Reforming the Electricity Market - The Law of Unintended Consequences?

Barely a day goes by without energy hitting the headlines - whether it's huge corporate profits, rising consumer prices or the debate about polluting fossil fuels versus the aesthetics of wind farms.

Barely a day goes by without energy hitting the headlines - whether it's huge corporate profits, rising consumer prices or the debate about polluting fossil fuels versus the aesthetics of wind farms.

There are good reasons for this. We are at a time of unprecedented policy change in the energy market, with the government currently figuring out the £110 billion investment that's required to make our energy system fit for the future - and there are many different factions competing with one another to have their say on how the money gets spent.

As the UK's only 100% renewable electricity supplier, Good Energy's position is clear - we want to grow green generation in the UK - and we believe that the consumer is key to achieving that.

We've always believed in listening to what our customers want; this was affirmed when we topped the Which? energy supplier customer satisfaction survey at the start of the year, for the second time. This wasn't just a great accolade for Good Energy but for the cohort of smaller energy suppliers, who took the top five places in the survey - despite only having around 1% of the overall energy market between us. In my view, this clearly affirms that the innovation smaller suppliers are bringing to the energy market is working for customers.

So, I am particularly worried about the industry regulator Ofgem's proposals to reform the electricity retail market. Although they claim to want to encourage more independent suppliers, I think they could have the opposite effect.

Ofgem is proposing to allow energy companies to have only one, standard, variable rate tariff - in the industry we call it an evergreen tariff - whilst allowing an unfettered proliferation in the fixed tariff market. Inevitably that means that suppliers will limit innovation to fixed-term, fixed-price tariffs.

Most energy bills are divided into a fixed standing charge per day (the cost of delivering energy to your home) and a per unit cost for the energy you actually use. Ofgem is proposing to set the same standing charge for the evergreen tariff for all suppliers. It's fairly intuitive that fixed costs are higher for smaller players than larger ones. So either Ofgem sets them too low to cover smaller suppliers' fixed costs, so their variable costs will have to be uncompetitive, or too high so the larger suppliers make a healthy return on the fixed charges and can afford to charge less for their variable costs. This is far from a level playing field.

One potential casualty of this could be the Green Energy Supply Certification Scheme, which has been a valuable way of dispelling greenwash in the industry since it was launched in 2010. It guarantees the provenance of green tariffs and therefore encourages households and small businesses to use renewable electricity to reduce their carbon emissions, stimulating investment in new renewable generation in the process. But, if suppliers are only allowed to market one, standard, variable-rate tariff, they aren't likely to choose a green one - unless they are a 100% renewable supplier, and there's only one of those!

Other potentially innovative schemes are also under threat. For example, those linked to wind farm developments which could offer discounted local electricity tariffs and ensure that communities benefit financially from having a wind farm in their midst. This would also reduce local objections to new sites. Tariffs linked to smart meters have the potential to give households more control over their energy use and help suppliers manage a smarter grid system, bringing costs down.

Good Energy has a proud track record of campaigning for an energy market founded on simplicity and transparency, so that the consumer, not the supplier, is in the driving seat. But there is no need to sacrifice the kind of innovation that helps deliver just that. This will become increasingly important as our market becomes more intelligent and consumers' expectations increase.

Ofgem appears to be sacrificing the best elements of the energy market of tomorrow to gain headlines today. Instead, it must recognise that tariff simplification has to be undertaken without harming the kind of innovation that is in the best interest of consumers, the best interest of the market and the best interest of the UK.

A simpler, clearer and more transparent energy market? Definitely. In the way that Ofgem proposes? No!


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