A sticking plaster for the energy market

Today Political Climate is joined by guest blogger Richard Hoggett, my colleague from the Energy Policy Group at the University of Exeter, assessing this week’s deal on energy tariffs:

This week DECC officials managed to deliver, at least in part, on David Cameron’s surprise announcement in the commons that the government would legislate to force energy companies to put consumers onto their lowest tariff. As ever, the devil will be in the detail, but on the face of it, reducing the complexity in energy tariffs is a good thing. However, there has a been a mixed response from industry and consumer groups to the announcement and for good reason, as this sort of on the hoof policy making both fails to deal with the underlying drivers of rising prices and is likely to have a range of unintended consequences.

One likely impact of the policy will be a levelling out between the most competitive tariffs and the most expensive. This will be good news for those non-switching consumers who should be relatively better off, whilst the engaged and active switchers are likely to be worse off; not everyone will be a winner. There is a concern that the lack of competition that the policy creates could see the overall level of energy prices rising.

A key issue for me is around engagement and the role of people within the energy system. Currently people are passively characterised, viewed as being unaware, unengaged and distanced from the production, distribution and use of energy. Arguably, even in terms of price, given that many people still do not actively switch, this view carries some weight. Changing the level of engagement is far from easy, but could bring a wide range of benefits, such as encouraging the uptake and/or acceptability of low carbon technologies, helping to reduce demand and supporting behaviour change – such steps would reduce the cost and increase the speed of a low carbon transition. Some have suggested that by simplifying tariffs consumers will become more engaged as it will be easier to compare what different suppliers are offering. I think this could easily go the other way, as people have also been given a signal that they will automatically get the best deal from their supplier. So why engage when the work has been done for you?

Another key concern is around the potential for tariff simplification to reduce the incentive to innovate. More clarity is needed, but it seems that just at time when new approaches will be needed to support the development of a low carbon energy system, like smart grid pilots, and opening up opportunities for demand-side response (including things like time of use tariffs, or new tariffs for electric vehicles) options could be considerably limited by reducing the number of tariffs suppliers can offer. Innovation is central to moving towards a low carbon economy, not just for existing and new technologies, but the wider political, social, and economic landscape in which they sit. Clearly a smarter system will also need smarter users, so this comes full circle back to the need for better consumer engagement.

This is really a policy about billing, rather than price, and it will be some time before we know the outcome of this policy scramble on either. It seems to do little to address the underlying issues and opportunities for reducing prices, such as sorting out the retail market, enabling new entrants, improving the efficiency of peoples’ homes and their energy use behaviour, or supporting innovation, etc. It also does little to address the long standing and growing concerns from investors around the need for policy certainty and the impact that this has on the cost of the energy system. Depressingly, Cameron’s intervention may have also actually cost consumers more by delaying the whole process, as he pre-empted what Ofgem could have done anyway without the need for new legislation.