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4 October 2019

Ofgem’s love of the consumer may prevent energy innovation

When is a government regulator not a regulator – well we found this out attending Ofgem’s annual State of the Energy Market event this week – and the answer is, “when it’s obsessively interested in price caps, and nothing else.”

We sat through multiple presentations about how the price cap was introduced, why it was introduced, how there was room for both innovation and profitability under the price cap and how it did not get in the way of the “climate emergency,” a subject that Ofgem chairman Martin Cave, gave short shrift to.

And many of the 200 plus attendees from major energy firms, City analysts, and alternative energy providers, went along with it, happy ONLY to discuss the details of the operational energy price cap, how long it will last and how Ofgem will know when it is time to remove it. Whatever the problem, lack of connectivity to distributed energy, lack of permitting for onshore wind farms, the falling price of solar, the answer is the price cap. At best it is one dimensional, at worst it is inept.

When we look at how other UK regulators, such as Ofcom, behave, we see they have the bandwidth to cap prices (such as in broadband) or for cellular international roaming, and still have time and resources left over to contemplate the future and the UK’s place in that and how we get from here to there. Ofgem instead under Cave, has engineered it so that all the important issues are “outside the Ofgem framework,” and rely on government policy. The buck stops, over there somewhere, not here, we’re too busy.

So with consumer care at the forefront of Ofgem’s policy, we default to the Climate Change Committee being the only government guidance that can suggest change, and the BEIS Ministry the only instrument of change on the horizon.

One of the most important questions of the day was raised by Professor David Healey from Keele University and related to how to get a renewables project he was advising a connection to the grid. He was told it would cost £millions, and take 5 years, which he pointed out was half of the time that we have left to get our emissions down substantially, by 2030. Cave pointed him to the idea that Access Reform was being planned by the Energy Data Task Force, which in turn reports back to Ofgem and BEIS, in a circular route to what so far looks like zero change rather than zero emissions.

Ofgem did however unveil its State of the Energy Market report with the consumer the focal point of the day’s presentations as it sets out to deliver a net zero economy at the lowest possible cost to consumers.

The UK claims to have reduced carbon emissions at a greater rate than any other advanced country, but the report shows that last year these rates hit the slowest since 2012.

Ofgem’s case seems to be that if the markets are performing well, as in efficiently, then increased competition will take care of innovation and it pointed to the rapidly falling costs within offshore wind, as evidence.

We would argue that the Contracts for Difference idea is the sole innovation of the UK around renewables, with all the technology coming from outside the UK and most of the investment also coming from overseas. Competition indicated by tight supplier margins, does not mean innovation is implicit.

Recent news shows us that four suppliers have missed deadlines to meet Renewable Obligation payments (see elsewhere in this issue), which makes it clear that pockets are being squeezed by these price caps, and competition is far from being increased. Four small suppliers missed the original deadline for payment and have not provided Ofgem with adequate assurances that they will pay by the late payment deadline. If suppliers fail to pay by 31 October, Ofgem could start a process to revoke their licence to supply energy.

We have no problems with price caps, which came into effect in January 2019, to combat fuel poverty and protect consumers from high prices and to get away from an industry practise where “teaser” rates mean that consumers which shopped around get a far better deal than loyal customers.

One key indicator for this is the number of Excess Winter Deaths related to cold housing – which Ofgem told us was around 15,000 in the UK, making it clear that the price cap is justified, but surely not the sole reason for Ofgem’s existence.

These caps limit the price consumers can pay per kWh used of electricity and gas. The limit currently sits at £1217 for a dual fuel single rate customer paying using a typical amount of energy in annualised terms, and £1179 for default tariffs. Reviewed every 6 months, adjustments are made to these limits in response to changes in factors such as wholesale costs, profit margins, headroom and VAT.

While the Big 6 remain critical of the price cap, Head of Analytical Strategy and Development at Ofgem, Maureen Paul indicated significant industrial change as a prerequisite for the price cap being lifted prior to its intended deadline in 2023, and she insists that Ofgem thinks this is the way to maintain effective competition in the UK energy industry.

Martin Cave, Ofgem’s new Chairman, insists Ofgem has not been “sitting on its hands”, but signs seem to suggest that energy innovation in the near future in the UK is being stifled not stimulated to the detriment of decarbonization.