A recent article by Utility Week highlighted views from Oxera Principal, Sahar Shamsi, on the evolution of energy network regulation in the UK. The following text is taken from the Utility Week website, and is used with permission. Text relating to Sahar is highlighted green below:

If one thing was clear from Utility Week’s latest Annual Energy Summit, it’s that the industry faces a long list of challenges. Certainly, there were plenty of things to discuss, and speakers had plenty to say.

One of the first topics to arise was the fast-approaching price cap of default tariffs which is due to be introduced by the end of the year.

Ofgem chief executive Dermot Nolan said there have been improvements in the retail market lately – the number of suppliers has grown to nearly 70, almost a quarter of customers are now signed up with a challenger supplier and switching in general has increased.

Nevertheless, the market is still not functioning as it should: “The idea of the bifurcated market has frankly not been resolved.” Hence, the need for the price cap.

When asked whether there would eventually be a return to a free market, Nolan said: “If you are looking at the energy market in five, ten years’ time, and you are saying, will it be an unfettered free market, I think that is unlikely because there will be some default arrangements, some kind of protection in place for those that are vulnerable”.

Laura Sandys, a former MP and now the chief executive of Challenging Ideas, said at the conference – sponsored by Oxera and Utilityx – that she was concerned market interventions have led utility companies to start considering the government as a “proxy for consumers”.

She worried that they have become “infantilised” to the extent that “they’re not actually understanding what the consumer look like and wants”.

Mistrustful customers

The two-tier energy market has ultimately emerged because of a lack of engagement from customers, and many in the industry are looking to smart meters to help solve the problem.   Suppliers have been tasked with offering all customers a smart meter by 2020.

But, chair of the Business, Energy and Industrial Strategy Committee, Antoinette Sandbach, said: “I don’t think we will hit the target realistically, and I think there needs to be a good look at why.”

She said customers remain mistrustful of the suppliers which are offering them the meters, and that more needs to be done to convince them of the benefits.

Labour shadow minister for energy and climate change, Alan Whitehead, shared her concerns. He joked that, with the cumulative number of SMETS2 installations rising from 250 in November to 1000 in June, the target would be met in “under 6,000 years”.

Whitehead said a “cliff edge” is approaching when suppliers stop ordering SMETS1 meters: “We will get a situation in about a year’s time, whereby whatever the intentions of the various suppliers there will be empty vans going around for installations. We’ve really got to get out of this swamp.”

His solution would be to continue rolling out SMETS1 meters “as fast as possible”.

“There are protocols which can make them operate more or less like SMETS2 meters, and then SMETS2 meters can be put in the box for replacements further down the line,” he explained.

Former energy secretary Ed Davey said the government should scrap the 2020 deadline on the basis that the “SMETS2 rollout has gone way slower than was planned”.

He disagreed with Whitehead’s suggested solution, saying he was unconvinced by the claims that SMETS1 meters could be successfully upgraded to make them interoperable.

Incentivising networks

Suppliers aren’t the only ones facing scrutiny over energy bills. Networks too have started to come under fire in recent years, and has Ofgem has responded by promising a tougher set of price controls for RIIO2.

Sahar Shamsi, a principal at Oxera, said, although they are important, the regulatory agenda should not be “monopolised” by a focus on network returns. She said the RIIO framework has been successful at incentivising networks to become more efficient and more innovative.

Examining some of the changes proposed by Ofgem, she told delegates: “Arguably we are now going backwards, full circle, from a primary focus on incentives, or outputs, or outcomes, to a de-facto rate of return, where networks earn no more and no less than their actual out-turn costs.”

Another issue facing both suppliers and networks is the growth of electric vehicles (EVs). Nolan said it was important to get the right systems in place to avoid the need for extra capacity on the power grid which would be “hugely expensive to whole-system costs”.

Ovo Energy chief executive Stephen Fitzpatrick said it is therefore “bonkers” for the government to continue subsidising dumb EV chargers: “The path of least resistance for consumers is to plug their car in as soon as they arrive home, and somehow, we expect to avoid the need for massive investment in upgraded networks and generation capacity.”

