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The UK energy system is in thrall to giant utilities – all at customers' expense The UK energy system is in thrall to giant utilities – all at customers' expense
(about 1 hour later)
Energy is having a bad week. Today’s Energy Bill formalises the demise of onshore wind development in the UK. Osborne’s emergency budget surprised everyone by applying a carbon tax to renewable energy - yes, you read that right.Energy is having a bad week. Today’s Energy Bill formalises the demise of onshore wind development in the UK. Osborne’s emergency budget surprised everyone by applying a carbon tax to renewable energy - yes, you read that right.
Related: Green energy sector attacks chancellor's changes to climate change levyRelated: Green energy sector attacks chancellor's changes to climate change levy
Meanwhile, the Competition and Markets Authority’s (CMA) investigation into the failings of the UK energy market suffered from a marked lack of imagination. Its headline conclusions are that UK gas and electricity markets are working well and that customers are paying around £1.2bn more on an annual basis. The CMA suggests that these conclusions are not contradictory because consumers are to blame for paying the big six energy companies too much. Meanwhile, the Competition and Markets Authority’s (CMA) investigation into the failings of the UK energy market suffered from a marked lack of imagination. Its headline conclusions are that UK gas and electricity markets are working well and that customers are overpaying around £1.2bn more on an annual basis. The CMA suggests that these conclusions are not contradictory because consumers are to blame for paying the big six energy companies too much.
The problem, we are told, is “sticky customers” who never switch suppliers and so languish on “rip-off tariffs”. These cash cows are more likely to be on low incomes, have low levels of education, live in rented accommodation or be over 65.The problem, we are told, is “sticky customers” who never switch suppliers and so languish on “rip-off tariffs”. These cash cows are more likely to be on low incomes, have low levels of education, live in rented accommodation or be over 65.
Blaming such groups for not switching seems, well, a little uncharitable. Overall, the CMA report is an exercise in thinking firmly inside the box and overlooks the promise of a more transformational remedy: local energy.Blaming such groups for not switching seems, well, a little uncharitable. Overall, the CMA report is an exercise in thinking firmly inside the box and overlooks the promise of a more transformational remedy: local energy.
The CMA’s purpose is to facilitate effective competition. It defines market failures as AECs – adverse effects on competition. This frame precludes even asking the question of whether cooperation might be a better way to deliver consumer satisfaction from energy services than competition. Perhaps energy would be better seen as a public good rather than a commodity?The CMA’s purpose is to facilitate effective competition. It defines market failures as AECs – adverse effects on competition. This frame precludes even asking the question of whether cooperation might be a better way to deliver consumer satisfaction from energy services than competition. Perhaps energy would be better seen as a public good rather than a commodity?
According to the dogma: competition is the thing, and if energy markets are failing consumers then more competition is the answer. In which case it is instructive to take a step back and compare Britain with a country whose energy market is not prone to the same problems: Germany.According to the dogma: competition is the thing, and if energy markets are failing consumers then more competition is the answer. In which case it is instructive to take a step back and compare Britain with a country whose energy market is not prone to the same problems: Germany.
A typical household in Germany can choose to buy energy from around 72 different suppliers out of 1,100 supply companies nationally. Almost half of these are owned by local government, communities and small businesses. Meanwhile Britain has around 25 active energy suppliers, with the big six squatting on a 93.5% share of the retail supply market last year. Germany’s big four had a mere 43.8% share.A typical household in Germany can choose to buy energy from around 72 different suppliers out of 1,100 supply companies nationally. Almost half of these are owned by local government, communities and small businesses. Meanwhile Britain has around 25 active energy suppliers, with the big six squatting on a 93.5% share of the retail supply market last year. Germany’s big four had a mere 43.8% share.
Related: Utility companies: has their business model become redundant?Related: Utility companies: has their business model become redundant?
In Britain, the grid is run by fourteen distribution network operators, private monopolies which are owned by just six - mostly foreign headquartered – multinationals. In Germany there are 888 distribution system operators and, by the end of 2012, 190 German communities had been successful in bidding to run their local electricity distribution grid, with at least nine of these being wholly community-owned ventures.In Britain, the grid is run by fourteen distribution network operators, private monopolies which are owned by just six - mostly foreign headquartered – multinationals. In Germany there are 888 distribution system operators and, by the end of 2012, 190 German communities had been successful in bidding to run their local electricity distribution grid, with at least nine of these being wholly community-owned ventures.
Evidently, healthy competition and cooperation are intrinsic to the German energy system in a way that it is alien to the British model. The difference is down to structure. In Germany, local energy markets and a diversity of actors have always been features of the system, while in Britain nationalisation followed by privatisation has left behind a monolithic, highly centralised system that militates against innovation and competition.Evidently, healthy competition and cooperation are intrinsic to the German energy system in a way that it is alien to the British model. The difference is down to structure. In Germany, local energy markets and a diversity of actors have always been features of the system, while in Britain nationalisation followed by privatisation has left behind a monolithic, highly centralised system that militates against innovation and competition.
Britain’s energy system is in thrall to giant utilities for the simple reason that it was expressly designed to service their needs. The big six have pulled up the ladder to their clubhouse in part through a mind-bogglingly byzantine administrative bureaucracy (pdf).Britain’s energy system is in thrall to giant utilities for the simple reason that it was expressly designed to service their needs. The big six have pulled up the ladder to their clubhouse in part through a mind-bogglingly byzantine administrative bureaucracy (pdf).
