The Conservative government has been busier in the area of energy policy in its first few months in office than many might have expected. Some of its moves have not come as a surprise: we knew that it would seek to curb renewables spending (if only in the case of onshore wind), and its decision to end the Green Deal was hardly a shock, given the dismal progress made under the scheme over the past two and a half years. By contrast, few anticipated the announced end to the Climate Change Levy exemption for renewables electricity, or the scrapping of the zero-carbon homes target. Neither of these were part of the Conservatives' manifesto, and both exposed the government to accusations that it lacked real commitment to the decarbonisation agenda pursued by its predecessors.
But there are plenty more aspects of the market that are in need of attention, and the energy and climate change select committee has recently opened an inquiry into policy areas that will require the most scrutiny over the next five years. Here, we detail some of the issues to which we would like to see the committee turn its focus.
Over the coming year, the Competition and Markets Authority's (CMA) energy market investigation--and more specifically the government's response to it--will warrant close scrutiny. The Conservatives were the only party who, in their election manifesto, made an unqualified pledge to implement the investigation's findings in full, and we have seen little in ministers' response to the provisional findings to suggest that the government will renege on this promise. This is all the more important because, assuming that the final conclusions do not veer too significantly from the authority's initial recommendations, we think that the investigation could deliver some genuinely beneficial changes (ES481, pp2-4, 13/07/15) to the regulatory framework and industry settlement. Of particular importance will be freeing, from the Retail Market Review restrictions, suppliers' ability to innovate with their tariffs, and the CMA has correctly identified issues with industry governance, though we would question some of the detail of its proposed remedies in this area.
As we wrote last week (ES484, pp2-4, 03/08/15), we also disagree with the proposals for a safeguard tariff and a centrally managed switching site, but do believe that the credibility of the investigation--and the best chance that it has of helping to improve trust in the industry--rests on the government implementing the bulk of its recommendations.
We think that the committee should prioritise building upon recent indications that consumers' trust in the market has improved over the past few months. In particular, while prices and profits have been scrutinised intensively over the past couple of years, we think further thought should be given to the establishment of clear customer service standards for suppliers.
At present, energy suppliers publish complaints levels on their websites, with details of the proportion of complaints and the number resolved. Perceived issues with customer service are evaluated on a case-by-case basis. Over the last 18 months, several suppliers have been investigated for failing to maintain a sufficient level of customer service. In Q114, RWE npower's complaints per 100,000 customers reached 8,303, and the company was ordered by the regulator to lower its backlog on a monthly basis. In March 2015, Scottish Power was penalised with a proactive ban, following a determination that its customer service was below a sufficient standard.
The CMA has also highlighted concerns about the quality of service offered by the Big Six suppliers. It asked the large suppliers to provide information on the number of complaints that they had received, broken down by type of complaint. The authority's provisional report noted that the number of recorded complaints had increased fivefold between 2008-13.
We think that the government could set out minimum standards to which suppliers must adhere with regards to customer service. These could cover a variety of criteria, including complaints per 1,000 customers, the time taken to resolve issues, call waiting times, and customers receiving the correct bills on time. There would need to be a clear process in place for failure to adhere to these standards, including the associated penalties. Such standards would enable suppliers to adjust processes and to improve their performance before this was deemed unacceptable by Ofgem.
There is a precedent for having service standards in the energy market. Currently, the Quality of Service Guaranteed Standards provide expected levels of service for suppliers; but these primarily focus on the technical aspects of energy supply, such as guarantees of supply, metering, and switching.
We would also encourage the committee, particularly in light of the CMA's provisional findings, to look beyond the domestic market--which dominates media and political attention--and towards some areas of the business market. Here, there are particular concerns at present about the relationship between business customers and Third Party Intermediaries (TPIs), who are the main channel of engagement for new customers. Relationships between TPIs and suppliers are mutually beneficial, but also mistrustful. There is growing concern surrounding the lack of transparency in the arrangements between the two, which has been intensified by the recent conviction of a broker for fraud.
