Ofgem says it needs to build a ‘more resilient’ UK energy market

Chief executive says more suppliers likely to fail this winter, and admits more focus on risk is needed

Last modified on Thu 7 Oct 2021 15.15 EDT

The energy regulator, Ofgem, has admitted that it needs to pay more attention to the potentially risky business models of small suppliers, amid a wave of company failures caused by whipsawing gas prices.

Speaking at an annual conference held by the trade body Energy UK, Ofgem’s chief executive, Jonathan Brearley, said it was likely that more suppliers would fail, adding to the 12 that have gone under this year.

“We will need to regulate the energy market differently,” he said. “When gas prices hit, many suppliers simply couldn’t cope with such a sharp, sustained shock.”

He said Ofgem would have to make plans based on the prospect of more volatility in gas markets, with prices having risen to record levels of more than 400p per therm this week.

This would involve a regulatory approach “more focused on business models and the risk they carry,” he said, admitting that Ofgem would have to “build an energy market that is more resilient in future”.

More than 2m gas and electricity customer accounts have had to be switched to new suppliers via Ofgem’s “supplier of last resort” scheme, as suppliers succumbed to high gas prices.

The crisis has led to warnings of “desperate choices” for consumers this winter, with the cost of the scheme likely to add to the upwards pressure on gas bills caused by soaring wholesale prices.

Speaking at the same conference, the business secretary, Kwasi Kwarteng, said the government “will not bail out failed companies”, amid widespread predictions that the number of suppliers could fall from more than 70 to about 10 by the end of the winter.

Officials in Westminster are understood to believe that companies that fail have not done enough to protect themselves by buying energy in advance to lock in prices and hedge against volatility. “They entered the market knowing the price cap was there and took enormous risks,” said one.

But the Energy UK boss, Emma Pinchbeck, appeared to upbraid Kwarteng for not heeding the trade body’s warnings. She said Energy UK had “resisted saying ‘I told you so’ until now”.

At the annual energy conference, leaders from across the sector gathered together in the midst of a period of huge upheaval.

Also on the agenda were government pledges to eliminate net carbon emissions from electricity generation by 2035 – meaning gas, which provides more than 50% of the UK’s power on windless days, must be almost entirely removed from the system.

Energy UK said it supported the end of investment in “unabated” gas, meaning plants that do not use technology such as carbon capture and storage to reduce emissions.

Pinchbeck said she supported the 2035 plan, which analysts have said could cost £200bn, but warned that government needed to back up its rhetoric with “ambitious” policies. “Pledges are exciting but we want government to turn them into action,” she said.

Officials at the department for business, energy and industrial strategy are understood to be considering measures to speed up the UK’s transition to renewable energy, including more frequent wind farm auctions.

Concrete proposals for reaching net-zero electricity by 2035 are expected to be included in an energy bill, building on a white paper published in December last year.

The bill is not expected before the end of 2021.

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