The energy regulator Ofgem has been warned by the Government that it is in “last chance saloon” and could be scrapped if it fails to shake up Britain’s uncompetitive gas and electricity market.
Senior ministers have made it clear that unless Ofgem takes swift action to improve competition and curb the profits of the “big six” energy companies, then the future of the regulator itself will be called into question.
Ofgem is currently conducting a joint assessment of competition in the energy market with the Office of Fair Trading and the Competition and Markets Authority which is due to report in March.
Ministers have made it clear they expect this assessment to be hard-hitting and lead to reforms that will break-up the dominance of the big six and reduce bills for consumers.
“Ofgem was set up to regulate the market and protect consumers from being over-charged for their gas and electricity,” said a senior Government source.
“But it is quite clear that in recent years it has lost sight of this objective. There is obviously a problem and Ofgem must resolve it. We are optimistic that they will but this is last chance saloon.”
Energy companies have always maintained that the profit margins they make on their retail operations are tiny and this shows that competition is strong in the market.
But critics, including the consumer group Which?, say the energy companies are merely transferring their excessive profits to their wholesale generating arms – the cost of which constitutes around 60 per cent of domestic energy bills.
The latest figures from Ofgem show that in 2012 the big six made 4.3 per cent profits on their retail arms, or £53 from an average £1,174 combined bill. But the same figures show that profits made on the companies’ wholesale operations were 20 per cent – or £122.40 on the average bill. This, critics say, shows the energy companies are using their vertical integration to rip off customers through the back door.
In theory it is up to Ofgem to regulate both sectors of the energy market to ensure there is adequate protection for consumers and that the energy companies do not make excessive profits.
But ministers have become increasingly concerned that the regulator, which is independent of Government, has become too close to the industry and has failed in its duty to consumers.
While it cannot dictate what Ofgem does, the Government ultimately has the power to scrap the regulator and bring market regulation back into the Department of Energy and Climate Change.
One senior official said: “Ofgem have been a nightmare for years. They keep Government in the dark about what they’re doing and then spring things on us at the last minute – usually at 3.30 on a Friday. There is not much sympathy for them in Whitehall.”
Another political source said there was frustration at Ofgem’s inability to explain what it was doing to protect consumers from excessive price rises. “I think there are some good initiatives going on around price transparency and making it easier for new entrants to come into the market, but Ofgem has been totally useless at explaining this to the public.”
Richard Lloyd of Which? said: “We want to see radical solutions to improve competition and keep prices in check, like the biggest energy companies being forced to separate wholesale generation from the retail arms of their business.”
An Ofgem spokesperson said: “We don’t comment on speculation.” A spokesman for Energy UK said: “The energy industry will co-operate with any inquiry and supports moves to foster competition and more transparency in the energy market.”