Joel Hagan

It’s good to hear Ofgem touting radical solutions to the challenges faced by the country in relation to energy in its Project Discovery announcement.

No doubt Ofgem has been stung into action by the Conservative Party’s plans for drastic job cuts at the energy regulator, as part of a sweeping overhaul of British energy policy and suggestions that it would be stripped of all its strategic powers on energy security. It may also have been stung by criticism of its abject failure to deliver on its principal statutory objective to protect the interests of customers by promoting effective competition, mistakenly believing that switching is the key performance indicator for competition.

The energy industry needs a bigger rethink. An industry structure is needed that responds to the enormous challenges of the next 50 years, not one that arose from political ideology in the 1990s and has been found to have shortcomings. We changed the railways. We can change the utilities. We need to cut the industry into three pieces like they did in California.

Generation

Generators should be licensed by the regulator for generation capacity by fuel type in line with Government policy. This allows the mix of fuels to be controlled to achieve environmental and energy security objectives. It enables long-term planning for capacity. It also enables influence over the geo-political imbalances created by such choices.

If these decisions are left to the market then the lowest cost solution will be the only certain result. Generated energy should be compulsorily pooled. This ensures that vertical integration cannot be exploited. Regulators worry too much about horizontal integration in narrowly defined markets.

Distribution

The national grid should be merged with the regional distribution networks r ight up to and including the meter.

There are currently five entities associated with the meter which is self-evidently a mess. The resulting entity should be owned and run like Network Rail because it’s a natural infrastructure monopoly like the lines and signals on the railways. It needs significant investment over the coming years as generation from renewables is plugged into the grid in locations that are different from the places where historically we have sited generation (close to coal mines for coal-fired, close to gas terminals for gas-fired, and on coasts for nuclear), smart metering (communicating meters and the communications infrastructure) is rolled out, and the smart grid (efficient networked assets, plugging local generation and storage into the grid etc.) becomes a reality.

The new entity would be responsible for collecting and making available raw billing data.

The complexity of the current structure is a major hindrance and a significant contributor to the cost of adapting to the future. Compare our progress on rolling out smart meters with that of California.

The costs of this entity would be charged to retailers, allowing the cost of universal service obligations to be shared equitably.

Retail

The retailing of energy to customers should be separated entirely from the rest of the industry and enabled like mobile virtual network operators.

This will lower the barriers to entry and increase competition, ultimately improving value for money. It will enable companies with strong customer propositions to extend their offerings.

Tariffs can be designed quickly and flexibly to meet customer needs and energy can be bundled to be sold as a service not as a commodity. Meters installed by the new national grid will be designed in a modular way so that retailers can easily add/remove functionality; this gets over the so-called ‘stranded asset’ challenge.

Let’s hope Ofgem now brings forward radical proposals for areas of the industry other than generation. It might also turn its attention to its own role, governance, and composition. What’s needed is little short of a revolution.

The challenges for the industry will be very different from the regulation by price that was required when privatisation first came along. Let’s hope too that this Government or the next is listening or the lights may yet go out.