Electricity market reform promised to limit ‘ludicrous’ pricing

Never has there been a more pressing time to see changes in the electricity market. With the wholesale price of power now hitting as much as four times the price it was a year ago, businesses are really struggling to absorb the impact.

We frequently get asked why, when the UK produces so much renewable power from free resources, is the cost of electricity still so high? At the time of writing, almost 50% of our supply is coming from solar, wind and hydro sources.*

As Boris Johnson succinctly explained at the recent G7 summit:

“People are being charged for their electricity prices on the basis of the top marginal gas price, and that is frankly ludicrous.“

We need to get rid of that system and we need to reform our energy markets as they have done in other European countries.”

Need to untie price of electricity from gas

It seems that the government is finally publicly acknowledging that the only real way to get sustainably cheaper power prices – without spending lots of public money – is to untie the price of electricity from the price of gas by reforming the way the wholesale market works.

Only then will prices come down to more accurately reflect the real cost of the UK’s growing share of renewable generation.

This is a topic we covered in the first two of our ‘Understanding the UK Energy Market’ reports earlier this year, which you can download here.

It’s also something our policy team has been busy looking at for some time.

More detail expected soon

We’re going to see a lot more detail emerge over the coming months, as the government shares more on its vision for wider energy market reforms, as part of its Review of Electricity Market Arrangements (REMA).

We’ve already seen the Energy Security Bill, which is now making its way through Parliament (we discuss what this could mean for business in our recent blog).

And we anticipate the Department of Business, Energy & Industry Strategy (BEIS) to release some more information about REMA over the summer.

National Grid, in its role as Electricity System Operator (ESO), has already produced a report recommending that the UK moves to a location-based market, allowing different regions to harness the energy produced in their area more cost-effectively.

We also expect to see proposals emerging from energy regulator Ofgem.

Reforming non-commodity charges

As well as looking at the retail energy market, Ofgem has also been instigating reforms to the way in which many of the non-commodity elements that are added to energy invoices are calculated.

We’ve covered this ‘Targeted Charging Review (TCR)’ and what it means for business consumers in lots of detail.

Last week, we also looked at reforms to one of the biggest policy costs added to electricity invoices currently – the Renewables Obligation (RO). (See our blog here.)

This already high cost (around £26/MWh) has become higher still due to the additional cost added by the ‘mutualisation’ of unpaid RO charges from suppliers who’ve gone bust.

Ofgem failings led to billions in extra costs

Ofgem’s wider role in regulating the energy industry came in for criticism in June when the National Audit Office published a report saying its approach "created an energy market built on shaky foundations. As a result, many companies simply collapsed under the shock of energy price increases.”

Our policy team estimates the cost of transferring the customers of these failed suppliers to new suppliers – as well as mutualising unpaid policy charges and the ongoing costs of maintaining Bulb’s operations – to be at least £5 billion.

"Once again, it's the public who has to pay for the mistakes of those charged with protecting them,” said Meg Hillier, who chairs the Public Accounts Committee.

Need for simple, clear rules

Ofgem has said it’s already making changes to address these failings.

What we’d like to see is simple, clear rules put in place, informed by the 2008 banking crisis, that prevent the misuse of customer's own money by all participants at all times.

So we’ll be watching any developments with interest. And we’ll, of course, keep you informed as soon as any announcements are made with regard to all aspects of these much-needed electricity market reforms.

*As at 2pm on 6 July. Source: https://grid.iamkate.com/