UK households will collectively pay an additional £2.7 billion to cover the costs of 28 energy companies that have gone bust, according to a damning report from the National Audit Office.
This means each household will have to pay an average of £94 more on their bills, contributing to massive increases due to rising gas and electricity prices and increases in groceries, fuel and other basic necessities.
Years of failure by energy regulator Ofgem is partly to blame for the bill hikes, the NAO found.
Consumers will face even more costs when the bill finally comes for the collapse of Bulb, the biggest supplier that got into trouble this year.
Considered too big to fail, Bulb was bailed out by the Government, with £1.9bn in public money currently earmarked to cover costs.
While rising wholesale prices for gas and electricity were the catalyst for a crisis that has left suppliers on the brink, Ofgem’s actions have increased risks for consumers, the NAO said.
NAO chief Gareth Davies said Ofgem allowed suppliers with weak finances to enter the market and did not anticipate that it could come at a time of persistently high energy prices.
This has allowed a market to develop that is “vulnerable to large shocks,” he said.
He added: “Consumers have borne the brunt of supplier failures at a time when many households are already under significant financial strain after their bills have soared to record levels. A supplier market that truly works for consumers needs to be developed. “
The NAO found Ofgem’s scheme to transfer 2.4 million customers to new suppliers had worked well for the “vast majority” of people who had no disruptions to gas and electricity. However, it still added to the household bills.
Citizens Advice had warned for a decade about the risks of allowing dozens of inexperienced companies without strong finances to establish themselves as energy suppliers.
The charity’s chief executive said the report underscored “serious errors” by Ofgem.
“It is totally unacceptable that providers have come into the market without proper verifications and customers have ended up with a bill worth billions of pounds as a result,” said Dame Clare Moriarty, chief executive of Citizens Advice.
The government had ordered Ofgem to increase competition in the energy market in order to break the stranglehold of the Big Six suppliers.
The regulator has acknowledged that the approach it took was too lax, that stricter criteria should have applied and that consumers were losing money as a result.
Dame Clare added: “Ofgem have started to improve their rules; it must now ensure that companies comply with it.
“The government must also do its part to protect customers if their supplier collapses.
“That means overhauling the system to reduce costs from future outages and end administrators’ harsh collection practices.”
The establishment of a price cap introduced by the government in 2019 has also been highlighted as a contributing factor to the recent chaos.
Ministers intended the cap to protect consumers and prevent suppliers from making excessive profits while driving up household bills.
However, the cap contributed to the fact that providers who could not pass increasing costs on to customers went under.
Those most at risk were smaller suppliers and those who had not adequately hedged against the risk of rising prices.
By the end of the year, more than two dozen had collapsed. The price cap has been raised to a record £1,971 to reflect rising wholesale energy costs. A further increase to up to £3,000 for the average home is expected in October.
Ofgem said it accepts the NAO’s findings and is working to address the issues raised.
“While the one-off global energy price shock would have led to market exits under any regulatory framework, we already knew that Ofgem’s suppliers and financial resilience regime were not robust enough,” it said.
“While no regulator can or should guarantee that companies will not fail in the future, we will continue to take a holistic approach to further strengthen the regulatory system and ensure a fair and resilient market for consumers that keeps costs fair as we evolve away from fossil fuels and towards affordable, green, domestic energy.”