Ofgem puts energy suppliers to stress test after string of bankruptcies

The sun rises behind electricity pylons near Chester in the north of England on October 24, 2011. REUTERS / Phil Noble

Dec. 15 (Reuters) – UK energy regulator Ofgem has put in place measures to strengthen the financial resilience of suppliers, including stress tests and a review of its price cap policy, after a series of bankruptcies triggered by soaring gas prices.

Ofgem’s role has come under scrutiny after more than 20 UK suppliers have gone bankrupt in recent months, overtaken by record-breaking wholesale gas and electricity prices that they did could not be passed on to customers due to the price cap. Read more

A 500% jump in gas prices in less than a year has exposed the vulnerability of some energy providers to price shocks, Ofgem said on Wednesday.

“Today I am proposing clear actions so that we have robust stress tests for suppliers so that they cannot pass inappropriate risk on to consumers,” said Ofgem chief executive Jonathan Brearley.

“I want to see more controls over staff in important roles, and better use of data to help us regulate.”

Energy providers will undergo financial stress tests from January to gauge their resilience against a range of scenarios.

Suppliers will also be required to perform self-assessments of their management, Ofgem said, adding that it had extended the evaluation period for new supplier licenses to nine months.

Ofgem has also launched a consultation on possible future changes to the price cap so that it can work better in volatile wholesale markets.

He said changes such as updating the cap quarterly rather than every six months could help ensure it reflects changes in wholesale prices more quickly.

Ofgem calculates the cap using a formula that includes wholesale gas prices, network costs of energy suppliers, and government policy costs such as renewable energy subsidies. The cap is currently updated twice a year.

In addition, Ofgem has opened a consultation on possible short-term temporary interventions, such as the availability of new tariffs as well as fees and charges to help stabilize the market.

Reporting by Pushkala Aripaka in Bengaluru and Nora Buli in Oslo Additional reporting by Susanna Twidale in London Editing by Subhranshu Sahu and David Goodman

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