Energy firms rebuilding profits must use cash responsibly, watchdog warns

Ofgem told suppliers they must not repay dividends to investors until they can prove they are financially robust.

The UK’s energy watchdog has urged suppliers to retain profits to protect consumers rather than dish it out to investors (Gareth Fuller/PA) (PA Archive)

The UK’s energy watchdog has urged suppliers to retain profits to protect consumers rather than dish it out to investors, as the energy crisis begins to ease.

In a letter to household energy suppliers, Ofgem warned that it would step in and take action if it finds that any companies are abusing its pricing rules.

It comes as wholesale energy prices have begun to ease and domestic suppliers are expected to return to profit after five years of losses.

But companies must learn the lessons of the energy crisis, where households and businesses across the UK faced soaring gas and electricity bills and people are set to face extreme financial difficulty this winter, the watchdog stressed.

It asked firms rebuilding their profits to be responsible and focus on maintaining financial resilience, rather than immediately paying out dividends to shareholders.

I expect no return to paying out dividends before a supplier has met those essential capital requirements

Jonathan Brearley, Ofgem's chief executive

Jonathan Brearley, the chief executive of Ofgem, told suppliers: “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.”

Mr Brearley said the regulator was closely monitoring suppliers to make sure that prices remain competitive and vulnerable customers are being protected.

After a meeting last week, the Chancellor agreed with utility watchdogs that suppliers must bring down prices in line with falling input costs.

Ofgem said it is working closely with suppliers to help businesses struggling with high energy costs, and monitoring whether this support is being felt on the ground.

“While we are observing some good practice, we are also finding evidence that some suppliers may have breached our pricing rules, which we are investigating further and will take action if we find abuse,” Mr Brearley warned in his letter.

The move comes after reports that Thames Water could be facing collapse, as the water sector has amassed billions of pounds worth of debt.

Nevertheless, around £1.4 billion was paid out in dividends by private water and sewage companies in 2022, according to analysis by the Financial Times in May.