Ofgem tells energy suppliers to put financial stability before dividends

Receive free UK energy updates

We’ll send you a myFT Daily Digest email rounding up the latest UK energy news every morning.

Britain’s energy regulator has warned suppliers not to pay dividends unless they are financially stable, as it seeks to avoid a repeat of last year’s energy crisis.

Jonathan Brearley, the chief executive of Ofgem, has written to company bosses warning them to “behave responsibly” as the price pressures ease in the wholesale energy markets.

The intervention came after Jeremy Hunt, the chancellor, urged regulators last week to make sure businesses were passing cost cuts on to consumers, in an effort to address the mounting cost of living crisis.

In an open letter to energy supplier bosses on Tuesday, Brearley told them that they should “reciprocate” the support given to the sector by taxpayers over the past year.

The government stepped in last October to subsidise rising energy bills after wholesale prices surged in the months before and after Russia’s invasion of Ukraine in February, costing an estimated £27bn.

The energy crisis led to the collapse of 30 suppliers, with households having to pick up the cost of transferring affected customers to other companies, which added a further £94 to domestic energy bills last year.

As suppliers failed Ofgem was widely criticised for failing to monitor the sector effectively, having allowed dozens of poorly capitalised suppliers to enter the market to boost competition.

It has since taken a tougher approach to financial resilience, including new capital requirements, though critics believe it should go further.

The regulator’s warning came as energy prices are falling. From the start of July, the energy price cap, which normally governs the amount paid for gas and electricity bills for typical usage, fell to £2,074 per year, its lowest level since April 2022.

However, the lower level still remains well above the pre-crisis average of almost £1,150 meaning many families will still struggle to pay their bills.

The latest price cap level includes allowances for a slightly higher profit margin for retailers, from 1.9 per cent to 2.4 per cent. The increase, which Ofgem argued was needed to boost financial resilience, is expected to add about £10 to average annual bills from October.

In the letter, Brearley acknowledged it was important to have an “energy sector where companies can make a reasonable profit” to ensure a sustainable, competitive market.

But he warned that “a return to the practices we saw before the energy crisis isn’t on the table — suppliers must reciprocate the support the sector was given by consumers and taxpayers when wholesale prices increased by behaving responsibly as prices fall and profits return”, adding: “I expect no return to paying out dividends before a supplier has met those essential capital requirements.”

The letter did not mention individual suppliers by name. Following last year’s market rout, the market is concentrated in the hands of large suppliers, such as British Gas, owned by Centrica, as well as EDF, Octopus Energy and Ovo.

The letter echoed a similar one from Ofgem in May that warned suppliers that any dividend payments had to be “within an appropriately responsible framework”.

Energy UK, the industry trade group, said: “It’s right that the regulator ensures the financial resilience of companies operating in the retail market. It should be noted that in withstanding the energy crisis and an extended period of unprecedented volatility, those suppliers still operating have already demonstrated resilience and financial responsibility.

“The energy industry will continue to work closely with Ofgem and the government to ensure a sustainable retail sector over the long term.”