Ofgem are set to play an outsized role in the energy market in coming years, so it’s essential to know the ins and outs of their organisation.
Beginning in Autumn 2021, a crippling energy crisis engulfed the UK, skyrocketing the cost of our everyday energy needs. For many, the burden became too difficult to bear, with over 6.5 million households plunging into fuel poverty, while many businesses were forced to close due to unsustainable costs. The crisis was caused by a variety of reasons, such as supply chain strain from COVID-19 and geopolitical trouble in Europe and the Middle East, but so far it shows little sign of easing up.
On top of this, increasing concerns about the climate have sparked a flurry of activity from the government, with commitments to net-zero and electric vehicles being among the most prevalent policies. Energy infrastructure will play a key role in transforming our economy into an eco-friendlier one, and people in government, businesses, and activist groups have all pushed for clearer leadership and regulation.
The combination of these two concerns have brought a renewed focus on the regulation of energy markets, with many calling for stricter price controls and harsher punitive measures for wrongdoing. This has thrusted Ofgem into the limelight, and while they might previously have been a lesser-known agency, the regulator will have an enormous role in the upcoming years as we tackle rising energy prices and transition to net-zero.
In today’s article, we’ll discuss what Ofgem is, and what they do in the UK. We’ll explore why they are important, their role in the future, and what energy regulations could mean for your business. Finally, we’ll delve into how Tariff can help you manage your business utilities, ensure compliance, and find opportunities to reduce costs.
Ofgem (Office of Gas and Electricity Markets) are independent regulators of energy in Great Britain. While technically a government body, Ofgem have been given the power by our parliament to operate independently from the UK Government. In this way, their role is primarily to support and enforce energy legislation, rather than to shape it. Despite this, Ofgem do have the power to highlight any legislation gaps that they feel are harming consumers, and therefore have some influence over government policy.
Ofgem’s priorities are numerous, but focus around creating a fair, free, and green energy market in the UK. Their aims include:
The body’s leadership consists of GEMA (Gas and Electricity Markets Authority), a board consisting of executive and non-executive members. This board determines strategy and makes decisions on regulatory measures.
Ofgem regulate key aspects of the energy market. For example, they’re responsible for setting the energy price cap across the UK, and therefore decide the maximum annual charge that energy suppliers can demand from households. This is based off various factors, such as the wholesale price of energy and various other operating and network costs.
In 2022, in light of rising fuel prices driven by the war in Ukraine, Ofgem raised the energy price cap up to £3,549. This caused great concern across the UK, as the price cap had almost doubled in a span of six months. In response, the government introduced an energy price guarantee, which subsidized fuel bills that reached over £2,500. As fuel prices gradually settled and lowered, Ofgem accordingly lowered the price cap, with the figure now resting at £1,928 until March 2024.
This is a great example of how the government and Ofgem work in tandem to enact and support energy legislation.
Another key function of Ofgem is to give out licenses to prospective energy companies. According to law, businesses are required to hold a license before conducting any activities related to gas or electricity, which encompasses everything from shipping and transporting gas through pipelines to generating or supplying electricity. Ofgem have a wide variety of licenses available, each with its own unique requirements and conditions.
Should a company break the conditions of their license, or fail to follow legislation surrounding the environment, consumer protection, or the free market, Ofgem are authorised to investigate. The body can demand full disclosure of a company’s information, and if any wrongdoing is found to have occurred, they have the power to impose fines and even enforcement orders on misbehaving businesses.
The regulations that Ofgem impose have far-reaching consequences across the UK. As we’ve seen, their price cap played an instrumental role in the amount of money being spent on energy bills, and helped inspire a government response to an energy market in crisis. In addition, businesses looking to enter and last in the energy industry must take great care to comply with any legislation and the license conditions outlined by Ofgem.
Therefore, it is essential for businesses to understand the role Ofgem plays in the energy industry. Not only will this help you comply with new regulations, but it allows you to look ahead and avoid getting caught out by sudden upheavals in the market. In the future, Ofgem will be making key decisions that could revolutionise our energy infrastructure, and with the estimated cost of transitioning to net-zero totalling an extra £25 billion a year, paying attention now could help you prepare and even take advantage of lucrative opportunities.
To get ahead of the curve, we’ll be looking at some of Ofgem’s short-term and long-term strategies, which are laid out until 2030, to achieve an understanding of where the energy industry may be heading.
Aiming to address the problems of today, Ofgem’s short term strategies are largely reactive in nature.
With energy prices skyrocketing across recent years, one of Ofgem’s most pressing priorities is to ensure prices remain fair and affordable for everyday consumers. The regulators are committed to working with the government and acting quickly to help lift UK residents out of fuel poverty. A key example of this is the government’s energy price guarantee in response to rising energy prices.
The volatility of energy prices has become a real problem – markets prefer stability, and with so many destabilising international incidents occurring in recent years, prices have fluctuated dramatically. This is primarily a result of strained supply chains, with changing demand and different energy sources leading to unpredictability. Ofgem aim to strengthen and diversify the UK’s supply chains to better withstand market shocks and reduce reliance on any one supplier.
According to Ofgem themselves, standards have recently declined across the sector. However, the body remains committed to monitoring and enforcing energy standards and consumer protection, and to tackle recent slippages, will introduce new standards to help protect some of the most vulnerable in our society.
Casting their eye to the future, Ofgem’s long term strategies are designed to plan for future challenges and obstacles in the road ahead.
Infrastructure will lead the way in transforming our economy to net-zero. Whether it be the installation of additional solar panels, the construction of new nuclear plants, or the introduction of hydroelectric energy, Ofgem seeks to enable the safe and rapid development of energy infrastructure. This will undoubtedly result in favourable treatment and an expedited process for companies looking to build new, more renewable energy sources.
As the past few years have proven, the energy market requires considerable reform for stable and affordable energy, and with the net-zero deadline fast approaching, Ofgem and the government must introduce more reforms if sustainable energy is going to take centre stage. Accomplishing this in a practical, and fair way, will require combined input from all levels of society. It’s a safe assumption that certain efforts will be rewarded, such as taking strides towards renewables, while others will be punished, such as unnecessary price hikes.
The UK’s approach to net-zero needs to be thoroughly planned and documented to ensure a smooth transition. Existing arrangements and institutions must be reformed and moulded to suit the emerging energy landscape. Ofgem play a key role in this, acting as a voice for both companies and consumers to lobby for more suitable settlements. In this way, people and businesses across the UK will be able to have some say in how our future is shaped.
As the energy industry shifts, so too will our use of utilities such as electric, water, and gas. Ofgem and their regulation of energy can be confusing, especially when the market is under global stress. However, Tariff are energy experts, and can assist your business with whatever challenge it may face.
Whether you’re looking to comply with regulations, cut down your energy spending, or optimise your business utilities, Tariff stand ready to assist. We examine your business and its specific needs to determine which supplier will suit you best. This allows you to get the very cheapest market price for your energy, and vets your supplier as an ethical and responsible operator.
For more information on what we can offer, feel free to contact us for an entirely free, no obligation quote.
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