‘Energy service models hindered by regulation’

Regulation of suppliers should be reformed in order to encourage the kind of energy service business model that will be required to help deliver decarbonisation of heat, a leading academic has told peers.

At a meeting of the House of Lords Industry and Regulatory Committee today (22 June), which kicked off its inquiry into Ofgem and net zero, Dr Jeff Hardy said service model propositions could remove the upfront costs that threaten to deter less engaged households from installing low-carbon heating systems.

But he warned that such a model, which would entail customers taking out long-term contracts with suppliers, is difficult to square with the regulatory regime’s current focus on price and boosting competition through switching.

Hardy, who is a senior research fellow at Imperial College London’s Grantham Institute, said: “You can’t do that at the moment because the relationship with energy suppliers is about a commodity and where switching is absolutely the thing we have to do as often as possible, you cannot be locked into a contract and you cannot have a long-term relationship.

“We have to think a lot about what a supply license looks like and what sort of business models are going to be allowed to have these relationships with consumers.”

Catherine Mitchell, professor of energy at The University of Exeter, told the same evidence session that the regulation of gas distribution is “asleep at the wheel”.

She said the huge sums that continue to be pumped into the gas network should be paid instead to customers to help install decarbonised heat solutions.

Mitchell said: “Consumers have paid £8.5 billion over five years for systems that we have to effectively get rid of by 2040.

“They are allowing so much money to go into the gas network, that could easily be delivered to people as energy efficiency packages or heat pumps rather than paying the gas network to continue.”

Distribution companies generally have become used to “very comfortable” lives, she said: “Until Ofgem sorts out the distribution entities, we are not going to move to net zero and the cost will be far higher than it has to.”

Mitchell said net zero must become the ‘raison d’etre’ of Ofgem, involving wholesale change in the organisation’s culture and management.

But while describing the current renewable governance of energy as “not fit for purpose”, it would not be “incredibly difficult” to resolve by the government setting up a unit as a precursor for the Energy Transformation Commission that she has previously recommended should oversee delivery of net zero.