Ofgem is a non-ministerial Government department and Independent National Regulatory Authority. To put this more simply, they are an independent body that regulates the gas and electricity markets on behalf of the government.
The acronym Ofgem stands for Office of Gas and Electricity Markets. It oversees the UK energy industry in much the same way as OFCOM (Office of Communications) regulates broadcasters and OFWAT (Office of Water) is responsible for water infrastructure.
EU directives officially recognise the work of Ofgem. They provide an extra mechanism to ensure that they remain independent.
What do they do?
The objective of Ofgem is to protect consumers now and in the future by working to deliver a greener, fairer energy system.
In the mid-term (until 2025) they are looking at the pricing structure within the industry. The current method of using price caps on default tariffs will expire in 2023. After that, all networks will need to comply with the next price control known as RIIO2.
Looking into the future, Ofgem will be responsible to the government to meet net zero carbon emissions. They have until 2050 to meet that target and must prove that they are actively working towards it.
They do not only work with the Government. Ofgem will directly engage with the energy industry and consumer groups to work out the best way to deliver net zero at the lowest possible cost to consumers.
Meeting targets is a big part of Ofgem’s role. Another key commitment for them is ensuring that competition in the market can flourish, because a lack of competition is bad for customers. This can mean seeking out and eliminating bad practices of profiteering energy suppliers.
Who governs Ofgem?
The aims and objectives of Ofgem allow for a lot of power and responsibility. Because the government cannot directly influence the actions of Ofgem, another independent body exists for this purpose. The Gas and Electricity Markets Authority (GEMA), was created to regulate the regulator. This body has a collective expertise spanning across the whole industry. The board of GEMA includes people from across sectors such as; economics, finance, investment, industry, European Energy, social policy, science and the environment.
GEMA is the authority that will determine the long term strategy of the UK energy sector. Ultimately it is this body that will set the price controls and enforcement measures that Ofgem will execute. GEMA is also responsible for setting policy priorities and making any changes to current regulations.
Who pays for Ofgem?
Looking after and regulating such a huge infrastructure comes at a cost. So who picks up the bill?
The vast majority of income comes from licensing. Every single energy supplier operating in the UK must have a license issued by Ofgem. Every 5 years there will be a review which looks at the budget given to Ofgem. It is here that license fees will be decided and they will largely depend on the current market conditions. In the most recent review (2015), Ofgem received a 15% cut to its overall budget.
Although the energy suppliers fund Ofgem, the regulating body remains independent from any of them. This means that the government, or a big six energy supplier such as British Gas or OVO will hold no sway over Ofgem.
How does Ofgem engage with the public?
The energy regulator has a range of mechanisms to try and prove its transparency. Official meetings will have their minutes published online. Big decisions like the price cap, will be announced in special press briefings. This helps to make sure that as many people as possible understand any updates. This is likely to be the case in 2023, when the new pricing system takes over the current price cap structure.
The Ofgem website also has a number of useful facts and figures to show why they have taken the decisions that they have. They regularly publish graphs and other information to support the work that they have been doing in the background. A recently published infographic (25th Sept 2020) shows the number of current energy suppliers in the UK. Alongside that is a useful breakdown of costs and profits reported by each of them. Another set shows the average cost of tariffs and compares average prices with the rest of Europe.
You may not have known much about Ofgem but they are very important to the energy sector. They work mostly in the background but oversee the energy companies which maintain your gas and electricity supplies.