Jonathan Brearley, the new chief executive of Ofgem, has pledged to crack down on “sharp practice” in the energy retail sector and promised networks a squeeze on the cost of capital.
He also vowed to change the perception of the regulator as overly concerned with short-term cost-cutting at the detriment of investment for the future.
Brearley was speaking at the Ofgem Energy Conference in London today (11 February), which outlined the regulator’s forward work programme and its recently published decarbonisation plan.
The journey to net-zero dominated Brearley’s opening speech, in which he said it was Ofgem’s core mission to help to build a low-carbon energy system while keeping consumer bills low.
He said: “There has sometimes been a perception that Ofgem has prioritised efficiency and reducing costs over protecting the customers of the future. Some stakeholders said we have been swept along by, rather than leading, the efforts to decarbonise the UK.
“Under my leadership Ofgem is taking an approach which recognises that protecting customers includes helping to hit the net-zero target. Giving equal commitment to protecting customers of today and in the near-future will reinforce every decision we make.”
He went on to say the biggest challenge of the net-zero goal “is not technical but deciding who pays for it and when”.
He added: “The plummeting cost of offshore wind shows us that thanks to innovation and economies of scale, low-carbon energy sources can become cheaper than their fossil fuel equivalents. In the long-run the bill for consumers may well be higher if we do not move now.”
Taking a tough line
Brearley said one part of Ofgem’s role in protecting consumers was “stamping out sharp practice” on the retail side, saying it would “do more to identify and call out the unacceptable behaviour in the market early where we are concerned about the way customers are treated”.
This focus on the customer stretches into network regulation, Brearley stressed.
“Our current price controls have resulted in company returns at the higher end of our expectations. We are learning lessons for the next set of price controls, which will be tough on the companies but fair.
“Of course we need investors. We cannot hit net-zero without attracting the necessary investment into Great Britain’s networks. This means having a fair, stable and transparent regulatory regime for those investors. But we will ensure that company returns in future are no higher than necessary to achieve this, in order to keep bills as low as possible for consumers.”
Asked about the priorities for RIIO-2, Brearley said there were three key areas:
“Firstly, that the cost of capital should come down and quite dramatically.
“Secondly, the price control needs to be more flexible. Given the uncertainty, we may need to ramp up or ramp down revenues as a result.
“And finally, we want more strategic innovation. We want to make sure we are focussing on the things that really matter for the sector, not simply operational improvements, where we expect the companies to take forward more of that on their own.”
The sea of change will not escape Ofgem, Brearley insisted. The regulation model can no longer be solely based on “pure, classical free market economics”.
“For a time we expected competition alone to fix the retail market. While competition can be highly effective at keeping costs down and stimulating innovation, markets can, and do, fail. When this happens, under my leadership, Ofgem will intervene to protect consumers – especially those in vulnerable circumstances – and the environment.
“Our exam question will always be which market or regulatory structure is in the best interest of current and future consumers. We will examine the full range of regulatory tools when identifying what we think is the best answer, without any prior assumptions.”
Measuring the price cap
During his speech, Brearley referenced the early success of the price cap and Ofgem’s commitment to it. Asked by Utility Week to point to these markers of success, Brearley said: “We seem to have a price cap that has definitely benefitted the consumer and we are seeing quite active competition. We are seeing switching rates at roughly the same rate or slightly higher than before. We are seeing customer service standards that don’t necessarily seem to have been compromised.
“If we take a step back and look at the things we were worried about, very early indications are that those aren’t things that seem to be playing through in that way.”
He was also quizzed on why Ofgem did not intervene in Ovo’s acquisition of SSE’s retail arm, given the ongoing investigation into the former’s historic failings on billing and communication with customers.
His response was that the regulator had acted “quickly and robustly to the things we saw”.
He added: “Like any company, if that behaviour continues we will follow that up with enforcement action and fines if necessary.”