Office of Gas and Electricity Markets

The liberalisation and privatisation of the energy markets in the United Kingdom began with the Margaret Thatcher Government in the 1980s (often called the Thatcher-Lawson agenda, due to the key role of Nigel Lawson in the Thatcher government cabinet). Aspects of the Ofgem model have been adopted by EU legislation.[12]

The privatisation of the gas and electricity supply industries was enacted by Gas Act 1986 and the Electricity Act 1989. Section 1 of the respective Acts created the roles of Director General of Gas Supply[13] and the Office of Gas Supply (Ofgas), and the Director General of Electricity Supply[14] and the Office of Electricity Regulation (OFFER). These were economic regulators independent of government, but accountable to Parliament. This arrangement separated their regulatory decisions from political control and which aimed to provide greater long term regulatory certainty and to encourage market entry and investment. The duties of the regulators were prescribed in Section 4 of Gas Act 1986[13] and Section 3 of the Electricity Act 1989.[14]

Starting in the 1990s, the supply of electricity and gas to end consumers in the UK has been unbundled from the rest of the industry. At the time of privatisation, British Gas and one regional public electricity supplier (PES) held a monopoly on supplying all domestic gas and electricity consumers respectively in Great Britain. Between 1996 and 1999, domestic energy consumers were gradually able to choose their supplier, and finally in May 1998, the domestic gas market was fully opened to competition, closely followed by the domestic electricity market in May 1999.[15]

Before there was competition on domestic markets, the regulators set price controls fixing maximum price that the monopoly suppliers could charge domestic customers. These price controls remained in place when markets started to get liberalised, and were then gradually removed between 2000 and 2002. Ofgem’s decision to remove price controls was based on the assessment that competition was developing well at that time and that the Competition Act 1998, being effective since March 2000, would deter companies from the abuse of market power, and provide Ofgem with sufficient power to tackle any abuse. Moreover, consumer surveys showed good awareness of the ability to switch, high and rising switching rates away from the former monopoly supplies, and substantial and continuing falls in their market shares.[16]

In 2000, the Social Action Strategy review group was established and the Competition Act came into force. In 2003 the Wholesale Gas Probe was published. Two years after the removal of the last price controls, in April 2004, Ofgem published a major review of the state of competition in the domestic energy supply markets, concluding that supply competition had delivered substantial benefits for all consumers and that the markets were competitive, though not yet mature. In 2005 there was the EU Energy Sector Enquiry, as well as the Supply Licence Review. The Energy Supply Ombudsman was then established in 2006 and in 2008 the Energy Supply Probe was published.[17]

Against the background of unprecedented increases in world fuel prices leading to record increases in wholesale and retail gas and electricity prices so that a typical household's energy bills more than doubled since early 2004 Ofgem undertook the Energy Supply Probe. The numbers of consumers in debt to their energy suppliers, average debt levels and disconnection rates were all rising. These energy price rises came at a time when household budgets were under pressure from the rising cost of food, petrol, mortgages and other essentials. Vulnerable consumers and those in fuel poverty were particularly affected. The Energy Supply Probe published the findings on the operation of the UK retail energy markets and set out a package of measures to tackle the issues raised.[18]

In June 2014 Ofgem announced a Competition and Markets Authority (CMA) investigation into the trading practices and competitiveness of the country's major energy companies: Centrica, SSE plc, RWE npower, E.ON, Scottish Power and EDF Energy. The investigation, which took two years, followed a referral by Ofgem to the competition regulator. "There is near-unanimous support for a referral and the CMA investigation offers an important opportunity to clear the air. This will help rebuild consumer trust and confidence in the energy market as well as provide the certainty investors have called for," Ofgem CEO Dermot Nolan in announcing the investigation.[19] In August 2016 Ofgem said that it would implement the CMA's recommendation that suppliers should be required to provide the details of customers who have been on expensive tariffs for three years or more to rival suppliers. Ofgem also said that it would impose an interim price cap on customers using pre-payment meters.[20]

In October 2017, Prime Minister Theresa May announced her intention to introduce a cap on standard variable tariffs for energy customers, to be designed and implemented by Ofgem.[21]

The Domestic Gas and Electricity (Tariff Cap) Act 2018 received Royal Assent on 19 July 2018.[22] It stipulated that the price cap would be in place from the end of 2018 until 2020, when Ofgem would recommend whether the cap should remain on an annual basis up to 2023. Ofgem would also review the level of the cap at least every 6 months while it is in place.[22]

Ofgem refers to this as the "default tariff" price cap, to distinguish it from the "prepayment" price cap, its other energy price cap.[23]