OFGEM’s five-year plan for energy companies and consumers

OFGEM’s five-year plan for energy companies and consumers

The energy industry’s regulator has an ambitious plan to make the sector more environmentally friendly. But at what cost? Is there a more straightforward way?

The Office of Gas and Electricity Markets, or OFGEM, is the independent regulator of the electricity and gas supply industry. It is funded mainly by consumers and is accountable to Parliament. Part of its remit as a watchdog is to rein in energy suppliers and stop them from taking advantage of their customers. It can set price controls, cap how much money firms can earn and collect fines from companies who break the rules. It can also direct companies as to how they meet environmental targets. As part of its environmental initiative, OFGEM has set out a five-year plan – a framework directing companies on how to invest in green projects.

What is the plan and why does it matter? How has it been received by the industry? And, can more be done with regards to the smart meter rollout?

The plan

OFGEM has set out a five-year plan to force energy companies to invest more in green ventures while cutting prices for customers. Under the plans, firms will be allowed to spend £25 billion on enhancing gas and electricity networks, including £3 billion making the network greener and £1 billion on green energy research and work on lessening the energy network’s impact on the environment.

Typically, companies would find a proportion of this investment money by raising the prices they charge their customers. However, OFGEM has reduced the amount the firms will be able to make from their investments by almost half. This means that consumers will meet less of the cost and the companies will bear more of the burden. It’s expected that customers will see their bills drop by an average of £20 per year as a result of these measures, over the next five years.

This new proposal (at this stage, it is still a proposal) comes on top of other OFGEM regulations, including a per-unit price cap and tighter rules around company financing. OFGEM changed the rules for new entrants to the energy market to try and end the number of companies becoming insolvent. It is also about to bring in controls around assessing companies who they suspect of being financially unstable.

The overall goal for the OFGEM plan is to help get to the Government’s target of achieving ‘net zero’ by 2050.

Energy firms are angry

The reception given to OFGEM’s proposals by energy firms was heated, to say the least. One by one, energy bosses lined up to tell the media how disappointed they were. This is understandable. After all, the amount of return on investment they can reap was nearly halved. It also means less money will be able to be passed on to shareholders, making the sector a less attractive option for outside investment. On the announcement of OFGEM’s plan, the National Grid price per share dropped from 899p to 869p.

Unsurprisingly, energy companies began to investigate whether legal action can halt OFGEM’s plan, threatening to open a case with the Competition and Markets Authority (CMA), which regulates business competition and activities that may skew the open market.  The firms’ argument is based around them not being consulted before OFGEM announced their proposals.

It’s clear that, if OFGEM’s proposals become a reality, the industry will bear the burden of these investments. The plan certainly affects the energy companies more than it does the consumer. However, OFGEM challenges the assertion that it will lead to a lack of outside investment in the industry, pointing out that in the water industry, investors are still investing, seemingly satisfied with slightly lower returns.

Is the plan good for consumers?

The OFGEM plan is much better for consumers than the energy firms. It’s important to note that the plan focuses on energy network companies, not suppliers. Although, energy networks traditionally pass regulatory costs on to suppliers, who then charge the consumer more on their bills. OFGEM will be making sure this does not happen in this instance.

The customer will also be able to save around £20 per year on their energy bills. While this is a modest saving, every little helps. Typically, customers expect the amount they pay to go up every year, not down. Yet, consumers can often save more than £20 per year by switching suppliers.

The smart meter rollout

The OFGEM proposals are another set of problems for the industry to deal with at an already challenging time. Wholesale energy prices are volatile, Coronavirus has devastated working practices and the smart meter rollout is still running behind schedule.

The smart meter rollout, meeting the Government’s target of giving every household in the UK a smart energy meter by 2024, has been beset with problems from the start:

  • Technical problems – a fault was found with a large proportion of already fitted smart meters, meaning they would stop working if the customer switched suppliers
  • Financial problems – the expected cost of the rollout now sits at £13 billion
  • Timing problems – the rollout was initially planned to be completed by 2020, but this deadline was put back to 2024

On top of this, the rollout had to be suspended during the Coronavirus lockdown, while doubts have emerged over whether smart meters deliver the financial and environmental benefits initially promised.

Is it too much to expect energy companies to deal with increasing their investment level in green projects while persevering with the smart meter rollout?

A better solution?

We welcome all initiatives that contribute to reaching the net-zero target, but do the sums add up?

Halting the smart meter rollout, instead ensuring that smart meters are fitted when existing traditional meters come to the end of their natural life, would take one problem off the energy industry’s agenda.

Perhaps OFGEM could think about making that part of their next proposal? We will have to wait and see.