The UK's energy regulator, Ofgem, is going through a tough period. Over the past few years, 30 suppliers have gone bankrupt under its supervision, household bills have soared to record highs, and there is no sign that these issues will be resolved in the short term.
Although the surge in energy prices initially triggered by the Russia-Ukraine conflict may have dissipated, analysts predict that higher energy bills and more supplier risks may continue until the UK transitions to cheaper renewable energy sources.
Typically, businesses pass on cost increases to consumers, but Ofgem's energy price cap policy limits suppliers from doing so. While the price cap helps to reduce energy expenses for residents to some extent, it is not good news for energy suppliers, as it restricts their profits, adds to their stress and risks, and leads to a loss of competition in the energy sector.
Following the global pandemic outbreak, and especially after the Russia-Ukraine conflict, Ofgem has pushed for changes in the energy sector's business capital adequacy requirements, financial resilience tests, and net asset value rules. These changes mark a shift from the pre-pandemic relaxation of regulations and increase in competition, significantly impacting the energy industry, especially energy suppliers.
Although Ofgem's reforms or the energy price cap policy have led to the bankruptcy of some UK energy suppliers and criticism from investors, they have enabled emerging businesses like Octopus Energy and Ovo Energy to enter the energy field and provide the much-needed competition under the price cap.
Most market participants or energy institutions say that the price cap increases business pressure, especially raising the bankruptcy risk for small and medium-sized energy suppliers. This is because the price cap limits suppliers from transferring the continuously rising energy costs to end consumers. For instance, Bulb, in a bid to become the seventh-largest supplier with 1.5 million customers, might have adopted an unsustainable growth model of providing energy supplies below cost, ultimately forcing it out of the energy sector.
Additionally, some small and medium-sized energy suppliers say that Ofgem's energy price cap policy harms their interests, offering "indirect" protection to financially robust large suppliers and allowing them to increase their market share. After British Gas owner Centrica acquired several declining competitors and Octopus acquired Bulb last year, the market share of the six largest natural gas companies in the UK rose to over 90%—a scenario the UK government strived to avoid a decade ago during energy market reforms.
Ofgem's energy price cap policy has received praise from consumers, but it might stifle innovation, industry development, and the global competitiveness of British energy companies. Ovo's CEO Raman Bhatia and Good Energy's boss Nigel Pocklington both suggest that the energy price cap needs to be redesigned or abolished.
Bhatia and Pocklington stated that the energy industry must exert more pressure on the UK government, urging Ofgem to repeal the outdated price cap. Otherwise, facing future market instability and competition from global counterparts, UK energy suppliers may face a more severe bankruptcy risk.
