RUTH SUNDERLAND: Government should consider replacing Ofgem

A pledge to renationalise energy companies is not on Sir Keir Starmer’s to-do list if he wins the election – at least not yet. Some of the heat – no pun intended – may stem from the issue of utility bills, which are likely to fall significantly when Ofgem unveils its summer price cap this week.

The blow to households will ease as wholesale gas prices have fallen.

But the underlying dysfunction in the energy market remains, and this is a gift to people like union Unite, the Labor Party’s biggest backer, who want nationalization back on the agenda.

Of course, seizing energy assets, including the major domestic suppliers and oil and gas operators in the North Sea, would be insane.

Unfortunately, this can’t stop it from appealing to voters. Unite claims that nationalization would end the “scandal of extortionate profits by energy companies” at the expense of customers. This ignores some inconvenient truths, the first of which is that the price of energy in international wholesale markets will not magically change after nationalization in the UK.

Prices are falling anyway because Europe is learning to cope without supply from Vladimir Putin.

It may be hard to believe, but the domestic energy supply industry in the UK as a whole is not profit making, it is loss making.

And if the UK is to reach net zero by 2050, we will need hundreds of billions of pounds of investment in renewables, hydrogen and new nuclear power.

A nationalized industry would fight for funds with the NHS, schools and the rest if the state coffers are overstretched. But under private ownership, the huge resources in UK pension funds could be tapped, alongside capital from foreign investors.

But the mess in the energy market, which has left contenders a happy hunting ground, means the likes of Unite are likely getting a better hearing than they deserve.

Ofgem allowed thinly capitalized companies to enter the market in the name of competition and allowed these companies to operate high-risk business models that relied on customer deposits as a source of working capital. Predictably, some were so lacking in financial resilience that they imploded on the first difficulty.

Even less palatable, several founders emerged from the wreckage millions of pounds richer, including those of Pure Planet and the couple behind failed supplier People’s Energy, who appear to be holding on to £50 million despite the collapse.

A serious concern is that a very large share of the domestic market is held by two businessmen, Stephen Fitzpatrick of Ovo and Greg Jackson of Octopus.

Their companies supply heat and light to more than 11 million homes, but as private companies they are not as transparent and accountable as one would like.

They have been consistent loss makers. Octopus says it could have posted a profit of £9m last year if it hadn’t chosen to spend £150m to keep customer bills down.

Both grew through the acquisition of customers from other suppliers. Octopus raised 1.5 million via the rescue of Bulb and Ovo won 3.5 million from SSE in 2020, and both – Shell’s UK retail energy business – are reportedly seeking significant further expansion.

The risk is that they seem to have no path to sustainable profits, but are too big to fail.

Stricter capital rules and the protection of client money are needed. Why were these not posted? Would some suppliers fail such a stress test?

The government should consider replacing Ofgem with a more robust regulator. But there are no easy routes out of the mess in the energy market. As the saying goes, you wouldn’t start here.