Ofgem clamps down on firms handing out dividends without secure finances
Ofgem will step in against suppliers that hand out dividends to shareholders before recapitalising, the watchdog’s boss has warned in a stern missive to chief executives across the retail market.
Chief executive Jonathan Brearley told suppliers that energy firms in poor financial shape should keep hold of profits rather than paying out dividends or risk enforcement action – which typically includes hefty fines.
“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,” he said.
Ofgem has introduced new fiscal rules which all suppliers are expected to meet if they want to reward shareholders.
The regulator aims to bolster the fiscal credibility of the energy sector following the collapse of over 30 suppliers amid the industry crisis, with dozens of firms exposed after failing to hedge properly.
This contributed around £100 directly to people’s record energy bills, and triggered massive volatility and an industry clean-up operation that cost billions of pounds including the de-facto nationalisation of Bulb for nearly a year before it was sold to rival Octopus Energy.
This comes amid expectations the sector is likely to return to profit this year after half a decade of losses, with suppliers able to recoup some of the losses from recent years.
The price of wholesale price of energy is at a near two-year low, even if costs are still well above pre-crisis levels.
While Ofgem recognises that reasonable profits are essential for a sustainable and well-functioning sector, however financial resilience must be prioritised following the crisis.
Brearley said: “No regulator of a competitive market could, or would want to, guarantee a zero-failure regime. But suppliers running at a loss for long periods of time leads to poor customer service, lack of consumer choice and, ultimately, supplier exits which leads to extra costs and disruption for consumers.”
The letter also outlined proposed reforms being considered by the regulator such as whether the market stabilisation charge – which incurs a cost on suppliers that take customers from other firms to compensate for hedged energy – was still necessary.
It is additionally re-assessing its ban on the ‘acquisition only’ tariffs, and consulting on a new consumer standards framework with a focus on the needs of vulnerable customers and those in financial difficulty.
In order to show firms are being sufficiently innovative, Ofgem is also asking suppliers to clearly publish all their domestic tariffs to provide customers and third-party intermediaries with complete transparency
This follows Ofgem opting to introduce a compromise measure on ringfencing, only requiring it for firms’ renewable obligation payments as it was concerned it would undermine competition in the industry.
After the crisis, the Big Six have a near 90 per cent market share – which is likely to increase after Shell sells its retail arm, with Octopus Energy, Ovo Energy and British Gas owner Centrica all reportedly circling.