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Last week, an influential former Conservative cabinet minister, John Penrose, published proposals for a new approach to regulation of the energy sector. Penrose’s acknowledgement of problems in the sector is to be welcomed but we need to think bigger to ensure consumers aren’t ripped off and that the power of the big energy companies is reigned in.
In his proposals, Penrose cites evidence of low customer satisfaction in energy companies and high energy costs to argue that there are problems with the functioning of the energy market. This is correct. As IPPR’s report last year demonstrated, competition is not working effectively: contrary to what should be expected in a competitive market, the main energy companies, the ‘Big 6’, do not appear to have improved the efficiency of their operations since 2007.
To fix the market Penrose advocates the provision of more information to consumers. As he explains:
“The best and most sustainable solution is to strengthen competition by introducing reforms which put consumers in charge, equipping them to make informed choices between vigorously competing suppliers.” (p.21)
Specifically he argues for mechanisms to make comparing tariffs and switching between suppliers simple for consumers.
These are sensible reforms that could improve competition in the retail market and help consumers get a better deal on their energy. Indeed, a similar reform first proposed by IPPR - limiting the number of tariffs that suppliers can offer to make switching options clearer - has been adopted by the Government. But Penrose is wrong to stop here: making switching easier should be the first step on a much wider programme of reform across the energy sector.
First, we need to address how power generators sell electricity to suppliers. Wholesale costs make up the biggest proportion of an electricity bill. But because most trading occurs bilaterally between generators and suppliers, without details on the deals put in the public domain, it is impossible to know whether these costs are passed on fairly to consumers. This problem is exacerbated because the Big 6 can ‘self supply’, trading energy between their generation and supply businesses. Furthermore, the amount of wholesale energy that is traded is low, which, according to the Treasury and DECC, acts as the key barrier to entry for independent suppliers and generators, and therefore limits competition.
Second, the existing problems with competition are exacerbated by the UK’s approach to electricity sector decarbonisation. The government is implementing major reforms to make investments in low carbon generation, like renewables, more attractive. But the mechanism for bringing forward investment, called ‘Contracts for Difference’, is expected to favour investments by utilities and large-scale developers. Only belatedly has the Government acknowledged that its proposals could make things harder for smaller, independent operators. But no action is yet being taken to increase opportunities for individuals and communities to invest in green power.
It doesn’t have to be this way. In Germany, where around 20 per cent of all electricity generated now comes from renewables, more than half of all renewable power is owned by private individuals and communities. Meanwhile, only 7 per cent of renewables are owned by the big utility companies. Matthew Lockwood convincingly argues that this pattern of ownership is key to understanding why the commitment to decarbonisation across German society is high, while the same cannot be said for the UK. Indeed, giving people the chance to own a stake of their energy system, rather than leaving them to pay ever increasing prices to companies they mistrust, seems not only fair but a vote-winner.
We need to pose the question: why is the UK approach to decarbonisation serving to reinforce the dominance of the Big 6 energy companies rather than challenge it?
The UK needs a revolution in its energy markets. Policy makers should be doing everything they can to reign in the power of the Big 6, encourage a diverse range of players in generation and supply, including mutuals and cooperatives, and putting the needs of individuals and communities first. To date the Labour Party has made the most progress in this area, calling for all wholesale trading to occur through a pooling system, similar to that used successfully in Europe. Penrose should be calling for the same level of ambition from his party.
