Energy UK is calling for sector regulator Ofgem to lose some of its current responsibilities to create a streamlined and more focused organisation better equipped to carry out its main duties.
The Department for Energy Security and Net Zero is currently carrying out a review of Ofgem’s performance and its future role, and in a paper on future sector regulation published today, Energy UK is recommending a radical reform of Ofgem’s remit.
Energy UK argues that by becoming too big and bureaucratic, Ofgem has overseen a dramatic increase in red tape, reducing growth, and pushing up costs for customers – while a failure to assert its independence in the face of external pressure has fuelled short-term thinking, detracting from its main duties and the carrying out of effective, efficient regulation.
The paper notes that, although the Government has committed to reducing the cost of regulation by 25% by the end of this Parliament, over the last ten years Ofgem’s headcount has increased by 120% and its budget by 200%, while the energy sector’s workforce has grown by a mere 8%.
This growth has contributed to a bureaucratic and onerous approach – illustrated by industry codes four times longer than the collective works of Shakespeare – creating a heavy regulatory burden that does little for customers while driving up costs for energy companies and diverting them from innovation and investment.
It points to how a failure to effectively regulate the retail market that led to 30 suppliers collapsing in 2021-2022, and Ofgem’s reluctance to allow sector investment ahead of need, particularly for network infrastructure, have cost billpayers at least an additional £4.5 billion in costs, despite subsequent efforts to address these issues.
The paper adds that a tendency to make ‘kneejerk’ responses and launch investigations without a clear rationale can divert time and resources from tackling the most serious issues, such as record customer debt, which continues to rise quickly.
Energy UK is therefore recommending a radical reform of Ofgem’s brief, refocusing on its core role as an economic regulator – with its consumer protection and competition role moving to the Competition and Markets Authority (CMA) and scheme delivery oversight shifting to other suitable organisations. This would leave a more streamlined Ofgem, centred on economic regulation of energy infrastructure, including networks and generation.
When the Government concludes its review, Energy UK says it should radically reduce Ofgem’s duties and set a new strategic direction for energy regulation to drive long-term customer value through enabling investment and lowering the administrative burden. The Financial Conduct Authority’s recent moves to reduce the regulatory burden by cutting back on its guidance offer a positive recent example. Government must then step back and let Ofgem and the CMA do their jobs independently and refrain from pressuring it into unnecessary interventions.
Energy UK’s chief executive , Dhara Vyas said:
“Systemic regulatory failures have left customers on the hook for billions of extra costs and a massive increase in red tape is holding back investment at precisely the time we need it most. It’s vital that a sector as important as energy has an effective regulator both for those companies it oversees and the customers they serve.
“Change is possible. We strongly believe that a smaller, more expert Ofgem will be better equipped to carry out its role, facilitating both growth and lower customer bills, while energy retailers continue to be held to high standards by the CMA. The current Government review is an ideal opportunity to reset energy regulation with a new structure that enables effective oversight of a fast moving and rapidly developing sector, which will continue to play a central role in this country’s future.”
Notes to editors
- Energy UK is the trade association for the energy industry, representing companies investing billions of pounds to secure our country’s current and future energy needs. From growing start-ups to major electricity generators, grid and infrastructure developers and energy suppliers, our members are driving change across power, heat, transport and flexibility. We champion initiatives such as our Vulnerability Commitment, which pushes suppliers to go beyond regulation to support customers with additional needs, and TIDE, the industry’s drive for greater inclusion and diversity. Through our Young Energy Professionals Forum, with more than 3,000 members representing 350 organisations, we support the development of future leaders.