New energy firms took high risk strategy - report

Some new suppliers saw the opportunity to enter the energy sector as a "free bet", a report into regulator Ofgem has found.

These companies could pursue a high risk, high reward model while knowing there would be little or no cost if things went wrong.

Some 30 suppliers have gone bust since a surge in wholesale prices began last summer.

The costs of those failures are being shared across all consumer bills.

Ofgem, which commissioned the report, said it accepted its recommendations in full.

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More than four million energy customers have seen their supplier go bust since August. Many saw an immediate increase in their energy bills when they were moved automatically to new suppliers.

All energy customers are each paying about £68 extra this summer to cover the costs involved in 30 firms going bust, while one company - Bulb - has been quasi-nationalised.

A report, commissioned by Ofgem, into regulation has been written by economics and finance consultancy Oxera, and has now been published.

It suggests that, while the supplier failures were "not a failure of the regulatory regime per se", the regulator could have acted differently over time.

High-risk

The report said that the pursuit of competition, and its benefits for consumers, led to Ofgem not fully analysing the risks and allowing companies to enter the market and grow without committing much of their own capital.

"This was justified largely on the grounds of increasing the degree of competition in the market, and created the opportunity for prospective suppliers to enter the market on the basis of a 'free bet'," the 117-page report said.

"By pursuing a high-risk, high-reward business model, such suppliers would benefit from any upside, while being able to exit at no or minimal cost if the downside materialised."

The report also raised questions about how the energy price cap was set in England, Wales and Scotland. The most recent cap added about £700 to the annual bill of a typical household.

The report suggested that only changing the cap every six months meant companies were exposed to rising wholesale costs for a long period of time.

It also said that the cap was calibrated to deliver "stretching levels of cost efficiency", meaning that it was set at too low a level and left suppliers with "insufficient headroom to deal with shocks".

The Ofgem board said it accepted the report's recommendations, many of which were already being implemented.

"Ofgem does the best it possibly can for consumers up and down the country," it added.