Ofgem

What is Ofgem?

Ofgem is the public body responsible for overseeing the electricity and gas markets. Its primary duty is the protection of current and future consumer interests. ⁶⁴ Ofgem, ‘Our powers and duties’ Ofgem, 19 July 2013, retrieved 1 November 2022, www.ofgem.gov.uk/publications/our-powers-and-duties  It achieves this by ensuring that energy companies comply with existing regulation, including by investigating potential breaches. Ofgem also manages environmental schemes and, initially since April 2017 but expanded in January 2019, sets a unit cap for household electricity and gas prices, the ‘price cap’. It operates primarily in England, Scotland and Wales – in Northern Ireland, the Utility Regulator assumes most of Ofgem’s responsibilities apart from the administration of certain renewable energy schemes.

What does Ofgem do?

Ofgem regulates all aspects of the energy market: generation at power plants, transmission through the National Grid and retail supply to consumers. Some companies operate in both the generation and supply markets while others only produce energy or only purchase it to then sell on to consumers.

Generally, all energy companies active in Great Britain must apply to Ofgem for a licence and must fulfil, on an ongoing basis, certain conditions around financial sustainability and treatment of vulnerable customers. ⁶⁵ Ofgem, ‘Supply licence guide: Introduction to the supply licences’, 21 February 2019, retrieved 1 November 2022, www.ofgem.gov.uk/sites/default/files/docs/2019/02/introduction_to_the_supply_licences_0.pdf  Ofgem has a broad set of powers to demand information from energy companies and to punish breaches of licence conditions, with fines of up to 10% of a company’s annual turnover. ⁶⁶ Ofgem, ‘Compliance and enforcement’, Ofgem, (no date) retrieved 1 November 2022, www.ofgem.gov.uk/energy-policy-and-regulation/compliance-and-enforcement

Ofgem also investigates anti-competitive behaviour such as introducing barriers to switching provider or active collusion between companies. Since 2010 it has imposed fines of more than £750m in total for these types of breaches. ⁶⁷ Ofgem, ‘Total fines and redress payments since 2010’, Ofgem, August 2022, retrieved 1 November 2022, www.ofgem.gov.uk/energy-data-and-research/data-portal/all-available-charts?keyword=penalties&sort=relevance  Its remit also requires it to support government in achieving its net zero targets and protect future consumers’ interests by making the market cleaner, which it does by administering government schemes and monitoring the compliance of suppliers with government-mandated renewable energy obligations.

How is Ofgem structured?

Ofgem is a statutory non-ministerial government department. ⁶⁸ UK Government, ‘Ofgem’, Gov.uk, (no date) retrieved 1 November 2022, www.gov.uk/government/organisations/ofgem  This means that, while it takes overall policy direction from the Department for Energy Security and Net Zero (DESNZ), its sponsoring department, it has some independence from central government in how it implements those policies. Its employees are civil servants and any change to its status must be passed by parliament. Ofgem is funded by a licence fee that it levies on the energy industry.

How has Ofgem evolved over time?

Ofgem was formed through the merger of Office of Electricity Regulation (OFFER) and Office of Gas Supply (Ofgas) under the Utilities Act 2000. ⁶⁹ United Kingdom, Utilities Act 2000, Chapter 1. London: Stationery Office, 2000.  The liberalisation of the domestic gas and electricity markets in 1998 and 1999 respectively meant a regulator was needed to promote competition in these markets due to the tendency of energy markets to become monopolistic. Politicians also worried that markets would not necessarily produce outcomes that were in the public interest regarding issues like protecting vulnerable consumers and producing clean energy.

Regulation of the energy sector was originally envisioned as small and temporary, serving to “hold the fort until competition arrived”. ^undefined Littlechild S, Regulation of British Telecommunications’ Profitability: Report to the Secretary of State, February 1983.  However Ofgem has in fact grown in scope and funding since its creation. In 2000 it had an operating budget of £69.3m (in 2025 prices); ⁷⁰ Ofgem, ‘Office of Gas and Electricity Markets Plan and Budget: April 2000 – March 2001’, March 2000, retrieved 1 November 2022, www.ofgem.gov.uk/sites/default/files/docs/2000/03/1751-planmarch.pdf  in 2023, its expenditure had more than doubled, to £154.5m (in 2025 prices). ⁷¹ Ofgem, ‘Accountability Report: Ofgem Annual Report and Accounts 2021-22’, Ofgem, 11 July 2022, retrieved 1 November 2022, www.ofgem.gov.uk/sites/default/files/2022-07/OFG2169%20Ofgem%20AR%26A%202022_Accountability.pdf  And while its principal duty remains consumer protection, under the Energy Act 2010 Ofgem was instructed to consider whether there are alternatives to competition when pursuing consumer protection. ⁷² United Kingdom. Energy Act 2010, Explanatory Notes. London: Stationery Office; 2010. United Kingdom

Under the same act, Ofgem was instructed to view reducing emissions and securing stability of energy supply as part of its remit. Partially in response, Ofgem changed its price control models in 2013 to place a greater emphasis on innovation-led investment over simply lowering prices. ⁷³ Ofgem, ’RIIO - a new way to regulate energy networks’, Ofgem, 4 October 2010, accessed 3 November 2022, www.ofgem.gov.uk/sites/default/files/docs/2010/10/re-wiringbritainfs.pdf  More recently, Ofgem has begun to develop a new framework of consumer interests that includes decarbonisation alongside lower prices. ^undefined Littlechild S, Regulation of British Telecommunications’ Profitability: Report to the Secretary of State, February 1983.

