Ofgem Action Plan for 2022
After all the chaos caused by the energy crisis in 2021, we’re sure many customers are worried about what’s in store for the energy market in 2022. Here we break down Ofgem’s new action plan for the energy market and how it will affect you.
The energy crisis of 2021 is still claiming victims. With gas-only supplier Zog Energy being the latest victim to be pushed into administration, the energy regulator Ofgem has been facing calls from both the government and the public to take action on the deteriorating market. This month, Ofgem published their action plan for tackling the energy crisis in 2022, and we’ve broken it down to explain how these new rules will affect you.
Why Do Ofgem Need An Action Plan?
Since the beginning of 2021, energy firms have been under increasing pressure caused by the rise in gas prices. As the price of gas has rapidly climbed, many smaller energy companies have been unable to fulfill their tariff agreements and have, as a result, gone bust. The largest energy company to be affected this year was Bulb Energy that had 1.7 million customers.
The UK energy market is among one of the freest in the world, meaning that it has fairly low barriers to entry compared to other energy markets. In 2017, the UK saw an explosion of new energy companies entering the fray in order to compete against the traditional Big Six. Octopus Energy, Bulb Energy, and People’s Energy were some of the many new “challenger companies” to enter the market.
What Has Been The Problem?
Since the UK’s energy market is very free, Ofgem has generally had a looser approach to regulation compared to other markets. This means that energy suppliers can generally set their own prices, and while there has been a price cap (a maximum on how much they can charge on a standard variable tariff), there is no limit on how little they can charge. This has been crucial for preventing energy bills from rising too high.
As a consequence, in order to attract more customers for its growth, energy companies have been charging too little to be able to cover their costs. As gas prices surge, this puts their entire business model in peril as they quickly are unable to afford their operations. When an energy supplier goes bust, Ofgem then appoints a Supplier of Last Resort (SoLR) to take on the customers, or appoints a special administrator as in the case of Bulb Energy’s collapse.
Ofgem’s New Plan For 2022
In response to the ongoing energy crisis, Ofgem has been preparing for the necessary steps in order to better regulate the UK’s energy market. This new plan is to build upon the safeguards already in place for customers currently, such as SoLR and the price cap, so it can prevent crises such as this occurring again.
So let’s a have a look at some of key focuses of Ofgem’s new action plan:
Starting from January 2022, energy companies will be expected to undergo stress tests to prove their financial health in times of crisis. Like the stress tests banks are subject to, Ofgem will make it obligatory for energy suppliers to test their resilience to price volatility, cold weather, bad customer debt, and for those companies that fail the tests, they will face penalties. For those who do fail, they will be provided with an improvement plan.
Protecting Credit Balances
Early in 2021, Ofgem was looking at new ways for protecting customer balances, particularly if customers have been in credit with their energy supplier. One of the options on the table is the autorefunding of credit so customers will not have to wait until the end of the year for their credit to be back in their bank account.
Price Cap Reform
The price cap has been an important part of the energy crisis. Since the price cap means there is a maximum limit on how much an energy supplier can charge per year, in another crisis where the wholesale prices are going up, an energy company is unable to charge more to cover the costs.
In response, Ofgem has been proposing a number of different reforms for the price cap to ensure that energy companies have the flexibility to deal with a crisis and that consumer interests are still protected. These reforms have included having a price cap review every three months or having default tariffs that are fixed over six months.
Limits On Acquiring More Customers
Ofgem will also look into setting particular milestones for energy companies when they have reached a certain number of customers. For example, if a supplier reaches 50,000 domestic customers, then they will be required to pause their acquisition process so Ofgem can assess the company’s financial health. These milestones will be developed as the new regulations come into place.
Will It Be Enough?
Ofgem has been the centre of much criticism over the last few months for its failure to put proper safeguards in place to prevent this crisis. With this new plan, they are open to changing the course for the UK energy market and helping it better prepare for situations like rising gas prices.
However, whether it will be enough to protect customers or just simple pasting over the cracks, only time will tell. It is likely that much will need to be done in order to keep the energy market properly regulated and robust enough to deal with the crises that might occur in the future.
How Will This Affect Me?
In short, the whole purpose of Ofgem’s new action plan for 2022 is to stop the worst parts of the wholesale price rises affecting domestic customers. With stress tests and price cap reform joining SoLR in their toolbox, the energy regulator will be able to help mitigate the problems caused by the crisis and avoid these issues spilling over onto consumers. Hopefully, as gas prices start to stabilise and regular stress tests are given, customers will be able to continue on as they are.