Review of Ofgem: Call for Evidence

Introduction

We are pleased to have the opportunity to respond to the Government’s Call for Evidence on its review of Ofgem. We think it is right to regularly review the regulation and broader protection framework available for consumers in the energy sector, to ensure it remains fit for purpose and is ready to deal with future challenges and opportunities – some of which can be predicted but many of which cannot.

Now feels like a particularly relevant moment to do this given the recent energy crisis, consumer bills sustaining at higher levels and rapidly emerging new technologies.

We have answered the specific questions in the Call for Evidence and have provided an overview of the key points of our response below.

Executive Summary

Regulation and Ofgem’s Role

• In a complex market, it is important that the protection framework and Ofgem’s role is clearly understood by consumers. Consumers should not be expected to have a detailed knowledge of the market to ensure they are being protected. We think simplicity, for both regulation and redress, should be a key objective running through this review.
• We support the questions asked around Ofgem’s mandate and duties. We believe the review should strive to simplify or clarify these wherever possible. However, there are also protection gaps in the current energy landscape, depending on how consumers choose to interact with the market. More can be done to ensure a consistent experience and outcomes for consumers, with the Heat Network and Third-Party Intermediary (TPI) markets being good examples.
• Low carbon technologies will have an important role in any drive to net zero. Joined up protection is crucial and will need to consider the assurance, monitoring and redress provided to consumers. Given this technology’s close relationship with energy consumption, it is right to consider whether Ofgem as the energy regulator could play a more substantive role.
• More can be done to create early warning systems in the sector, both in energy supply and emerging markets like low carbon products. Identifying issues sooner and resolving these proactively will help to build trust in the eyes of consumers. This is not just Ofgem’s responsibility and will need the support of a number of organisations.

Empowering Energy Ombudsman

As with Ofgem, the remit of the Energy Ombudsman will need to keep up with the evolving energy market. As well as providing individual protection, our role needs to enable the data and insight generated by resolving complaints to help the market learn and improve.

• Consumers who could benefit from using the Energy Ombudsman should have the best opportunity to do so. Currently too many consumers who could use our service either cannot or choose not to. We look forward to continuing discussions with suppliers, Ofgem and Government on how we can improve access for all consumers.
• There are aspects of our process, and of complaint handling more broadly, that do not receive the focus needed from all energy suppliers. These include signposting to our service when consumers become eligible, and completing remedies, where a supplier takes too long to implement the course of action we have decided is appropriate. We welcome the opportunity to explore how the roles of Ofgem and Energy Ombudsman can be enhanced to ensure the right outcomes are achieved.
• We would be cautious of assuming that the best way to solve these issues is by increasing the power of the Energy Ombudsman directly. It is important that we maintain our independence within the sector and that clear roles and responsibilities are in place between Ofgem and us. We look forward to discussing this with both Government and Ofgem as the Review progresses.

Governance of Energy Ombudsman

• Our existing governance model has worked well in ensuring we have been able to meet the demands of our role, particularly during the challenging years of the Covid pandemic and subsequent energy crisis. Specifically, we have been agile to adapt quickly to changing market conditions.
• Being approved by Ofgem ensures we have in place the requirements to operate our various schemes, but allows us to remain fully independent and impartial, both when making individual case decisions and with policy suggestions more broadly.
• We welcome the opportunity to work with Government on how this model could be further strengthened to ensure we are able to play a full and active role as the market moves forwards over the coming years.

Answers to questions

Legal Mandate

We are seeking views on what Ofgem’s mandate should be.

The energy sector plays a key role in the UK economy and Ofgem has an important role to play in ensuring the market works for consumers, energy suppliers and other participants, and is attractive to investment. By doing this Ofgem will help the Government’s ambition to create growth and unleash the wider benefits of the drive to clean energy and net zero – not just in terms of decarbonisation but also in terms of maximising job creation and economic growth. With potentially competing priorities, it is crucial that Ofgem has clarity as to how to manage these.

To help Ofgem perform this role, we think it is essential that other organisations within the wide regulatory landscape also play their supportive part. By sharing data and insights to identify what is happening in the market, which in turn helps to facilitate a framework that is agile, responsive and targeted, this will help Ofgem meet this mandate.

Duties

We are seeking views on whether Ofgem’s duties should be streamlined, and if they should, views on which goals might be prioritised.

