Ofgem (the Office of Gas and Electricity Markets) are the regulators for the electricity and downstream natural gas markets in Great Britain. Ofgem are a UK government department, however, they are an independent regulator and act without government say or supervision. Ofgem’s main aim is to protect consumers. They do this by enabling market competition, enforcing market rules and promoting innovation.
Ofgem have the ability to impose fines and enact/change market policies. Some of the key decisions they have made across different parts of the energy sector are listed below:
Price caps: Ofgem has the ability to cap the price that an electricity supplier can charge a customer on a per kWH basis (i.e. there is no limit to the total cost of your bill as this will depend on your usage, however, the price per kWH you are charged is capped). Price caps apply for customers on prepayment meters and those on standard variable tariffs (estimated to cover a total of 15 million customers in the UK). Price caps are reviewed twice a year, with new caps commencing in April and October.
Price control: As regulators of the network owners of the electricity system (Scottish Hydro Electricity Transmission; Scottish Power Transmission; and National Grid Electricity Transmission) Ofgem are required to set ‘price control’ periods where they determine the level of revenue the three network companies can make on the capital investment that they spend on the network. Ofgem recently set out initial plans to reduce the rate of return currently enjoyed by network companies by almost 50%. They believe that the reduction in costs will benefit customers due to a reduction in consumers electricity bills, while still maintaining a high quality network system.
Trading fines: in April 2020, Ofgem imposed a fine of £37.2m on InterGen after they were found to have sent misleading signals to National Grid regarding the availability of some of their generation fleet back in 2016. InterGen had submitted notifications indicating that some of their plant would not be operating during a time of peak demand. National Grid during this time spent money attempting to bring additional power onto the grid, and eventually paid InterGen money to turn-on their plants which had been incorrectly scheduled not to be operating. InterGen were also found to have provided misleading information regarding the capabilities of their power plants, and would have financially benefitted from this by receiving additional income when their plants were utilised in the Balancing Mechanism.