What is Ofgem and What Does It Do For Your Business?
When researching your household or business energy, you may have had cause to pause and ask, “What is Ofgem?” Below we take a look at the various responsibilities the regulatory body has, what it does to try to meet them, and how it seeks to protect small businesses.
Whether you’re a domestic energy customer, or dealing with business electricity and gas, you’ve likely heard of Ofgem.
The Office of Gas and Electricity Markets is the independent regulatory body for Great Britain – meaning it covers consumers of domestic and non-domestic energy in England, Scotland and Wales. In Northern Ireland, the market is regulated by the Northern Ireland Authority for Utility Regulation (NIAUR).
But you might not know what exactly Ofgem does. Or what rules it has created to help protect micro businesses. Below we take a look at how Ofgem works, and how it might impact your small business.
What does Ofgem do?
Ofgem’s role isn’t to create energy policy in Great Britain – that job falls to the Department for Business, Energy and Industrial Strategy (BEIS) – but rather to regulate and enforce rules and changes within the framework set out by the government. It also highlights areas that may need addressing.
Its three broad responsibilities are to:
- ensure that customers, whether they are domestic or non-domestic, are treated fairly
- help the country switch to a greener economy
- enable innovation and competition in the energy market
Ofgem tries to achieve these aims through a combination of the following:
- monitoring and updating industry codes
- conducting strategic reviews
- making, implementing and enforcing regulatory proposals
- granting energy licences
- monitoring supplier compliance through consumer research and other methods
- investigating companies that have potentially breached or failed to comply with legislation
- issuing financial penalties if an energy company has breached legislation
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How does Ofgem deal with business energy?
One of the most notable ways Ofgem deals with business energy is through its rules surrounding micro businesses.
For the purposes of business energy, you are classed as a micro business if you satisfy just one of the following:
- you have nine employees or fewer, and an annual turnover or balance sheet that is no greater than €2 million
- your business uses up to 100,000 kilowatt hour (kWh) of electricity a year
- your business uses up to 293,000 kWh of gas a year
This means that the vast majority of the UK’s businesses will actually fall into the category of ‘micro business’.
Ofgem dictates that suppliers must take ‘all reasonable steps’ to identify your business as a micro business. You can also supply supporting evidence to prove you are a micro business if your supplier claims you do not qualify as such. This is important, as if you are classed as a micro business you have some added protection:
- You have a maximum notice period of 30 days when switching business energy suppliers.
- You can let your supplier know you intend to switch at the end of your contract at any time before the notice period.
- Your contract end date and notice period must be visible on all bills for fixed-term contracts.
- Any rollover contract cannot last more than 12 months.
- You cannot be ‘back-billed’ for energy you used more than 12 months ago if you haven’t been correctly billed for it previously.
In 2020, the regulatory body also carried out an investigation into the relationship between energy brokers and micro businesses. Ofgem found that a small number of unscrupulous brokerage firms were hiding fees in the contracts they had negotiated, causing some micro businesses to overpay for their energy. This has led to a rise in business energy claims being made against these brokers.
What is the Ofgem price cap?
One of the most discussed topics surrounding Ofgem is the energy price cap, officially called the Default Tariff Cap.
This is the maximum amount an energy supplier can charge domestic customers for a unit of energy on a default (i.e. standard variable) tariff or prepayment tariff, and is updated by Ofgem twice a year.
When deciding the price cap, Ofgem will take into consideration a number of factors, including, perhaps most importantly, the cost of wholesale energy. It is meant to prevent energy companies from making ‘excessive profits’, while at the same time passing on ‘reasonable costs’ to customers.
Although businesses, micro or otherwise, aren’t protected by the Ofgem energy price cap, any movement in the cap itself is usually a symptom of wider changes already affecting the sector.
This means, for example, if wholesale energy costs are on the rise, businesses will likely start to see the impact of this – whether through their variable tariffs, or the fixed-rate tariffs they are offered when looking to switch – before Ofgem actually gets around to increasing the price cap.
Of course, if you run your business out of your home, and have a domestic energy contract, you may be directly affected by changes to the cap.
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Connor is a writer and spokesperson for NerdWallet. Previously at Spreadex, his market commentary has been quoted in the likes of the BBC, The Guardian, Evening Standard, Reuters and The Independent. Read more