Is the government right to intervene in the energy market?

This article first appeared in Utility Week

Energy is generally considered a basic human right and access to it is essential for an adequate standard of living and to promote health and well-being. In that context, the chancellor’s intervention is appropriate and necessary, as without his package of support, millions of British households would be in fuel poverty.

It does, however, provide only short-term protection for consumers by subsidising and smoothing the impacts of the forces affecting the current energy market. It does nothing to protect them in the longer term.

Given the price cap is currently reviewed every six months and that the wider global forces that have pushed up prices are significant and outside of our control – it’s difficult to imagine that these issues will be resolved in time for the next review.

Consumers will undoubtedly face further price shocks as the global supply and demand balance adjusts and the demand for gas as a transition fuel from coal to clean energy persists. That means the next price cap will bring more of the same and more sticking plasters will need to be applied.

The provision of energy has been largely taken for granted. What has become clear is that, with recent events, energy is now part of the public conscience in a way that it has never been before and this raises the question of what value do we as society put on it. We should be striving to deliver a cost effective and efficient system that is affordable and meets our net zero ambitions.

Our energy system can only be insulated from the worst of global macro-economic events if we become more self-reliant, and more efficient in our use of energy.  Maintaining our longer-term security of supply has and always will be a political issue and one lesson from today’s situation is that we need a faster path to home-grown renewable energy generation.

This has been the focus of government policy for at least a decade and there has been laudable focus on decarbonising the energy system, but we now face an acute crisis where we need swift action to also protect our longer-term energy security, and provide affordable energy.

That requires urgent intervention to secure and decarbonise energy supply. This means new approaches to how our electricity is generated, the infrastructure we need to transport it to customers, and how wholesale markets are priced to recognise intermittency and reward flexibility provided at a local level.

Looking first at generation, there are instruments available (Contracts for Difference – CfDs – and Power Purchase Agreement – PPAs) that were designed to signal the need to build renewable generation over the longer term and provide stable revenue streams for investors.

These instruments have allowed the sector to attract investment far faster than would have otherwise been the case. Every CfD auction has been oversubscribed and materially lowered the cost of new low carbon energy sources ahead of time, so this has to be seen as a success. However, we have to build at a far greater rate than today to compensate for coal and gas replacement, which is currently slowed by obstacles such as delays to planning and consent both for generation and infrastructure.

The challenge with wholesale markets is that they were designed at a time when generation was large scale, centrally-planned, carbon-intensive, and largely predictable in their output.

As renewables become an ever-larger part of our energy mix, the way energy is priced needs to evolve. We used to know how much demand there would be for energy with relative certainty, and we had a system with additional capacity that could respond to demand or supply shocks.

With the proposed electrification of transport and heat it is harder to predict where and when demand will arise. It is harder to forecast when generation will run, as it is affected by weather patterns, and we are more vulnerable to global political and macro-economic factors.

This is all further exacerbated by the delay to new build nuclear which means that having the right, cheap, energy available when it’s needed in the location required is a more complex undertaking now than has ever been the case. Together, these factors highlight that we need systematic reform – we need to re-evaluate the risk and return across the energy value chain from generators to retailers.

System reform can help us to address the problems we’ve outlined here, but it takes time. Time to design, time to plan, and will no doubt need legislation to underpin whatever interventions prove necessary which will then need time to pass into law. Recent events show us that legislation can be implemented rapidly in times of crisis, and it is clear to all that we face a crisis in energy.

There are those who would claim this undermines free market principles but we should be honest and acknowledge that successive governments, including today’s, have already intervened substantially in the sector to the point where free-market principles no longer apply.

The often-quoted trilemma of how to achieve affordability, security of supply and decarbonisation has never left us, but we have, understandably, been distracted from tackling it by major world events.

Our path to net zero has been laid out in the 10-point plan but the viability of many of these technologies depends on wholesale energy prices and appropriately rewarding flexibility. High prices discourage adoption and will stall our progress.

Government can do more, and it is within its gift to address every element of the trilemma for the long term, but it needs to do so with careful and focused action.

The price pressures from the global market fundamentals will continue for many years to come. We can prepare ourselves to emerge stronger by taking action to reform the whole energy system from generation through to wholesale markets, retail and infrastructure provision, recognising that each of these parts are intrinsically linked.

Without that action, we will be storing up problems for future generations.