Ofgem: Update on non-domestic market review

Dear Chancellor of the Exchequer,

Thank you for your letter on highlighting your concerns for business customers. As you know from my letter to you on the 30 January, we have been very concerned about the reports we have had from customer groups and via our own monitoring about the behaviour of some suppliers. We opened compliance reviews and a broader non-domestic market review towards the end of last year and have completed the first stage of our analysis.

Although large parts of the non-domestic market are showing signs of recovery from a challenging period of high and volatile wholesale energy prices, our emerging evidence suggests there are areas that remain of significant concern, where we will need to take deep dives into key issues impacting certain segments and suppliers. Specifically:

• We have found cases where ‘deemed’ contract1 rates are higher than is explained by market conditions. We have clear rules around rate setting for these types of contracts and will be addressing this with companies where this is found to be the case.
• We have seen significantly higher security deposits being required. Although risks have changed different parts of the non-domestic market, both through the volatile wholesale price of energy and through wider economic challenges. Ofgem will seek to understand with suppliers whether these are proportionate.
• Standing charges have also increased significantly in some cases; where this coincides with the start of EBRS this will form part of our assessment of compliance with EBRS rules.
• We will require more evidence from the sector to assure compliance with the rules of the EBRS scheme. We will continue to work with suppliers and the Department for Energy Security and Net Zero and HM Treasury to understand and assure compliance. For some suppliers we are already investigating potential breaches through our compliance processes and will take enforcement action if necessary.

There are some issues that have been raised by non-domestic customers that Ofgem does not have the legal powers to intervene on. For example, contracts signed in Autumn last year are now much more expensive that current wholesale market conditions would deliver. Unless there is evidence of misselling, Ofgem cannot unpick private law contracts between commercial customers. However, we will work closely with trade bodies and non-domestic retailers to see if there are common sense ways for both sides to address this. For example, contracts could be reassessed to spread costs over a longer period of time, therefore avoiding a ‘cliff edge’ for business customers in April. I will personally call together relevant stakeholders to see if we can collectively find the best way to manage this very real problem for many businesses.

When taken together with the evidence that certain groups, such as the hospitality sector, are struggling to secure contracts, these are strong signals that some segments of the non-domestic market have not yet returned to the level of competition experienced before the gas crisis. We will link this evidence with the input we get from stakeholders from our Call for Input2, which closes at the end of this month, to look at what changes need to be made to licences or regulations to better support business customers.

The annex to this letter sets out in more detail what we have learnt so far from this period of intensive analysis. We have been working closely with officials from HM Treasury and the Department for Energy Security and Net Zero to factor in their views from government’s work and will continue to do so as we progress our review.

Next steps

As stated above, we will progress compliance and enforcement actions against existing rules. Where our non-domestic review shows further regulatory protection for customers is needed, we will action changes to our rules, or signal to government where legislation or other government action may be needed that is beyond our powers to resolve. We may also make a market investigation reference to the Competition and Markets Authority (CMA) if we have reasonable grounds to suspect features restrict, prevent or distort competition; we will be briefing the CMA on our initial findings. We will publish our full report and consult on suggested actions in summer.

Actions that don’t need licence changes can begin to be implemented from this summer and any licence changes will follow our statutory process and be concluded by the end of the year.