Ofgem gives energy firms finance warning

4th July 2023

Sector regulator Ofgem says a number of energy companies do not meet its financial resilience standards. While it did not specify which companies were falling short of its standards, it warned that around a third of the market is below the target.

The energy regulator has written to energy companies warning them that an expected return to profitability must be used to bolster their balance sheets.

In the letter, he tells the sector’s CEOs that energy regulator Ofgem is ready to act against suppliers that do not yet have sufficient capital if they use profits for paying dividends above recapitalising.

After a period where suppliers have largely made losses due to difficult trading conditions, the price cap has now dropped, and the price of wholesale energy, while still well above pre-crisis levels, is much lower than over the last two years. This means the sector is likely to return to profit this year and suppliers can recoup some of the losses from recent years.

But while Ofgem has always been clear that reasonable profits are essential for a sustainable and well-functioning sector, the letter makes clear that financial resilience must be prioritised.

The letter also reminds suppliers that the energy regulator and government moved quickly to stem losses and protect consumers when prices were rising sharply, including with swift amendments to the price cap rate and methodology where suppliers were suffering higher than expected costs. And multi-billion-pound subsidies were provided for consumer bills from the public purse.

Now, as prices come down and profits return, Ofgem expects suppliers to act responsibly and in the interests of their customers and will act to amend the price cap rate and methodology to ensure that it continues to fairly reflect costs as market conditions change.

The letter also details how Ofgem’s reforms have shored up the sector to ensure it is more resilient, supportive and responsive than before the energy crisis and that there will be no return to the risky behaviours of the past.

Jonathan Brearley, CEO of Ofgem, told suppliers in an open letter “An energy sector where companies can make a reasonable profit is important to create a sustainable and competitive market for consumers. However, a return to the practices we saw before the energy crisis isn’t on the table – suppliers must reciprocate the support the sector was given by consumers and taxpayers when wholesale prices increased by behaving responsibly as prices fall and profits return.”

“The energy market has changed. Ofgem has introduced major changes to the market, and we need suppliers to learn the lessons of the energy crisis and play their part by making sure they’re financially robust, can absorb potential losses and are meeting our new capital requirements. I expect no return to paying out dividends before a supplier has met those essential capital requirements.”

“We will closely monitor the situation, including to make sure that the market is operating competitively on price alongside customer service and innovative products, and to make sure that suppliers are meeting their obligations to the most vulnerable.”