As the number of non-domestic TPIs continues to increase, we believe that an inquiry into their role in the business sector is necessary in order to bolster trust and to ensure that SMEs and micro-businesses are getting a fair deal. The inquiry should have a particular focus on commissions paid to TPIs. This would continue the good work of the previous committee, who in February of this year published its Protecting consumers: Making energy price comparison websites transparent report. This also focused on transparency and commissions.
It would be of particular importance at the moment, as Ofgem has just postponed its consultation for a code of practice in the non-domestic TPI sector. Specifically it decided to defer until there is more clarity around the level of intervention to be expected from the CMA in this area. We would expect further work by the select committee to complement, not duplicate, the work of the CMA.
In the meantime, the regulator has identified a number of principles it expects all TPIs in the non-domestic sector to follow, which would underpin any possible future regulatory interventions. However, we believe that an improved foundation of knowledge is required to effectively implement these principles.
We would also advocate a more fundamental evaluation of the future of the energy system. In the second half of the last parliament, a range of stakeholders--particularly in the academic sphere--expressed increasing concern about existing governance arrangements, and their compatibility with the way in which various aspects of the system are evolving.
At present, the electricity system is functionally divided into roles and institutions that are, by their nature, reactive, and that tend to think tactically rather than strategically. This has resulted in the lack of a cohesive plan for the wholesale markets and their underlying physical infrastructure.
The system's institutions behave in response to a strict and complex set of regulatory codes and frameworks designed at a time when centralised production and distribution across networks was the dominant model for electricity markets. This is a model that has since institutionally and organisationally changed only conservatively. The incumbent players, around whom this system has been designed, are given a strong role in the design of this system, but do not necessarily possess any commercial interest in moving its design forward. Significant system reforms can take a considerable amount of time to complete.
An example of this, which increasingly is having material impacts on suppliers and customers, is the application of electricity network charges. Under the new RIIO price control regime network companies now have good sight of their allowed revenues over an eight year period. Users of the networks though see their charges change annually. The long standing principle has been that network companies must collect allowed revenues through cost-reflective charges. In practice this means that complex charging methodologies have been developed that create charges based on models that, at their core, quantify the cost of incremental investment in the network at times of peak demand.
This approach, albeit arcane in practice and nigh on impossible for all but the most well-resourced and committed to replicate, was fit for purpose in an energy system that was characterised by centrally dispatched generation and growing demand but no longer holds true. As seen in the most recent Digest of UK Energy Statistics publication the GB market has seen a sustained year on year decrease in demand in absolute terms and at peak times. The upshot is that customers, specifically half-hourly metered consumers that are subject to distribution and transmission charges skewed to be significantly higher at time of peak, are paying charges that result in revenues to network companies that are no longer closely correlated to the investment being made. In simple terms much of the reinforcement investment is as a consequence of the location of generation and not wholly to bolster capacity at peak. Overall electricity demand has fallen by over 15% compared to the highs of the middle of the last decade and peak demand is now nearer 50GW than the 60GW seen ten years ago. Moreover distributed generation is no longer in the margins. Although exact numbers are difficult to come by we estimate that nearing 20GW of capacity is installed at the distribution level—around one quarter of transmission installed capacity. The location of a large proportion of generation built in the last decade is driving the need to invest in networks, such as offshore transmission assets, reinforcing links between Scotland and the north of England and distribution networks that can no longer accommodate additional generation due to constraints.
Despite this customers are seeing large increases in charges based on the premise that their behaviour at times of peak demand are the primary reason for network investment. An example of this is that half-hourly metered customers in the north of Scotland are likely to see a 90% year on year increase in transmission network charges in 2016-17. This trend will continue where demand at peak and in absolute terms is predicted to fall until at least the 2020s. A thorough review of the basis on which network charges are derived is urgently needed as it is apparent that they are no longer levied on a cost reflective basis. There is precedent here with Ofgem's Project Transmit that has finally resulted in generation users of the transmission charges being charged on the basis of peak and year round use of the network.
