Dealing with the energy crisis is today’s top political priority, and the government is preparing to apply a huge and expensive sticking plaster to the energy market, to protect consumers and the economy. On grounds of cost alone, this crisis package is not sustainable. The question therefore arises: what sort of energy market do we want when the plaster is removed?
At some future point, we all hope to live in smart, energy-efficient homes where making the best (and cheapest) use of energy is automatically managed for us and where all energy is green. Sadly, that utopian vision is many years away, so we need to work out what we do between now and then.
After privatisation, a small number of powerful incumbents ran the show and, despite the regulator Ofgem’s best efforts, there was little benefit for consumers by way of keener prices or improved service. The policy answer appeared to be more competition, so effort focused on opening the market.
A two-tier market developed: some consumers shopped around and switched every year in search of a better deal. The majority stuck with their existing supplier. These sticky customers often found bills creeping up as their loyalty was exploited. Politicians responded with the retail price cap.
It turns out that the price cap cannot protect consumers from high and volatile energy prices and also distorts the market. We also now know that many cheap deals that looked so enticing on switching platforms were unsustainable, as were many of the firms offering them.
Learning the lessons of the past, it should be possible to design a market for the decade ahead that is more in tune with what consumers need and want, still allows competition to flourish, and incentivises efficient energy use.
To get the debate going, here are my suggestions for market reform.
Universal provision of energy
A modest amount of energy could be provided universally at a regulated price that avoided sudden shocks for basic essential use. The costs of this would need to be smoothed over time. Net costs could be funded by top-slicing energy profits in upstream markets. It could either be provided by current suppliers or by others through a competitive franchising process.
The government would need to appoint an independent public interest body to set the parameters, determine the level, and organise delivery of a basic energy allowance. This could be Ofgem or a dedicated new body. A smartphone app would keep consumers informed of their energy usage and warn them when the limit was being approached. They could then be presented with options for top-up tariffs based on current market offerings. All households would need smart meters for this to work, so local taskforces may be needed to ensure they’re installed.
Major public interventions in dysfunctional but important private markets are not without precedent. The Low Pay Commission sets, or technically advises, government on, the national minimum wage that all employers must abide by. The National Employment Savings Trust runs the default scheme for auto-enrolled workplace pensions.
Boost competition in the market
A freely competitive market for energy above this basic level with less prescriptive regulation could be created. This would enable digital and zero-carbon energy services to develop.
Normal consumer law would apply, so contracts would have to be fair, marketing would need to be clear, and consumers would need to get what they paid for. Other than that, the current plethora of licence conditions and code requirements could be replaced with a single set of streamlined requirements on data protocols and the like. This would free up competition and innovation and take cost out of the system.
Clearly, developments would need to be kept under review to deal with any unforeseen problems, but the overall net consumer gain would be considerable.
Ditch the standing charge
The regressive standing charge could be replaced so that fixed costs (for example, to pay for networks) are instead recovered proportionately through unit rates.
Consumers are flummoxed by standing charges. Bill structure was never reformed post-privatisation, perhaps because monopoly networks found it convenient to levy a “tax” on all consumers in this way.
I’m not sure the standing charge is fit for the modern world, both because of its inbuilt unfairness (poor people in tiny flats pay the same as rich people in huge houses, regardless of how much energy they use) and because it obfuscates energy bills and blunts price signals. Imagine trying to cut your energy to an affordable level and having an unavoidable, uncontrollable standing charge ticking up on your meter.
With no standing charge, fixed costs would be added to unit rates in a proportionate way, and included pro rata in the basic universal tariff and in charges for energy services. The greater use someone made of the network, the more they would pay, which seems pretty fair.
Others may have better ideas. The important thing is that we open our minds to a different approach that learns from the past, delivers for consumers and is in line with our net zero future.
• Christine Farnish is former chair of public body Consumer Focus and was, until recently, a non-executive director of Ofgem
