Switching between suppliers can no longer be relied on to drive change and improvement in the energy retail sector, Ofgem’s chief executive has stated.
Speaking at the Future of Utilities Summit in London on Monday (21 November), Jonathan Brearley said high prices and volatility in the international gas market, as well as the shift to a low-carbon energy system with more frequent changes in supply, demand and therefore prices, means a new retail model is needed.
Among other things, Brearley said this model must “increase standard across” whilst acknowledging that “customers switching between suppliers will not play the role historically hoped for”.
“We need other drivers of change and improvement,” he added.
Brearley explained that in the past there was a “great amount of faith” that unhappy customers would simply switch supplier. As a result, compliance and enforcement actions were reactive and focussed only on the worst cases.
Ofgem, he said, has now moved to a proactive assessment of company performance through a series of Market Compliance Reviews.
He revealed that the regulator is publishing one such review on Tuesday (22 November), which will be a deep dive into how customers in vulnerable circumstances are treated.
Acknowledging the work suppliers have done to ensure vulnerable customers are supported, Brearley said there is room for improvement in “every supplier in the market”.
He added: “There are a lot of great things we are doing, there is a lot of excellent practice, but given the conditions in the market there is more that we can do to support vulnerable customers…so it really is incumbent on the industry to proactively find ways to identify customers and offer support where we can.
“There is a lot more for all of us to do and we will work closely with the industry and government to make sure those who are most vulnerable, facing the conditions they are facing today, are helped as much as we can collectively.”
Brearley said this new model must also provide financial resilience and allow suppliers to be sufficiently capitalised to expand the range services they provide to consumers.
He said Ofgem has learned “painful lessons” from the dozens of supplier failures last year and taken action to prevent more: “We have carried out stress tests, we’ve strengthened and applied existing rules, and used our compliance and enforcement powers where companies are falling short.
“Now despite the more difficult conditions this winter, the sector is clearly more resilient this year than last year, with no major failures to date.
“We are also changing the rules fundamentally to increase capital adequacy and prevent unsustainable business models re-entering the market, and we will be publishing our proposals on this very shortly.”
Lastly, Brearley said the new model must provide fair pricing and price regulation that can adapt to the current market volatility.
He welcomed the government’s introduction of the Energy Price Guarantee, saying the price cap which it has superseded was “never designed to be one that would subsidise costs to consumers.”
Brearley said the recent announcement by chancellor Jeremy Hunt that the Energy Price Guarantee will be extended by 12 months from its previous cut-off date of April, albeit at a higher level of £3,000, “gives us space to rethink the enduring model for pricing regulation that we need inside the retail market.”
“The price cap, while providing protection, does have risks for customers,” he stated.
“For example, in a volatile market, a cap increases the financial risks that companies face and therefore, the capital that companies need to hold. That entails a cost to customers. Equally, where all companies are basically following the cap formula, that may have a role in the prices that are paid in the market, and therefore ultimately the prices that customers pay.
“It is my feeling that we will need to examine a wide range of options around the price cap to allow it to better adapt to the market we are in and, certainly to be compatible with the low carbon market of the future.”
He said Ofgem “may need to look at the framework underpinning the price cap, including the flexibility the regulator has to set it.
“So I very much welcome the announcement made in last week’s Autumn statement that the government is looking at a new approach to consumer protection from April 2024, and considering options such as social tariffs.”