Cost of Energy Review: Market reset or chip paper?

On Wednesday this week, Dieter Helm’s government sponsored Cost of Energy review was published. It is a very good document.

Helm well describes the state of the UK energy market today with a history lesson in how we got here. He does not mince his words in what is wrong with how today’s market is functioning, and more importantly why it is not fit for purpose for the future.

He proposes a different approach with some radical but sensible changes. I might not agree with them all, and the focus is on the ‘what’ rather than the far more tricky ‘how’, but at their heart they articulate some clear and sensible principles:

- Government must stop trying to predict the future: Technology and innovation is now moving too fast to second guess. Government’s role must focus on creating a framework in which winning technologies prevail and research and development is properly supported. Helm’s suggestion is expansion of the ‘auction’ approach for all supported technologies where the best ones win, with the abolition of the existing FIT and CfD schemes.

- Nationalisation of the national and regional system operator: The argument is that by doing so, responsibility for security of supply could be passed over to the system operators. This responsibility would come with the autonomy to determine nature and frequency of capacity and flexibility auctions and products which would provide appropriate market signals and ensure that assets were being built where needed.

- Radical simplification of the supply model and supply bill: Helm rightly suggests that the list of complex subsidy collection schemes (eg FITS, CfDs, Capacity Market, RO) are consolidated into a single tax. Rather than taking the forecasting risk associated with them, the supplier would collect the consolidated revenues as a simple tax, in the same way as VAT or CCL. Likewise the costs of distribution and transmission. These moves would enable transparency in genuine supply margins and most importantly enable businesses to focus on the growth of new innovative customer facing technology models rather than regulatory risk management. The complex organisations required to manage the forecasting and operational risk associated with all the individual line items would go, as would the, not insubstantial, organisations currently collecting and reconciling the revenues at OFGEM e-serve and EMR delivery body. Energy retailers would be freed up to focus on genuinely innovative customer offerings, and the current complexity of supply would become a bit part in exciting new business models.

- Dismantling of BEIS and OFGEM in their current guise: And here is the big one. To achieve what is being suggested, the organisations that have created the current market and its complexity have to vote for Christmas. As Helm has rightly identified, much of the complexity in the market has resulted from self interest and successful lobbying playing through to policy and regulation which has created busy jobs for 100s of people in these organisations. To really reset the market, much of the existing work would have to stop and resources would need to be redeployed. The ultimate danger is that history repeats itself and ‘bits of’ Helm’s recommendations are incrementally added onto what is already a market that is being held back by policy and regulation, making matters worse not better. To succeed, Greg Clarke would need an independent strategic body focused on market simplification, with authority to drive change in a controlled way through the existing infrastructure. A very different culture and mindset is needed.

Ultimately what Helm’s report lays out makes sense, for the market that we are already in and in providing a suitable framework for the accelerating energy market transition. The report, whilst his personal view, should be taken seriously and acted on, but its messages are not easy. It made headlines on Wednesday evening, page 17 in The Times on Thursday- let’s hope not chip paper today.

This turkey is voting.