Added to this, successive UK governments have developed energy policies in silos. This has seen a clear focus on layering interventions into the current system architecture, with precious few policy-makers thinking seriously about radically re-engineering that architecture for the future--despite the use of labels like "Electricity Market Reform" for large-scale policy programmes. As a consequence, policy remains focused on centralised and utility-scale generation, and the provision of the necessary networks to support it.
Meanwhile, we are seeing the emergence of disruptive technologies, such as energy storage, a raft of demand-side measures, community energy schemes, local trading arrangements and smart meters. These technologies are effectively progressing in the absence of consistent policy incentives. However, they might, we fear, fall short of their true potential to reduce consumer costs and improve system reliability--particularly if the most significant barrier to their development remains the anachronistic system itself.
Worse still, unless properly designed and monitored, the unintended consequences of piecemeal, if well-intended, interventions to encourage the development of certain technologies or models might actually become counter-productive. Witness, for example, the significant growth of small-scale reciprocating gas and diesel engines through the capacity market and STOR; this has come under the auspices of a weakly-defined notion of demand-side response, which fails to take into account appropriate boundaries with other policy objectives.
Eventually, without a strategic approach, the growth in certain sectors of the energy system could become so profound as to require corrective action. But this often leads to a "feast to famine" approach to system policy, whereby inadvertently generous incentives are controversially unwound. This is always a destructive outcome.
This all points to the possible need for a system architect, which could consider how to engineer network and institutional roles to best manage and exploit new technologies in a fashion that complements existing infrastructure and actors. It would help ensure that a systematic view on policy action was taken, and that value-for-money assessments of different strategic pathways take into account all accrued benefits and costs.
Given the existing time lag between system design and market evolution, we would suggest that the committee recommends to DECC the need to investigate the possibility as an urgent priority.
A further concern is that the government is failing to calculate and publish with sufficient frequency or accuracy its assessments of the cost of policy support schemes. This is preventing proper scrutiny of the efficacy of its policies, and denying market players the opportunity to react to budgetary pressures before facing rushed interventions by DECC.
Recent events demonstrate the point. The measures to reduce low-carbon spending announced in July were justified on the grounds of projected overspend within the Levy Control Framework (LCF); yet the last time that DECC published its own assessment of costs in November 2014, it clearly anticipated a significant surplus of funds available to allocate to contracts for difference in 2020, though we publicly disagreed with this assessment at the time. Analysis by the Office for Budget Responsibility published alongside the Summer Budget on 8 July, which indicated a £1.5bn overspend in 2020-21, eventually prompted DECC to act.
Against this backdrop, it remains very challenging for any stakeholder properly to scrutinise DECC's use of levy expenditure. The department will struggle to make good policy, in sufficient time, to correct potential expenditure issues, especially given the proposed hammering of resource levels within DECC, which itself must be a concern. We therefore suggest that the committee makes it a priority to consider management of the LCF and for DECC to provide it with at least quarterly updates on all levy-funded schemes, so that it can properly be held to account on its management of budgets and the impact on consumers' bills. This would take the form of updated LCF projections for the period of agreed expenditure, however that period is defined (currently pre-2020, but at some stage post-2020).
These are just a few of the areas that we think are ripe for exploration over the next few months, though we could think of plenty of other examples--the breadth and (mis)management of the smart meter programme, barriers to market entry for smaller players, challenges arising from further EU integration, and perhaps more clarity around the future energy mix, to name a few. This should be a busy parliament for the committee, building on the excellent record of its predecessor
On a separate point, the fact that the committee has taken to consulting with stakeholders on its priorities for the years ahead is itself a welcome move. The committee chaired by Tim Yeo during the last parliament will be a tough act to follow, but with major changes already sign-posted over the coming years, the need for proper scrutiny of the government's decision-making remains urgent.