If there is one thing that is clear, it is that regulation of the energy sector is a complex and complicated
While doing some reading up on the circumstances that have led to the closure of some of the smaller energy retailers in the United Kingdom over the past 12 months, I wandered down a path of increasing contradiction as I attempted to make sense of regulation in a competitive environment.
I have been trying to understand how the UK energy market has come to the point where the Office of Gas and Electricity Markets (Ofgem) is needing to include both price caps and increased vetting of independent suppliers before licencing. The latter will include the need to show the financial resources to operate for at least 12 months from entering the market, and that they are able to meet Ofgem’s customer service requirements. This review will no doubt be a welcome addition to the market set up, which has seen 9 independent retailers go out of business in the past year and has resulted in Ofgem needing to make alternative arrangements for affected consumers.
While I will probably need a degree in economics and regulation in order to make sense of any of it, consensus amongst industry experts and insiders is that the market is in desperate need of fixing. A review by Professor Dieter Helm which examines the cost of energy and the need to meet climate change goals has highlighted that multiple levies and taxes imposed on the sector to meet “renewables obligation certificates (ROCs), the feed-in tariffs (FiTs) and low-carbon contracts for difference (CfDs)” have significantly contributed to increasing costs.
While note the only cause, Helm believes that the complexity of the market is such that few can fully understand the conflicting impacts each additional “intervention” has on costs and the resulting unintended consequences thereof. I am not going to go over the 240+ page report in this note, however, the reforms proposed by Helm are far reaching and in some cases, quite radical – ie: separating out the legacy costs of ROCs, FiTs and CfDs, ringfencing these and placing them in a ‘legacy bank’ and exempting industrial customers from these costs; imposing a “universal carbon price on a common basis across the whole economy, harmonising the multiple carbon taxes and prices currently in place” and implementing “a default tariff to replace the Standard Variable Tariff (SVT), based on the index of wholesale costs, the fixed cost pass-throughs, levies and taxes, and a published supply margin.”
They may never actually see the light of day.
It has become evident that, in the short term, because consumers need more protection from increasing costs, the industry itself will need to bear that brunt of this dynamic. This is being imposed through the introduction of a price cap on certain types of tariffs, including those utilising prepaid payment options or tariffs which are considered “poor value” deals. How the caps will work in the face of increasing wholesale volatility is still to be seen.
Questions I am pondering at the moment include:
Is the government going to reduce the legacy levies and taxes on the system, or will the onus continue to be on the energy companies to work with increasingly tight margins across a sector in which consumer expectations and carbon neutrality demands are constantly rising?
Are prices really too high or have consumer expectations changed when it comes to the real cost to deliver?
Is there a better way of ensuring a fair, increasingly carbon neutral and cost effective system?
I’d love to hear from those of you who are at the forefront of this industry. What are the dynamics we aren’t taking into consideration? What are the grey areas in this landscape we aren’t even seeing? Contact us at email@example.com with your insights.
Until next week
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