Oxford economics professor Dieter Helm has called for a drastic overhaul of the UK’s energy sector in his independent review of costs, published today (25 October).
The government-commissioned study concludes that energy costs are “significantly higher” than necessary and that current policy, regulation and market design are “not fit for purpose”.
According to Helm, the government has “moved from mainly market-determined investments to a new context in which almost all new electricity investments are determined by the state through direct and often technology-specific contracts.”
“Government has got into the business of picking winners,” he writes. “Unfortunately, losers are good at picking governments, and inevitably – as in most such picking-winners strategies – the results end up being vulnerable to lobbying, to the general detriment of household and industrial customers.”
Helm says the scale and number of interventions are now so great that “few if any could even list them all, and their interactions are poorly understood.”
“Complexity is itself a major cause of rising costs, and tinkering with policies and regulations is unlikely to reduce costs,” he adds.
“Indeed, each successive intervention layers on new costs and unintended consequences. It should be a central aim of government to radically simplify the interventions, and to get government back out of many of its current detailed roles.”
To rectify the situation, he recommends a broad swathe of reforms, the most important of which are outlined below:
- Feed-in tariffs, contracts for difference, the renewables obligation and the capacity market should all be merged into a unified equivalent firm power (EFP) auction. Low-carbon generators would be compensated on the basis of their intermittency.
- The legacy costs of the renewables obligation, feed-in tariffs and contracts for difference should be separated out, ring fenced and placed in a “legacy bank”. They should be charged separately on customer bills and industrial energy users should be exempt.
- The government should establish an independent national system operator (NSO) and regional system operators (RSOs) under public ownership. They should take on a number of duties currently undertaken by distribution network operators (DNOs) and Ofgem.
- The RSOs should be responsible for securing local energy supplies and should do this by contracting out system requirements. This process should take the place of periodic reviews and price caps under the RIIO framework. DNOs would effectively become contractors – “one of a number of competitive suppliers”.
- Carbon taxes and prices should be harmonised by setting a universal carbon price across the whole economy. There should be a border carbon price to prevent emissions being exported.
- Separate licenses for generation, supply and distribution should be replaced by a simpler, single license, at least at the local level.
- Standard variable tariffs should be superseded by default tariffs based on an index of wholesale costs, fixed cost pass-throughs, levies and taxes, and a published supply margin. The government’s proposed price cap should take the form of a cap on the supply margin.
- The government should give an annual statement to parliament, setting out required capacity margins and guidance for the NSO and RSOs.
Helm says failure to implement these recommendations is “likely to perpetuate the crisis mentality of the industry, and these crises are likely to get worse, challenging the security of supply, undermining the transition to electric transport and weakening the delivery of the carbon budgets.
“It will continue the unnecessary high costs of the British energy system, and as a result perpetuate fuel poverty, weaken industrial competitiveness, and undermine public support for decarbonisation.”
“We can, and should, do much better, and open up a period of falling prices as households and industry benefit from the great technological opportunities over the coming decades,” he concludes.