Wholesale market reform could deliver “permanent” social tariffs by scrapping existing “pile it high, sell it cheap” retail arrangements and enabling low income customers to benefit from cheaper, renewable electricity, Alan Whitehead has claimed.
In a fringe meeting at the Labour Party conference, the shadow energy security minister outlined what he acknowledged is the opposition’s “not finalized” thinking on reforms to the retail and wholesale markets.
If elected, an incoming Labour government’s “day one” priorities would include fixing the electricity grid and setting up its Great British Energy public company, he said.
And the increasing share of cheaper renewable electricity on the grid raised challenges to existing arrangements, Whitehead said: “What will feed into the markets will be a very different proposition from what has hitherto been the case. That itself opens up tremendous opportunities to reset energy markets, how they trade, how they work together, and particularly the retail market.”
One of the “most egregious” features of the way current energy markets arrangements work, which sees more expensive and typically gas power plants setting the wholesale price, is that it “cancels out” the dividends for customers from the cheaper, low carbon power flooding onto the system, he said: “During the height of the energy crisis, power from gas and fossil fuels was nine times more expensive than power coming from renewables but you wouldn’t know that in terms of how the retail market actually worked.
“In that market increasingly, the tail is wagging the dog.”
By scrapping these so called marginal cost pricing arrangements, a “direct relationship” could be forged between the price of cheaper renewable power and the tariffs on offer to customers, Whitehead said: “Even today, we can take that much lower cost power that is coming through from the system and then apply what we will call for the moment social tariffs, but a much cheaper arrangement on prices as far as vulnerable and lower income customers are concerned.
“The money is already there in the market for giving a social tariff or a range of tariffs.
“You actually establish changes in the system so you have a permanently lower priced arrangement, a permanent social tariff arrangement within the retail system and you are getting the renewable dividends into the market.”
This shift should be accompanied by a move from treating energy supplies as a commodity to a service, he said: “We need to turn the retail market around from a ‘pile it high, sell it cheap market’ to an energy services market, where you have a relationship between your supplier and yourself, where the supplier is trying their hardest to sell you less energy and is instead involved in a relationship with you as a customer to get the best out of your energy supplies.
“Instead of making a profit by scalping the customer, the profits come from the partnership where they are supplying you with an energy service over a period of time, which will be much more secure and much cheaper.”
By contrast, the Southampton MP said, the current basis of the wholesale market relies on suppliers being incentivised to sell “as much energy as you can on entirely the wrong basis for a low carbon economy”.
Getting the “broken retail market into a fit state” will be a “high priority” for an incoming Labour government, but will not be dealt with during its first 100 days, he said.
The “complicated” nature of the retail market means any reform will require legislation that cannot be pushed through during this first phase.
But adding that the retail market is now “completely bust”, Whitehead said that maintaining current arrangements mean that Labour’s mooted “green energy revolution simply won’t work and wont feed through to customers”.
He also anticipated resistance among the civil service to Labour’s radical reform proposals. “We just have to say no, that’s what we’re doing, it’s renewables now and on your bike if you don’t believe that.”
The government published an initial call for evidence on its own review of electricity market arrangements (REMA) programme last year and has promised further consultation.
Former Conservative MP and ex-government energy adviser Laura Sandys told the same meeting, which was organised by the New Economics Foundation, more energy service-type propositions should be “absolutely” encouraged.
Advocating the introduction of a block tariff, where the first chunk of a household’s power consumption is charged at a low rate and then bills rise on a sliding scale in line with usage, she said customers are already used to service propositions in areas like mobile phones.
Sandys added that consumers may be more comfortable buying heat pumps on a service contract rather than paying the full cost upfront, because if could offer peace of mind in the event of a breakdown requiring repairs.
The NEF held the meeting to showcase its work on a National Energy Guarantee, a type of social tariff proposed in a report published earlier this year.