New Thinking: Rethinking the role of energy – the Labour 14th January debate

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New Thinking: Rethinking the role of energy – the Labour 14th January debate

CM cropped medRethinking the role of energy – the Labour 14th January debate

Catherine Mitchell, IGov Team, 13th January 2015

Ed Miliband announced last Sunday that the Labour Party is going to force a vote in Parliament on Wednesday (14th January) to fast track legislation which gives Ofgem, the Regulator, the power to force energy suppliers to cut their prices when wholesale costs fall, if firms don’t do it first. This gauntlet was thrown down after George Osborne placed energy at the centre of an early election campaign, calling for another investigation into prices and for suppliers to cut household bills and to pass on savings from falling oil prices. No doubt the Labour Party has been hoping for something like this since they gained the high ground with Ed Miliband’s own reset speech in September 2013, where he said the Labour Party would freeze energy prices, undertake a review of energy and put in place a tough regulator.  The Labour Party has taken a lot of criticism over the last 18 months about their reset speech, in particular criticism that they were intervening too much in the market and undermining competition. In effect though, Osborne’s speech last week accepted that the thrust of the Labour Party argument and their placing energy at the centre of their campaign was right. So will, and should, there be cross-party support for the Regulator to be able to cut energy prices?

There are three key points about this. Firstly, as Ofgem’s State of the Market Assessment showed, and as the CMA is investigating, the competitive market has not been great for domestic customers.  It is not just that (1) the majority of domestic customers are ‘sticky’, and those customers pay higher prices for their energy but (2) that Ofgem has not really made efforts to either keep track of how much profit companies have been making or to ensure that prices are held down as far as possible – because, as the principle goes, it should be the competitive market that does this rather than the Regulator. But if neither the market nor the regulator actually does this, then shareholders profit at the expense of the sticky customers and competition is not working.

Secondly, reducing total energy use in general, making energy use more efficient or targeting the fuel poor to make their houses more energy efficient (so that they can afford adequate energy) is not something that the competitive energy market has had any success at. GB still has millions of households which are fuel poor. This should not be acceptable to our politicians, or indeed ourselves.

Thirdly, the way society, Government, the Regulator and companies think about energy has to change, and that includes starting to think about energy as a social good rather than a widget.  Energy systems are changing rapidly in a time of great uncertainty. Financial report after financial report now questions whether the centralised utility model is past its sell-by-date because of the falling costs of generation technologies, new ICT for operating and managing energy systems, new business models and the needs of climate change.

In this situation, it seems entirely right to me that important questions are asked about whether the rules and incentives we have for our gas and electricity markets are appropriate?; what the role of the Regulator should be,  and whether they are doing their job in relation to customers?; and what the role of utility companies should be? These very questions are being asked all over Europe, and in the US, and one can only hope by the CMA as well.

In this situation, a number of non-competitive but regulated solutions should be explored. Most US States have something called a default service. This is a ‘price to beat’: a regulated price to customers which gives the utilities a small profit for each unit. Those who support pure competition do not like default service because most customers, either because they are ‘sticky’ or because they want to be sure that they will pay a low price, prefer to be with the default service rather than choose a competitive retailer. Only Texas, out of the 17 States which have retail competition, do not have a default service. It is clear though that the majority of customers prefer this – and there is the conundrum of competition.

GB does have a really interesting competitive retail market at the moment in electricity – albeit a very small percentage (about 9% of electricity, and less for gas). New, mainly supply, services are being offered, and genuine innovation seems to be stimulated. Obligating a straight default service, based on low price, may (or may not) undermine domestic competitive retail. However, continuing domestic competitive retail as it is means that the majority of customers suffer on the price they pay.

One way forward might be requiring all suppliers to offer a regulated rising block tariff – as opposed to the recent fiasco of the  required 4 tariffs only – as a kind of default service. A rising block tariff is one of the few tariffs which incentivises energy efficient behaviour on the part of customers. It can also be designed and targeted so that the fuel poor or vulnerable are able to receive ‘extra’ low priced units. Would a combination of this and competitive domestic retail provide a better service to GB customers?

The current competitive framework for energy expects that businesses chase and maximise profits, and they cannot be blamed for this if the rules and regulations are set up for them to do so. However, do we as a society really want our utilities to think of their businesses in this way? Would we like them to be public service companies? – ie companies which can make profits, but not excessive profits at our (and the fuel poor’s expense). We may differ over what percentage is an excessive profit, but we do all understand the concept of an excessive profit. Would we like our Regulator to keep track of the level of profits that energy companies make? Absolutely, and Ofgem should have been doing this anyway, and certainly should be doing it now. Would we like our politicians to enable the Regulator, if s/he so judges, to force companies to cut their excessive profits, and hence their prices? I certainly would. I don’t think energy companies should make excessive profits. I would prefer that competition ensures that does not happen but if competition is failing then I am fine about a regulated approach, and I suspect most other customers would agree. All of this of course is a different approach to energy than we currently have in place. If competition is failing, then it is simply ideology to maintain it so narrowly.

Energy is different – not just because it is a social good in one sense, but it is also the greatest cause of climate change.  While all of our society should be able to afford adequate energy; our society also needs to be innovating to keep up with the technological changes going on around the world, to best enable a managed, low cost transformation to a sustainable energy system, and to overcome the inertia of the system. This requires a more directed, strategic framework – including a new regulatory framework– as well as competition. This requires questioning what that regulatory framework should be; and what the role of the regulator, the utility and the customer should be.

It seems to me that the Labour Party is asking these questions of the energy system, and is attempting to break out of its inertia for the benefit of customers and society. It is not so much that they are undermining competition – which in fact never existed – more that they are trying to marry the needs of society. This should be welcomed as an opportunity to more openly discuss what society wants and needs from its energy system, and to get regulation appropriate to that in place.

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