Ofgem boss warns over declining appeal of UK’s energy sector for suppliers

Shell’s potential exit from the energy retail market raises questions over the industry’s attractiveness for businesses, Ofgem chief executive Jonathan Brearley has warned.

The watchdog boss told the BEIS Select Committee that there needed to be a credible pathway to profit for energy suppliers.

He said: “It remains a concern to us around the long-term sustainability and attractiveness of this market.”

Ofgem has announced a raft of reforms to clean up the energy sector including fit and proper person tests and capital adequacy requirements, as it looks to clean up the industry and shift business models from a reliance on switching and growth pledges to sustainable profit-making.

Brearley explained to the Westminster committee he was looking to ensure suppliers would find the market attractive to invest in, while protecting customers from industry carnage and skyrocketing bills.

He said: “We will continue to do what we can in two ways. Both in terms of evolving the existing price cap to make sure it’s as flexible as possible, and as we build financial resilience of the sector it will become more compelling for investors to come into this market and make sure they can see a sustained profit not based on volatility in the market.”

The energy price cap does not just constrain costs for energy usage, but also caps the level of profits an energy supplier can make to 1.9 per cent.

Unlike energy producers, which have raked in record profits over the past 12-18 months, energy suppliers operate in a highly regulated environment and have suffered losses amid the industry crisis.

Even Centrica, which has recently predicted a near eight-fold increase in its full-year profits, expects British Gas will struggle to break even.

Brearley’s comments were in response to questions from committee chair Darren Jones about Shell’s long-term future in the home retail market.

The energy giant announced last week it has launched a strategic review of its retail operations in the UK, Germany and Netherlands.

The home supplier business, Shell Energy, is a loss-making enterprise for the company, reflecting the industry landscape at large, where 30 suppliers have collapsed amid tough market conditions and insufficient hedging.

It is home to 1.4m household customers in the UK, making the energy firm’s possible exit a significant blow to the market.

The London-listed fossil fuel giant confirmed to City A.M. the review is in line with its ‘Powering Progress’ strategy, which focuses on maximising value for shareholders – and refused to rule out a sale of the business.