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Britain’s energy regulator has warned suppliers not to pay dividends until they are financially stable, as it seeks to avoid a repeat of last year’s energy crisis.
Ofgem chief executive Jonathan Brearley has written to company bosses warning them to “behave responsibly” as price pressure eases in wholesale energy markets.
The intervention came after Jeremy Hunt, the chancellor, urged regulators last week to ensure businesses are cutting costs to consumers in an effort to address the rising costs of life’s crisis.
In an open letter to energy supplier bosses on Tuesday, Brearley told them they should “get behind” the support given to the sector by taxpayers over the past year.
The government stepped in last October to subsidize rising energy bills after wholesale prices rose in the months before and after Russia’s invasion of Ukraine in February, costing an estimated £27bn.
The energy crisis led to the collapse of 30 suppliers, with households having to bear the cost of transferring affected customers to other companies, which added a further £94 to household energy bills last year.
As suppliers fail Ofgem has been widely criticized for failing to effectively monitor the sector, allowing dozens of poorly capitalized suppliers to enter the market to increase competition.
It has since adopted a tougher approach to financial resilience, including new capital requirements, although critics believe it should go further.
The regulator’s warning comes as energy prices fall. From the start of July, the energy price cap, which normally controls the amount paid for gas and electricity bills for normal consumption, has fallen to £2,074 a year, the lowest level since April 2022.
However, the bottom line is still above the pre-crisis average of around £1,150 meaning many households will still struggle to pay their bills.
The latest price cap levels include allowances for slightly higher profit margins for retailers, ranging from 1.9 percent to 2.4 percent. The rise, argued by Ofgem to boost financial resilience, is expected to add around £10 to average annual bills from October.
In the letter, Brearley acknowledged that having an “energy sector where companies can make a reasonable profit” is critical to ensuring a sustainable, competitive market.
But he warned that “a return to the practices we saw before the energy crisis is not on the table – suppliers must replace the support given to the sector by consumers and taxpayers by acting responsibly when wholesale prices fall and profits return”, adding: ” I expect there will be no return on paying the dividend before the supplier meets those essential capital requirements.”
The letter does not name individual suppliers. Following last year’s market trajectory, the market is concentrated in the hands of large suppliers, such as Centrica-owned British Gas, as well as EDF, Octopus Energy and Ovo.
The letter echoed a similar letter from Ofgem in May which warned suppliers that any dividend payments must be “within an appropriately accountable framework”.
Energy UK, the industry trade group, said: “It is right that the regulator ensures the financial resilience of companies operating in the retail market. It should be noted that in surviving the energy crisis and extended period of unprecedented volatility, those suppliers that are still operating have already demonstrated resilience and fiscal responsibility.
“The energy industry will continue to work closely with Ofgem and the Government to ensure a sustainable retail sector for the long term.”