Last week’s announcement of a £15 billion package to protect customers from the full impact of another dramatic rise in the energy price cap in October was widely praised by the sector.
However, it also highlighted that short-term solutions are not sustainable in the face of complex underlying problems affecting the volatility of prices and the way they are passed on to consumers.
The issue is at the heart of Utility Week’s Energy Reset campaign, which aims to use the current spotlight on energy prices to highlight the need for wider market reform. This is an unavoidable step in reducing energy usage, bringing down bills and decarbonising the country.
Now leading energy retailers have shared their views with Utility Week for a major new report, produced in association with PA Consulting.
The report looks at how the potential of retailers to drive forward the energy transition can be unleashed, by creating the conditions for sustainable businesses that deliver sustainable prices.
However, change cannot come about through reform of the energy retail market in isolation. The work to ensure a retail market fit for the future will be a core part of tackling the much discussed – and suddenly very topical – energy trilemma of balancing net zero, security of supply and affordability. This requires much wider reform to ensure the wholesale market reflects the falling price of renewables and that decarbonisation measures support a rapid rollout of green power as well as incentivising demand-side response.
These issues, and the frictions arising from them, are discussed in the report through interviews with suppliers, Ofgem, politicians, trade and consumer bodies and independent experts.
Key recommendations from the report include:
- A more targeted approach to helping vulnerable customers with their energy bills is needed beyond this winter. There was strong support for a social tariff, perhaps tied initially to the Warm Home Discount but ultimately as a replacement for the price cap.
- Other suggestions for reforming the price cap include moving it from an absolute to a relative cap, which moves with wholesale pricing within parameters to be defined. Many interviewees were in favour of its ultimate removal but if it is to remain, as the government has suggested, then it must be reformed to reduce the risks to retailers including those associated with hedging, which has caused companies to fail.
- Reform of the retail market needs to ensure that businesses coming into the market are risking their own money and that no one is given a “free bet”.
- As part of its Review of Electricity Market Arrangements, the government must urgently tackle wholesale market arrangements that are currently not reflective of the rapidly falling costs of renewable generation. There is also a need to develop frameworks for locational pricing, although being mindful of the impact on volatility and the risk of a postcode lottery.
- A properly funded and executed national energy efficiency scheme is the clearest and fastest way to cut energy use and bills for millions. This could be delivered through an existing scheme such as the Energy Company Obligation scheme (Eco) but there is an urgent need to build the skills and the framework necessary to deliver at scale.
- The definition of a functioning competitive retail market needs to be broadened, away from switching rates and price, and towards a measures of success that incorporate other factors including innovation, customer service, and supporting net zero.
- The government’s Energy Security Strategy is heavily focused on long-term steps but more attention is needed on the period 2025 to 2035 when the UK faces a potential supply crunch as aging nuclear and gas plants must be retired. Short term measures to mitigate this supply crunch could include a more relaxed planning regime for onshore wind as well as further support for energy efficiency and flexibility.
Quotes from those interviewed for the report include:
Philippe Commaret, managing director of customers, EDF Energy, on regulatory reform:
“We need to rethink completely what is the role for the price cap, which customers do we want to protect and what type of consequences it has on the customers that are unable to pay for their bills.”
Keith Anderson, chief executive, Scottish Power, on conditions for market entry:
“We need to get rid of a market where you can come into it on a completely free bet because that’s what has driven some of the most illogical behaviour. It’s just run faster, run faster, flip it, or sell out and cheerio. There has to be a stake in the game.”
Monica Collings, chief executive, So Energy, on the need to remove the ‘loyalty cap’:
“At the moment customers simply don’t trust energy retailers – all they see is their bill going up and our name on the envelope…… There’s not much positivity about at the moment and that’s a real problem because ultimately, we’re going to be the ones who are going into their homes and installing new kit to help them decarbonise.”
Michael Lewis, chief executive, Eon UK, on energy efficiency:
“People talk about there being no silver bullets, but this is as close as you can get to one. It’s not immediate but it’s pretty quick. And it really will have a material and long-term effect on not only reducing bills, but cutting CO2, making homes warmer, making a healthier environment for people to live and laying the foundations for future decarbonisation.”
Rachel Fletcher, director of regulation and economics, Octopus Energy, on wholesale market reform:
“We’ve got a single national wholesale market that gives one price per half hour for the entire country. That feels crazy. It’s a bit like sort of saying every seat on every airplane taking off at the same time of day is the same price.”
Amy Marshall, head of consumer energy, PA Consulting:
“Recent events have highlighted structural challenges and shortcomings across the board but have also created a perfect storm of consumer interest in energy. There has never been a better time to reframe the market for customers, for our security of supply and in pursuit of net zero.”
Download the full report here