Easter saw 90 hours of UK electricity generation with no input from coal-fired power stations.
For nearly four days as Britain basked over the bank holiday weekend, the grid was coal-free, breaking the previous record of 76 hours set the April before.
This event offered a glimpse of the near future: 2025 to be exact, when the government has pledged to ban the most heavily emitting fuel from the electricity system.
The following week therefore turned out to be a good time for the future of energy to be under the industry’s microscope.
Energy UK returned to work by publishing its long-awaited Future of Energy report, which examined the implications of trends such as digitalisation and decarbonisation. And Citizens Advice held a conference examining how consumers will fit into this transformed energy system.
The technological revolution the industry is undergoing will also have huge implications for how energy utilities interact with their customers, says the Energy UK report.
New, specialised models
The proliferation of new technologies and business models means the understanding of customer engagement will have to become “more sophisticated”, “going beyond simply measuring switching rates”.
It will have ramifications for how suppliers are set up. Current market structures mean energy retailers must deliver a number of “fundamental functions” such as metering, settlement and billing.
But this won’t necessarily be the case in the more diverse market environment of the future, says Energy UK.
Some companies may be interested in offering bespoke products that only serve a particular facet of a customer’s energy needs, such as heating or transport.
The report says it is “important” that existing market arrangements do not thwart the development of these new and more specialised models.
And forcing all service providers to undertake all the functions of a traditional supplier may end up hitting consumers in the pocket, the report adds.
But this more diverse energy ecosystem offered scope for responsibility to become blurred between different providers and regulators, said Dhara Vyas, head of future energy services at Citizens Advice, who spoke at the House of Commons launch of the Energy UK report.
As an example, she pointed to the difficulties if the same customers have multiple meter points.
“The worst case scenario would be stranded consumers, who are not able to sort their problems, going from one potential supplier to another and being pushed from pillar to post.
“Some customers would find it hard to be very aware and know what to do.
“It’s important that people in the industry, government and regulator think about how the journey for customers is going to be simple,” she said, adding that some customers will continue to need some form of protection.
This is just one of the questions that energy transformation raises regarding the relationship between energy suppliers and their customers.
In any future retail market, Energy UK says it is “imperative” that all customers are able to access energy on terms that are both affordable and commercially viable for suppliers.
The report says improvements in data-matching can help to ensure that vulnerable customers are better identified, protected and offered solutions, enabling them to access the benefits of a digitalised and more consumer-orientated energy market.
Consumer safe space
But even with these advances, some customers will still be less able or reluctant to engage.
Professor Jim Watson, director of the UK Energy Research Centre (UKERC), told the Citizens Advice conference that he agreed government and regulators have a “really important role” to provide a “safe space” for consumers.
“The risk is that some consumers and households get left behind and left out,” he said.
Consumers are a diverse bunch and need to be thought about in a much more “sophisticated” way, Watson said: “Too often, we are still talking about consumers as if they are all the same. There are people who will be very early adopters and will want to be very engaged and others will be missed out altogether.”
He suggested part of the problem is the term consumer itself, and that when it comes to a multi-faceted service such as energy, it is better to think in terms of customers as citizens. “Consumers is a very limited word in itself,” he said, adding that the term citizen is a better way of framing people’s interaction with energy.
“Citizens are not just buying and selling things: they have a view about the future, about all sort of things like where we get our energy from.”
The use of bill payer subsidies to decarbonise the energy system brings these concerns into sharper focus, said Watson: “If they are paying more through their bills, they want more transparency about how that is being used.”
The issue is particularly acute in England, where a bigger share of energy efficiency improvements are paid via energy bills rather than general taxation.
He said research carried out for the UKERC by Cardiff University had identified the limits of what customers would be willing to pay for decarbonisation. “People strongly support this sort of change towards a lower carbon energy system but have limited appetite for paying for it through their bills,” he said, noting that the study showed consumers would be prepared to pay 9 to 13 per cent on top of their bills to support a transition to a lower carbon energy system.
“They expect industry and government to take the lead. Whether they pay through bills or taxes, the distributional effect is very different.”
Gillian Cooper, head of energy policy at Citizens Advice, told the conference it is “inevitable” that changes will need to be paid for from a combination of taxes and bills, expressing the hope that a consensus will have developed on the issue by 2030, when the fifth carbon budget kicks in.
Lack of trust
Audrey Gallacher, policy director at Energy UK, expressed concern at the conference about lack of trust in the energy market.
“The real danger is that we are going to create a system that isn’t seen as legitimate. This is a particular worry because that will impact on what we have to achieve in terms of providing an affordable, clean and secure energy system in the future.
“We want an energy system that encourages innovation while ensuring that protections are there.”
Watson agreed. “The public already think that industry and government are too close together and they don’t think there is enough separation.”
Vyas told Utility Week: “This not a market that people always have a positive experience with and that is going to remain the case unless you build in customer protections at the outset.”
Greater digitalisation, combined with a more widespread uptake of renewable energy devices, will enable the development of a more flexible approach for consumers to manage their demand. This could mean charging consumers based on the impact they have on the network or the how big their connection is – rather than the number of units of electricity they consume. This would avoid expensive network upgrades affecting all energy users “indiscriminately”, the Energy UK report says. “The energy system should fit the user, not vice versa.”
Another option is to offer households incentives through time-of-use tariffs. However, Vyas said research on existing usage patterns shows households can’t necessarily take advantage of flexibility, even when it is on offer. A study presented at the Citizens Advice conference showed low-income households were often unable to fully take advantage of existing time-of-use-style tariffs.
“People on legacy Economy 7 don’t always use tariffs when it is cheapest,” she said, noting that 40 per cent of people said it isn’t practical to use appliances at off-peak times because of factors such as worries about the safety of leaving appliances running overnight or the disruption to sleep caused by noisy washing machine spin cycles.
Services such as auto-switching may help customers to seek out cheaper services, but must offer the option of a manual override, she said: “For lots of consumers, automation will be brilliant, but there will be times when things change, for example if someone gets sick or there is a very important meeting for which you want to ensure the car is charging.
“There should also be the ability for people to take control.”
Energy UK’s ideas for a future policy framework
Energy UK’s Future of Energy report estimates that £170 billion will have to be invested by 2030 in order to meet the UK’s decarbonisation targets while ensuring security of supply – similar to the sums ploughed in since the privatisation of the early 1990s.
But these levels of investment won’t be attracted solely on the back of wholesale market revenues, which look set to continue to be “highly risky”. Increasing deployment of renewable generation creates more volatile wholesale prices, which will plunge to zero or even negative values for increasing periods of time.
In order to achieve the UK’s goals “most efficiently and at lowest cost to consumers”, Energy UK believes the future policy framework must include: a support mechanism for investment in low-carbon generation, a “technology neutral” capacity market, an effective carbon price to support the wholesale market, and “open and liquid” flexible markets.
The report suggests there is no need for “radical change” to the contracts for difference (CfD) and capacity market mechanisms. But it says every technology type should have the opportunity to participate in the capacity market CfD auctions and low-cost options such as onshore wind should not be excluded.
Energy UK’s report also says that in the future, using the wholesale price to benchmark the level of subsidy may no longer be relevant as fossil fuels are phased out. Instead, competitive auctions, rather than an arbitrary £/MW target set by policymakers, should be held.
And the trade association’s Audrey Gallacher warned the Citizens Advice conference about the importance of not ignoring the vulnerable end of the customer spectrum. “Transition has to work for everybody.”