Dermot Nolan speech at Energy UK Annual Conference: Energy customers in the future?
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Our CEO Dermot Nolan appeared as a guest speaker at the Energy UK Annual Conference 2015 on 21 October 2015. You can read a transcript of his speech below.
“Good afternoon. Thank you for the opportunity to speak at this year’s Energy UK annual conference.
The theme of this year’s conference is choices. It’s also a recurring theme for the industry at the moment. How should the energy market best serve consumers? And how should regulation best support this?
The Competition and Markets Authority is currently considering a wide range of remedies – I’m not sure if they would use the word ‘choices’ – to answer these questions.
It might seem a lifetime ago – to me anyway – but when I joined Ofgem in March 2014 one of my first actions was to refer the market to the CMA. We did not think the market had been working in the interests of all consumers for some time. We still have concerns.
Winter wholesale gas prices this year are at their lowest levels since 2009.
Over the last year alone, wholesale gas prices for this winter have fallen by around a third.
This has resulted in better deals for many consumers who are on fixed tariffs. But for the vast majority – the 70% of consumers who remain on standard variable tariffs – energy bills have fallen very little this year. This issue was at the heart of the CMA’s provisional findings in July.
The CMA found strong evidence that the large suppliers are exploiting their market power by overcharging inactive customers who are on standard variable contracts compared to those on fixed deals.
Last week [15 October 2015] the Secretary of State for Energy and Climate Change repeated her challenge to suppliers to respond to the fall in wholesale prices by cutting bills. It’s a challenge we support.
In a properly functioning market, when costs fall, competition should be driving down prices for all consumers, whether they are on fixed rate or standard variable tariffs.
We at Ofgem are not embarrassed to repeat ourselves even at the risk of sounding like a broken record – we urge all consumers to shop around and switch if they can get a better deal.
But as much as some of you might like me to, I’m not here to talk about the details of the CMA’s proposals.
We look forward to seeing the CMA’s final remedies next year. We will work with them and the industry to make sure that they succeed. That means all of us working together. Something that, at times, we haven’t all been good at in recent years.
Of course, the CMA isn’t just looking at fixing what has gone wrong in the past. It is looking to the future – and we are too.
Its final remedies should work not just for today’s consumer but tomorrow’s as well. New technologies like smart meters are likely to transform the energy market and bring in new entrants from the hi-tech sector and elsewhere.
To ensure that consumers enjoy the full benefits of such innovation and greater competition, that also means looking at how the market is regulated.
The CMA wants supply licences to more flexible. In particular the CMA has been quite clear that one of our RMR reforms restricting suppliers to offering four core tariffs is likely to be removed to do this.
I have been quite clear about this too. I stood here this time last year and said that the four tariff rule was not a long term solution.
Before the CMA publishes its final report – and as we look ahead to a post–CMA energy market – change is already happening now.
The rise of the independent suppliers is gathering pace. According to our new indicators which we published last month as part of our work to monitor the market, almost 11% of households now buy their energy from independent suppliers. Ten years ago the figure was less than 1%.
But this is only the beginning. More innovation bringing many more changes is coming down the tracks. Our energy system will be more complex and interconnected than ever before.
That presents big opportunities but also challenges both to the energy industry, and us as the regulator. Managing major change is never easy and not without risks. This is what I want to talk about in the rest of my speech.
Before I start talking about what tomorrow’s energy market might look like, it would be helpful to spell out what kind of market we, as the regulator, would like to see.
We want an industry which is open to innovation, not resistant to it. We want a more competitive industry which is easier for new entrants to join. In short we want an industry which is capable of being disrupted by powerful new innovation which benefits – and engages – consumers.
And as I paint this utopian vision of an energy future, where does the regulator fit in? As the regulator we will help industry, consumer groups and the government work together to make sure that all consumers enjoy the full benefits that innovation can bring.
And to protect consumers who risk losing out. We also need to work together to communicate to consumers how they can benefit from tomorrow’s energy market. We want consumers to welcome these changes and not feel that change has been forced upon them.
For me, one litmus test of whether we have succeeded – or failed – will be smart meters. For many consumers, smart meters will be the most significant – and most visible – example of innovation in energy coming into their lives.
In 2020 will consumers say that having a smart meter in their home gives them greater control over how they use energy and saves them money? Or will they think smart meters have been imposed on them? Or just as bad – will they not think about their smart meter at all – will it become another untouched black box under the stairs gathering dust?
It’s all very well for us to talk to each other about lots of exciting innovations at industry events. But if innovations like smart meters do not benefit or engage the consumer, we will have failed.
So to answer my question – what do we want tomorrow’s energy market to look like – we want it to be innovative, competitive and efficient. And with engaged consumers at its heart.
Other rapid changes are already having a big impact on the energy system. Solar is the biggest example.
The uptake in solar PV has far surpassed what anyone was forecasting just a few years ago. This chart gives you an idea of the scale, although current estimated installed capacity is now even higher at around 8GW. This compares to forecasts made in 2012 of around 1.5GW for 2015.
Under these forecasts, we were expected to hit around 7GW capacity in 2030. But we’ve already gone beyond that point today, 15 years ahead of schedule. This solar revolution has come about thanks to a massive fall in costs.
The pace of such unexpected changes poses big challenges to the industry and Ofgem. In the South West of England, Western Power Distribution is saying that it cannot connect any more large generators for a number of years because of the take up of solar. Other distribution grids face similar capacity issues because of the growth in solar farms.
