Even more energy suppliers are short of capital. Ofgem needs to toughen up
When half the nation’s retail energy suppliers, including Bulb with 1.7 million customers, failed during the gas crisis of 2021-22, the embarrassed regulator, Ofgem, decided it should probably pay more attention to companies’ balance sheets.Better late than never.The cost of mopping up the corporate calamities added up to £2.7bn, or £94 on every household’s energy bill, calculated the National Audit Office.
The result was a new regime from March last year in which Ofgem set “capital targets” for each supplier to ensure financial resilience.And the secondary effect was an entertaining quarrel between Octopus Energy, which confessed to being one of three suppliers below its capital target, and British Gas-owning Centrica, whose chief executive argued it was “criminal” that the regulator was not applying its ultimate sanction of barring under-target firms from taking on new customers.So what’s today’s state of financial resilience? The question is timely because wholesale gas prices are again behaving wildly.The volatility is not to the same degree as in 2021-22, but cold weather in North America has affected the European market, the type of event that can upset UK suppliers’ hedging arrangements.The answer, found deep within an Ofgem report this week, is that even more suppliers failed to meet their capital targets at the latest measurement date.
From three last June, the tally was five at the end of September,There were only 23 suppliers at the time, so slightly more than a fifth of the supplier base was out of line,That is not a small proportion,“Where suppliers are below the target, we work proactively with them on their plan to meet this target in the shortest reasonable time,” says Ofgem’s report,But that’s about all it reveals.
The regulator doesn’t name the under-target firms (Octopus and Ovo volunteered their status last year) or say how far short they fell from the aim of having adjusted net assets of £115 per dual fuel equivalent customer.What is Ofgem’s definition of “the shortest reasonable time”.Are we talking six months, a year or longer? It is impossible to say because there is no statutory timeline and Ofgem treats each capital-improving plan as unique.And what does “working proactively” mean? Ofgem deems its measures too commercially sensitive to talk about.This is a strange version of a supposedly get-tough regime.
Over in banking-land, the Bank of England publishes its stress tests for each bank and the results are pored over by the City,Banks know the consequences would be severe even if they fell only close to regulatory minimums,The stakes are lower in the retail energy market, and the setup is newer,But the levels of transparency are poles apart,“Where a supplier is not meeting the Capital Target but has a credible and agreed plan in place they remain in compliance with our rules,” says Ofgem, reserving the right not to explain what it regards as credible.
One does not have to be in Centrica’s “ban ’em from accepting new customers immediately” camp to think the regulatory approach is far too weak.How much extra time will laggards – now increased in number – be given? Ofgem should be able to answer.The new rules are there for a reason.
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