Ofgem Accused Of "Enhancing Profits" Of Energy Companies With New Price Cap Rise
Domestic energy debt increased by £300m in the third quarter of 2023 alone. (Alamy)
5 min read
Energy security and net zero (ESNZ) select committee chair Angus MacNeil told PoliticsHome Ofgem's recommendations to increase its price cap to protect energy suppliers from soaring domestic energy debt would only "enhance profits" of energy companies.
On Friday energy regulator Ofgem announced it has put forward a proposal for a one-off price cap adjustment that would see £16 added to its energy price cap between April 2024 and March 2025 in response to ballooning domestic energy debt. The cap is already set to rise in January from £1,834 to £1,928 a year.
The recommendations suggest the extra charge will provide companies with the resources to set up payment plans, write off debt on a case-by-case basis, and work out affordable repayment holidays.
Ofgem says it estimates there was £2.9bn of debt in the domestic energy market at the end of the third quarter in 2023, a steep increase of £300m on the second quarter of 2023.
MacNeil was highly critical of the proposal at a time when energy companies continue to record significant profits.
In July Centrica, the company which owns British Gas, reported £969m in profits in the six months to 30 June alone – up significantly from £98m the year prior by nearly 900 per cent.
"I don't think Ofgem's job is profit recovery, or profit enhancement for profitable businesses – these companies are making profits," MacNeil told PoliticsHome.
"Even though some of them will disguise it with their retail arms, energy companies have been making unparalleled profits – and Ofgem now play the accountancy game with them, enhancing their profits.
"This begs a whole pile of questions. If the government is setting up a regulator for profit protection, this isn't market forces – this is regulator forces."
In Ofgem's latest announcement, its director general for markets, Tim Jarvis, said the regulator knew the cost of living was "hitting people hard", with "energy debt reaching record levels".
"We have taken steps to ensure energy firms are taking better care of customers and treating people struggling with debt fairly, through our robust consumer standards, and that companies are getting in touch to offer support, such as affordable payment plans, where needed," Jarvis said on Friday.
“However, the record level of debt in the system means we must take action to make sure suppliers can recover their reasonable costs, so the market remains resilient, and suppliers are offering consumers support in managing their debts.
“The proposals set out today are not something we take lightly. However, we feel that they are necessary to address this issue. This approach will ensure the costs are recovered fairly, without penalising a particular group of customers.
“The price cap has helped to protect consumers from a volatile gas market. However, it remains a blunt instrument in a changing energy sector, and the way it works may need to change in the future, so customers continue to be protected.”
Energy campaigners have been warning throughout 2023 that energy debt was becoming a significant issue for consumers after several years of record breaking energy bills and inflation hitting a 41 year high.
On Friday, the cross party Energy Security and Net Zero committee also released a report warning "urgent action is needed from the government, Ofgem and energy suppliers to help households facing an apparently inevitable new winter crisis".
"While recognising the unprecedented levels of support provided last year, the committee is concerned that no new specific financial assistance has yet been announced and warns that the challenge of coping with continuing high energy costs this winter will be exacerbated by wider cost of living pressures and accumulated energy debt," said the committee.
As well as more financial support for vulnerable groups struggling to afford their bills, the committee called for a more "proactive and more empathetic approach to customer service by energy companies".
Simon Francis, coordinator of the End Fuel Poverty Coalition, described Ofgem's latest proposals as an "outrageous tax" and said it was "simply not fair".
“Energy suppliers have posted billions in profits already this year while millions of people struggle in cold damp homes," Francis said.
"The record levels of energy debt are due to Britain’s broken energy system, not the fault of the hard-pressed public.
“We have called for the government to introduce a help to repay scheme for homes in energy debt. But ministers have refused to listen and now customers will pay the price of their inaction.”
He told PoliticsHome a more sustainable solution to the crisis of domestic energy debt was needed – including a social tariff, which Chancellor Jeremy Hunt said the Treasury would look at in the autumn statement in 2022, and something the ESNZ committee has called for.
"Solving the energy crisis is, of course, only one part of the solution," Francis continued.
"What we also need to see is reform of tariffs themselves so that people don't get in such high levels of energy debt in the first place.
"One way of doing that is the ideas for social tariffs, which would reduce the cost of energy for those who especially are in the most vulnerable situation.
"It's time for a sort of fundamental review of our energy system and to work out not just a way of helping people get out of energy debt, but also to ensure that in the future, we never see such problems and such levels of debt build up again."
A Department of Energy Security and Net Zero spokesperson said: “We recognise the cost of living challenges families and households are facing. We expect energy suppliers to help customers who are struggling with energy costs, prioritising support for the most vulnerable.
“That’s why we’re spending £104 billion to support households with all their bills – including targeted support for the most vulnerable.
“Bad debt can push up bills for everyone and Ofgem has a responsibility for setting the level at which suppliers can recover costs they incur.”
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