Tom Crisp Editor 01603 604421 [email protected] Monday 25/09 – At the Labour Party Conference Shadow Chancellor John McDonnell confirms that a Labour government would bring ENERGY PERSPECTIVE 02 utilities, including energy, back into public control. The Energy Networks Association launches the first consultation on its Electricity Help the aged (and fuel poor) – the next social policy obligations Network Innovation Strategy. National Grid data reveals that in the – Robert Buckley three months to 22 September almost 52% of UK electricity generation was from low-carbon sources POLICY 05 Tuesday 26/09 – Anesco opens its 10MW Clayhill solar farm, with a Labour Conference focuses on renationalisation 6MW energy storage facility – the first subsidy-free solar farm in the Energy UK sets out industry UK. Following a year-long in-depth study, the CMA announces that it is priorities for Helm review setting clear rules for all online price comparison tools. BEIS Policy Exchange sets out roadmap to boost business announces that the government is providing £5mn of funding to energy efficiency support new exploration in the North Sea. Finnish power utility Fortum IPPR calls for simplification of officially launches a takeover bid for Uniper. energy bills Wednesday 27/09 – Research by Frontier Economics recommends REGULATION 12 comprehensive Buildings Energy Infrastructure Programme to achieve National Grid presents ideas on significant energy savings in UK homes. National Energy Action says future ESO incentives the report shows it is possible to tackle decarbonisation and fuel poverty simultaneously, provided efforts to improve domestic energy INDUSTRY STRUCTURE 15 efficiency are dramatically enhanced. The Renewable Energy Imperial finds solar and storage Association calls on the government to develop a charging could be cost-competitive by infrastructure strategy. 2030 Academic warns UK oil and gas Thursday 28/09 – BEIS statistics show coal’s share of generation fell reserves may expire in a decade from 5.9% in Q2 2016 to a record low of 2.1% in Q2 2017. The Welsh NUTWOOD 18 government sets a target of generating 70% of its electricity consumption from renewable sources by 2030. The EU Commission MCPD: the music stops but the dance continues – Gareth Miller approves a €222mn investment package to support the transition to a more sustainable and low-carbon future. Vattenfall’s £365mn Pen y MARKETS 20 Cymoedd windfarm, located between Neath and Aberdare, officially opens. Friday 29/09 – A letter calling on Prime Minister Theresa May to implement her election pledge to bring in a price cap on standard variable tariffs to domestic customers is published, having been signed by 192 MPs. In response, SSE says it believes in competition not caps, and any intervention should be simple to administer, time- limited, and maintain the principles of a competitive energy market. Media reports suggest RBC Capital is leading the sale of flexgen provider UK Power Reserve. Funding energy over 2mn eligible customers, at a cost of around efficiency and other £320mn per year. benefits for Beyond ECO2t the government has confirmed that vulnerable a supplier obligation will run until 2021-22 at least. consumers through As for the WHD, it has said it will also extend this to domestic energy bills 2012-22, maintaining current levels of expenditure has been an in real terms. Both schemes were introduced by important part of government, but are administered by Ofgem. Robert Buckley policy for more than Director 20 years now. The A Little soul 01603 604404 first energy efficiency [email protected] With a cost of around £1bn to be recovered schemes annually, the issue of supplier coverage of the administered through suppliers were put in place schemes remains an important one. Reflecting this, in 1994, before full competition came to the energy there has long been a carve-out for small market. They have become progressively more suppliers, reflecting their lack of scale and (usually) important in terms of both their scale and their unrepresentative customer bases. impact on the market-place. ECO has now to be paid by suppliers with more As current schemes approach maturity, active than 250,000 domestic “accounts” (technically a thought is being given by officials to their dual fuel household counts as two accounts, so replacement and consultations are promised early this is 125,000 customers), and selling more than in 2018. In this, the first of two Energy 0.4TWh of electricity and 2.0TWh of gas. The perspective’s, we consider the existing support liability date (the point at which suppliers notify baseline. A key question is which suppliers should their qualifying customers via Ofgem to BEIS) is 31 be subject to the obligations without loading December, with ECO compliance taking effect disproportionate compliance costs onto them, from the