Penrose: Competition can take the politics out of energy

Utility Week speaks to Conservative MP, John Penrose, about the current energy crisis facing the UK and how increased competition in the sector could help to take some of the politics out of energy. He argues the relative price cap, for which he is a well known proponent, could enable this competition, whilst also protecting the many consumers who are unwilling to shop around for the best deal.

Straight after lunch on Wednesday last week and the atmosphere is buzzing in Parliament’s Portcullis House annex where Utility Week is meeting Conservative MP John Penrose.

This heightened mood probably has a lot to do with the fact that it’s barely an hour since Prime Minister’s Question Time, which has marked Boris Johnson’s first appearance in the House of Commons since opposition leader Sir Keir Starmer was heckled by a mob of anti-vaccination campaigners on the previous Monday night.

We’re not here though to discuss the PM’s ongoing travails but the energy bills crisis, one of the most pressing items in his government’s in-tray.

We meet less than a week after Ofgem announced its 54% price cap hike, followed almost immediately after by chancellor of the exchequer Rishi Sunak’s package of measures to ease the immediate pain facing energy customers.

In addition, the day before has seen Ofgem chief executive Jonathan Brearley admit to MPs on the Business, Energy and Industrial Strategy Committee that the price cap will only be lifted if market conditions “change quite considerably”.

A few days later, energy minister Greg Hands told The Times that the price cap is “here to stay”.

As existing legislation stipulates that the price cap can only remain in place until the end of 2023, the mechanism will have to renewed, replaced or modified by then, says Penrose.

“The existing legislation has to be renewed later this year so we have an opportunity to reform that in whatever way we choose.”

As seasoned Utility Week readers will no doubt recall, Penrose was one of the leading campaigners in Parliament for the introduction of the price cap back in 2018.

At the time, he advocated a relative cap, which would set each retailer’s default tariff set at no more than six per cent above the most competitive rate they offer.  The idea was to protect customers on default tariffs from excessive charges while giving them an incentive to seek cheaper deals.

This option offers a more sustainable solution for the energy market over the longer term than the one-size-fits-all cap that the government opted for, Penrose believes.

While acknowledging that a relative cap “wouldn’t completely solve” the pinch facing consumers, it would help, he says: “The relative price cap doesn’t fix the sky-high price of international wholesale gas but would certainly help.

“It would mean that the challenger brands that remain and don’t have a big back book of long-term inherited customers because they weren’t part of the Big 6, would no longer be at a competitive disadvantage. It would be a level playing field.

“Based on the principle that every little helps, and this is more than a little, it is something we should do but shouldn’t be the only thing.”

The other big plus point of his proposal, Penrose argues, is that it would take Ofgem out of the process of determining the price cap.

“That would be a much less intrusive piece of underlying regulation. It wouldn’t be something that would have to be reset with a great deal of political grief and Jonathan Brearley wouldn’t have to appear on the Today programme every six months to explain what’s going on.

“Each company would be able to set its prices just like it does today: the only difference would be that their default price would be priced off their best prices. If you want to do sustainable or paper-only tariffs, you can still do that and you can choose a price-point but your default tariff must not be a rip off compared to what you charge everybody else.

“Once you have that basic piece of regulation in place, you can potentially start to reduce the regulatory burden. If you do these things the right way you can strip out a load of the red tape.

“It would be part of the background furniture,” he says, adding that a similar mechanism has recently been introduced to crack down on so called loyalty penalties in the “almost adjacent market” of insurance.

“We have a proof of concept in the real world.”

It may seem out of kilter for a Conservative like Penrose to be espousing price regulation, but he argues there is no contradiction, given that all markets operate within regulatory frameworks.

“This means that any customer can vote with their feet but also that those who are too busy to switch can get an equally good deal,” he says.

The Weston-Super-Mare MP illustrates his argument by pointing to the supermarket sector, which he will know well given that his wife Baroness Harding is a former senior executive at Sainsbury’s.

In retail, unlike energy, most consumers benefit by riding on the coat tails of those who are looking for a bargain, he says: “If you go into a supermarket and choose a pot of jam or a tin of coffee, if I’m a regular switcher and you don’t, I still get the same price because the supermarket knows it’s got to price keenly so I get the same benefit.

“That’s not what is happening in energy at the moment and that’s what needs to happen, so if you are not a switcher you can still coat tail on the prices of people who are.

“Markets are not like the law of the jungle or the laws of physics, they are man-made.

“In any sector we take for granted that if you want to take something back you can. That didn’t just happen, we invented that rule, and everybody accepts it is normal and fair, so all markets are based on rules we have made up. You can either make those rules help consumers or leave the door open for rip offs. Any rules need to be the most pro consumer, most anti-rip off and pro competition because that is the ultimate the way consumers get a good deal: I don’t see any conflict or inconsistency.

