What does Ofgem do?

You’ve probably heard the name Ofgem on the news or read it in other articles about the energy industry. But do you know what or who Ofgem is, and what it does? Here’s everything you need to understand about the energy regulator.

Ofgem website

In this guide you'll find answers to questions including:

  • What does Ofgem stand for?

  • What is Ofgem?

  • Why was Ofgem formed?

  • Who is behind Ofgem?

  • Who pays for Ofgem?

  • Why do we need a gas and electricity regulator?

  • Does an electricity watchdog like Ofgem set prices?

  • Is Ofgem effective?

What does Ofgem stand for?

Ofgem stands for the Office of Gas and Electricity Markets. The name stems from the merging of the Office of Electricity Regulation (OFFER) and the Office of Gas Supply (OFGAS) into one central gas and electricity regulator. 

What is Ofgem?

The Office of Gas and Electricity Markets is an independent National Regulatory Authority and non-ministerial government department. The main role of Ofgem is to keep tabs on the energy market to protect the interest of electricity and gas consumers. According to its website, this includes things like:

  • Supervising and developing the energy markets and competition

  • Promoting security and sustainability of the energy supply

  • Regulation and delivery of relevant government schemes

  • Promoting value for money

Although Ofgem works with the government, it’s an independent authority that regulates and oversees the energy companies. Its role as industry watchdog is similar to other organisations like Ofsted (education) and Ofcom (broadcasting and telecommunications). There are over 60 regulatory bodies like this in the UK, monitoring everything from our food standards to the water supply. 

Why was Ofgem formed?

Ofgem’s history dates back to 1986, when the UK’s gas and electricity market was privatised by the Thatcher government. Before this point, most gas and electricity was provided by a single, publicly owned utility company, British Gas.

When the energy market was liberalised in 1986, it was opened to competition. UK households were now able to choose their own suppliers, with increasing freedom from 1996. In 1998, the domestic gas sector fully opened, followed by the electricity market in 1999. This made the need for an energy regulator even more important. Ofgem’s history can be traced to the following government acts.  

  • Gas Act 1986

  • Electricity Act 1989

  • Competition Act 1998

  • Utilities Act 2000

  • Enterprise Act 2002

At first, Ofgem’s primary responsibility was to use price controls to set maximum prices for energy, but today its remit has widened to focus on protecting consumer interests both in terms of price and supplier behaviour.

Who is behind Ofgem?

Ofgem is governed by GEMA (the Gas and Electricity Markets Authority). GEMA’s governing board consists of both non-executive and executive members. They come from many different backgrounds to lend a broad range of expertise to the board, including:

  • Economics

  • Industry

  • Consumer and social policy 

  • Finance and investment

  • Science and environmental studies

GEMA sets policy priorities, defines Ofgem’s strategy, and makes ruling decisions on any regulatory matters that concern consumers like price controls. 

Ofgem aims for full transparency, publishing the minutes of Authority meetings, holding briefings for Parliament and the Press, and arranging workshops for stakeholders. 

Who pays for Ofgem?

You don’t pay directly for Ofgem; the energy companies do. The costs of running Ofgem are recovered from the licensed companies it regulates. All licensed companies pay an annual fee set to provide funding, but Ofgem is fully independent of the regulated companies. 

Why do we need a gas and electricity regulator?

Ofgem is responsible for protecting consumer interests. Although you’re unlikely to have any direct contact with the regulator, it’s always there working on your behalf behind the scenes. All the end products that consumers see are the result of policies set out by the electricity watchdog, from payment relief schemes to price caps. It also exists to provide procedures to protect you if something goes wrong with your gas and electricity supply.

Ofgem also has stepped in to make the market more transparent for consumers, ensuring you’re able to compare tariffs and suppliers freely. You’re able to switch suppliers when you wish. Here are a few other ways that Ofgem helps keep the market in check: 

Setting price caps

Ofgem researches, fixes and administers energy price caps to keep prices from spiralling out of control. This currently includes prepayment tariffs as well as default and standard variable tariffs.

Keeping records of complaints

Ofgem doesn’t handle your complaints directly. After following the process with your supplier, you can then follow up unsettled complaints with the energy ombudsman. However, it does record these complaints over time to help monitor the market. This data is published, allowing you to research suppliers to see how it handles customer complaints and service. 

Monitoring government social schemes

Government schemes like the Warm Home Discount and Cold Weather Payments were designed to help vulnerable consumers afford and access energy during the colder months. Ofgem administers and ensures that suppliers comply with these schemes, along with environmental initiatives like the Renewable Heat Incentive and delivering the extra help users on the Priority Services Register require.

Serving as a safety net

If you’ve been following the energy market in the news you may have noticed that numerous energy suppliers have failed over the past couple of years. This kind of situation is where an energy regulator like Ofgem can really help, protecting the gas and electricity of households suddenly left without a supplier. Its Supplier of Last Resort (SoLR) process ensures these households are transferred to a new supplier as quickly as possible to avoid any disruption. 

Outlining energy bills

When you look at your energy bills, you’ll see loads of detail to help you understand your energy consumption and tariff. You can thank Ofgem for that, as it specifies the information that must be included. This includes projected figures of what you’ll pay if you decide to stick with the same tariff over the following year – so you know when it’s time to switch. 

And on that note, Ofgem regularly publishes data about the suppliers so you can find out a little bit more about them if you’re thinking of switching

Does an electricity watchdog like Ofgem set prices?

Although it can administer short-term price caps, Ofgem doesn’t control the actual price of gas and electricity. Prices are set by the suppliers in the energy market.

So, how do energy suppliers set prices? They follow supply and demand, which impacts their own cost of buying wholesale gas and electricity. Regional distribution and network costs are then factored into the price. 

When price caps are set, they tend to be applied to the most expensive standard variable tariffs, factoring in things like suppliers’ overhead costs.

Is Ofgem effective?

What powers does Ofgem have to regulate the energy market? This can be a difficult thing to quantify, but the electricity watchdog does have the power to issue fines. 

If energy firms breach their licence conditions or break consumer protection laws, Ofgem has the authority to investigate the matter and, if necessary, penalise the firm financially. It’s imposed over £263 million in fines and redress payments over the past decade. 

What are some examples of actions that have led to penalties?

  • Failure to meet deadlines for smart meter rollout

  • Failure to provide connections for rural households

  • Mis-selling of tariffs by phone or on the doorstep

  • Poor handling of customer complaints and billing 

  • Erroneously charging fees that don’t apply to the consumer

  • Hindering the customer’s ability to switch suppliers

When fines or redress payments are collected, they don’t go to Ofgem. Instead, the funds are passed on to the Treasury, or to government schemes that help energy customers. The money is transferred when possible to consumers that have been let down by the particular supplier, followed by energy charities or trusts. 

Ofgem can also be considered effective in that it ensures suppliers keep customers notified of the cheapest plans available, with information clearly printed on each bill. This can be very useful if you decide to switch suppliers in the future, armed with transparent information. The idea is that Ofgem works for consumers first and foremost.

Last updated: 9 November 2020