To enter the UK supply market, one must first escape the bewildering thicket of network codes and agreements that comprise over ten thousand pages of obscure jargon. This alphabet soup can only be deciphered by career specialists employed by the giant utilities and grid operators party to the regulations. Changes to the codes typically take years to process and are decided on by opaque panels of industry technocrats. You and I cannot propose changes, nor can Ofgem or the Department of Energy and Climate Change.To enter the UK supply market, one must first escape the bewildering thicket of network codes and agreements that comprise over ten thousand pages of obscure jargon. This alphabet soup can only be deciphered by career specialists employed by the giant utilities and grid operators party to the regulations. Changes to the codes typically take years to process and are decided on by opaque panels of industry technocrats. You and I cannot propose changes, nor can Ofgem or the Department of Energy and Climate Change.
To have a seat at the negotiating table one must be party to the regulations, and the big incumbents hold all the cards and have no real appetite for change. Consequently, the most useful and significant thing in this week’s CMA report may well prove to be the recognition that all of this constitutes an “adverse effect on competition”.To have a seat at the negotiating table one must be party to the regulations, and the big incumbents hold all the cards and have no real appetite for change. Consequently, the most useful and significant thing in this week’s CMA report may well prove to be the recognition that all of this constitutes an “adverse effect on competition”.
So what else could the CMA have recommended?So what else could the CMA have recommended?
First, removal of the requirement for all retail suppliers to offer power to customers nationally, which is very restrictive – the IT system alone can easily cost £1m. Many smaller players would create distinctive, local offers if it were possible, hugely boosting consumer choice.First, removal of the requirement for all retail suppliers to offer power to customers nationally, which is very restrictive – the IT system alone can easily cost £1m. Many smaller players would create distinctive, local offers if it were possible, hugely boosting consumer choice.
Second, we need a way to realise the extra value created in the energy supply chain when local demand matches local supply. Small changes to the network codes could allow local suppliers to offer lower tariffs to local customers at the same time as offering better routes to market for energy from local renewable generators.Second, we need a way to realise the extra value created in the energy supply chain when local demand matches local supply. Small changes to the network codes could allow local suppliers to offer lower tariffs to local customers at the same time as offering better routes to market for energy from local renewable generators.
Actively facilitating local energy markets would open a new world of possibilities (pdf) for bottom-up innovation. Community energy groups can achieve levels of trust and engagement with their peers and neighbours that British utilities can only dream of. This make them well placed to un-stick the “sticky customers” that the CMA blame for being overcharged by the big six.Actively facilitating local energy markets would open a new world of possibilities (pdf) for bottom-up innovation. Community energy groups can achieve levels of trust and engagement with their peers and neighbours that British utilities can only dream of. This make them well placed to un-stick the “sticky customers” that the CMA blame for being overcharged by the big six.
New and novel business models would become viable for the first time. Not-for-profit local suppliers could offer discounted electricity exclusively to customers on pre-payment meters, or rising block tariffs where the less energy you use the lower the price you pay for it. Tech startups could use smart meters and near-real-time local balancing to allow demand-side response to drive down energy demand peaks – and therefore costs.New and novel business models would become viable for the first time. Not-for-profit local suppliers could offer discounted electricity exclusively to customers on pre-payment meters, or rising block tariffs where the less energy you use the lower the price you pay for it. Tech startups could use smart meters and near-real-time local balancing to allow demand-side response to drive down energy demand peaks – and therefore costs.
Energy service companies (pdf) could finally take off in the UK, where companies offer long term contracts for providing the outcomes we want from energy (for example, warm, well lit homes) rather than maximising unit sales of kWh, offering huge potential to drive energy efficiency and demand reduction. Negawatts (pdf) – energy not used – are the best kind of power when it comes to solving the energy trilemma, but have no traction under the present market conditions. Local energy markets would also go a long way towards stemming the flow of money out of our neighbourhoods, regions and ultimately the nation.Energy service companies (pdf) could finally take off in the UK, where companies offer long term contracts for providing the outcomes we want from energy (for example, warm, well lit homes) rather than maximising unit sales of kWh, offering huge potential to drive energy efficiency and demand reduction. Negawatts (pdf) – energy not used – are the best kind of power when it comes to solving the energy trilemma, but have no traction under the present market conditions. Local energy markets would also go a long way towards stemming the flow of money out of our neighbourhoods, regions and ultimately the nation.
There are exciting signs of progress – the big six have finally begun to lose market share to independents, even under the current hostile regulatory environment. Experimental social entrepreneurs Energy Local are currently recruiting for a pilot project that will supply local people with cheap wind and solar power from community coop Westmill when it is windy or sunny in Oxfordshire. Wadebridge Renewable Energy Network is working with Regen SW to trial a sunshine tariff (pdf) aiming to get around Cornwall’s grid constraints by using more of its solar power locally. These kinds of schemes could become commonplace with the right support from government and regulators.There are exciting signs of progress – the big six have finally begun to lose market share to independents, even under the current hostile regulatory environment. Experimental social entrepreneurs Energy Local are currently recruiting for a pilot project that will supply local people with cheap wind and solar power from community coop Westmill when it is windy or sunny in Oxfordshire. Wadebridge Renewable Energy Network is working with Regen SW to trial a sunshine tariff (pdf) aiming to get around Cornwall’s grid constraints by using more of its solar power locally. These kinds of schemes could become commonplace with the right support from government and regulators.
Sadly, there is nothing in the CMA report to suggest any awareness of the scale of opportunities for solving Britain’s energy trilemma that are being missed under the present system. The future of energy in the UK is not just clean, affordable and secure – it is local.Sadly, there is nothing in the CMA report to suggest any awareness of the scale of opportunities for solving Britain’s energy trilemma that are being missed under the present system. The future of energy in the UK is not just clean, affordable and secure – it is local.