Auto-switching ‘represents old school thinking’

The surprise twist in the Energy White Paper was its embrace of the idea of auto-switching. David Blackman looks at how this and other key planks of the paper landed with the sector, and why it came out of the blue.

It’s a mark of how long it has taken the Energy White Paper to gestate that it was first floated in front of a live audience.

In November 2018, the then secretary of state for business and energy Greg Clark announced in a speech at the Institute of Directors that a white paper would be published “early” in the following year.

However Brexit, a switch of prime ministers, a general election and then of course the coronavirus pandemic intervened. The long-awaited white paper finally emerged in mid-December 2020.

Josh Buckland worked on previous iterations of the white paper when special adviser to Clark before the latter left government in July 2019 when Boris Johnson became prime minister.

He says: “The difference between this (white paper) and the previous version is much stronger focus on how to pay for the transition and affordability so that consumers and vulnerable customers don’t feel they are paying too much of the burden.”

“For the first time, this government has set out how it sees the energy sector’s transition,” says Buckland, who is now a director at public affairs company Flint Global.

In many respects, the white paper doesn’t supply the answers that the industry has been seeking the past two years. Instead, the document fires the starting gun on a swathe of consultation papers, the bulk of which are due to be published in the next 12 to 18 months (set out here).

“It parks a lot of the difficult questions and policy decisions over the next 18 months,” says Buckland.

“There is a whole raft of difficult stuff identified in the paper, however the really hard work starts now in terms of addressing those policy issues. The government acknowledges that the white paper is a point in time and not an end point.”

Much of the white paper fleshes out proposals already aired in Johnson’s 10-point plan for a green recovery.

The Labour opposition criticised both the white paper and Johnson’s plan on the grounds that it did not include much specific spending to deliver the net zero transition. The £12 billion of green spending commitments that the government itself identifies in the white paper is dwarfed by the sums committed by other nations, such as France and Germany.

The level of government spending is beside the point, Clark’s successor but three Kwasi Kwarteng told a meeting of the business, energy and industrial strategy (BEIS) select committee in January.

It was not “fair” to look at the white paper through this prism, he contended, pointing to the huge private sector investment in UK offshore wind over recent years.

Surprise switch

Perhaps the biggest surprise surrounding the white paper though was the emphasis on switching in the briefing that immediately preceded the document’s publication.

In a bid to end the current situation, where more than half of energy customers pay a so-called “loyalty penalty” for remaining on default tariffs, the white paper outlines a series of moves to encourage auto-switching.

It says the government will consult by March on creating a new framework to introduce opt-in switching and trials of opt-out switching.

The timing of the proposals was especially surprising given how little focus there has been on this facet of energy policy since the government concluded a joint consultation with Ofgem on energy retail markets in the dying days of Clark’s time at BEIS.

This prompted suspicion in some quarters that this aspect of the white paper was tailored to address the bread and butter concerns of the Tories’ new working class supporters, such as those in the ‘red wall’ constituencies that the party captured from Labour in the 2019 general election, who are probably less worried about saving the planet than their bills.

A former big six director muses that the retail chapter looks like a last-minute political addition rather than something developed over time along with the rest of the thinking in the paper.

With the price cap due to be wound up by 2023, it is understandable that minds in Whitehall are turning to its replacement.

The former director expresses concern that the white paper’s proposals on auto switching feel out of kilter with the net zero delivery thrust outlined in the rest of the document.

While much of the paper sets out an encouragingly nuanced understanding in the BEIS department about the complex challenges involved in whole system decarbonisation, the auto switch proposals betray some “very old-school thinking”.

“They imply that the below cost prices in the market are the right prices,” they say, adding that it is “outrageous” that companies may be forced to open up their customer books.

And industry sources complain privately that there was no engagement by government on the white paper’s retail chapter in the run up to the paper’s publication.

An energy companies source expresses concerns that the way the proposals are couched in the white paper is tone deaf to the predicament that the industry finds itself in post-pandemic.

“The retail energy sector is in very challenging times: we are responding to Covid, supporting customers with rising debts.

“Talking the retail sector down and raking up old arguments is not helpful.”

In addition, ideas to encourage switching were investigated by regulators following the Competition and Markets Authority’s own report into energy prices in 2016.

Technology enablers

However, Robert Buckley, head of retail at Cornwall Insight, believes that the time may be right to take forward the white paper’s proposals to encourage switching.

By 2023, smart meters should finally be rolled out, equipping suppliers with much better data about customers.

“More technological advances more things are enabled that perhaps wouldn’t have been before. It is certainly worth having a very careful look at,” he says, adding that collective switching has worked in other jurisdictions, like the US state of Texas.

And the market has changed significantly since such ideas were being mulled by regulators, he says: “The large supplier landscape is very different: the market is not what it was.”

Industry concerns were not assuaged by the Treasury’s interim net zero review, which emerged on the day Parliament broke up before Christmas.

While the paper was heavy on analysis about the distribution of costs, again it left a lot of questions “unanswered” about how these knotty problems of reallocation are going to be addressed, says the energy companies source.

And many measures for delivering the white paper’s goals, like promoting competition on the onshore grid and retail market reform, will require legislation, says Buckland: “The acid test is whether this can commence in the next six  months.”

After a long time waiting for a steer from Whitehall, it looks like 2021 will be pretty busy for the industry on the policy front.