Jonathan Brearley, CEO at Ofgem, gave a briefing on the energy market as part of a webinar for the Institute for Government yesterday (23 January).
Brearley discussed the rising costs of energy bills and their implications, as well as what consumers can expect in the coming year as a result of the energy market’s persisting volatility.
The CEO covered five action points to help develop a fairer, more flexible and robust energy market which have been summarised by Current± below.
Build a future system operator for success
Although the energy market is experiencing an improved outlook following a mild winter and the improving situation with France’s nuclear fleet, Brearley warned that the UK must remain “vigilant” and “cautious” for the future.
Brearley discussed the need for a holistic plan for future system operator on both a national and regional scale. Ensuring that this infrastructure, once planned, is delivered efficiently, will allow the system operator to proactively set planning parameters for network companies and thus, “vastly increase the pace of investment”.
What would be critical in this approach would be anticipating generation, meaning that generators will be able to connect to the grid as soon as they are ready, replacing the more incremental approach. This, Brearley explained, could accelerate large transmission projects by two or three years.
Moving forward, Ofgem is reviewing the institutional framework at regional and local levels to deliver a more connected approach.
Reform electricity wholesale market
A prominent consideration Brearley highlighted for reforming the wholesale market, was to ascertain how to “break the link” between gas and electricity prices.
“Ultimately, we need to recognise that geopolitics is playing a stronger hand in this country’s energy decisions than we have planned for, or that we would like it to,” said Brearley, highlighting the need for a transition towards “more homegrown, secure and renewable sources of energy supply”.
“In a large measure” Brearley continued, “the best way to achieve this is to move as quickly as possible from fossil fuel power to renewables and low carbon sources of generation”.
One option suggested by Brearley was to move all renewable generators onto existing Contracts for Difference (CfD) schemes to allow consumers to benefit from the lower electricity prices of renewable plants.
Brearly also identified the equally pressing need for a market that considers locational differences. Splitting the wholesale market so that prices vary across the country in accordance to local supply and demand conditions could also help tackle grid congestion.
Locational Marginal Pricing would be a complex consideration, but its benefits have been highlighted by non-profit innovation centre Energy Systems Catapult, who revealed last December that it “could be the foundation of a net zero system”.
Brearley also discussed the benefits of a redesigned flexible market which allows consumers to limit (or remove altogether) their energy consumption during ‘peak’ periods.
National Grid ESO has run nine Demand Flexibility Service (DFS) tests to date, with the most recent taking place yesterday afternoon (23 January). The tests request that consumers reduce their energy as much as possible during peak demand periods. There are now 26 DFS providers throughout the UK.
These tests are experiencing success amongst consumers, for example Octopus Energy customers partaking in Octopus “Saving Sessions” scheme – which pays customers for reducing their energy during grid constraint periods – moved almost 450MWh of energy consumption throughout four sessions.
Retail market reform
“We need a fundamental change in our retail business model and the policy and regulation that sits behind it,” Brearley said.
“To manage volatility that we might see in the future to shape this new market, we know that the regulatory and legislative framework around our retail market, as well as its structure, might need to change.”
In the medium term, Brearley suggested that this would entail building a “financially robust” market of companies that can invest in smarter technologies and treat customers fairly.
The current gas crisis, continued Brearley, “exposed several problems” with the retail market model. These were especially evident in the large number of supply failures between the end of 2021 and beginning of 2022.
Ofgem has suggested a series of proposals to promote financial regulation and ensure the retail sector is sufficiently resilient to withstand potential future. These include ringfencing renewable obligation receipts until 1 April whilst setting a trajectory for long term goals and implementing a new monitoring framework to make sure that suppliers’ liabilities can be met.
Re-examine approach to price protection
A redesigned, flexible market that can reward consumers for using energy when demand is at its lowest, would also support UK consumers, continued Brearley; this would involve analysing the way in which energy prices are regulated.
The Default Tariff Price Cap, which sets the maximum price a consumer will pay for their energy prices, worked well during a stable market but, Brearley warned, the volatility of today’s market paired with an inflexible price cap increases financial risk for suppliers.
In October 2022 the price cap was frozen at £2,500 for two years and was replaced by the Energy Price Guarantee, which can adapt quicker by changing every three months, to protect customers from unnecessary costs.
Brearley welcomed the Government’s intention to review the retail price regulation framework, praising its flexible approach to achieving the aims of the price gap.
“The fact that we are asking for demand response shows that we need to remain vigilant and we need to remain cautious about what may happen in the future” said Brearley.
Referencing Ofgem’s data, Brearley drew attention to the serious situation faced by vulnerable households by stating that, in the current market, households on medium disposable income will spend 10% of their earning on electricity bills, whilst those relying on state pension will spend as much as 29%.
To support vulnerable households with their energy prices, Brearley acknowledged that there was a “case for examining with urgency a social tariff that limits the impact of extremely high prices and reduces volatility for a defined set of vulnerable groups.”
Brealey concluded by saying that Ofgem would work closely with the UK Government to explore a “full range” of options.
Earlier this week, ninety-five charities and non-profit organisations recently signed an open letter to the chancellor Jeremy Hunt MP, calling for a social tariff to be implemented in the energy market to support vulnerable households.
