Citizens Advice response to DESNZ’s Review of Ofgem

Citizens Advice response to DESNZ’s Review of Ofgem 534 KB

We welcome DESNZ’s review of Ofgem. Now is the right time to consider what changes are needed to enable the regulator to drive the transition to net zero and deliver better consumer outcomes in the decades ahead. Given the rare opportunity for this sort of holistic review, the Government should focus on the long term and key strategic issues, based on learning the key lessons of energy regulation since privatisation. 

We feel that Ofgem’s current mandate maintains the right focus on consumer outcomes and is generally appropriate, but that the complex duties that sit underneath it could be streamlined to enable Ofgem to deliver clearer strategic direction and timely decision-making. This should include taking a more enduring approach to Ofgem’s duties in relation to price protection that allows more flexibility to deliver the best consumer outcomes as the market develops.  

Changes to Ofgem’s duties are necessary but not sufficient - the review should also address the regulatory culture and the challenges that can arise in areas where there are blurred lines between governmental policy and Ofgem’s regulatory role, and the increased complexity of the system in which Ofgem operates. This has led to inertia in areas where progress is most desperately needed to support decarbonisation and economic growth - particularly in relation to retail market reform which can enable innovation and unlock better consumer propositions. 

Introducing a new Consumer Duty is vital to delivering higher standards for consumers and enabling innovation in the sector, by reducing reliance on prescriptive rules. This should increase consumer confidence to engage with new services by ensuring these deliver good outcomes on an ongoing basis, and are required to deliver fair prices, which Ofgem currently excludes from its overall standard of conduct. In contrast, while we think that greater use of automatic compensation can work well in some areas (and particularly in relation to smart metering) in other areas it can be inflexible and inappropriate, particularly when applied to areas of service with competitive differentiation. 

A Consumer Duty can also support the expansion of Ofgem’s remit to new products and services like TPIs and flexibility, by providing clear and consistent consumer outcomes across different areas of regulation. To ensure Ofgem has the powers it needs to manage changes in the coming years we also support the review looking at means of regulation which are more flexible and responsive. An authorisation regime could protect consumers using energy services which currently fall outside the licence, like those who purchase energy via resale or private wire networks. 

Unlocking the innovation required to achieve the clean power mission and wider net zero goals is likely to require further reform beyond the rollout of smart metering and introduction of half hourly settlement to improve access to time of use pricing. Policy levy reform is needed to ensure that consumers are able to benefit from low carbon power, while changes to the Universal Service Obligation could enable more specialist providers compared to the current approach which militates towards more standardisation. These changes must be accompanied by the appropriate targeting of support for those consumers on low incomes who could lose out from these changes.  

Installing low carbon technologies in millions of homes is also crucial in meeting net zero goals. However, the current consumer protection framework is not sufficient enough to enable consumers to seek solutions and redress in the event of faulty installations. We believe a reformed framework with enhanced protections and an enforcement body is required. 

Also crucial to meeting net zero goals is delivering the grid infrastructure required for connecting renewable energy and low carbon technologies. The strategic plans that will be produced by the NESO should enable Ofgem to focus more on ensuring value for money and improving services (rather than whether projects are justified). Demonstrating that the profits earned by network companies are justified by improved consumer outcomes is needed to maintain public confidence in the regulatory regime. Without this, future investments are put at risk.

Ofgem has an important role to play given the interconnected relationship between technology and energy supply. The regulator could take on a greater role in enforcing consumer law ahead of broader reform of the sector, which may not be in the scope of this review but could be impacted by decisions it makes. For example, Ofgem has significant responsibilities for the administration of low carbon energy schemes which don’t necessarily align with its core mandate and could sit elsewhere, but could add more value if reforms to its powers are made as part of this review. 

It’s vital that the review learns the lessons of the collapse of the retail market and the energy crisis. We support better protections for customers of insolvent firms after the point of supplier failure, and mechanisms to ensure that shareholders cannot walk away from failed businesses with profits while other energy consumers pay the costs of failure. We also believe there is a case for the regulator to make urgent licence modifications to respond to emergencies and extreme market conditions more rapidly, subject to appropriate safeguards. 

It’s also important to ensure that Ofgem has the right tools available to ensure compliance with its rules, and take enforcement action where needed. This should improve these powers in areas where the regulator has struggled previously to enforce rules, and ensure it is set up for its role in new sectors, like heat networks, which pose new challenges due to the number and diversity of businesses it will be regulating. 

Alternative dispute resolution also plays an important role in ensuring consumers can enforce their rights, but alongside greater powers for the Energy Ombudsman it is important that the Government also consider how it can enable stronger statutory advice and advocacy as part of this review. These services empower consumers and provide support to those who are most vulnerable, while making the case for policy improvements that can lead to better consumer outcomes. The scope of these services should expand in line with regulation of new energy services to ensure consumers have access to coherent support, and they should have strong and consistent powers to collect and publish data on consumer matters. 

Please find our detailed response to the consultation questions below. We look forward to working with the Government as it progresses with the review.