The role of regulation in delivering a greener, fairer energy system

In this guest post, Ben Scott, principal at IT service provider Netcompany, sets out his view about how Ofgem needs to react to the UK’s on-going energy crisis

Regulator and regulation are interesting words. Applied to a clock, the regulator controls the speed of the hands, but when applied to a national industry the regulator is responsible for ensuring effectiveness and fairness.  With the UK’s energy industry facing unprecedented challenges caused by price rises and sustainability, what options does the regulator, Ofgem, have to safeguard the delivery of a greener, fairer energy system?

Let us first consider the question of greenness.  With an established pattern of warmer summers and colder winters, climate change is now clear to all but the last of the luddites. The UK’s fair, but challenging, Net Zero targets will not be achieved on their own, and the regulator clearly has a substantial role to play.

It is only the regulator, at a national level, who can galvanise an entire industry. Put simply, it is Ofgem who are best placed to drive nationwide reform to achieve a more sustainable future, through the adoption of technology and the digitisation of the UK’s energy industry.

I’m thinking of technology and digitisation in their broadest and most creative forms, from the ability to generate power at scale, from the movement of the sea (as they are in Japan) to the creation of the UK’s digital spine, which will enable visibility across the whole industry.

Ofgem’s flagship initiatives – such as smart metering, faster and more reliable switching and market wide half hourly settlement are significant steps in the right direction, but can more be done, more quickly?  I’m reminded of the speed at which an oil tanker can change direction. In pursuit of our nation’s green goals, isn’t now the time to become more agile, more innovative and deploy a number of speed boats? To continue the analogy, my first speed boat would be the use of data and data sharing to better predict future demand, followed quickly by the second to champion a culture which drives a faster speed of change.

Is fairness a factor?

Turning our attention to fairness, Ofgem are rightly focussed on the protection of consumers, ensuring the availability of a safe and affordable supply of gas and electricity (particularly to the most vulnerable in society). With recent price rises and huge volatility in the wholesale market, the government has intervened in the form of an energy price guarantee, protecting consumers and businesses.

Is the current criticism of Ofgem’s attempts to drive down prices through increased competition fair? Possibly, whilst competition should be encouraged in free markets, a lack of regulation (which enabled energy companies to be established and gamble on the future through lack of effective hedging strategies) resulted in government bailouts and businesses failing when market conditions turned against them.

I’m reminded of the financial crisis in 2008 and the nationalisation of Northern Rock. As a result, the financial service industry in the UK was subject to increased regulation, and that approach must be tempting for Ofgem too. I’d suggest there may be more rigorous checks for new market entrants and for the financial solvency of energy firms to be more closely monitored (similar to the re-assessment of the capitalisation requirements of banks post 2008), but fundamentally I believe Ofgem can increase fairness in other ways.

At the top of my list are daily standing charges, which appear unfair and are at best confusing.  But in August 2022, following review, Ofgem confirmed that they wouldn’t be amending their standing charge policy.  Historically, daily standing charges were levied to cover the transportation of electricity and gas and provide meter readings. However, more recently the charge has increased significantly to include the reimbursement of the costs of managing the 30 suppliers who have failed, and from next year will rise again to recover the costs of providing the £400 energy discounts to support households this winter. To increase competition, surely more simple tariffs (which also help people budget) would be welcomed, encourage supplier switching, and result in a fairer market?

The energy industry requires differentiation

If daily standing charges are the low-hanging fruit, longer term, Ofgem should be encouraged to take note from the sale of other commodities in other industries.  Ultimately, as pricing converges, energy companies will need to find other ways to differentiate themselves.  Customer service and the exclusive use of renewable energy sources are already proving effective strategies for certain market segments, but it will be the bundling of services beyond energy that will be the game changers.  Ofcom has already faced these seismic shifts with the bundling of landline, mobile, TV, and broadband, and the energy market is next.

Over the next few years, Ofgem, as the regulator, will undertake a crucial role as the market recovers and evolves. Traditional approaches and methods will require modernisation, and Ofgem will be well advised to see innovation and technology as friends who can support them in delivering for the UK a greener, fairer energy system.

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