The UK energy regulator Ofgem is warning suppliers they must not use surging profits to pay huge shareholder dividends.
Gas prices have fallen 70% from a year ago and the sector is expected to return to profitability after five years of losses, according to Ofgem. The watchdog, along with other regulators, was called to a meeting with Chancellor of the Exchequer Jeremy Hunt last week to discuss how to make sure that decline in wholesale costs is passed onto consumers.
Surging energy costs as a result of the war in Ukraine pushed about 30 companies out of business in the UK and the price of the cleanup will ultimately be paid by consumers via their bills. The regulator was criticized for allowing badly run companies to operate, and not doing enough to protect consumers.
Now that the sector is emerging from the crisis, the regulator needs to show it’s doing a better job of balancing the needs of consumers and taxpayers with those of investors.
The issue has become even more politically sensitive as it emerged last week that the government is considering a nationalization of Thames Water, a privatized utility that racked up more than £13 billion in debt while paying dividends, increasing bills, and failing to invest enough in infrastructure.
“We need suppliers to learn the lessons of the energy crisis and play their part by making sure they’re financially robust, can absorb potential losses and are meeting our new capital requirements,” Jonathan Brearley, chief executive office of Ofgem said in a letter to suppliers. “I expect no return to paying out dividends before a supplier has met those essential capital requirements.”
Ofgem has increased capital requirements for companies in response to the crisis to make them more resilient and less likely to need state intervention.
But the regulator also loosened other rules to allow companies to claim back some of the losses they incurred during the pandemic from consumers’ failing to pay their bills. That allowance is part of the way Ofgem calculates the cap on consumer bills, and could mean more profit available to funnel to shareholders.
Centrica Plc, the UK’s biggest supplier said last month that it expects “significantly higher” earnings from its household business after those regulatory changes made by Ofgem. Iberdrola SA’s Scottish Power also said it expects a significant portion of the losses in 2022 will be recoverable this year.