Gas crisis has ‘fundamentally changed’ economics of energy

The gas crisis that began in autumn last year and deepened with Russia’s recent invasion of Ukraine has “fundamentally changed” the economics of energy, according to Ofgem chief executive Jonathan Brearley.

Speaking at a renewables conference in Glasgow on Wednesday (11 May), Brearley said the massive increase in gas prices since then has brought an end to the old idea of an energy trilemma, whereby the objectives of decarbonisation, affordability and security of supply are in tension with each other.

“For years, some have argued that you cannot move to a low-carbon and renewable energy system and at the same time keep costs down for consumers,” said Brearley.

“I have to say that that argument no longer holds weight – the economics of energy have fundamentally changed.”

He continued: “Before the crisis, many forms of low-carbon generation had already become cheaper than conventional generation.

“With the volatility we see in gas prices, the economic case is far stronger.

“The only way we can reduce our vulnerability to volatile and high gas prices is to focus on generating cheaper, cleaner power here at home,” he remarked.

“In the future, greener energy means cheaper energy. It also means more secure supplies of energy too.”

Brearley said gas markets have remained in a “febrile state” since the Russian invasion and warned that the regulator expects further price rises later this year.

He said the crisis has put a “huge strain” on customers, noting that for some, “not being able to afford rising bills is literally a matter of life and death.”

“It’s going to require every ounce of innovative, creative thinking that we can collectively muster to find new ways to help customers,” he added, citing as an example National Grid’s agreement to pay back £200 million of excess interconnector revenues under the Cap and Floor regime ahead of schedule.

For its part, Brearley said Ofgem is working fast to improve the financial resilience of the retail market and ensure inappropriate risks are not passed on consumers following the failure of dozens of suppliers over the past year. He said it is also reforming the price cap to ensure it is able to adapt to market conditions.

He said energy companies also need to “step up,” stating: “Now, more than ever, we expect customer service standards to be maintained and customer payments to be fair. Customers need to be able to turn to us with confidence.”

Highlighting Ofgem’s recent launch of a series of market compliance reviews, the first focussing on whether recent direct debit increases are justified, Brearley warned that the regulator “will not hesitate to act if we find companies are falling short of their obligations.”

He noted its recent fine of Western Power Distribution, which agreed to pay nearly £15 million into the regulator’s voluntary redress fund for failing to properly support vulnerable customers on its priority services register.

Brearley also admitted to failings by Ofgem as well, saying it has “a full action plan” to implement the recommendations of the independent report it commissioned from Oxera, which found the regulator had been “reactive” and “slow” in addressing risks to the financial resilience of energy suppliers. He said Ofgem would do everything it can to reform the regulatory system to protect consumers in “this new, volatile, and risky market.”

But Brearley said there are also “limits” to what it and the energy industry can do to shield consumers from high gas prices: “Even by doing everything we can, none of us can solve or even mitigate this gas crisis alone – we need to work with government.

“That is why I am pleased the Scottish and UK governments intervened to help customers earlier this year and, as you would expect, we continue to have active conversations about what more can be done.”

Having identified an accelerated drive towards net zero as the ultimate solution the current crisis, Brearley said realising the potential benefits will require “fundamental changes to the British energy market.”

He therefore welcomed the government’s recent announcement of its Review of Electricity Market Arrangements and said Ofgem will put forward its ideas for necessary changes in the coming months.

Brearley said strong strategic system planning will be required at both the national and local level.

He said the government’s move to establish an independent Future System Operator (FSO) as per the regulator’s recommendations will therefore be “critical” and lauded National Grid for the “cooperative, supportive and collegiate” approach it has taken in starting work on the design and implementation of the FSO.

He also drew attention to Ofgem’s recent launch of a review into potential models for local energy system operation, adding: “Beyond these changes, we are likely to need wider changes to our wholesale electricity market to reflect different local conditions.”