Security risk

He said smart charging standards need to be established urgently: “If we as an industry don’t work together on agreeing on how we’re going to make these assets interoperable it’s going to be very bad news for us as an industry and for consumers, and ultimately we’re going to face much more heavy-handed regulation”.

Fitzpatrick said EVs could otherwise create “the greatest national security risk that we have in Britain.”

“The idea that we would have a foreign agent could hack a system that would throw 7GW of demand onto our grid instantaneously would be catastrophic for national security,” he explained.

On the topic of generation, Whitehead said the industry must be up front about the fact that from wind to gas to nuclear “pretty much all energy is underwritten in one way or another”.

This, he suggested, is not an issue by itself. But he criticised a lack of consistency, which he said was causing “great uncertainty for investors”. “Every instrument, a lot of which don’t work anymore, is just chopped and changed every year,” he added.

Stupid policies

Whitehead lamented the lack of consensus on energy policy in Westminster – particularly within ruling Conservative party. “There’s considerable tension, for example, between what the Treasury thinks is energy policy and what [the Department for Business, Energy and Industrial Strategy] think is energy policy,” said Whitehead. “And that, I think, has been responsible for a number of policy lurches over the last few years…”

Davey agreed, saying the government has a number of “stupid policies” as a result.

“There’s no certainty, which undermines investment in innovation”, he added.” There’s no leadership. There’s no sense of direction which is so important for ideas.”

He lauded the work of Ofgem, whose leadership, he said, is “filling the vacuum”.

Davey also praised the efforts of Tory allies, including both Sandys and Sandbach, but said Whitehead was right to identify the problem as coming from within in the Conservative party: “You need people in the government party to stand up to those dinosaurs and climate change sceptics who still lurk on the backbenches”.

Sandbach responded that there are “a massive number of MPs” who support the decarbonisation agenda, particularly younger members, from both inside and outside the Conservative party.

For those looking for common ground, one place they could start is on energy efficiency. All agreed that, as a cheap, no regrets option, it should a major priority for the government.

Whether consensus can be turned into action is another question entirely. Going by past progress, they will still be making the same call at next year’s energy summit.

Key takeaways

Customers are mistrustful of energy suppliers and have yet to be convinced of the benefits of smart meters.

• Networks, as well as suppliers, have come under fire in recent years, but a focus on network returns should not be allowed to monopolise the regulatory agenda.
• It is essential that smart charging standards for electric vehicles are established as soon as possible to avoid massive investment in upgraded networks and generation.
• Energy policy uncertainty – driven by differences among Conservative MPs – continues to dissuade potential investors.
• Energy efficiency is a cheap, no-regrets option and should be a priority for government.

Views from the room

Laura Sandys, chief executive, Challenging Ideas, and former MP
“The industry needs to stop constantly looking to the government and the regulator for permission to
change. It can change on its own.”

Ed Davey, Liberal Democrat MP and former energy secretary
“The NHS could save a huge amount of money if they just ponied up and gave use a bit of their money to
help us with insulating homes… There is evidence out there that for every pound that the NHS could pay
towards energy insulation they’d save ten quid.”

Lawrence Slade, chief executive, Energy UK
“Our energy bill at the moment is one of the most regressive forms of taxation in the world, not just in
the country. How can it be right that some of the worst-off in society are paying for some the better off
in society? …Where is the equality in that?

Stephen Fitzpatrick, chief executive, Ovo Energy
“We’re arriving at technologies that are inherently cellular. In other words, they tend not to have very
large economies of scale… We start to see this reduction in size of systems from gigawatt to kilowatt
scale.”

Basil Scarsella, chief executive, UK Power Networks
“I’m not a big subscriber that innovation should be funded by Ofgem. If you look at the competitive
market, innovation is a market advantage that you benefit from but no regulator funds it.”

Sahar Shamsi, principal, Oxera
“The notion of excessive returns is polarising, and it is emotive. We shouldn’t let a preoccupation with returns hi-jack what RIIO2 fundamentally and ambitiously needs to deliver – a flexible and coordinated whole energy system.”