The head of Ofgem has fired a warning shot at suppliers as the worst energy crisis since the 1970s abates, making clear that Great Britain’s gas and electricity regulator will clamp down on excess profits and that firms with weak finances should not pay dividends.
Jonathan Brearley, the chief executive of Ofgem, said during the past two years the country had experienced an “energy crisis genuinely unprecedented since at least the 1970s” and as more normal conditions returned it would be alive to profiteering.
“We will be vigilant in the way the price cap changes so it continues only to reflect costs reasonably incurred in the market,” he said. “We acted quickly to make changes to allowances in the price cap as prices rose and suppliers struggled to stem excessive losses, and we will act equally quickly to adjust the price cap if we see undue rewards across the sector as prices fall and profits return.”
The price cap sets a maximum price that suppliers in Great Britain can charge consumers for each kilowatt hour (kWh) of energy they use, limiting the amount of profit they can make.
Brearley said: “To ensure fair cost recovery, earlier this year we allowed suppliers to recover costs incurred through the market turbulence of previous years. This, alongside the usual regulated profit margin, means suppliers are likely to make significant profits this year.”
“Companies do need to recover costs and to make reasonable profits for there to be a sustainable and competitive market for consumers,” he added.
Until recently, profits have not been the problem as energy suppliers have made combined losses of about £4bn over the last four years, with 29 suppliers going bust during a tumultuous period. The run of failures led to criticism of Ofgem’s effectiveness as they ended up costing consumers £2.7bn, or an extra £94 each, as the cost of managing millions of customer transfers was added to bills.
Brearley said: “We will act against any suppliers who have not learned the lessons of the energy crisis and do not put their customers first. This means not only ensuring falling prices are passed on to consumers in their energy bills, but also stepping up to deliver excellent customer service this winter – in particular to the most vulnerable.”
In a nod to the high number of failed suppliers, Brearley said companies that were “not yet sufficiently financially resilient” should not pay dividends until they had “the financial resources in place to deal with future price shocks”.
He added: “All companies need to work hard to avoid the costs that hit all energy customers in the event they go bust. Customers deserve a stable and financially resilient energy market, and we will take action against any company that pays out to their shareholders while taking unnecessary financial risks.”
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Although energy prices have fallen, the annual bill for a typical household in Great Britain is still more than £1,000 more than before the crisis. Ofgem cut the price cap on standard dual-fuel tariffs to £2,074 at the start of this month, although most households will feel little relief.
That is because the government has withdrawn its universal support for energy bills. In addition to the £400 credit given to bill-payers, its energy price guarantee, which temporarily replaced the price cap, limited average energy costs to £2,500. Both those schemes have now ended.
With bills still high, Brearley said there was a significant group of vulnerable customers that would struggle to pay this winter. “This may well mean we need further targeted support for those worst affected, and we will work with government on examining this need,” he said.