The nature and the importance of the energy sector to the UK dictates that Ofgem will have a range of duties and responsibilities. We think all the duties referred to are important and agree that it is key that Ofgem is able to balance those duties effectively.

We are particularly interested in Ofgem’s role in protecting consumers and believe this is a vital part of Ofgem’s mandate. The heating and powering of peoples’ homes are essential services, and it is therefore important that regulation is protecting consumers and leading to positive outcomes.

Transparency and accountability

We are seeking views on making more detailed information available about energy company performance and behaviour, and how this might assist other licensees and consumers.

We are inviting views on Ofgem’s annual report and the KPIs it reports against, and how to strengthen Parliamentary scrutiny of Ofgem’s performance

Transparency of company performance helps consumers make informed choices about which supplier to choose and acts as an incentive for suppliers to ensure they are providing good levels of customer service.

It would be helpful if Ofgem provided more of the findings from its monitoring and compliance work. As well as raising awareness of supplier performance, it would demonstrate the important work Ofgem does in overseeing the market, helping to build trust between consumers and suppliers. It would also help to share examples where suppliers are performing well for consumers.

Consideration should be given, however, to ensuring that information and data published brings more clarity of supplier performance. Several organisations (including the Energy Ombudsman) already publish supplier data, and it is important that changes to what is published is framed appropriately so as not to add to confusion for consumers.

Skills and Capability

We are seeking views on the capabilities Ofgem needs to be an effective regulator in a more digital, fast-moving sector.

Ofgem will need to be equipped properly to oversee a rapidly changing energy sector. It is crucial that Ofgem acts when it sees evidence of consumer detriment and takes prompt action. There is more data available than ever before and Ofgem will benefit from having the right skills and capabilities to act on that insight and make good decisions about when to intervene. We will continue to provide Ofgem with data and insight that will help it fulfil its role.

Ofgem’s Regulatory Remit

Does Ofgem have the right regulatory remit? Have you observed harms caused by uncertainty over Ofgem’s remit, or by gaps in what is currently regulated in the energy sector?

We are seeking views on Ofgem’s role in an energy system that is now, in part, driven by strategic planning following the creation of NESO, in particular, how should regulatory strategy be aligned with strategic energy plans.

The energy market is evolving rapidly and Ofgem’s remit, as it stands, risks gaps emerging as energy moves further beyond the direct provision of gas and electricity. Indeed, we believe there are protection gaps in the current energy landscape, depending on how consumers choose to interact with the market. More can be done to ensure a consistent experience and outcomes for consumers, with the Heat Network and TPI markets being good examples.

By way of example, we currently run a dispute resolution scheme which resolves disputes between energy TPIs and their clients. We established this following the requirement placed on suppliers to work only with TPIs signed up to such a scheme. Our scheme helps to ensure that consumers who feel they have been treated badly by a third party can obtain redress. However, the absence of regulation and single ombudsman means that:

• Multiple dispute resolution schemes co-exist, complicating the redress landscape for consumers.
• Our only recourse with brokers not adhering to our scheme rules is to eject them, which rarely solves the issues left for consumers who haven’t got the redress they deserve.
• The incentives for brokers to select a dispute resolution scheme are not necessarily aligned with what’s best for consumers. We are also seeing evidence of some TPIs signing up to multiple schemes, further complicating things for consumers.
• Though we publish an annual report highlighting what we are seeing in the market, we lack the complete view of what’s happening and therefore it is only part of the story, restricting the benefit of joined up insight and data.

Regulation would allow the setting of clear standards, ensure appropriate sanctions can be made against poor TPI performance, and the ability to simplify the redress landscape for consumers.

Low carbon technologies are another example where Ofgem could play an important role, given their contribution to the drive to net zero. Joined up protection is crucial and will need to consider the assurance, monitoring and redress provided to consumers. Given this technology’s close relationship with energy consumption, we think it is right to consider whether Ofgem as the energy regulator could play a more substantive role.

Increasingly, we see energy-adjacent sectors which are not currently regulated or covered by the remit of the Energy Ombudsman overlapping with our day-to-day work. For example, while we can consider complaints relating to Electric Vehicle (EV) charging at a consumer’s home, we are unable to consider complaints about charging away from the home.

We think that consideration should be given to how Ofgem might assume responsibility for energy relevant areas like these to close the gaps in protection that exist, simplify things for consumers and help to build trust in this evolving market.

