The Evolving Role of Ofgem and Market Regulation

Introduction

The Office of Gas and Electricity Markets (Ofgem) has long been the central regulatory authority for Great Britain’s energy sector. But the last decade—and especially the period from 2021 to 2024—has seen Ofgem’s role evolve dramatically. The regulator is now at the nexus of competing priorities: protecting consumers, enabling innovation, ensuring security of supply, and driving the transition to net zero. The energy crisis of 2021–2022, the rapid digitalisation of the market, and the growing complexity of system operation have all tested Ofgem’s mandate and approach. In this article, I’ll explore how Ofgem’s role has changed, the regulatory tools at its disposal, the challenges it faces, and the future of market regulation in a decarbonising, digitalising world.

1. Ofgem’s Statutory Duties and Strategic Objectives

1.1. Statutory Duties

Ofgem’s core statutory duties, as set out in the Gas Act 1986 and Electricity Act 1989 (as amended), are to:

Protect the interests of existing and future consumers, including their interests in the reduction of greenhouse gases.
Promote effective competition in the generation, transmission, distribution, and supply of electricity and gas.
Ensure security of supply and system reliability.
Support the delivery of government policy, including net zero.

1.2. Strategic Objectives (2022–2024)

Ofgem’s Strategic Narrative 2022–2024 sets out four key priorities:

Enabling Decarbonisation: Supporting the transition to net zero through market reform, innovation, and investment.
Protecting Consumers: Ensuring affordability, fairness, and support for the vulnerable.
Security of Supply: Maintaining system resilience in the face of new risks.
Promoting Competition and Innovation: Fostering new business models, technologies, and market entrants.

2. Regulatory Tools and Approaches

2.1. Price Controls (RIIO)

Ofgem regulates network companies (transmission, distribution, gas) through the RIIO (Revenue = Incentives + Innovation + Outputs) price control framework. The current RIIO-2 period (2021–2026) places greater emphasis on:

Delivering net zero outcomes.
Digitalisation and data sharing.
Consumer engagement and vulnerability.
Innovation and whole-system thinking.

2.2. Supplier Licensing and Market Entry

Supplier Licensing Review: In response to the 2021–2022 supplier failures, Ofgem has tightened financial resilience requirements, introduced new “fit and proper” tests for directors, and enhanced ongoing monitoring (Ofgem: Supplier Licensing Review).
Market Entry and Exit: Ofgem oversees the Supplier of Last Resort (SoLR) process, ensuring continuity of supply when suppliers fail.

2.3. Retail Market Regulation

Default Tariff Cap: Introduced in 2019, the price cap protects disengaged and vulnerable consumers from excessive prices. Ofgem reviews the cap methodology regularly to reflect market conditions (Ofgem: Price Cap).
Consumer Protection: Ofgem enforces standards of conduct, complaint handling, and redress mechanisms.

2.4. Code Governance

Strategic Direction: Ofgem has taken a more active role in code governance, directing changes to support policy objectives (e.g., Market-wide Half-Hourly Settlement, flexibility markets).
Code Review: Ongoing reforms aim to simplify and consolidate industry codes, making them more agile and accessible (Ofgem: Energy Code Review).

2.5. Innovation and Flexibility

Innovation Funding: Ofgem administers the Network Innovation Competition (NIC) and Strategic Innovation Fund (SIF), supporting projects that deliver decarbonisation, digitalisation, and consumer benefit.
Flexibility Markets: Ofgem is driving reforms to enable DSR, aggregation, and local flexibility, including through the Smart Systems and Flexibility Plan.

3. Ofgem’s Response to the Energy Crisis

3.1. Supplier Failures and Market Stability

The 2021–2022 crisis saw over 25 suppliers exit the market, affecting millions of customers. Ofgem’s response included:

SoLR Process: Appointing new suppliers to take on customers, protecting credit balances and continuity of supply.
Market Monitoring: Enhanced scrutiny of supplier finances and risk management.
Review of Price Cap: Adjusting the cap methodology to reflect unprecedented wholesale price volatility.

