Ofgem Seen Asleep at the Wheel in Energy Supplier Crisis

(Bloomberg) -- Pressure is growing on the U.K. energy regulator to account for its role in allowing a landslide of suppliers to go out of business at a cost to consumers. 

Ofgem is accused of failing to act to prevent poorly-run suppliers from entering the market, after their subsequent collapse left consumers with a bill that Investec Bank Ltd. estimates at 3.2 billion pounds ($4.2 billion). Industry officials are among those who have blamed the watchdog for regulatory failures and not recognizing rule-breaking.

“Ofgem has a lot of questions to answer as to whether or not it’s the right kind of regulator,” said Stephen Fitzpatrick, chief executive officer of Ovo Group, owner of Britain’s second-biggest supplier.

The regulator didn’t immediately respond to a request for comment.

A total of 24 domestic energy providers have collapsed since the start of August, as wholesale prices surged. Bulb Energy Ltd., the biggest so far with 1.7 million customers, needed to be temporarily nationalized to avoid market chaos. It’s not over yet -- some industry bosses expect just a handful of suppliers to be left by April.

A surge in power and gas prices, to levels more than four times higher than usual for this time of year, will be reflected in bills when contracts are up for renewal, and through the nation’s energy price cap. That’s on top of the costs that will be passed through to cover the suppliers that have gone bust.

A panel of lawmakers that holds the government to account opened an inquiry on Wednesday into energy pricing and the future of the energy market. The committee will examine the role of policy and regulation, the impact of rising prices on consumers, and the operation of the price cap.

Lessons to Be Learned

The government insists that the tools it has are working to manage the disruption. For it’s part, Ofgem is looking at imposing stricter capital requirements for gas and power suppliers. Many of those going out of business were partially or totally unhedged, leaving them vulnerable when prices increased dramatically.

The government expects suppliers to be properly hedged, energy minister Greg Hands told a panel of lawmakers last week. He said there were lessons to be learned for companies still in the market.

The retail market needs to adapt to high prices on a long-term basis, though “clear and sharp” rules are needed on how companies buy energy in advance to supply customers, Ofgem Chief Executive Officer Jonathan Brearley said at another session last week.

With so many suppliers already bust, new rules may be too late. 

“If we’re to believe the government’s narrative that only badly run suppliers have gone bankrupt, then what on earth has Ofgem been doing allowing half of the market to be badly run?” said Kathryn Porter, energy consultant at Watt-Logic. “Ofgem has been asleep at the wheel.”

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