following 1 April. For WHD the dates are thereby harming competition. the same with just the account numbers threshold Everybody’s problem of 250,000 applying. Presently there are two important schemes. The energy efficiency scheme threshold was increased from 50,000 customers at the start of The Energy Company Obligation (ECO) is directed ECO (itself a successor to various previous at improving energy efficiency. Starting in 2013, the schemes, such as EEC and CERT, that had the second iteration of the scheme was introduced in same threshold). Once a supplier pushes through 2015, but was recently extended by 18 months to the threshold, it has to catch up with the obligation end September 2018 (ECO2t) as a transition period through a “taper” mechanism. Under this there is a to a new obligation. The new obligation, we are two for-one obligation for each new customer it told, will have even greater focus on fuel poverty. takes on, until it reaches the full obligation at At present BEIS estimates that households 500,000 accounts. receiving ECO improvements from suppliers will save up to £300 on their heating bill per year. It Figure 1: Indicative costs of energy policy schemes expected that by the end of March 2017 some 2011-12 to 2017-18 1.9mn homes would be impacted with installation 100 of over 2.1mn qualifying measures. The annual cost 80 is presently to the order of £600mn or 60 £30/customer (see Figure 1). 40 20 The Warm Homes Discount (WHD) has since April 0 2011 formalised previous voluntary arrangements where suppliers offered savings on bills to nominal) vulnerable consumers. The current regulations took the scheme into a sixth year, which will close CERT/ECO Warm homes discount at end March 2018. Its focus is a £140 discount to Cost/dual fuel household ( £ 2 The existence of the threshold and then the taper At the time of ECO design, there were eight has a very important influence on supplier growth competitors to the Big Six in the domestic market strategies. Many newer entrants approaching the serving 165,000 energy accounts (or 0.3% of the threshold put a brake on growth at least market). With hindsight its design at the turn of the temporarily. But once over it, there is an incentive current decade was pretty much concurrent with to dash for customer acquisition. In a market the high water mark of the integrated increasingly dominated by fixed price offers (which generator/supplier “Big Six” business model. restrict the ability to recover new costs), the judgements over pricing have had to be fine. Figure 2: Energy accounts served by SaMS 2012-2017 Different class 10,000 Back in 2011, DECC stated that the scheme costs 8,000 weighed more heavily on small suppliers unable to spread the fixed costs of compliance across a 6,000 large customer base, and therefore they could not 4,000 exploit economies of scale. Indeed, on the raising Accounts (k) of the threshold for ECO, officials stated the move 2,000 would increase competition, “which would bring down prices and encourage innovation, benefitting 0 energy consumers”. For the WHD, it was also asserted by officials that SaMS accounts outside ECO SaMS accounts with ECO the costs of compliance would be significantly higher for smaller suppliers. In particular, the Big The period since ECO was implemented has of Six had been involved in pilots to identify and course seem a proliferation of new suppliers into market the scheme to eligible customers, and they the domestic energy supply market. Since 2011 the generally enjoyed better access. share of the domestic energy accounts held by the Nevertheless, the issue of what might be small and medium energy suppliers (SaMS) has considered proportionate costs of these support surged to nearly a fifth. Our 31 July market share schemes has long been debated among suppliers. assessments put 8.7mn domestic energy accounts This debate came to a head in late 2013 after the outside the six largest suppliers. Indeed there are costs arising from tougher targets for ECO were over 50 suppliers now competing with the Big Six, blamed by the large suppliers as a contributor to and we assess nine of these as having crossed the 1 the standard variable tariff increases they levied threshold at end December 2016. Those SaMS that autumn. At the time some suppliers alleged that have an ECO now serve just over 6.0mn that the obligations cost upwards of £100/customer domestic energy accounts (see Figure 2). But the costs of ECO were slashed in 2014-15 as a But many smaller suppliers are still not subject to result of reduced obligation levels, and targets the obligation. Indeed some 30% of the customers were extended by two years to March 2017 to of the SaMS – or 5% of the total domestic market – allow more time to deliver required carbon are supplied by companies who are not subject to savings, in so doing lowering costs by 40% or so.