E.ON Next Energy Limited, R (on the application of) v The Gas and Electricity Markets Authority

Ofgem’s discretion under SLC 9.5 to consent to a Last Resort Supply Payment claim is broad and must be exercised case by case. Published criteria may guide that discretion without legally fettering it.

A legitimate expectation requires a statement that is clear, unambiguous and devoid of relevant qualification, construed objectively and in context. A confirmation that costs are subject to Ofgem’s review does not promise that they will be allowed.

Where a regulator disallows shaping or imbalance costs because the supplier has not shown that SoLR customers generated costs exceeding those already covered by the price cap, that approach may be rational. An unqualified reservation of discretion to withdraw a proposed contribution does not amount to a dependable commitment under SLC 8.3.

E.ON was appointed as Supplier of Last Resort for customers of Igloo, Symbio and Enstroga during the exceptional energy-market conditions of 2021. It submitted Last Resort Supply Payment claims, including shaping and imbalance costs.

Ofgem disallowed those costs on the basis that E.ON had not demonstrated that the costs attributable to SoLR customers exceeded those faced by its non-SoLR customers, which were already reflected in price-cap allowances. In the Igloo decision, Ofgem also deducted £15 million because E.ON had said it would contribute that amount towards wholesale costs.

E.ON sought judicial review, alleging legitimate expectation, irrationality and, alternatively, that the £15 million contribution was not a binding commitment.

1. Legitimate expectation. The alleged expectation failed. A legitimate expectation requires a statement that is clear, unambiguous and devoid of relevant qualification, assessed objectively and in context. The Comfort Letter stated that subsequent claims were subject to Ofgem’s review and did not restrict the statutory discretion under SLC 9.5. It gave no assurance that shaping or imbalance costs would be accepted, or that particular criteria would not be applied.
2. The surrounding context reinforced that conclusion. Ofgem’s published criteria repeatedly included whether costs were directly incurred as part of the SoLR role rather than through normal customer acquisition. E.ON had not challenged that criterion when it was repeated during the later claims process. In any event, the Deed of 1 March 2022 expressly provided that True-Up claims would be reviewed by reference to the applicable criteria and approach. That was inconsistent with reliance on the alleged expectation.
3. Irrationality. The court applied a wide margin of appreciation to an expert economic regulator. Ofgem was entitled to balance consumer protection, the allocation of risks and costs, incentives to volunteer as SoLR and the danger of moral hazard. The requirement to show that SoLR customers generated greater shaping and imbalance costs than non-SoLR customers was not a new criterion. It was an application of the existing criterion concerning costs directly incurred as part of the SoLR role. It was rationally connected to the retrospective price-cap adjustment, which was intended to cover increased shaping and imbalance costs.
4. The challenges to the disallowance of shaping and imbalance costs therefore failed. The reasons given by Ofgem were clear and coherent, and E.ON had not shown that the criterion was impossible for suppliers generally to satisfy.
5. £15 million deduction. The alternative ground succeeded. E.ON had reserved an unqualified right, in its own opinion and discretion, to reduce its proposed contribution if its claims were treated unfairly. The communications did not create a contract, and there was no basis for implying a rationality constraint into those words under Braganza. Taken at face value, E.ON had not committed to make any contribution unless it formed the relevant opinion. Having formed that opinion, it had not breached SLC 8.3. The £15 million deduction was therefore wrong in law and/or legally irrational.