“We shouldn’t be apologising for that because nearly every market is like that. Energy is no different. If readers ask themselves when they last switched their brand of coffee or jam the answer is most consumers don’t. We do occasionally and try something new but most of the time we don’t. The reason most other markets work is because you have coat tailing effect where I get same price even though I don’t switch.”

“The thing that is abnormal is that markets like energy don’t work that way,” he adds.

However, as Penrose has already pointed out, price regulation won’t “completely solve” the problems of the energy market and is only “part of the answer,”

Amongst a “whole bunch of things” that need to happen, he highlights the need for what he describes as a “wholesale reform of wholesale energy”

“The problem at the moment is that if you are running a wind farm, your costs haven’t changed in the last couple of years and may have come down as you optimise and invest in it, yet the price you are able to sell energy at has gone through the roof.

“The reason is that wholesale market works off the wholesale market for gas, which is clearly bonkers for all other kinds of energy where costs haven’t changed in quite the same way.”

A “fundamental reset and rethink” is required, the 57-year-old says: “We can uncouple ourselves so that everything isn’t priced off the marginal price (of gas), which is currently set by decisions made in Moscow and is a falling percentage of our wholesale energy costs. Yet it’s completely leading the entire market and that can’t be right. It’s fixable but you need to make wholesale change to the wholesale market.”

Other changes include greater localisation of energy pricing, which he believes could reduce costs “quite dramatically” and extending competition across networks to a greater extent than now.

“We need to expose as much of the energy sector to competition, even if it’s the incomplete competition we have today, because it’s a best way of driving good outcomes for customers,” he states. “There are some areas where it’s hard to get full competition in the networks, so we probably can’t do it comprehensively, but we can probably do more than we do today and we should.”

Of course, energy policy is currently a major hot potato within the Tory party where a noisy group of backbenchers have come together under the banner of the Net Zero Scrutiny Group to push for fracking.

Penrose acknowledges the validity of the group’s concerns about the costs of decarbonisation.

“There is a finite amount of fossil fuel we are committed to use in order to hit our net zero targets. The planet doesn’t care whether that supply comes from the North Sea or Siberia: the issue is how much we use.

“They are absolutely right that there are probably 300 different paths to net zero in 2050: it clearly makes sense for all of us to choose the two or three paths that are least costly to households and our economy.

“We shouldn’t just be only focusing on the fastest and not care about the cost. We have to care about costs, productivity and efficiency. That all matters and so it should in a democracy.”

Greater reliance on home grown production could be good for the economy, security and stability, while “not sacrificing sustainability,” Penrose says.

But the woes of the current market shouldn’t be laid at the door of the 2050 net zero target, he says: “It is hard to argue that the spike in wholesale price of international gas, largely driven by decisions made in Russia, is because of decisions made in Glasgow at COP 26, but they are right to say that anyone who pretends that the price of net zero doesn’t matter is just wrong as well.”

The ex-minister is confident that business and energy secretary Kwasi Kwarteng is working on a wide-ranging reform of the energy market, an announcement on which he “hopes and expects” to see “soon”.

“It’s important that it’s soon because details need to be worked through. Jonathan Brearley and Ofgem need to do whatever they need to do.

“You have to plan for at least six years and ideally 26 years to make these decisions work.”

And the government cannot duck the issue by opting for sticking plaster solutions, Penrose says: “If you don’t go for market reform that maximises competition and gives maximum pressure for reduced prices for consumers, you end up with answer that requires ever more subsidy and taxpayers’ cash. None of that is a very good way to get re-elected.

“Nothing big and thoroughgoing is going to pass the sniff test with people whose bills are going through the roof and want to see the light at the end of the tunnel.

“I will be encouraging him to be as radical and competition-based as can be because that ultimately is the only sustainable answer that gets politics right out of the sector.”

“The price cap as it currently stands politicises energy prices in way that is never helpful for any product, energy or anything else,” he says, adding that energy should be no more a “political football” than fruit.

“Wouldn’t it be great if energy were no more politically or regulatorily controversial than cars or coffee or donuts? If energy were as boringly normal as anything else we take for granted in our lives, wouldn’t that be lovely?

“If politicians get out of the way and everybody competes for consumers, that’s a far better way of giving people a good deal and reducing their bills than anything any politician could do with clod hopping intervention.”

We’re sure a lot of energy bosses would agree.

The cost of living crisis and how utilities can respond to it will be a key part of the debate at Utility Week’s Customer Summit on 16 & 17 March. Find out more here.