Billions of pounds have been added to UK household energy bills because the regulator developed a market that left the risk and costs of supplier failures with consumers, an investigation by parliament’s spending watchdog has found.
Customers are expected to pay an estimated £2.7bn to cover the cost of 28 energy suppliers collapsing since June 2021, the National Audit Office said. The burden of the failures has been distributed across all energy bills, rather than just those of customers of suppliers that went bust, and equate to about £94 per customer, it added.
The supplier failures were caused by a rise in wholesale gas prices, which increased nearly six-fold from February to December 2021. But Ofgem’s low bar for new entrants and its light-touch approach to monitoring increased the risk and cost of them failing, the watchdog said.
Gareth Davies, head of the NAO, said: “Consumers have borne the brunt of supplier failures at a time when many households are already under significant financial strain having seen their bills go up to record levels. A supplier market must be developed that truly works for consumers.”
About £1.8bn raised from energy bills — or £66 per household — has gone to companies such as British Gas, which have taken on 2.2mn customers from failed suppliers, according to the report published on Wednesday.
The £2.7bn includes an estimated £548mn of additional claims from energy companies that took on customers from failed suppliers that is yet to be approved.
Some failed suppliers also missed payments into the government’s schemes to support renewable energy generation, which may add a further £296mn to customers’ bills, the watchdog added.
The NAO found that £900mn had been spent and a further £1bn budgeted for the cost of running Bulb Energy, the largest supplier to fail, which is currently in government hands and up for sale. The government is intending to recover the costs of bailing out Bulb from bill payers.
Ofgem is seeking a court ruling to determine whether it can make a claim as a creditor in the administration of a failed supplier. If the regulator’s claim is successful, the total cost to customers could be reduced by as much as £500mn but is likely to be significantly less than this, the NAO warned.
Although the customers of failed providers were transferred to alternative suppliers without interruption to their supply, Citizens Advice estimated the cost of that transfer has added £30 per month to bills for the duration of their contract, as many were moved to a higher tariff.
Customers have faced other challenges, such as the loss of debt repayment plans, which particularly affects vulnerable households.
Ofgem is seeking additional resources from HM Treasury, including fresh powers to enable it to be more proactive. But stakeholders told the NAO that Ofgem had previously been slow to react to potential licence breaches and that it was requesting new powers when it had not made full use of its existing ones.
The NAO also criticised Ofgem for failing to thoroughly stress test the design of its price cap on energy bills, which was introduced in 2019 to protect consumers from volatility in gas prices.
Since 2019 there has been a 78 per cent increase in the bill of a typical customer buying energy at the price cap limit to £1,971 per year.
Ofgem said it accepted “the findings of the NAO report . . . we are already working hard to address all of the issues raised”.