Market view: A plan for UK energy policy

New thinking is needed to create a competitive, consumer-focused energy market that keeps prices under control while delivering carbon budgets. Simon Skillings outlines a four-point strategy.

The UK is riven by uncertainty following the Brexit vote and the energy sector is no exception. The extent and nature of UK participation in the EU internal energy market could take years to resolve. Meanwhile, the economy has received a shock and the aftereffects are likely to persist for some time. A weakened pound will increase the cost of imported fuels and higher financing costs will drive investors to seek greater returns on infrastructure projects, both of which will push up energy bills.

While energy is unlikely to take centre stage in the febrile politicking of post-referendum UK, Ofgem and government officials will have a full agenda. It is not clear how previous policies can create a competitive and consumer-focused market that keeps a tight rein on prices while setting out a credible pathway to deliver future carbon budgets. New thinking is needed.

Now is the time to place consumers front and centre of policy thinking and align their interests with the creation of a smart, flexible and low carbon energy system.

The challenge is to ensure that buying low carbon energy and consuming it efficiently is the simplest and most cost-effective thing to do. This situation will not arise quickly. It is important to understand that if we are going to harness the power of competition to drive this transformation, it will not happen by letting the market decide. The best way to promote competition is through policies that create markets supported by measures to ensure the transformation happens at least cost and works in the interests of consumers.

Here is a four-point plan for the UK government.

1. Create markets

True competition requires markets that are populated by a range of businesses seeking to increase share through innovating and providing consumer choice. While there are businesses already offering exciting new products, these tend to be small and their growth is constrained by the ability to finance an expanding business. Larger incumbents are more reluctant to throw their weight behind new products and services. Obligations have proved a powerful regulatory tool to overcome the hurdles that prevent businesses offering new products to consumers. Cleverly designed obligations could harness the imperative for least-cost compliance to drive innovation that will deliver a smart energy system. These obligations could focus on products that allow consumers to lower costs by adjusting consumption in light of short-term energy prices.

Alternatively, they could embrace a more holistic 100 per cent renewable approach, with costs minimised through the procurement of the cheapest new renewable resources and by efficient, flexible consumption and the trading of new storage products.

Other market creation tools are available, most notably product standards, and these could be a powerful tool in ensuring the development of a flexible energy system progresses in step with the deployment of electric vehicles and electric heating systems. However, such standards work best if applied internationally and it may be necessary for the UK to simply reflect the evolving systems of standards adopted for the EU internal energy market.

2. Consumer charter

We cannot achieve the next stage of the energy transition unless consumers take a more active role and this demands a new framework of rights and protections. Work is under way to ensure appropriate data protection measures are in place and that obligations are designed to ensure all consumers can access the new products. However, market creation measures will increase costs in the short term and these will be passed on to consumers. The mechanisms for cost recovery therefore need to be addressed to ensure fairness and equity.

Finally, it is vital that public messaging from government and the regulator shifts from the ‘switch and save’ narrative towards one that highlights the benefits for comfort and convenience of adopting new technologies.

3. Market reforms

Market and regulatory reforms must ensure businesses can compete in the new markets, becoming self-sustaining and without the need for imposed market creation measures. Many of the much-needed reforms are under way, including the rollout of smart metering and half-hourly settlement. Genuine scarcity pricing and liquid intra-day trading are also important. However, new initiatives might also be needed. For example, new markets in the short-term trading of storage products should be established. Grid access and charging mechanisms must also ensure suppliers have ready access to the cheapest renewable resources.

4. Industry governance

Investment in smart, low carbon infrastructure can provide a valuable economic stimulus, but sectoral silos and ‘predict and provide’ approaches are not fit for purpose. In a financially constrained country, new investment decisions and delivery processes are needed to ensure money is not wasted on generation and network assets that would not be required if there was more certainty over the emergence of efficient and flexible energy consumption. There is a crucial role to be played by cities and local authorities in identifying consumer needs and opportunities and in taking a lead role in delivery.

It may be tempting to think nothing has changed in energy policy and the old approaches can be rolled over to a post referendum world. This is not correct. We will face new challenges, particularly around energy prices, and these demand a new policy agenda that places consumers at its centre.