Delivering investment and innovation in the transition

We are seeking views on the role Ofgem should play to support growth and the government’s industrial strategy.

What can Ofgem do to increase investment and innovation in the sector?

What might Ofgem do to support an environment of falling energy prices?

What else might Ofgem do differently to support higher growth in the energy sector and wider economy? Are Ofgem’s regulatory processes sufficiently fast, effective and user friendly?

The cost of energy has been a key area of concern across many industry sectors over the last few years, as prices have risen to previously unprecedented levels. The Energy Ombudsman’s remit was extended to allow us to consider complaints from larger businesses both in energy supply and the TPI market and this was driven, in part at least, with the aim of ensuring UK businesses could flourish.

We are proud of the work we have done to protect small businesses from unfair practices. We look forward to working with Government and Ofgem on how the regulatory framework could further adapt to ensure businesses, which ultimately drive growth, can be better protected in what has proved to be a volatile energy market.

Low Carbon Technologies

We are seeking views on Ofgem’s remit in enforcing consumer law in respect of low carbon technologies, such as heat pumps and solar panels, and what the appropriate boundaries might be.

As we set out in our answer to questions on Ofgem’s remit, we agree it is worth reviewing the boundary of Ofgem’s role in enforcing consumer law in respect to low carbon technologies and energy efficiency measures.

Over the next few years, UK consumers will be encouraged to adopt a range of new technologies in their home, with potentially large financial outlays or other elements of risk. There is a risk that if these technologies are not sold, installed or operated properly, consumers will be reluctant to adopt them and trust in the sector will be damaged.

We think it is right to review the assurance, monitoring and redress landscape for low carbon technologies to build consumer trust and confidence. There is currently a patchwork of standards, codes and dispute resolution coverage. Simplifying these mechanisms, by providing a clearly defined and consistent path for each, would benefit consumers.

Better outcomes for consumers and more accountability

This ‘better outcomes for consumers and more accountability’ section therefore seeks views around increasing accountability and consumer standards in the sector.

In our experience, the level of service individual consumers receive from suppliers can vary significantly – both between suppliers and within individual suppliers. Events can also influence the level of service a supplier is able to offer, as we saw clearly during the Covid pandemic and energy crisis.

We do think there is room for improvement across the sector in terms of standards of service, as shown by levels of trust in the sector which, while showing some recent signs of improvement, remain below many other markets. We would support proposals that aim to improve the consumer experience, and we welcome the holistic approach proposed, in which all industry players are seen as having a role to play.

Improving executive accountability and consumer standards

We are seeking views on how Ofgem can ensure consumer standards are better represented – for example with reference to other business models within the sector, such as through potentially adopting a ‘consumer duty’ and ‘Senior Management Regime’.

We believe that mechanisms such as a consumer duty are certainly worth considering and could be particularly helpful for nascent parts of the market. Ultimately, what matters for consumers is the outcomes they receive, and it is right to review whether there are alternative regulatory approaches that could lead to better and more consistent outcomes for consumers, while also giving suppliers room to innovate and provide bespoke services to their customers where this benefits them.

In any model, we think the joining up of data and insight from a range of organisations is crucial, and we will continue to play our part in supporting Ofgem with evidence from our service.

Enhanced investigatory and enforcement powers to protect consumers

We are seeking views on Ofgem having enhanced investigatory powers.

We are seeking views on Ofgem being granted enhanced enforcement powers similar to the CMA

The energy sector is evolving and therefore needs Ofgem to be able to take proportionate and targeted action that may look different from how it does it today. The TPI and Heat Network markets are good examples, where both the number and type of potentially regulated entities will look very different to what Ofgem regulates today. Indeed, in relation to the introduction of regulation in the heat network market, we are working with DESNZ, Ofgem, Citizens Advice, Consumer Scotland and others as consumer advocacy and advice and redress come into operation before regulation does. We will all learn valuable lessons as we begin to operate this scheme.

We agree that ensuring that Ofgem has consistency in the areas that it regulates will be critical to improving consumer outcomes. We think it is sensible to explore how enhancing Ofgem’s enforcement powers to bring these in line with the Competition and Markets Authority (CMA) could benefit the sector. Indeed, having a range of enforcement powers in the toolkit, as long as these are understood well by the market, can help action to be taken that is appropriate, targeted, effective and timely.

