Nolan: Deliver social tariff through networks

Former Ofgem chief executive Dermot Nolan has told Utility Week he would like to see a social tariff delivered through energy networks as opposed to suppliers.

Nolan, who led the regulator between 2014 and 2020, said the introduction of a social tariff, set below the price cap for vulnerable customers, brought the risk of distorting competition if dispersed via retailers.

As part of a series of Utility Week interviews gauging views on how best to protect customers from the worst impacts of soaring energy prices this winter, Nolan said a doubling of the Energy Bills Support Scheme was the best option in the short term despite it being an “imperfect solution”.

He dismissed the proposed approach from the Labour party of a blanket price cap freeze for all customers as “phenomenally expensive” and said he was “surprised that the Labour party has come up with an idea that is broadly not progressive”.

He noted a clear demand for a social tariff but warned it was likely to take up to six months to implement and that ultimately it would need a clear steer from government.

“Ofgem has always tried to avoid cross-subsidisation and a social tariff is a conscious distributive act”, he said. “Ofgem can’t say wealthier people should pay for poor people unless an elected government gives them permission to do that.”

Asked how eligibility for such a tariff would work, Nolan said Universal Credit was probably the best option but also pointed to metrics developed during the pandemic to assess vulnerability. He warned though that some form of legislation may be needed to allow utilities access to this data.

He added: “One thing that needs some real attention, but understandably isn’t part of the wider debate, is how this support is dispersed. I would do that via the networks. I would make it a credit on the networks bill.

“The problem with doing it through the suppliers is it distorts competition because the share of vulnerable customers does not sit evenly across the different companies. It’s been an argument for many years that the incumbents have more vulnerable, and therefore higher cost to serve, customers. That’s perhaps less true than it was a few years ago because you have disruptors who are now essentially incumbents. But it’s still fair to say that some suppliers have far more customers that would be covered by a social tariff than others. So that does risk distorting competition.

“Delivering this through networks would be a relatively simple solution to that, even if it was only for a short time. Although, again, there would be data issues to solve.”

On the subject of funding support, Nolan stressed “whatever is going to happen in the next six to 12 months it’s going to be pretty much all Exchequer-funded”.

While not explicitly opposing an extension of the windfall tax, which has so far been applied to upstream oil and gas companies, he warned there would be significant challenges in designing such a scheme.

“While we have to be very conscious of the cost of living crisis we also have a security of supply issue to manage” he said. “If you’re taxing gas generators, they’re the people you need to keep the lights on for the next three years. With nuclear, is it a mixed message to tax on one hand and then hail a nuclear revolution over the next few decades on the other hand? Are you going to tax renewables?”

He also highlighted the challenge of identifying where the profits sit, pointing out that some generators are likely to have sold their output forward on the financial markets.

The frictions inherent in balancing net zero, security of supply and affordability are at the core of the agenda for the Utility Week Forum, on 8-9 November in London. Find out more here.