Energy suppliers should be required to have internal audit functions to reduce the risk of a repeat of the wave of collapses that cost British households billions of pounds, Ofgem has urged.
Energy companies “are systemically important and need a robust audit and governance framework, in much the same way we have for large financial providers,” the Chartered Institute of Internal Auditors wrote in a letter to the regulator.
Around 30 UK energy suppliers have collapsed in the past 18 months because they were unable to pass on soaring wholesale prices to customers due to price caps, leaving taxpayers and households on the hook.
The weight of failure was distributed across all energy billswhich so far amounts to about £94 per customer, but that figure is expected to rise sharply once the costs of the failure of Bulb, the biggest provider to collapse, are passed on to consumers next year.
The Office for Budget Responsibility predicted that the Bulb bailout would it costs about £6.5 billionadding around £200 to each household’s bill.
“As far as we can tell, none of the energy suppliers that have recently gone into administration have had any internal audit capability,” CIIA CEO John Wood he wrote in a letter to Jonathan Brearley, his Ofgem counterpart.
Companies hire internal auditors to identify business risks – from financial to cyber security or other operational risks – and independently assess how they are being managed.
The absence of such experts was not the main cause of energy companies falling into administration, Wood said, but “may have meant they did not obtain sufficient and effective independent assurance on their critical business risks, including energy market exposures, financial and liquidity risk”.
A tougher approach was required because “energy providers provide a basic public service,” he said, adding: “Just as financial services regulators learned from the financial crisis in 2008, Ofgem must now learn from the energy crisis.”
A string of corporate collapses led to criticism of both the government and the government Ofgem. This was stated in this year’s report of the National Audit Office Ofgem’s low bar for new entrants and easy access to monitoring increased the risk and cost of their failure.
“We believe introducing mandatory internal audit for energy suppliers will help reduce the risk of failure and support your ambition for stronger and financially stable energy suppliers better equipped to weather future economic shocks,” Wood said.
“This will help ensure that energy suppliers identify, manage and mitigate their risks effectively.”
Ofgem is expected to raise the price cap on Thursday, although households will be protected as the government has pledged to cap the typical bill at £2,500 by the end of March.
It said its priority was “protecting consumers” and that it had “made huge strides in how we ensure suppliers are financially resilient to mitigate future supplier failures”, and introduced measures such as requiring boards to self-assess its control framework. .
She promised to respond to the letter in “good time”.