RUTH SUNDERLAND: Government should consider replacing Ofgem

A pledge to renationalise energy firms does not feature 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 come out of the issue of energy bills, which are likely to fall significantly when Ofgem unveils its summer price cap this week.

The hit to households will reduce because wholesale gas prices are down.

But the underlying dysfunction in the energy market remains, and this is a gift to those like the Unite trade union, the Labour party’s biggest financial backer, that want nationalisation back on the agenda.

Seizing energy assets, including the big domestic suppliers and North Sea oil and gas operators would, of course, be bonkers.

Unfortunately, this might not stop it from appealing to voters. Unite claims nationalisation would end the ‘scandal of energy company profiteering’ at the expense of customers. This ignores a number of inconvenient truths, the first of which is that the price of energy on international wholesale markets will not magically change following nationalisation in the UK.

Feeling the heat: An underlying dysfunction in the energy market remains

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

Hard to credit perhaps, but the UK domestic energy supply sector as a whole is not profiteering, but loss-making.

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

A nationalised industry would fight for funds with the NHS, schools and the rest when the public purse is overstretched. But under private ownership the vast resources in UK pension funds could be tapped, alongside capital from overseas investors.

Yet the mess in the energy market, which has provided a happy hunting ground for chancers, means the likes of Unite will probably get a better hearing than they deserve.

Ofgem, in the name of competition, let thinly capitalised firms enter the market and allowed these businesses to run risky business models reliant on customer credit balances as a source of working capital. Predictably, some so lacked financial resilience that they imploded at the first whiff of 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 have held on to £50m despite the collapse.

A serious concern is that a very large chunk of the domestic market is in the hands of two businessmen, Stephen Fitzpatrick at Ovo and Greg Jackson at Octopus.

Their firms supply heat and light to more than 11million households, 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 booked a £9m profit last year had it not chosen to spend £150m on keeping customers’ bills down.

Both grew through the acquisition of customers from other suppliers. Octopus took on 1.5million via its rescue of Bulb and Ovo gained 3.5m from SSE in 2020, and both are reported to want Shell’s UK retail energy business – a significant further expansion.

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

Tougher rules on capital and ring-fencing customers’ money are needed. Why were these not put in place? Could some suppliers not pass such a stress test?

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