Ofgem is a name that pops up quite frequently when people talk about energy, especially in the news. But what exactly is it and what service does it provide?
In this guide, we’ll explain what Ofgem is, why it exists and how it helps the UK energy sector.
What is Ofgem?
Ofgem stands for the Office of Gas and Electricity Markets. It’s the government body in charge of regulating the energy market.
It’s their responsibility to monitor all the different energy suppliers in the UK; this includes the Big Six and smaller independent companies. They also promote competition in the energy industry, which should result in better prices for domestic and commercial customers.
As well as looking after the interests of gas and electricity consumers by controlling prices, Ofgem also monitors issues related to renewable energy, greenhouse gas and energy independence.
Ofgem is governed by the Gas and Electricity Market Authority (GEMA) and funded by levies on the energy suppliers it regulates. Ofgem is, however, independent of all the energy suppliers.
How did ‘Ofgem’ get its name?
The name ‘Ofgem’ was formed when the Office of Electricity Regulation (OFFER) merged with the Office of Gas Supply (OFGAS). Now, Ofgem supports the current Gas and Electricity Markets Authority (GEMA).
Why was Ofgem formed?
The energy market in the United Kingdom was liberalised and privatised by Margaret Thatcher back in the 1980s, which called for the various energy companies to be monitored by a regulator. This is when the first iterations of Ofgem came about.
Until the mid-nineties, British Gas and one regional Public Electricity Supplier had a stronghold on the market and virtually monopolised it. From 1996 onwards, home and business energy customers gradually got more and more freedom to choose where they got their gas and electricity from.
Then, in May 1998, the domestic gas sector was opened fully, followed by the electricity market one year later. This meant that the role of a regulator became significantly more important.
What is Ofgem’s job?
Ofgem has identified some of its primary aims as:
- Promoting the security and sustainability of the UK's energy supply
- Promoting value for money in relation to energy tariffs
- Overseeing and establishing competition within the energy market
- Regulating government schemes and aiding in their delivery
Over the last four years, Ofgem has issued close to £100 million in fines to various energy companies that have not toed the line. Perhaps the most significant of these was the £12 million fine imposed on E.ON in 2014 for misselling products to home and business energy customers.
How is Ofgem structured?
As is the way with many official bodies, the Gas and Electricity Markets Authority has a Chairman as well as executive and non-executive members.
The current chairman of Ofgem is Martin Cave, who was appointed as the head of the group in 2018. Jonathan Brearley is the current Chief Executive Officer; he was assigned this role in 2019.
Removal of price controls by Ofgem
When there was little or no competition in the domestic energy market, Ofgem was able to control prices with a certain amount of ease. As the industry became more and more liberalised, these price controls remained in place but they started to disappear between 2000 and 2002.
The regulator made the decision to remove these price controls as they believed that healthy competition between the emergent energy suppliers was ample to keep these prices at a suitable level.
This may well be a decision that Ofgem is rueing due to the continued distrust in the Big Six energy suppliers and the extortionate prices that they are now charging. It was thought that the Competition Act of 1998 would stop companies from charging unfair prices and abusing their power as dominant forces in the industry.
There are, however, price caps in place for standard variable rate tariffs and prepayment-meter deals to prevent customers from being overcharged.
The Energy Supply Probe
Two years after the price controls were removed, Ofgem conducted a review of the state of competition in the home energy market. In April 2004, they concluded that supply competition had delivered significant benefits to the consumer. The Energy Ombudsman was set up a few years later in 2006, and then in 2008, the Energy Supply Probe was introduced.
This probe took place due to record increases in fuel prices across the globe, which had led to wholesale and retail gas and electricity prices soaring.
In fact, home energy bills had doubled over the previous four years and there was growing anger and distrust emerging from consumers. Ofgem was concerned that more and more energy customers were in debt with their suppliers and disconnection rates were also going through the roof.
Due to the fact that the cost of living was rising in the UK in general, the regulator was keen to establish the cause of these problems and highlight some potential solutions. The Energy Probe did just that and it was concluded that the market was not working in the best interests of its consumers. Ofgem has since then continued to regulate the energy sector to ensure that customers receive fair and trustworthy service from their energy providers.
How does Ofgem help me?
Ofgem helps energy customers by creating rules for energy companies which promote good service. They also help customers by penalising energy suppliers who fail to comply with such regulations. These rules and regulations typically relate to the following:
- Mis-selling offers and services
- Overcharging and mischarging customers
- Feed-in tariff / SEG payments (also any other relevant government schemes)
- Complaint handling
- Energy connections in rural areas
- Ensuring that customers are adequately informed
- Ensuring that all necessary information is included in customer bills
Ofgem also provides you with a safety net should your energy supplier ever fail or go out of business. In this case, Ofgem would protect your existing credit balance and assign a new supplier to you within a few days; this process is called Supplier of Last Resort (SoLR).
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You can learn more about Ofgem by visiting their site at https://www.ofgem.gov.uk.