Next government has ‘big conversations’ to be had about energy retail

Soaring energy bills have dominated UK politics in the past three years. However, the issue scarcely figures in either the Conservative or Labour manifestos. Filling in the silence, David Blackman explores what the general election could mean for the future of the energy retail sector.

With a few exceptions – like November 2019’s Get Brexit Done poll – British general elections tend to be held in the summer when energy bills aren’t at the front of voters’ minds.

And this year is no exception following Prime minister Rishi Sunak’s decision to send voters to the polls later this week.

The immediate backdrop for this year’s poll, in terms of energy bills, is the welcome news that the price cap is down to £1,568, lower than at any point since 2021.

However this relief looks likely to prove short lived with Cornwall Insight forecasting that the price cap will climb back by almost £200 in the autumn and then stay there for the next couple of years.

This means that the oft-repeated pledge in Labour’s manifesto to cut energy bills “for good” won’t be met for a while if, as every poll indicates, the party wins next week’s election.

But even though soaring energy bills have been one of the dominant themes of the last three years in UK politics, the issue scarcely figures in either the Conservative or Labour manifestos.

Neither even mentions the spiralling energy debts, which are causing sleepless nights across retailers, points out Simon Francis, coordinator of the End Fuel Poverty Coalition of NGOs and other charities.

None of the major parties has grasped this issue “at all”, he says: “Given the concern that that we, the energy industry and the regulator have, it’s surprising that there’s not been anything said about that.”

However tackling energy debt will be one of the “big things” that the new energy minister is going to have to look at after next week, Francis adds.

Introducing a social tariff, offering cut price bills for customers in vulnerable circumstance and/ or on low incomes, has emerged as the preferred solution to this problem amongst both the industry and fuel poverty campaigners.

“There’s ways that could be introduced in a way that would provide that safety net and allow the market to innovate and continue to do the things that it wants to do without leaving people behind and running up debt,” says Francis.

Social tariffs also haven’t merited a mention in either the Labour or Tory manifestos.

Tara Singh, a former Number 10 Downing Street special adviser for energy and climate during the coalition government, presumes Labour’s silence on the issue is explained by worries that the Tories would put a tag on it.

Instead, Labour’s manifesto places its faith in its pledge to boost generation from cheaper low carbon power sources to cut bills.

In the more immediate term, the 136-page document has some stern words about “much tougher regulation that puts consumers first”.

If elected, the manifesto says Labour will “strengthen” Ofgem to ensure it can “hold companies to account for wrongdoing, require higher standards of performance and ensure there is automatic customer compensation for failure”.

Labour “don’t trust” Ofgem as it currently is, based on its performance during the energy crisis when so many retailers failed, says an industry source: “There’s been a sense that they fundamentally failed on price regulation and on competition within the retail market.”

Singh, who is now managing director of public policy at communication agency Burson, says that blaming Ofgem for regulatory problems would be an “easy” step for a new government.

Singh is sceptical though that Labour will live up to its tough rhetoric, such as requiring “automatic customer compensation for failure”, with action given the consequences that harsher regulation could have on what remains a financially fragile sector.

“We already have tough standards, which aren’t always enforced, probably because the sector couldn’t bear it if they were,” she says pointing as an analogy to the difficulty customers face getting similar kinds of compensation from airline companies over service failures.

Adam Bell, a former head of energy policy at the BEIS (business, energy and industrial strategy) suspects Labour’s proposals on energy retail feel a bit “under baked” because the party was due to carry out work on the issue over the summer.

Standing charges are clearly in Labour’s sights with the manifesto declaring that they bear “too much of the burden” of bills.

Once the election is out of the way though, Labour is likely to have to grapple with the same conundrum on standing charges as those highlighted by Ofgem in its recent consultation on the topic.

Shifting costs, like network charges, from the bill’s fixed standing charge element to usage-related unit rates will disproportionately hit those in the pocket who are on low incomes but must use large amounts of energy, notably patients reliant on medical equipment, like dialysis machines.

“If you start putting more cost on the unit charge, it penalises people who have no choice but to use lots of energy,” says Jonny Marshall, senior economist at the Resolution Foundation thinktank.

“There will be some quite significant unintended consequences and I’m unconvinced that there has been enough thinking within Labour about what those consequences would be,” says another industry source.

The problems surrounding standing charges are only likely to be exacerbated by the push to upgrade the electricity network, he says, pointing to National Grid’s recently announced transmission investment plans.

Experts agree that unless the Exchequer shoulders a bigger share of the costs currently paid for through standing charges, reforms to the existing system will have to be accompanied by some form of targeted support for potential losers.

And it will probably take at least 18 months to develop a mechanism that ensures no low-income households are adversely affected, says the industry source.

Labour’s reference in its manifesto about working with Ofgem is telling, suggests Singh, noting that the regulator’s chief executive Jonathan Brearley is “really close” to Ed Miliband with the two having worked together on the Climate Change Act when the latter was energy secretary of state in the late Noughties.

Marshall suspects that an incoming Labour government will, therefore, end up following Ofgem’s lead on the issue.

The Tory solution to expensive energy bills is to reduce policy costs and levies lower in each year of the next Parliament than they were in 2023 in the now unlikely event that they form the next government.

Some policy costs will start to naturally drop off bills as the expensive Renewable Obligation starts to wind down. But these savings only kick in from 2027 onwards.

And this is likely to be counterbalanced by new levies, such as the Hinckley Point C Contract for Difference, assuming that the long delayed nuclear plant is running by the end of the next Parliament, says Marshall: “That’s not going to reduce the green levies.”

“You can’t avoid those costs,” says Bell, who is now head of policy consultancy Stonehaven.

The only way for green levies to come down is for them to be reallocated, says Marshall.

The Tory pledge on green levies could be a nod to a wider rebalancing of energy costs, which the government was understood to be working on until the general election was called, he adds.

The only other way would be to shift policy costs and levies onto taxation, says Bell.

Another option could though be to axe the warm homes discount and the Energy Companies Obligation (ECO), both of which are currently have two years to run.

“We don’t want to run a risk of some of these absolutely vital programmes coming to an end earlier, creating even further market insecurity amongst supply chains that have built up to deliver things like ECO,” says Francis.

The next government will need to have a “bigger conversation” about energy retail, he adds. Just don’t expect Labour to enter that discussion before Thursday.