Ofgem are quite possibly one of the most criticised institutions in Britain, but what exactly does the energy regulator do, and why does it come under fire?
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Ofgem, or the Office of Gas and Electricity Markets, is the energy market regulator. That means Ofgem is responsible for keeping in check the big energy companies that keep our lights on.
What is Ofgem?
Ofgem is the official regulatory body for the electricity and natural gas markets in Great Britain. In other words, it is the energy regulator.
It is an official government regulatory body, like Ofsted, Ofcom, the Healthcare Commission or the Financial Services Authority and, as such, has certain powers and duties.
Ofgem was formed through the merger of the Office of Electricity Regulation and the Office of Gas Supply.
The energy regulator is funded by a levy on the energy companies it regulates. The levy is paid annually, but Ofgem is independent of the energy suppliers.
Why does Ofgem exist?
Ofgem’s history lies in the liberalisation of the gas and electricity market in the UK.
Until 1996, almost all gas and electricity was provided by British Gas. This changed between 1996 and 1999, when the market was opened up to competition, and households were given the ability to choose their supplier.
At this point, an energy regulator was needed and Ofgem was responsible for setting the maximum price, but these controls were removed between 2000 and 2002.
Since that time, wholesale gas and electricity prices have skyrocketed, with the average gas and electricity bill rising nearly 160% since 2004.
Today, Ofgem is responsible for setting price controls, protecting consumers and helping the energy suppliers reduce their environmental impact.
What powers and responsibilities does Ofgem have?
As the regulator of the gas and electricity market, Ofgem’s primary role is to promote fair competition, protect consumers’ interests and ensure the security of supply.
Arguably, the most important function Ofgem serves is promoting value-for-money for energy consumers.
In other words, it is Ofgem’s duty to ensure the prices consumers pay represent 'value for money'. This part of Ofgem’s role is often the cause of the energy regulator coming under fire — especially in this era of ever-rising energy prices.
Ofgem is also responsible for collecting data on the performance of energy companies, including the complaints they receive. Ofgem requires all suppliers to publish domestic complaints data on their websites.
Ofgem is also responsible for monitoring whether energy companies are fulfilling their social obligations. This includes checking what payment methods energy suppliers are providing, the levels of debt of its customers, as well as disconnection rates and the number of prepayment customers it supplies.
The energy regulator is also responsible for ensuring energy suppliers do enough to protect vulnerable customers, and is accountable for promoting sustainability by reducing greenhouse gas emissions.
Ofgem and the Confidence Code
In 2013, Ofgem also took over the Confidence Code, which governs energy price comparison sites, including uSwitch.
The Confidence Code sets requirements on price comparison sites to act independently and represent information in a fair and unbiased way to consumers.
uSwitch was involved in the formation of the Confidence Code in 2002 with Consumer Focus, which managed the code until Ofgem took over in 2013.
Ofgem and the Retail Market Review (RMR)
In June of 2013, Ofgem published the RMR, the results of its review of the energy market and whether it was serving the interests of consumers.
The main conclusions of the RMR were:
- Multi-tier tariffs One of the key conclusions, Ofgem found that tariffs that charged different rates depending on the level of usage were confusing and made it difficult for consumers to compare, so they proposed these types of tariffs be eradicated.
- Uniformity Again, to make sure different tariffs could be easily compared, Ofgem proposed all tariffs should have one standing charge and one unit rate. The only exception is Economy 7, Economy 10, White Meter and Heatwise tariffs that offer cheaper rates during off-peak hours.
- A fixed number of tariffs Ofgem also found that by creating too many different tariffs — many of which were only available to new customers — energy companies were confusing customers. Therefore, the RMR proposes just four core tariffs per supplier.
- Dead tariffs Ofgem also found that energy suppliers were keeping customers on poor-value tariffs that were no longer available to new customers. The RMR therefore proposes these ‘dead tariffs’ be banned, unless they offer value for money.
- Key information The RMR also proposed that all suppliers provide on their customers’ bills a box of key information about the tariff they’re on, so it can more easily be compared.
- Notification Finally, Ofgem requested that energy suppliers tell customers if a cheaper deal was open to them, and to notify customers who haven’t switched for a long time an estimate on the cheapest tariff for them.
- It is worth noting that Ofgem also launched the ‘Be an energy shopper’ campaign in April 2014, as a means of getting more people to find a cheaper energy deal. The basis of the initiative is promoting the fact that the vast majority of households continue to pay too much for their energy and could lower their costs substantially by switching.
How does Ofgem affect me?
As the energy market regulator, Ofgem is the government body standing between energy suppliers and customers.
Ofgem is the organisation that ensures that any new energy company complies to certain standards, or that energy companies are responding to complaints and fulfilling their social and environmental obligations.
For example, energy companies are responsible ensuring low-income households get support for energy-saving upgrades (ECO), and must pay customers who generate their own energy a fee (Feed-in Tariffs). Ofgem ensures that energy companies comply with these obligations.
Ofgem also ensures that energy companies comply with their daily obligations when it comes to approaching new customers or dealing with existing customers, and has the power to set fines for non-compliance.
For instance, Ofgem has fined energy companies for mis-selling to customers by doorstep and phone.