What is the state of competition in the energy market?

Evidence on the true degree of competition in the energy market is mixed, both in the wholesale energy generation and retail supply markets. In 2019, more than two thirds of all energy was produced by the largest six companies; ⁷⁴ Department for Business, Energy and Industrial Strategy, ‘Competition in UK electricity markets’, (no date) retrieved 1 November 2022, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/920563/Competition_in_UK_Electricity_Markets.pdf   the retail supply market is even more concentrated. The so-called ‘Big Six’ suppliers emerged from the 15 former regional monopolies by 2002 and held 99% of the retail market in 2008. ⁷⁵ Ofgem, ‘Energy Supply Probe: Initial Findings Report’, Ofgem, 6 October 2008, retrieved 1 November 2022, www.ofgem.gov.uk/sites/default/files/docs/2008/10/energy-supply-probe---initial-findings-report.pdf, pp. 27-28.  The number of companies active in the market did grow steadily  – from 12 to 70 between 2010 and 2018 – but has since fallen back down to active 21 suppliers following a number of companies going bust during the energy crisis. ⁷⁶ Ofgem, ‘Supplier entries and exits in the domestic energy retail market (GB)’, (no date), retrieved 13 January 2025, www.ofgem.gov.uk/retail-market-indicators  What are now the Big Five, following the merger between E.ON and npower in 2019, still hold over three fifths of the market, but newer entrants such as Octopus Energy have also gained a large market share in recent years. ⁷⁷ Ofgem, ‘Electricity supply market shares by company’, (no date), retrieved 12 January 2025, www.ofgem.gov.uk/retail-market-indicators

The number of households switching suppliers did increase from 2014 to 2019, ^undefined Littlechild S, Regulation of British Telecommunications’ Profitability: Report to the Secretary of State, February 1983.  but Ofgem found in 2017 that many customers, especially the most vulnerable, still didn’t know how to do so. After a major review in 2016, the Competition and Markets Authority estimated that “in total, domestic customers of the Big Six energy companies were paying an average of £1.4bn a year more than they would in a truly competitive market”. ^undefined Littlechild S, Regulation of British Telecommunications’ Profitability: Report to the Secretary of State, February 1983.

Between mid-2021 and spring 2022 – so before the further price pressures caused by the war in Ukraine – wholesale energy prices rose rapidly, causing the failure of 29 small energy suppliers and costing consumers £2.7bn in additional charges. ⁷⁸ Public Accounts Committee, ‘PAC: Ofgem failures “come at considerable cost to energy billpayers”’, parliament.uk, 13 November 2022, retrieved 13 January 2025, https://committees.parliament.uk/committee/127/public-accounts-committee/news/174285/pac-ofgem-failures-come-at-considerable-cost-to-energy-billpayer….  The number of households switching suppliers fell dramatically because all suppliers were pricing energy at the capped rate, so there was no financial incentive to change. Since then, the markets have stabilised and energy supplier switching has slowly started increasing again. ⁷⁹ Ofgem, ‘Number of domestic customers switching supplier by fuel type (GB)’, (no date), retrieved 13 January 2025, https://www.ofgem.gov.uk/retail-market-indicators  To improve financial resilience in the energy market, Ofgem has introduced a ‘common minimal capital requirement’ for all energy suppliers from March 2025, which will provide a buffer if prices rise. ⁸⁰ Ofgem, ‘Financial resilience in the energy retail market’, (no date), retrieved 13 January 2025, www.ofgem.gov.uk/energy-policy-and-regulation/policy-and-regulatory-programmes/financial-resilience-energy-retail-market

How does Ofgem encourage the net zero transition?

Ofgem was given a statutory net zero duty in 2023, ⁸¹ Ofgem, ‘Ofgem welcomes energy act getting royal assent’, press release, 26 October 2023, www.ofgem.gov.uk/press-release/ofgem-welcomes-energy-act-getting-royal-assent  but advancing decarbonisation has long been part of Ofgem’s strategic framework and described as an “enduring priority”. ⁸² Ofgem, ‘2022/23 Ofgem Forward Work Programme’, Ofgem, 30 March 2022 retrieved 24 November 2022, www.ofgem.gov.uk/publications/202223-ofgem-forward-work-programme#Who%20we%20are%20and%20 http://www.nationalgrid.com/stories/energy-explained/how-much-uks-energy-renewable  It delivers renewable energy schemes worth more than £10bn a year. ⁸³ Ofgem, Forward Work Programme 2024/25, Ofgem, 2024, retrieved 13 January 2025, www.ofgem.gov.uk/about-us/our-strategy-and-proposed-programme-work/forward-work-programme

However, Ofgem must balance this responsibility alongside its other duties, such as consumer protection through low prices. This is principally done through price controls, in which Ofgem must weigh up the degree of investment to allow energy companies against the extra costs this will mean for consumers in the short term. In 2022, a House of Lords Industry and Regulators Committee report warned that price controls “have the potential to stifle investment” necessary for decarbonisation. ^undefined Littlechild S, Regulation of British Telecommunications’ Profitability: Report to the Secretary of State, February 1983. Ofgem will now have a role alongside the new National Energy System Operator (NESO) in delivering the government’s clean power plan, including by considering regulatory reform and changes to the process of connecting renewable energy projects to the grid. ⁸⁴ Department for Energy Security and Net Zero, Clean Power 2030 Action Plan: A new era of clean electricity, 13 December 2024, https://www.gov.uk/government/publications/clean-power-2030-action-plan