Energy Bill: Juliet Davenport on EMR

Good Energy chief executive Juliet Davenport tells Janet Wood what she is lobbying government to include in imminent Electricity Market Reform.

Good Energy is one of a handful of small companies that has successfully fought its way into a niche in the UK’s energy industry. Now it needs to make sure the industry that emerges from the Energy Bill (due out yesterday – 22 November – after Utility Week went to press though possibly delayed) will keep it not just in business, but healthy and growing.

Chief executive Juliet Davenport acknowledges that even keeping up with policy development is no small task. “There are so many issues right now, it is knowing where to start,” she says. “It’s a constant risk assessment, looking at opportunities to find our way through it.”

She has a clear agenda guiding her in finding those opportunities. “We think the really exciting change in this market could come from the whole idea of decentralisation. The reason we have six large companies is the nature of the economics. You have a lot of power, you trade a lot of power, you need a lot of credit and a big infrastructure to deliver it. I think the opportunity is to say, ‘what happens if you didn’t need as much power to buy and sell? What if you provided services for people generating power in their own homes’?”

Does that mean we will finally see the rise of the energy service companies that have been trailed for so long? Davenport sees a shift that way: the feed-in tariff has changed thinking and smart meters will provide some leverage.

She says that’s why Good Energy is pressing within Electricity Market Reform (EMR) “to make sure the structures that come out, particularly for contracts for difference [CfDs], don’t preclude anything under 50MW being able to be supplied locally, and get local power purchase agreements [PPAs]”.

Does the EMR framework, especially CfDs, fit this new world? Davenport says originally they did not. “But there has been a lot of work to try to make sure that they do… We think that in any contracts with supply companies – particularly with the smaller side – people should be able to look for different lengths, different structures, rather than being dictated by a single structure. So we are coming up with lots of different models, playing with them, and trying to get Decc [the Department of Energy and Climate Change] to include them as a possibility.”

When I ask whether the issues are around liabilities, cashflow, or the counterparty, Davenport says they are all problems. “The people they [CfDs] are going to give advantage to are the people who are already around. So the bigger players will have an advantage over the smaller players and the smaller players will have an advantage over new entrants who don’t exist yet. We’ll cope with it.”

She elaborates: “There will be a price coupon on the CfD that will be related to variability, which is okay. There will be one for size, and potentially there will be one because we buy forward with a PPA – we essentially get some form of forward price hedge. Even if it is variable, you still get a portfolio effect.

“If we buy forward in the wind market, the current idea is to have a daily strike price. You are buying variable power at a variable price. Why would I want to do that? I pointed this out to a few officials, and they said they didn’t believe that would be a problem.” She asked for analysis to prove that.

In fact, she wants more analysis across the Energy Bill proposals. “I don’t think enough testing has gone on about what the impact of CfDs will be.

“It’s such a big change and they [Decc] haven’t done the analysis. They are struggling. [The Decc team is] pretty small, and to be able to do this kind of policy experimentation you need half a university to do decent research work.”

She continues: “If they create a market that is so complex and so difficult to get into – because the risks are so difficult to get your head around unless you have been in market for a while – then we won’t see those new entrants and that will be to the detriment of the whole industry. “

Davenport is frustrated that the speed of work on the Bill has limited joined-up discussion. “It reminds me of the work towards Neta [the New Electricity Trading Arrangements], when there was a single-minded focus to get something over the line. All the problems would be put into separate groups – not quite forgotten, but to say “we’re dealing with that”. I understand that you need single-mindedness for delivery… but we have done a huge amount of work, and it just needs to be listened to.”

What about another aspect of the arrangements, the capacity market? Davenport is not sure how that will play out. “We’ve just been responding to Ofgem’s cash-out consultation and one of the issues we have is that smaller players and smaller customers can’t really play in the capacity side, because we don’t have the signals coming through on the settlement side that allows us to do that on non-half hourly metered customers.”

She thinks it would be better to focus on getting smart grids and smart meters done, because “that will help us do the balancing we need”.

She is feeling some deja vu around Ofgem’s discussion. “We seem to come back to the same thing time and time again, like revisiting cashout prices. I have struggled with the concept that short-term pricing signals give you long-term investment. I don’t think they do. If feels like competing economic theories are being mustered in the energy market.”

And she doesn’t discount the European angle. “The concern is that there is a different capacity mechanism going in every country. With greater interconnectivity, you are going to have some very interesting trades across different capacity mechanisms and I am sure there is some gaming work to be done there.”

If decentralisation is at the heart of Good Energy’s strategy aims, does Davenport think that the distribution network operators (DNOs) are fully on board? She says: “They realise they will have to become more engaged… [But] it’s very rarely in any industry meeting that I come across a DNO. All the DNOs and National Grid could spend more time listening to smaller suppliers. That could be interesting.”

As an innovative supplier, I wonder what Davenport’s thoughts are on a government measure that could change the customer relationship, the Green Deal. She says it is disappointing. “Decc didn’t really engage with the smaller suppliers, so when we got into the working groups they had already formulated a lot of their concepts and ideas.

“They went about it in the wrong way. They tried to reduce the attractiveness for suppliers to come in and administer this, by saying it would cost £3 per year [per account].

“First of all, it’s not attractive. Second, it doesn’t make any sense. We have done our own mapping of the procedures that you have to go through to administer a Green Deal customer. We did it, we shared it with Decc and they completely ignored us. It is in the order of £20-30. You cannot forget that customers will want to talk to you occasionally if you take money out of their accounts. You also have to look at the fact that you are taking two direct debits, you have to split the money between electricity bill and repayments for the loan. There was stuff that meant that at the very practical level it was difficult to do.

“Anecdotally we have heard others say they will be losing money on it… to a certain extent I think it’s an anticompetitive move by Decc.”

However, Davenport has other innovations in mind. “From our point of view, especially on the gas side, if we could reduce gas usage I can expand my customer base quicker because I need less credit if I am buying less gas.”

And she has other suggestions around collective switching. She starts with a word of caution: “I worry sometimes that we focus too much on switching and not on saying that there are better ways for people to reduce their costs. I would hate people to think that rather than insulating their homes they should spend their life on the internet switching. Also, there are some agents out there who like switching, who call for it quite often, and I would like them to be challenged on that a bit more.”

So how could collective switching work? She says: “My sense is that collective switching needs a bit more thought and it might deliver something interesting…There may be a more permanent role about people buying energy collectively, maybe buying it locally. They could get to be their own supply company but with support from others.”

She suggests that groups of customers have more purchasing power than they realise. “They can take responsibility for the bits they are good at. So if they took responsibility for collecting their debts properly you could give them a reduced price. If you could make sure that they bring in the customer, you don’t have to pay any marketing.

“If someone came to me and said they would have zero bad debt, I would give them a deal where they can have all the bad debt I would price in. You can have it back at the end of the year if you all pay your bills.”

That’s the kind of innovation that needs a good customer relationship.

This article first appeared in Utility Week’s print edition of 23rd November 2012.

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