Energy suppliers warned not to start dolling out dividends too soon

Energy suppliers have been warned by the industry’s watchdog not to start prematurely showering investors with dividends as they return to profit.

Ofgem’s chief executive Jonathan Brearley told chief executives yesterday that the regulator is ready to take action if firms start rewarding shareholders before rebuilding their financial health.

Billions of pounds in taxpayer subsidies have been spent propping up the sector after global energy prices surged following Russia’s invasion of Ukraine.

Now that the pressure is starting to ease, the regulator is trying to ensure that consumers benefit and that firms beef up their financial resilience.

In a letter to the chief executives of all domestic energy firms, including British Gas-owned Centrica, EDF, Ovo and Eon, Brearley said: ‘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.

‘We need suppliers to learn the lessons of the energy crisis and play their part by making sure they’re financially robust, can absorb potential losses and are meeting our new capital requirements.

‘I expect no return to paying out dividends before a supplier has met those essential capital requirements.’

Brearley’s letter comes as his counterparts at Ofwat, the water sector regulator, face pressure over the financial troubles facing that industry – and the suggestion that firms had been allowed to rack up too much debt while paying out big dividends.

The crisis in the energy sector dates back to before the Ukraine war when rising wholesale prices resulted in dozens of smaller energy suppliers going bust.

That raised questions about the financial health of some of those companies as well as Ofgem’s oversight of them.

Subsequently, the Ukraine war intensified the pressure on wholesale prices and the government was forced to step in with billions of pounds of subsidies for energy bills.

Now that wholesale prices have come down, a fall in the energy price cap from July 1 means that households are finally starting to see some relief.

That fall has knocked £426 off a typical annual energy bill.

Brearley said Ofgem would ‘closely monitor the situation, including to make sure that the market is operating competitively on price’.

It comes after Chancellor Jeremy Hunt last week summoned regulators, including Ofgem, to a summit at 11 Downing Street, resulting in the confirmation of a series of measures to protect consumers.

They include making sure that pre-payment meter customers pay no more than direct debit customers and that the formula Ofgem uses to work out the price cap is kept under review to ensure it accurately reflects the costs facing suppliers.