Approach to penalties and compliance orders

We are seeking views on whether the scope and scale of Ofgem’s current penalties are set at the right level.

We agree that the Review should consider the effectiveness of the scope and scale of Ofgem’s current penalties. For example, are they adequate, do they act as a deterrent, have they fulfilled the policy aims when initially set, how might they need to change to cover the role Ofgem plays now and the future role that may come out of this Review.

As well as scope and scale, the process and time taken to reach these conclusions is equally important. In the eyes of consumers, a regulator that is seen to be able to correct poor behaviour strongly and quickly is crucial, and therefore Ofgem should have the ability to act swiftly where it or other stakeholders identify regulatory or systemic issues in the market.

Quicker response to emerging issues

We are seeking views around whether this process should change to make it easier for Ofgem to create new rules to respond to emerging challenges

We are seeking views on how Ofgem might better respond, or be better equipped to respond, to emerging issues, especially for which there is not already a clear precedent

As we set out above, we think clarity on the process Ofgem goes through and efficient timeliness is crucial for building trust in the sector. Ofgem must be seen to have the power to act promptly and decidedly where necessary. We think it is right to review whether the current requirements on Ofgem restrict it taking timely actions that would lead to better outcomes for consumers.

Though we appreciate Ofgem balances a range of priorities and must necessarily apply focus to the most significant issues, there are examples where issues raised by the Energy Ombudsman have not turned into regulatory action in a timely way. We are keen to work with Government and Ofgem on how this process can be made more agile and decisive where necessary.

Supplier failure

We are seeking views on how Ofgem might be better equipped to protect consumer interests in cases of (predicted or actual) supplier insolvency and/or financial distress.

It may be sensible to look at how Ofgem can play a more active role and intervene before a supplier gets into financial distress and certainly insolvency, although company failure is a feature of competitive markets. Using insights and data from organisations such as the Energy Ombudsman may help to identify issues early, such as the first signs that a supplier is struggling financially and how it manifests through impacts on customer service. We know there have been instances where data provided by Citizens Advice and Energy Ombudsman has indicated that a supplier is in distress.

More broadly, there are still areas of the Supplier of Last Resort process where directly affected consumers lose out on protections. We have raised previously, for example, that when suppliers leave the market through this process, consumers with outstanding disputes lose out, because there is no obligation on the new supplier to fulfil the obligations.

Automatic compensation

Is the current compensation framework in the energy market fit for purpose to protect consumers and ensure they receive a consistent minimum level of service?

Are consumers aware of their rights under the existing compensation framework and are eligible consumers receiving timely, appropriate redress when they do experience poor levels of service?

Are there ways in which the current compensation framework could be improved to better serve consumers? For example, are there specific issues or service areas not currently covered by the existing compensation framework where there is evidence of consumer detriment?

Are there examples of compensation frameworks in other sectors that are worth consideration in the context of the energy market?

How should Ofgem drive energy suppliers to go beyond minimum levels of service and deliver high standards of customer service?

Automatic compensation can be an effective measure for ensuring that suppliers resolve common issues consistently and in a responsible manner. We also support improvements that can take the onus away from consumers – this is a complicated market, and it can be difficult for consumers to understand the level of service, and therefore compensation that they might be entitled to. Indeed, increasing the scope and application of automatic compensation may potentially resolve certain issues before a consumer needs to make a complaint.

However, we know from experience that auto-compensation arrangements do not resolve all issues – and sometimes create new issues. For example, we see disputes from consumers who believe they are entitled to auto-compensation but have not received it, or where they feel that they are due more than the stipulated payment because they have had a particularly bad experience. Where the issue they wish to complain about is not resolved by auto-compensation (e.g. if a consumer is waiting for an engineer to replace their meter), receiving compensation for the engineer not showing up does not change the fact that the meter still needs to be replaced. Very often a consumer has several issues to complain about, if only one relates to auto-compensation the consumer can become confused as to which route to take.

Trust Alliance Group has experience of auto compensation from operating the Communications Ombudsman. A common type of complaint we receive in this sector is in relation to broadband outages and Ofcom introduced an auto-compensation system for such complaints. It did not follow that we saw a reduction in complaints related to this issue.

Finally, auto-compensation is often set at a level that recognises an average level of detriment. As such, it has the potential to become a blunt tool which does not always remove the need for a more in-depth review of a consumer’s detriment.

