The cost of energy review: what’s in and what’s out

The governments cost of energy review vows to be wide-ranging and in-depth, but some key areas have been left out. Utility Week rounds up what’s in and what’s out.

The Department for Business, Energy and Industrial Strategy (BEIS) has launched its much-anticipated review into the cost of energy in the UK. The study forms a key part of its proposed industrial strategy and kicks off a campaign to achieve the “lowest energy costs in Europe” for UK households and businesses.

The review – which will be led by utilities celebrity Dieter Helm – promises to be wide-ranging and comprehensive. However, critics have condemned the terms of reference set out for the review for leaving out some major areas they believe should be up for discussion.

When announcing the review, business and energy secretary Greg Clark said: “The review will consider how we can take advantage of changes to our power system and new technologies to ensure clean, secure and affordable supplies over the coming decades. Professor Helm will bring invaluable expertise to the review, and I look forward to seeing his recommendations.”

Utility Week rounds up some of what’s in and what’s out:

IN:

Electricity

Despite recent acknowledgements from Ofgem that the decarbonisation of heat is “the biggest challenge” facing the energy sector in the next decade, the new cost of energy review is set to focus exclusively on power. It will report on the full supply chain of electricity generation, transmission, distribution and supply, considering the opportunities to reduce costs in each part.

Responding to the review announcement, former energy secretary Ed Davey cautioned Helm not to “repeat the mistakes” of the Competition and Market Authority (CMA) energy investigation by focusing too heavily on the electricity market. But with the scope given, it looks as though this horse has bolted.

Decarbonisation

The Climate Change Act commits the UK to reduce emissions by at least 80 per cent by 2050, and the government has a tough task ahead if it is to meet these targets whilst ensuring security of supplies of energy, at the lowest possible cost. Last year’s Future Energy Scenarios report from National Grid flagged that the UK is on course to miss its carbon goals because progress in decarbonising electricity has not been matched in the heat and transport sectors.

BEIS writes in its terms of reference that the review will consider how energy policy can “best facilitate and encourage” technological developments, consistent with the overall objectives of decarbonisation and security of supply.

Former boss of RWE Npower, and now chief executive of renewables company North Star Solar, Paul Massara is not convinced this approach will be helpful.

He warns there is “no discernible strategy” which tackles the total decarbonisation of energy produced, and argues that the short three-month timeframe in which the review must be completed will not be long enough to come to any “lasting conclusions” on how to progress decarbonisation.

However, Helm has assured he is “ready for the challenge of reducing carbon emissions”.

Energy efficiency

Energy efficiency is commonly held to be the holy grail of energy cost reduction, with enthusiasts pointing out that the cheapest, cleanest megawatt is the one you never use.

However, government has, for many years, struggled to implement a stable long-term energy efficiency strategy. In 2015, it scrapped its ailing Green Deal mechanism – a monumental flop. The latest version of its Energy Company Obligation (Eco2t), although slightly more successful, has been slated for being a “shadow of previous measures”. Earlier this year, David Blakemore, chair of the Committee on Fuel Poverty also observed that the scheme is “poorly targeted”, failing to effectively prioritise interventions in the most energy inefficient homes.

Former energy minister Charles Hendry warns that the review panel will have a tough job coming to useful conclusions about the relationship between energy efficiency and the cost of energy. He observes the variation between households – in both the pace and the volume of how they consume their energy – will make it practically impossible to deliver robust findings.  

But Joanne Ward, chief executive of the Association for the Conservation of Energy, disagrees, welcoming the inclusion of energy efficiency in the review. “Nothing drags prices down more than using energy sparingly, she says” a view backed by Energy UK’s Lawrence Slade who calls for energy efficiency to become “a national infrastructure priority”.

Network regulation

The way prices are set for the energy networks has recently come under scrutiny with Citizens Advice suggesting networks are making “excessive” profits thanks to their “generous” cost of equity levels, set by Ofgem – accusations strenuously denied by the Energy Networks Association.