3.2. Case Study: Bulb Energy Special Administration

Bulb Energy, with 1.7 million customers, entered Special Administration in November 2021—the first use of this regime. Ofgem, BEIS, and the courts worked together to ensure continued supply while seeking a long-term solution. The case highlighted the need for robust supplier oversight and contingency planning (Ofgem: Bulb Special Administration).

4. Enabling Decarbonisation and Innovation

4.1. Net Zero Mandate

Ofgem’s duties now explicitly include supporting the delivery of net zero. This has driven:

Network Investment: Approving major investments in transmission, distribution, and offshore networks to integrate renewables and electrify heat/transport.
Market Reform: Supporting reforms to the Capacity Market, Contracts for Difference (CfD), and flexibility markets.
Whole-System Approach: Encouraging coordination across electricity, gas, heat, and transport.

4.2. Digitalisation and Data

Ofgem’s Digitalisation Strategy requires networks and market participants to invest in digital capabilities, open data, and cyber resilience.

4.3. Innovation Funding

The Strategic Innovation Fund (SIF) supports projects that deliver system flexibility, consumer benefit, and decarbonisation.

5. Protecting Consumers and Ensuring Fairness

5.1. Vulnerability Strategy

Ofgem’s Consumer Vulnerability Strategy 2025 sets out a comprehensive approach to identifying and supporting vulnerable consumers, including:

Proactive identification and outreach.
Enhanced supplier obligations.
Collaboration with charities and local authorities.

5.2. Affordability and the Price Cap

The price cap remains a key tool for protecting consumers, but its future is under review as the market evolves.

5.3. Digital Inclusion

Ofgem is working to ensure that digital innovation does not exclude vulnerable or digitally disengaged consumers.

6. Challenges and Criticisms

6.1. Balancing Competing Objectives

Ofgem must navigate trade-offs between affordability, security, and decarbonisation. The energy crisis exposed tensions between protecting consumers and ensuring market stability.

6.2. Market Complexity and Code Fragmentation

The proliferation of codes, rules, and regulatory processes can stifle innovation and create barriers for new entrants.

6.3. Pace of Change

Some stakeholders argue that Ofgem’s processes are too slow to keep pace with technological and market innovation.

6.4. Political and Public Scrutiny

Ofgem’s decisions—on the price cap, supplier failures, and network investment—are subject to intense political and media scrutiny.

7. The Road Ahead: Regulatory Evolution

7.1. Code Reform and Strategic Direction

Ofgem is leading efforts to consolidate and simplify industry codes, giving the regulator greater powers to direct change in support of strategic objectives.

7.2. Proactive Regulation

Ofgem is moving from a reactive, rules-based approach to a more proactive, outcomes-focused model—setting clear goals and holding industry to account for delivery.

7.3. Whole-System and Cross-Sector Coordination

The regulator is increasingly focused on whole-system outcomes, working with other regulators (e.g., Ofwat, Ofcom) and government departments to align energy, water, transport, and digital policy.

7.4. International Engagement

Ofgem is active in European and global regulatory forums, sharing best practice and learning from other markets.

8. Lessons Learned

Regulation Must Evolve: The pace and complexity of change require agile, forward-looking regulation.
Consumer Focus is Paramount: Protecting and empowering consumers—especially the vulnerable—remains the core mission.
Collaboration and Innovation: Ofgem must work with industry, government, and consumers to deliver a secure, affordable, and sustainable energy system.

Conclusion

Ofgem’s role has never been more challenging or more important. As the GB energy market navigates the twin transitions of decarbonisation and digitalisation, effective, agile regulation will be key to delivering a secure, fair, and sustainable future. The regulator’s ability to balance competing objectives, drive innovation, and protect consumers will define the success of the energy transition.

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