Notice

Ofgem review: terms of reference

Published 19 December 2024

Rationale

The energy market is changing fast as we transition to net zero. Ofgem was established in 2000 when the main goal was to promote competition, and Britain’s decarbonisation journey had barely begun.

As that journey accelerates, we are moving to a more diverse energy market with the spread of electric vehicles (EVs), heat pumps, solar panels and heat networks; alongside the move to a more strategically planned and procured energy system.

Consumer trust in this changing market will be key to delivering this transition. But today, consumer trust and satisfaction in the energy market is systemically lower than where it needs to be. The recent energy crisis revealed weaknesses in consumer protection and the impact on people’s lives when the energy market isn’t working for consumers.

This is the right time to ask what kind of energy regulator the country needs to better protect consumers and facilitate the investment needed to deliver a rapid and cost-effective energy transition.

Aims

The aim of the review is to establish an energy regulator fit for the future. Critically, it will consider how to set up Ofgem so that it can regulate a fast-changing market to deliver a fair deal for consumers as we transition to net zero.

The review shall examine:

Protecting consumers and delivering fair outcomes

• whether Ofgem has the right mandate and duties to meet the aims of the Review. This shall examine what Ofgem’s role and priorities should be and whether its existing functions and duties enable it to deliver these
• whether Ofgem’s scope and remit is keeping up with a rapidly changing energy market. This will consider what the right regulatory boundaries are and how new markets should be regulated
• whether Ofgem has the right powers to protect consumers and give them confidence in the energy market. This shall examine lessons from the approaches taken by other regulators
• whether Ofgem has effective compliance and enforcement tools, so consumers can be confident that any failures will be investigated and rectified quickly, and what additional powers Ofgem might need to achieve this

Delivering investment and innovation in the transition

• what role should Ofgem play to support growth and the government’s industrial strategy, so that investment and innovation reduces energy prices
• what should the role of the regulator be in an energy system that is now, in part, driven by strategic planning and with the creation of the National Energy System Operator (NESO). In particular, how should we align regulatory strategy with strategic energy plans

Strengthening performance and accountability

• how do we strengthen transparency and accountability on regulatory decisions and how to support parliamentary scrutiny of Ofgem’s performance
• the capabilities Ofgem needs to be an effective regulator in a more digital, fast-moving sector

Process

The review shall be carried out by officials in the Department for Energy Security and Net Zero, who shall engage across government and with external stakeholders. The review will set up an external group of advisors drawn from experts such as consumer groups, academia, the energy sector and investor community to provide critical challenge and insight. The review shall involve public consultation.

Outcome and timing

The output from the review shall be a report, with recommendations to the Secretary of State. The review shall deliver a final report to the Secretary of State in Spring 2025.