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on Jun 18, 15 • posted by rhoggett •

New Thinking: Governing UK Suppliers: enabling or constraining demand management?

Governing UK Suppliers: enabling or constraining demand management?

Caroline Kuzemko, IGov Team, 18th June, 2014

About Caroline: http://geography.exeter.ac.uk/staff/index.php?web_id=Caroline_Kuzemko

IGov has recently published a new working paper on the rules and incentives governing suppliers operating in GB gas and electricity markets. The paper assesses whether, on balance, energy governance successfully enables greater demand management through innovation. This is achieved by analysing a wide variety of energy policies, rules and regulations, how they structure markets and incentivise and/or deter certain industry practices, and the ways in which they enable and/or constrain demand innovations. Aspects of governance analysed include: supplier codes and statutory licences; market and trading (collateral) rules; Licence Lite; BETTA; decisions to allow vertical integration; supplier obligations and tariff rules, amongst others.

The paper concludes that energy governance has sent very mixed signals to companies over time. Indeed incentives and mandates have not yet stimulated incumbents to significantly include demand management within their ongoing practices, nor has there yet been an adequately enabling environment for new, more innovative, market entrants.

It is worth, however, also highlighting some key takeaway points here:

1. Suppliers, as a whole, are understood to be important to demand management (defined to include demand reduction; demand side response and distributed energy) for a number of reasons:

Firstly suppliers, under the supplier hub model, are the interface between consumers (who are so important to demand management but who are also voters and lobbyists) and the gas and electricity systems.
Secondly suppliers, in this case only large companies, remain responsible for how domestic efficiency policy has been implemented.
Lastly, some innovative new suppliers offer alternatives to consumers: support for prosumption; demand aggregation; new contracts for local and community energy; and dedicated markets for renewable energy production. We view active and involved consumers as central to sustainable energy transformation and demand management. Independent suppliers can also be motivated by different values, such as sustainability, demand management, and facilitating clean energy, and not just profit maximisation

2. The paper is sensitive to the fact that demand and/or efficiency policies do not act within a governance vacuum and that their effects can be constrained by other aspects of energy governance (for example energy security policy). The paper analyses many different ways in which energy companies are mandated and incentivised and this provides us with a hugely complex picture that shows how mixed energy governance signals are. For example, we feel (unlike the Competition and Markets Authority’s energy market investigation) that companies seeking to innovate and grow must face the combined effect of multiple barriers to entry and expansion, some exacerbated by aspects of governance.

3. Lastly, this paper offers a critical insight into how the costs and benefits of energy governance and industry practices are distributed. This points (amongst other things) to:

financial benefits (profit) not reinvested in UK energy system transformation but distributed to parent companies and shareholders;
sticky (vulnerable) domestic and SME consumers paying more than necessary;
cost reductions whilst some incumbent supplier customer satisfaction remains poor;
and an increasingly tricky politics of energy and climate change as consumers remain sensitive to price increases and poor service.

This large and in-depth analysis of energy governance reveals the overall supply and scale-orientation of energy governance and markets, whilst arguing also that governance needs to change. IGov has already opened up a debate about the need for entirely new, flexible, transparent, legitimate and coordinated governance structures in order to better enable sustainable innovation and leaning by doing.

Also included in this working paper are some recommendations:

1. For an overhaul of supplier licences and statutory codes (not least to overtly recognise the need for sustainable practices in energy industries);

2. Climate mitigation, as a regulatory/policy goal, should be included across all energy market policies, regulations and rules;

3. Suppliers should be required to treat vulnerable consumers fairly;

4. It should be recognised that new companies face a combined effect of barriers to entry and expansion and that improved rules are needed for small-scale energy projects.

The UK government should not be afraid to create new markets, to challenge utilities that stand in the way of progressive change and who do not treat customers fairly (or indeed with much respect). Energy governance should overtly recognise the possibilities for change presented by the broad range of innovative independents that have been trying to offer improved services to UK consumers for some time now. Given that government thinking on energy has largely emphasised the role of markets delivering public objectives, and delegating responsibility, then a refocus on innovative new companies allows for continuity and a continued emphasis on markets. The difference being, however, that government will also need to start listening to a new range of corporates (small and innovative not large).