Both EDF Energy and Ovo have been granted permission by the Competition and Markets Authority (CMA) to intervene in Utilita’s appeal against Ofgem’s decision to introduce minimum capital requirements for energy suppliers.
While Ovo agrees with Utilita that the regulator’s decision is based on “flawed analysis”, EDF claims that Utilta’s complaint shows the retailer is “not alive” to risks that Ofgem is trying to mitigate.
Utilita has concerns that the capital target of £115 adjusted net assets per domestic dual fuel equivalent customer, to be introduced in 2025, will not achieve its objective for four key reasons.
These include: the fact that it believes a market with a capital target will not face materially lower levels of supplier failure and mutualised cost than one without one; that the risks which the target is designed to address are already adequately addressed in the existing regulatory framework; because it believes the target systematically favours traditional suppliers; and because the regulator’s impact assessment was flawed.
Documents published this week by the CMA show that EDF Energy is in favour of Ofgem’s decision, while Ovo has submitted evidence in favour of Utilita’s appeal.
Outlining its reasons behind its intervention, EDF’s submission states that it supports Ofgem’s decision to introduce a minimum capital requirement, viewing it as a “proportionate and necessary measure”.
EDF also raises questions about Utilita’s understanding of market risks, saying: “Given the costs associated with a supplier exit and the risks that all market participants face, a capital target that is materially above zero is not one that can be objected to and there is no clearly better option.
“Indeed, the fact that Utilita does not recognise this risk in its notice of appeal (NoA) would appear to indicate it is not alive to such risk – which provides all the more reason to regulate.”
EDF’s submission also warns about a “moral hazard” emerging without investors having “skin in the game”, with profits owed to directors/ investors and losses borne by the consumer through mutualisation.
“Utilita has not explained this. Its argument that reporting suffices fails to address the reality – no regulator is perfect; the market is complex and there are many unanticipated shocks. As such, a capital target above zero is necessary to protect or mitigate the risk that ultimately customers must bear.”
Ovo meanwhile is in support of the appeal, saying Ofgem’s decision “rests on a flawed cost-benefit analysis in the impact assessment”.
It adds: “The impact assessment significantly overstates the benefits arising from the introduction of the capital target and does not properly engage with the significant costs that the capital target will result in.
“When these errors are corrected, the very small consumer benefit that GEMA considers that the capital target will have is completely wiped out and, instead, analysis shows that the decision will do more harm than good.
“Absent delivering consumer benefit, it is impossible that the capital target will achieve its stated objective and it follows that its introduction would be disproportionate and not in the interests of consumers.”
Ovo’s submission adds that it “consistently highlighted” its concerns to Ofgem during the consultation process but that “Ofgem failed to properly engage with Ovo’s concerns, such that the decision remains flawed”.
In its response to the CMA, Ofgem described the challenge as “ill-founded”.
The regulator argues that minimum levels of capital will help improve market resilience by allowing the regulator to intervene early to support recapitalisation by a supplier where it is below the capital target. It will also reduce “moral hazard” by requiring “skin in the game”; and reduce the mutualised costs to consumers in the event of supplier failure.
According to the government’s website, the main hearings of the appeal will take place this month and the deadline for the CMA’s final determination is 21 January 2024.