Energy crackdown crumbles

The new parliamentary arithmetic was reflected in a barebones Queen’s Speech and a loss of impetus for proposed energy price curbs. David Blackman reports.

What a difference a month makes. On 18 May, the day the Conservatives published their election manifesto, the party had a 9 per cent poll lead and looked set for a landslide election victory. A promised Tory clampdown on energy bills appeared to be only a matter of time.

But within days, the manifesto had unravelled, followed soon after by the Tory poll lead, and three weeks later by the election of a hung parliament. The upshot of that uncertain result was last week’s Queen’s Speech, which kicked much of the Conservative manifesto into the long grass.

One of the relatively few policy promises to survive was the pledge to curb energy bills, thanks to the substantial support that the idea commands across the House of Commons. However, the government is going about the price capping job in a less gung-ho manner than it might have done had prime minister Theresa May secured a strong parliamentary majority.

The government has said it will consult before deciding how it proceeds on energy price curbs, and has yet to make up its mind on whether regulation or fresh legislation is needed. On this issue the key dividing lines are within the Conservative party: free market Tories versus interventionists such as May, whose hand has been weakened by her failure to win a majority.

However, energy secretary Greg Clark has signalled his determination to press ahead with price reform. On the same day as the Queen’s Speech, he wrote to Ofgem chief executive Dermot Nolan, spelling out his belief that the regulator has the powers to fix the market. He has asked Nolan for advice on three issues: safeguarding customers on poorest value tariffs, ensuring fair treatment for micro businesses, and the future of standard variable tariffs. Clark acknowledges the need for formal consultation, so there will at the very least be a stay of execution for the industry.

Ryan Thomson, a partner at energy consultancy Baringa, believes that a price curb is unlikely to be introduced for a couple of years, given its potentially grave consequences for companies.

Former National Grid chief executive Steve Holliday says the consultation offers utilities a window of opportunity to address ministers’ concerns about customers locked into excessive tariffs. Thomson says this could give a chance to press the case for more targeted interventions rather than a one-size-fits-all cap. Another way of protecting consumers while preserving competition would be to force customers to renew their tariffs annually.

Crucially for the industry, a slackening of wholesale price rises may ease pressure to hike tariffs, which would feed through into less pressure on MPs from constituents. Thomson says the market outlook over the next two years is relatively benign, although spikes are possible. “I would be surprised if the market doesn’t self-correct during the consultation period,” he says.

The other big announcement in the Queen’s Speech was the unveiling of a Smart Meters Bill. The Conservative manifesto had already watered down a previous commitment to install a smart meter in every home by 2020. The bill extends the government’s existing smart meter roll-out powers by another five years. While the bill doesn’t mean that the government is reversing course on the smart meter programme, Thomson says it does offer “wiggle room” over the pace of implementation.

Dan Lewis, energy policy adviser for the Institute of Directors, says the government has recognised that the original deadline cannot be achieved. “There was no way they were going to make the 2020 target.”

He interprets the bill as watering down of the 2020 deadline, saying it reflects the emergence of smaller competitors without the resources to support deployment. “The world has changed a lot: it’s gone from a market where 99 per cent of customers were with the big six who had the infrastructure and balance sheets to support this.” A more relaxed approach to smart meter installation will enable companies to tackle some of the technical teething troubles while halting the installation of the less sophisticated SMETS 1 meters, says Lewis.

“When this bill comes through we are going to get a proper debate about smart meters that we haven’t really had, which will be very healthy.” If utilities’ views prevail in this debate, the Queen’s Speech would result in “a double lobbying win” for the sector, added Lewis. “They won’t get hit with extra charges for smart meter deployment and the price cap has been put off.”

Nolan urged to rebut price cap

Ofgem chief executive Dermot Nolan has been urged by a group of former regulators to rebut the government’s conviction that price intervention in the energy market is required.

The group, led by Stephen Littlechild, has written to Nolan to set out the case against price capping. Littlechild suggests that Ofgem, “guided by its statutory duties and by the evidence available, should first consider carefully whether there is in fact a case for further restrictive regulatory intervention”.

The letter makes two key points that Ofgem should address instead of focusing on price regulation. The first relates to the increasing impact of environmental and social costs on energy bills. The second, the inability of vulnerable customers to “take full advantage of the lowest prices that the competitive retail market has to offer”.

Their move follows the energy secretary Greg Clark giving Ofgem the job of advising on how best to implement a “safeguard tariff”.

The full anti-price cap letter can be read here.