Energy Ombudsman

We are seeking views on whether there are changes that could be made to the model under which Ofgem appoints the Energy Ombudsman, to strengthen the Energy Ombudsman’s ability to resolve consumer disputes.

We welcome the fact that this Call for Evidence specifically seeks views on how the Energy Ombudsman’s ability to resolve consumer disputes can be strengthened. Working closely but independently from Ofgem is crucial to performing our broader role of helping to build trust between consumers and businesses. We provide our thoughts in the following four areas:

1. Remit of Energy Ombudsman
2. Improving access for all consumers
3. Ensuring suppliers and brokers adhere to our decisions
4. Governance

1. Remit of Energy Ombudsman

As with Ofgem, our role and remit will need to keep pace with the evolving energy market. Over the last few years we have extended our remit to cover the TPI market and small business customers and, from 1 April 2025, we will be covering the heat network sector. Though these are welcome, without equivalent regulation (in the heat network and broker market), for the reasons we have described above the level of protection remains lower.

As well as providing individual protection, our role needs to enable the data and insight generated by resolving complaints to help the market learn and improve. This is best achieved by having a single Energy Ombudsman, whose remit is closely aligned to that of Ofgem, so that we can work collaboratively but independently to identify and resolve issues that occur. We have highlighted examples of where this is not the case today, and how this is leading to poorer outcomes. We think it is also worth considering whether additional investigatory powers or responsibilities could supplement insight already available today to better identify problems more quickly.

Similar to our comments on Ofgem’s remit, we look forward to working with Government on how we can support new areas of the market that we don’t cover today, including the broader low carbon technology market identified in the Call for Evidence.

1. Improving access for all consumers

Consumers who could benefit from using the Energy Ombudsman should have the best opportunity to do so. Currently too many consumers who could use our service either can’t or choose not to. Our research suggests this is for a number of reasons, including consumers being unaware of who we are or how we can help, as well as being daunted by how our process works. We think the process of resolving a dispute should be made as quick and easy as possible for consumers, and we are working with Government, Ofgem and suppliers on how our process could adapt and how technology could be used to do this.

We look forward to continuing our work with Government and others on how we can improve access for all consumers.

1. Ensuring suppliers and brokers adhere to our decisions

So that consumers have confidence in the role of the Energy Ombudsman, it is crucial that industry fulfils its Ombudsman obligations. There are aspects of our process, and of complaint handling more broadly, that do not receive the focus needed from all energy suppliers and brokers. These include signposting to our service when consumers become eligible (either after eight weeks or deadlock), and completing remedies, where a supplier takes too long to implement the course of action we have decided is appropriate. Not only is this disappointing for affected consumers, but it also leads to a poor perception of the Energy Ombudsman, it adds time into our own processes and distracts from activity that could add more value to the sector.

Though Ofgem is supportive where we identify issues, we are aware that it is managing a number of priorities and ultimately must make decisions about where to focus enforcement efforts. Previous examples of where we have escalated issues with Ofgem have sometimes taken too long to reach action taken against suppliers. Indeed, Ofgem has also highlighted areas where it does not believe it has the power to enforce in relation to Ombudsman obligations. This leaves gaps that could result in poor outcomes for consumers, and we are keen to take this opportunity to ensure that we strengthen and/or formalise the mechanisms by which issues we identify are reported and then acted upon.

We would be cautious of assuming that the best way to solve these issues is necessarily by increasing the power of the Energy Ombudsman directly. It is important that we maintain our independence within the sector and that clear roles and responsibilities are in place between Ofgem and us. We welcome the opportunity to explore how the roles of Ofgem and Energy Ombudsman can be enhanced to ensure the right outcomes are achieved.

1. Governance

Our existing governance model has worked well in ensuring we have been able to meet the demands of our role, particularly during the challenging years of the Covid pandemic and subsequent energy crisis. Specifically, we have been agile to adapt quickly to changing market conditions.

Being approved by Ofgem ensures we have in place the requirements to operate our schemes, but allows us to remain fully independent and impartial, both when making individual case decisions and with policy suggestions more broadly. Retaining independence is a crucial component of an effective Ombudsman system.

We welcome the opportunity to work with Government on how this model could be further strengthened to ensure we are able to play a full and active role as the market moves forwards over the coming years, including how to simplify the redress landscape in the energy sector.

We look forward to continuing to work with Government as it progresses its review and we would be happy to provide more detail on any of the points raised in our response.