Ofgem decision not to direct changes to the methodology1 |
Why it matters for households
Supplier failure costs reach households through standing charges and unit rates, so the choice between them decides which kind of household pays more. A fixed charge spreads the cost equally across customers regardless of how much energy they use; a usage-based charge places more of it on higher consumption. Ofgem's decision means the split stays as it is, on the grounds that moving more of the cost onto usage would raise bills for households with greater energy needs, including disabled users and those with electric heating off the gas grid1.
For a household, the practical effect is that the cost of other companies' failures remains embedded in the policy costs and levies that sit inside the price cap, rather than being redistributed. The scale of that embedded cost is set out in the committee report: £2.7 billion across the 29 failures, around £94 per customer2. The same report notes that the Government spent £0.9 billion in 2021 to 22 to maintain supply to Bulb's customers and budgeted a further £0.92 billion for 2022 to 232. How those sums are eventually recovered has not been reported beyond the arrangements described.
The wider context is the supplier licensing and failure regime that Ofgem operates, and the role of the regulator in setting who bears residual costs. The committee 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.
What happens next
Ofgem has stated it will not direct industry parties to make changes to the methodology1. No further consultation or timetable on the recovery arrangements is set out in the decision. The BEIS Committee report of 26 July 2022 carries recommendations to government, to which the Government has two months to respond2.