I have decided to retire when my five year term as chairman of the UK Gas & Electricity Markets Authority (GEMA), Ofgem’s ruling body, comes to an end next September.
Thinking back over the last few years I’m amazed at how quickly time has passed and what an interesting and challenging time it has been to be involved with Ofgem. Energy has remained at the centre of political debate throughout my term. When I started as chairman in October 2013 Ed Miliband, who was then leader of the Labour Party, had just delivered his 2013 conference speech in which he promised that a Labour government would introduce a cap on energy prices.
Given our concerns that the energy market was still not working for all consumers, we decided to refer the energy market to the Competition and Markets Authority (CMA) the following year. The CMA’s final report, published in June 2016, put forward a series of remedies which we are implementing to help people get a better deal, particularly those on poor value standard variable tariffs. In October this year the Government published a draft bill to introduce a temporary price cap for customers on default tariffs, such as standard variable tariffs, while these remedies and other reforms we are implementing take effect as we deliver a smarter, fairer and more competitive market. It’s fair to say that media and political scrutiny of the retail energy market remains as intense today as it did when I began my term back in 2013.
My term has coincided with a period of major and rapid change across the energy sector. In the retail business, we now have over 60 independent domestic suppliers, with a combined market share fast approaching 20%, compared to less than 1 per cent a decade ago. The six largest suppliers have had to adapt to survive: three of them have announced plans to restructure their businesses away from the previous “vertically integrated” model of generating your own electricity to supply your customers. In recent weeks, SSE and npower have announced plans to merge their supply businesses.
Elsewhere, we have seen other major changes. Deployment of renewable generation has surpassed even the most optimistic forecasts while a number of coal plants have closed and the contribution of coal plant to total generation output has fallen dramatically. GDP growth has been decoupled from energy demand since the financial crash in 2008, thanks in part to significant improvements in energy efficiency. In other words, energy demand from homes and businesses has continued to fall even as the economy grows.
Some of these changes – such as the rapid growth in solar generation for example – have happened far more quickly than we or anyone else could have predicted. While we certainly don’t have a crystal ball, what will be the challenges for the next few years and what may surprise us?
Well, first, I don’t think the pace of change is going to slow down at all. We are moving rapidly towards a world of smart meters as the Government’s programme of rolling them out across the UK by 2020 gathers pace. At the last count, over one in four households had a smart meter installed.
At the very least this will mean domestic consumers will no longer be billed on the basis of estimated consumption. But more importantly, the data smart meters will make available will potentially enable the development of a range of new business models. We are aware of some of these through our Innovation Link, a ‘one stop shop’ offering support on energy regulation to innovative new business models, but I think there will be many more.
Looking further ahead two big changes on the horizon are the large scale emergence of electric vehicles (which I think may surprise everyone by its pace) and the decarbonisation of domestic heating (the replacement of gas heating with cleaner alternatives such as electric heating or using hydrogen). These have far-reaching implications for consumers, for the industry and for us as regulators.
So, life will remain interesting, challenging and busy!
I started this blog by mentioning how quickly, for me, the last four years have gone by. I have enjoyed (almost) every minute of it. I’ve had the privilege of working with highly talented and committed people who really want to make a difference for energy consumers.
I will regret not being involved in the long term developments I’ve mentioned in this blog but, in the meantime, there is a lot still to do before I step down next September to make sure that Ofgem is fully ready for the challenges ahead and I look forward to that.
In the more immediate future I’m looking forward to the Christmas period and I wish you all a very good break.