Ofgem's Capital Target Failures Rise as Energy Suppliers Face Renewed Pressure
In the wake of the catastrophic gas crisis of 2021-22, which saw the collapse of half the nation's retail energy suppliers including Bulb with its 1.7 million customers, the regulator Ofgem pledged a tougher stance on financial oversight. The aftermath was costly, with the National Audit Office calculating the clean-up bill at a staggering £2.7 billion, equivalent to £94 on every household's energy bill. This prompted the introduction of a new regime in March last year, where Ofgem set specific capital targets for each supplier to bolster financial resilience.
A Growing Problem Amid Market Volatility
The timing of assessing this financial resilience is particularly pertinent. Wholesale gas prices are once again exhibiting significant volatility, driven by factors such as cold weather in North America affecting European markets. While not yet reaching the extreme levels of 2021-22, this instability threatens to disrupt UK suppliers' hedging arrangements, making capital adequacy more critical than ever.
Delving into a recent Ofgem report reveals a concerning trend. The number of suppliers failing to meet their capital targets has increased. From three firms identified last June, the tally rose to five by the end of September. With only 23 suppliers operating at the time, this means slightly more than a fifth of the supplier base was non-compliant—a significant and troubling proportion.
Opacity and a Lack of Enforcement
Ofgem's response to these failures has been characterised by a notable lack of transparency. The regulator states, "Where suppliers are below the target, we work proactively with them on their plan to meet this target in the shortest reasonable time." However, the report divulges little else. It does not name the under-target firms—though large suppliers Octopus and Ovo voluntarily disclosed their status last year—nor does it specify how far short they fell from the aim of holding adjusted net assets of £115 per dual fuel equivalent customer.
This approach raises several pressing questions. What constitutes "the shortest reasonable time"—six months, a year, or longer? There is no statutory timeline, as Ofgem treats each capital-improvement plan as unique. Furthermore, the meaning of "working proactively" remains opaque, with the regulator deeming its specific measures too commercially sensitive to discuss.
A Stark Contrast to Other Sectors
This stands in stark contrast to regulatory practices in other critical sectors, such as banking. The Bank of England publishes detailed stress test results for individual banks, which are meticulously analysed by financial markets. Banks face severe consequences even for nearing regulatory minimums. In the retail energy market, Ofgem's stance is markedly different: "Where a supplier is not meeting the Capital Target but has a credible and agreed plan in place they remain in compliance with our rules," it states, while reserving the right not to define what it considers credible.
The debate over enforcement intensity was highlighted last year in a public quarrel between Octopus Energy and Centrica, the owner of British Gas. Centrica's chief executive argued it was "criminal" that Ofgem was not applying its ultimate sanction of barring under-target firms from taking on new customers.
Calls for a Stronger Regulatory Stance
One does not need to fully endorse Centrica's hardline position to recognise that the current regulatory approach appears excessively lenient. With the number of laggard suppliers now increased, crucial questions remain unanswered. How much additional time will these firms be granted to comply? Ofgem, having established these new rules for a clear reason, should be capable of providing transparent answers. The stakes for consumer protection and market stability are too high for ambiguity in a sector still recovering from a multi-billion pound crisis.
