“Our regime was not fully developed and our regulatory action was overtaken by the speed of change in energy markets,” said Ofgem’s chief executive as he unveiled a raft of measures to strengthen financial resilience among suppliers.
For critics of the regulator, this was finally a sign that there is an appetite to discuss reform of the energy retail market.
The package of measures is wide-ranging, including the introduction from January of financial stress testing for retailers, proposed changes to the price cap and some temporary measures to combat market volatility.
The rapid turnaround time for some of these fixes show they are clearly designed as quick and dirty solutions to complex problems. The timescale laid out leaves just six weeks to formulate and then begin the tests, meaning Ofgem will be under immense pressure to come up with individual solutions for the more than 20 retailers left after the turmoil of this year.
Where it has previously faced criticism for being far too slow to respond to events in the market, as a report by Citizens Advice recently highlighted, Ofgem now finds itself in a situation where it is racing against the clock to meet its own deadlines.
The move smacks of shutting the stable door after the horse has bolted given that these issues were well known about for months and, in some cases, years beforehand. Ofgem has paused and prevaricated to the point where rushing in stress testing seems an inevitability.
This will be the start of a series of stress-testing exercises but there does not seem to be an appetite with an Ofgem for a move towards full prudential regulation.
Of course, many suppliers do already undertake their own stress testing and the regulator will seek input from Energy UK to develop the new tests.
That being said Ofgem has set itself an extremely tight deadline to try and resolve what is a very complex issue. It has done this against a backdrop of mounting pressure from the sector.
Just last month Energy UK’s deputy director of external relations, Simon Markall, said both the regulator and government need a new vision for the energy retail market if it is to come out of the current crisis stronger.
“It has 2015 solutions to a 2010 problem that will only be delivered in 2027,” he said of the government’s retail strategy.
His prayers may well have been answered. On the same day Ofgem announced its new measures, energy secretary Kwasi Kwarteng revealed the government was pausing development on its recent consultation on autoswitching – the cornerstone of its energy retail strategy – as part of a “refresh”.
Here is a chance for the government, in conjunction with Ofgem, to work out what the future energy retail market will be. They may finally realise that a focus on switching for cost alone is not well suited for an energy sector on the road to net zero. Perhaps minds will instead focus on products and services such as electric vehicles, time of use tariffs and home energy generation.
Ultimately, there will be no quick fixes. Most of the measures revealed this week will not come into effect until next winter at the earliest. Other than a series of temporary proposals, which the regulator has already said there will be a “high bar” to implement, there is no provision for the almost certain pressure facing the sector, and of course the public, at the next price cap rise in April.
Over the coming weeks and months, the regulator will be trying to mitigate the impact of a new wave of the pandemic on suppliers, along with trying to ensure they are as resilient as they can be to external shocks like wholesale price increases.
Ofgem undoubtedly has a monumental task ahead.