Reforming the electricity generation licensing system to make it easier to set up grassroots suppliers creates the “danger” of distorting the market, energy minister Kwasi Kwarteng has warned.
In Parliament yesterday (14 October) Plaid Cymru MP Ben Lake called for community energy suppliers to be subject to less onerous and costly licensing requirements than their larger counterparts.
Having to comply with this licensing framework is holding back the development of the community energy sector, he said: “That potential is frustrated by the antiquated rules that govern our energy markets, which were designed primarily in the 1990s and were suited to a different system of large power stations and a handful of utility companies.
“Unfortunately, those rules still rule the roost, and they create insurmountable cost barriers to any community energy initiative that wishes to sell the electricity it generates directly to local households and businesses.
“The most effective solution would be to introduce greater proportionality to the licensing system, to ensure that the costs and complexities of being a licensed electricity generator are proportionate to the scale of its supply.
“If the costs are proportionate, it becomes financially viable for smaller-scale renewable generators to supply electricity, and, in turn, new community-owned schemes would become viable.”
But responding to Lake’s call, Kwarteng said that “artificially” reducing network costs for local electricity suppliers could distort the market.
He said “Changing the licensing framework to suit the business models identified by his campaign appears attractive, but the danger—and we always have to be mindful of dangers in government—is that it would create wider distortions elsewhere in the energy system.
“One is essentially incentivising a behaviour that may not be economical in the first instance, and that would mean higher costs falling on other consumers, which would increase as more local suppliers were subsidised. Creating a special category of local supplier brings its own complexities, and there may well be unintended consequences as a result.”
Kwarteng told the House of Commons that the focus should be the flexibility of the whole electricity system rather than relief for suppliers.
And he said that while supply licenses are usually granted on a Great Britain-wide basis, Ofgem has powers to award them for specified areas, enabling the provision of “more targeted and potentially innovative” products and services.
The House of Commons recently passed legislation giving Ofgem a new duty to create a Right to Local Supply so that community groups can set up energy companies, but it needs the backing of a government or private members bill before possessing statutory force.