Reform like a Formula-1 Racing Team

This article was first published in Utility Week

Winning in F1 is all about executing a finely tuned plan, demanding co-ordination and managing a huge amount of complexity at speed. It’s about keeping ahead of the race while adjusting the mechanics and keeping the wheels spinning, as well as keeping an eye on the longer term changes you need to make over the whole season.

The current energy crisis has highlighted the importance of maintaining affordability for consumers and protecting our security of supply to mitigate the effects of the worst of global macro-economic events. To achieve both of these, while we pursue the path to net zero, we need to reform the sector. The government urgently needs a long-term race plan for extensive changes to the energy sector, in a market where prices are likely to remain high over the longer term. It is an argument that is at the heart of a new report produced by PA Consulting and Utility Week as part of the Energy Reset campaign.

Rishi Sunak’s announcement on 26 May appears to have responded to calls to both address the contribution that energy price increases make to the cost-of-living crisis, and the inequity of profits across the sector. However, it feels more like a tyre change than an overall race plan.

The announcement included welcome and specific interventions designed to support those households in the greatest need – converting the £200 loan already announced to a £400 grant in addition to a further £650 payment to more than 8 million low-income households.

The 25% Energy Profits Levy on Oil and Gas Companies will be a multi-year scheme, in place until wholesale prices normalise, but comes with a tax break for the companies affected allowing them to reduce their tax burden by committing to new investment in the UK energy transition.

If the £9 billion package announced in February was a sticking plaster – a point proven by the speed at which government has again had to intervene in the sector – this most recent announcement is another. But at least this time the structure of the measures sends a signal that we can’t lose sight of our climate goals even in the dire circumstances in which many households find themselves. However, it still lacks the commitment to reform that is needed to avoid the price volatility we are seeing today remaining a feature for years to come.

The longer-term race plan
Reforms are unpopular at the best of times, costing money and taking attention in businesses that are fighting for their survival. Despite the usual resistance to reform there is now a clear chorus of voices in industry calling for the crisis to be used to galvanise the case for change, and quickly. We must act now rather than wait in the false hope that former stability will return before.

That means taking more dramatic steps to address those structural elements of the market that no longer serve market participants or customers. We must change the wheels while the engine is running – this is a moment to treat industry reform like a Formula 1 race. The good news is that the Energy Bill is an obvious vehicle for that change.

More to do in the short term
As our report identifies, the first area that needs focus is energy efficiency, where extending schemes such as ECO would be a positive step in addressing a key barrier to decarbonising heat. Second, there is a need to reform the price cap including considering the introduction of a social tariff to give those who need it most an ongoing support structure

Energy companies should also take back control of the narrative. They have been criticised over prices, confusing tariffs and customer service over many years, but energy retailers are also sources of hugely positive contributions like green jobs, and home-grown green energy supply. Finally, there is a need to start preparing for whole system reform.

Medium term
The balance must be struck between structural reform and incremental steps. This means starting medium term changes now that align with climate change goals, policy objectives, and consumer protection. These can be implemented in parallel with both short-term fixes and longer-term reform measures.

This should include a full review of planning processes to speed the implementation of home-grown green generation. At the same time there is a need to reform network regulatory mechanisms to allow investment ahead of need, so the infrastructure can be put in place to support the energy transition.

This would allow faster roll-out of EV infrastructure and deliver our commitment to offshore wind. Infrastructure takes time to build and supply chain tensions and skill shortages are already evident. That makes it critical to start now to train the staff who will deliver our low-carbon ambitions.

There is also a need for proper consideration of how to implement flexible services and greater demand-side response, be that through the DSO model or other means.

Beyond
Whole system reform needs careful consideration. Although the need for urgency is real, care must be taken not to rush and risk severe unintended consequences.

The type of reform envisaged is wide-reaching. It needs to take into account (and take away) the barriers that exist to a fully flexible energy system such as the ability to integrate new low carbon technologies, and mechanisms to reward consumers for contributing to the system.

This requires a review of the fundamentals, like the nature of regulated network roles, and the appropriateness of the supplier hub.

Any reform will need to pursue the same goals as today, those of competition, consumer protection, and security of supply – but with entirely different mechanisms that will need to be redefined. For example, effective competition needs to be redefined in the retail sector, including what purpose competition serves when price competition and switching are no longer options.

We need to consider and incentivise protecting security of supply which was historically predicated on sufficient gas storage and which is now no longer the case.

Meticulously planning our way out of a crisis with the kind of roadmap that sequentially plots towards a destination won’t make the difference we need. The fall out of macro-economics, the accelerating path to net zero and competitive forces have all combined to leave the sector in crisis.

While hugely unsettling, the resulting pressure gives us the opportunity to think differently, do more, and do more in parallel. The stakes for financially pressured consumers, for the government, and for the energy transition have never been higher so we must act now where we can, and plan seriously for long term reform.