In addition, the impact of network costs on the cost of energy supply came into dispute after British Gas’s announcement of a 12.5 per cent increase to its standard electricity tariff, in part it said because of upwards pressure in the network element of the bill. Ofgem’s figures for the Supplier Cost Index however, show a decline in this area.

Following on the heels of this controversy, government’s cost of energy review will include an examination of network regulation. Responding to the announcement of the cost of energy review, Energy Networks Association chief executive David Smith hoped it can bring “transparency and clarity” to the debate on energy costs. “Networks are already one of the most transparent parts of industry and deliver exceptional value for customers,” he claimed. “Network costs have fallen 17 per cent since privatisation and are projected to remain flat into the next decade.”

Technological advancement and innovation

One of the biggest impacts on energy costs will be the influx of new technologies – such as batteries, other types of energy storage, electric vehicles, artificial intelligence and smart devices – expected over the next few decades. The review will consider the impact on costs of the emergence of these types of technology.

Davey suggests that the CMA “missed opportunities” when it carried out its investigation, by failing to look into innovative business models that new technology is expediting to enable more competition in the energy market.

OUT:

Gas

Gas is not given a mention in BEIS’s terms of reference document. This is a worry for Davey, who argues gas and heating account for a “considerable portion” of an average household energy bill.

Hendry, however, argues that the issues that contribute to the size of consumer gas bills are very different from those which determine the level of electricity bills. He believes it is right not to include gas in the review, as electricity bills affect all households, while gas is a “more exclusive fuel”.

Smart meters

The review has been condemned in the national media for ignoring smart meters. Although it must be pointed out that smart meters do at least get a mention in the terms of reference, as the government says it will “take into account the roll-out of smart meters and the work already underway to underpin the transition to a smarter energy system”.

And certainly, Hendry is unperturbed by the exemption. He says the impact smart meters already been installed will illustrate disparities between households, and argues that the uneven impact of the smart meter is “not conducive” to an overall cost analysis.

Massara, on the other hand, insists that smart meters are a “significant technology”, and are effectively used as enablers for consumers to regulate their costs. Meanwhile, the fact that British Gas cited smart meter programme costs as a growing burden and an important factor in its decision to raise prices, means that the exclusion of smart metering from the core of this review is surprising.

Earlier this year, EY’s energy partner Rob Doepel spelt out just how significant a factor smart meter costs are for suppliers. He said the programme is “sapping investment into future growth opportunities”.

Doepel said he can clearly see a future in which the investment demands of the smart meter rollout leads to “all the capex investment being sucked up by the deployment programme and there is nothing left for the innovation.”

Hinkley Point C

The terms of reference read that: “The review will focus on system issues and will not comment on the status of individual projects.”

It’s no doubt a sensible decision, especially given the interminably controversial nature of one particular individual energy project and its costs – Hinkley Point C. But it will frustrate those commentators who so ardently believe the project should not be going ahead.

Project owner EDF has admitted that, less than a year after getting the final go-ahead, the project is already on course to breach its budget by £1.5 billion – with its overall cost now expected to be £19.6 billion. Meanwhile, the National Audit Office slammed the economic case for Hinkley in its June report. It said the deal to fund the power station has “locked consumers into a risky and expensive project with uncertain strategic and economic benefits”.

Embedded benefits

Another hole in the review is the issue of embedded benefits.

Energy regulator Ofgem confirmed in June that it will move ahead with plans to drastically cut the triad avoidance payments available to distributed generators, after making a final decision on reforms this subset of so called “embedded benefits” for distributed generators.

Energy and Climate Intelligence Unit energy analyst Jonathan Marshall warned at the time that the ruling will “play into the hands of the big six”, adding to energy bills and forcing planned projects to be cancelled. The decision will “undo technological progress from recent years that has kept the lights on and ensured costs stay low,” said Marshall.

Ofgem recently embarked on a wider ranging review of network charging arrangements which may well lead to further cuts to embedded benefits.

Read Utility Week’s profile of the people behind the review