We are challenging WPD and other distribution network operators to come up with better solutions to prepare for and adapt to a wider range of future scenarios.
More change is round the corner. A mass roll out of energy storage is in sight as battery costs, as we have seen with solar and onshore wind, fall dramatically. This could transform the energy system.
In the not too distant future, we could have batteries not just in electric cars but in the home, office blocks and industrial sites as well. More renewables and storage have big implications not just for how electricity is generated but also how it moves around the network.
Distribution has traditionally been the junior partner to transmission, feeding into the much larger arteries moving power around the country. As distributed generation grows and baseload power stations capacity falls, more power will be moved around local distribution networks instead.
Distribution network operators, rather than transmission network operators, may play an increasing role as system operator balancing demand. This has implications for the future of our grids.
As distributed generation grows, will we need to invest as much in our electricity transmission networks?
There have even been some headlines about a “death spiral” for all electricity grids. If costs continue to fall, the combination of solar PV and battery storage makes it possible for customers to go off the electricity grid altogether. And as more customers go off grid, the costs for those remaining rises – increasing the incentive for others to jump ship too.
It’s happening now in Hawaii. I’m not predicting that it will happen here – unfortunately the UK is not as sunny as Hawaii.
So while we will need grids for decades to come, it’s likely that more customers will go off grid in the future. We need to ensure that whatever happens, our network charging structures are fair and efficient and do not discriminate against any particular group of consumers.
Suppliers aren’t immune from these changes either. They face competition from new types of businesses and not just from other suppliers and not always ‘for profit’. Local authorities such as Cheshire East Council are now supplying energy locally with the help of Ovo Energy under their communities model.
The business model of supplying energy itself could also come under threat. In the future will the value come from helping consumers control their energy costs for example through smart meters? Will the value come from aggregators helping to balance the system by incentivising large energy users to consume less energy at times of peak demand – for example by using air conditioning at different times?
Other players – for example Google NEST – are looking to enter the market to mine the data explosion that this kind of automation could herald.
There will be other changes which no-one – including us – have thought of. Regulators don’t have a crystal ball to predict the future – nor should we try to. It’s our job to put in place an agile regulatory framework which is best able to adapt to the changes which we know are coming – as well as whatever else the future may throw at us.
We’ve talked about the future energy market – so what should this future regulatory framework look like?
I mentioned earlier that the CMA wants supply licences to be more flexible to allow innovation to flourish. This approach fits in with our ongoing review of how we regulate for a fast changing energy market.
We want to move away from a box ticking approach to regulation where we micro–manage the industry using a growing list of prescriptive rules. This box ticking approach doesn’t always result in the best outcomes for consumers. Unnecessary rules stifle competition and innovation and make it harder for suppliers to take the initiative.
In the future, we will rely more on principles to achieve better outcomes for consumers. This will put much greater onus on suppliers, in particular senior management, to work out how best to do this.
A change in culture is needed on both sides. We need to work more closely with suppliers in an open and constructive way to help them through this transition and beyond. The rest is up to them.
Let me be clear. This is not light touch regulation. Suppliers will continue to be bound by rules governing their conduct. But under our plans, they will have to obey not only the letter of the law but the spirit too. And we will be as tough as ever in taking enforcement action against suppliers who fail to deliver for their customers.
We began this journey towards regulating based more on principles when we introduced the standards of conduct in 2013. These make it a licence requirement for suppliers to treat consumers fairly.
And in case anyone thinks these principles are a soft option for suppliers, we are currently investigating two suppliers – npower and ScottishPower – over whether they have met this requirement. And if we find that they have not, they will face enforcement action.
We will be consulting on the next steps in December and will listen closely to what you, the industry, as well as consumer groups have to say.
As part of our review of how we regulate for a fast changing energy market, in February we began a consultation trying to understand non-traditional business models and whether we are doing enough to encourage them.
I’ve already mentioned one example of a non-traditional business model – a local authority which becomes an energy supplier. But we expect many different types of new business models to develop, particularly those offering flexibility services to balance the system, such as aggregators for example.
One of the things stakeholders told us in their responses was that the current regulatory regime is getting in the way of new players offering these flexibility services. Many stakeholders told us that regulation needed to be more agile and flexible. That incumbents may be protected by a complex and prescriptive regulatory regime which makes it harder for disruptive new entry and expansion.
There is a similar problem over industry codes preventing new entrants disrupting the status quo, which is something we’ve taken action over. Industry codes are the technical protocol governing how the system operates – for example how suppliers transfer customers who have switched. The codes have been drawn up by the industry, which means they can tend to favour the needs of the companies who were around at the time.
We are acting to streamline the code governance process and have been talking to the CMA about the potential for more radical institutional reform.
To sum up briefly. Major change is around the corner. The transformation of the energy system is already happening. It provides an opportunity to redefine the relationship between industry and consumers which too often in the past has been remote and disconnected. We want consumers to be switched onto the benefits that innovations like smart meters offer and from increased competition.
Other changes have the potential to boost security of supply and reduce costs for consumers and businesses. As regulator, we need to change too.
We’ll strike a balance. We’re not going to try and micromanage this transformation. That would stifle the very changes we want to see happening.
We will let companies innovate and provide new services which are in the interests of consumers and which will make the system work better.
But we’re not going to just sit back and watch it happen either. We will intervene where necessary to protect consumers. And we will make sure no consumers are left behind and that everyone benefits in tomorrow’s energy market.
I invite all of you in the industry, consumer groups and the government to help us achieve that common goal.”