Catalogue of errors at Ofgem leaves consumers with multi-billion pound bill
Ofgem failed to act against unfit energy suppliers for nearly a decade, leaving the market vulnerable to this year’s spike in wholesale prices. This is according to a major new report from Citizens Advice.
The charity finds that mistakes and missed opportunities left the market in a precarious position when gas prices surged in 2021. Since the rise in prices, 26 suppliers have now collapsed, hitting four million households and leaving consumers with a bill of £2.6bn (excluding the £1.7bn of taxpayer money set aside for Bulb). This will cost the average household around £94.
The report details multiple instances in which the regulator did not act on evidence of rule-breaking and scaled back enforcement activity even as concerns grew
Enforcement powers went unused as supplier behaviour worsened:
As customer service declined in the three years before the crisis, Ofgem only opened one formal customer service investigation. It hasn’t made use of its powers to stop a supplier taking on new customers in relation to customer service concerns since February 2019.
In early 2021, Ofgem introduced new supplier monitoring, financial checks, and protections for customers of collapsed suppliers. Yet only one of the 20 suppliers that failed from August to mid-November 2021 had a Customer Continuity Plan (known as a “living will”) required under these new rules.
In the four years before the crisis (2017-2021), as firms began failing and supplier conduct worsened, the number of people working on enforcement at Ofgem fell by 25%
Regulatory failings led to a culture of non-compliance, with slow or missed action in response to evidence of licence breaches and on issues including accurate billing, access to phone lines for customers, and offering prepayment options.
There were a number of missed opportunities to reform the market:
As new suppliers entered the market from 2010 to 2019, Citizens Advice raised repeated concerns about poor practice and financial viability. It called as early as 2013 for a formal review of the licensing regime that accredits new suppliers.
No review took place until 2018 - with Ofgem only tightening the rules on new entrants in 2019, after 11 supplier failures. It took a further two years to introduce new rules for firms already in the market.
Poor practice was rife, with many companies showing clear evidence of financial unsustainability, including firms run out of the owners’ living rooms and kitchens.
Customer money was used to prop up ailing firms:
Long before this year’s crisis, there was evidence of financial weakness, with a number of suppliers reliant on customer credit balances for working capital. Ofgem’s own analysis showed suppliers held a total of £1.4bn in surplus credit in 2018
Analysis suggests some consumer balances were excessive. People who contacted Citizens Advice for support, after their supplier failed, had average credit balances of £353, with some customers saying their energy supplier was holding over £1000 of their money. According to Ofgem, an average bill payer needs only £150 in credit to cover typical winter usage.
Reforms are urgently needed
With energy bills now set to rise by hundreds of pounds next April, Citizens Advice says lessons must be learned, with changes to how the market is regulated. The charity is calling for:
An independent review of the causes of the market collapse, including Ofgem's approach to compliance and enforcement, and its reforms to ensure companies are fit to trade
A new “consumer duty”, similar to that is being introduced by the Financial Conduct Authority (FCA)9, making companies accountable for the outcomes their customers experience
Action by Government and Ofgem to protect consumers from unnecessarily steep increases to bills to pay for supplier failures
Avro Energy case study
On 10 separate occasions from 2018 to 2021, Citizens Advice raised concerns with Ofgem regarding Avro Energy, as the company’s customer base grew from 210,900 to 590,000.
2018 - Citizens Advice issues formal letter to Ofgem raising concerns about Avro’s potential breaches of licence conditions
2019-21 - Citizens Advice raises multiple concerns regarding Avro’s conduct on transfer blocking, billing errors, and poor customer service
September 2021 - Avro collapses, owing creditors £250m and leaving consumers with a £679m bill. Administrator reports reveal the company was reliant on credit balances to fund its day-to-day operations and had failed to buy sufficient energy in advance from wholesale markets (‘hedging’)
Dame Clare Moriarty, Chief Executive of Citizens Advice, said:
“Energy customers are facing a multi-billion pound bill, in large part because Ofgem missed multiple opportunities to regulate the market and tackle rule breaking by suppliers. Recent wholesale price rises would have been hard to handle in any circumstances, but they need not have led to the collapse of a third of companies in the market.
“It’s now clear that reform is needed - and this isn't just about avoiding another crisis.
“If consumers lack confidence in the energy market, or feel they're getting a bad deal, it will be even harder to transition to net zero. So reform is vital for the future as well as for avoiding the mistakes of the past."
Notes to editors
£2.6bn figure based on new analysis by BFY Group for Citizens Advice. When an energy supplier fails, Ofgem normally appoints a new supplier to take on its customers. This will incur costs - like paying for energy for the new customers and protecting their credit balances - which the new supplier can apply to use an industry levy to recover. The costs of the levy are ‘mutualised’ (paid for by all other customers through an extra charge on our bills).
Estimates of costs per household are based on dividing the £2.6bn by the number of households. This assumes that Ofgem proceeds with its minded-to position to amend industry rules so that last resort supply costs are no longer collected from non-domestic gas users from April 2022.
Data from a Freedom of Information request issued by Citizens Advice shows that despite record numbers of companies operating in the market, the number of Ofgem staff working on enforcement fell by 25% between 2017/18 and 2020/21, before rising slightly in the current year 2021/22.
Between 2017/18 and 2020/21, the number of staff working on compliance and monitoring rose by under 5% and the total number of staff working on regulatory functions at Ofgem rose by 1.5%.
https://www.ofgem.gov.uk/publications/ofgem-introduces-new-tougher-entry-tests-energy-suppliers
https://www.ofgem.gov.uk/publications/supplier-licensing-review-reducing-credit-balance-mutualisation - based on dual fuel tariff priced at the price cap level of £1138 (Apr - Oct 2021).
https://www.fca.org.uk/news/press-releases/fca-introduce-new-consumer-duty-drive-fundamental-shift-industry-mindset
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