Martin Cave's Speech at the State of the Market event 2019
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Supply and Retail Market
As you know our primary duty is to protect current and future consumers.
I found myself contemplating how to protect future consumers recently, when I spent the day babysitting my grandson.
He lets me know what he needs in general, but he’s not quite ready to articulate what he wants Ofgem to do – he’s only 3 months old.
But he has a fair chance of living to be 100.
Over the last year all of us at Ofgem have been thinking more about future consumers over the last year and about how to protect them.
This means helping to protect the environment.
The Government’s new target date for net zero carbon emissions brings this into sharper focus.
In July we published our new corporate strategy, setting out our three key objectives, one of which is to decarbonise to deliver a net zero economy at the lowest cost to consumers.
It’s important to recognise the progress made so far on decarbonisation – as well as the challenge that lies ahead.
As you will shortly hear from Joe, who will present our latest annual State of the Market report, the UK has reduced its emissions of greenhouse gases since 1990 at a greater rate than any other advanced economy.
This is mainly down to the huge growth in electricity generated from renewables - growth which Ofgem’s regulation and administration of government environmental schemes have supported.
But progress may be stalling just when we need to step up our efforts. Last year, greenhouse gas emissions in the UK fell by the slowest rate since 2012.
While the Government will continue to set the direction of energy policy, it has indicated that it plans to move away from direct decision making in the energy market.
This could leave Ofgem to play a bigger role in building Great Britain’s low carbon energy system as we push ahead on the road to net zero.
So what does Ofgem’s objective on decarbonisation - to deliver a net zero economy at the lowest cost to consumers - mean in practice?
We are hardwiring our decarbonisation objective into all our policy decisions.
Internally, we are reviewing the sustainability guidance given to teams to ensure that environmental impacts are robustly assessed.
We expect network companies in particular to step up to the challenge.
Their business plans for the next price control period, RIIO2, must help put the UK economy on the path towards net zero by 2050 at the lowest possible cost to consumers.
Of course, the journey to 2050 is a long one filled with uncertainty.
There is no energy sector equivalent of sat-nav to chart the single most effective, fastest and lowest cost route to this destination today.
So companies must be flexible and be prepared for different conditions they may come across along the way.
Their business plans must rigorously test the economic and technical assumptions made against a range of scenarios, including different carbon values, payback periods and asset utilisation rates.
We also require them to identify projects which have direct environmental benefits, such as reducing gas leaks from the pipe network.
If we do not think a business plan is compatible with the net zero target, we will not approve it.
And it goes without saying that our approach to decarbonisation sits alongside our enduring commitment to protect Great Britain’s security of energy supply.
Ofgem’s network regulation also needs to be flexible and prepare for different conditions – but without adding unnecessary costs to consumers.
This challenge is encapsulated in the debate about the role of anticipatory investment for electric vehicles.
That is, how much investment in new infrastructure like road-side charging points should be made in anticipation of forecast, not existing demand from electric vehicles.
Non regulatory economists might call it the “chicken and egg” dilemma.
We accept that some of the investment required to develop a public charging infrastructure must be anticipatory - as it almost invariably is to meet new demand.
If drivers cannot charge their cars when they need to, the electric vehicle revolution will stall.
But there is huge uncertainty about the speed of growth and the scale of charging infrastructure and grid reinforcement needed to meet it.
To address this we are considering adding an adjustment mechanism into the next network price control.
This would allow companies to scale up their investment within the price control period if electric vehicle numbers are higher than expected.
To hit the net zero target, we must also decarbonise how we heat our homes and businesses.
The direction of travel for heat is even more uncertain.
Electrification could be the way forward. Or hydrogen.
Energy efficiency also has an important role to play, as might making use of waste heat.
Ofgem must be careful to avoid unnecessary investment – and cost – in options that turn out to be dead ends.
So as with electric vehicles, we are considering introducing flexible mechanisms in the network price control to accommodate different pathways to decarbonise heat.
We are also encouraging gas and electricity distribution network companies to start working together at a local level to help facilitate likely collaboration on heat in the future.
Whether it’s for power generation, transport or heat, we will only support proposals which offer the best value, most effective and fastest route to decarbonisation.
So that each pound from consumers’ energy bills gets the biggest bang for their – and the planet’s - buck.
We won’t be writing blank cheques for network companies or suppliers or green lobby groups who are putting forward a low carbon project.
This goes back to our primary duty – which is to protect the interests of both future consumers AND of current ones.
Many consumers, particularly the vulnerable, struggle to pay for the last energy bill or next weekly shop.
Loading excessive, unfair costs of decarbonisation onto their energy bills today to protect consumers of tomorrow could undermine public support needed to tackle the climate crisis.
Our message is this: Ofgem’s priority, along with the rest of government, is to help deliver a net zero economy by 2050.
There will be a cost to do this, but our aim is to keep this as low as possible, affordable and spread fairly.
And experience so far tells us that, thanks to innovation and economies of scale, the cost of decarbonisation comes down over time and low carbon energy sources could become cheaper than fossil fuel equivalents.
Last month, the UK’s latest offshore wind farm projects were awarded contracts for difference for as little as £40 per megawatt hour, significantly lower than forecast wholesale energy prices, and a fraction of the £154 price for early projects in 2014.
Some also estimate that the lifetime costs of buying and running an electric car are already cheaper than their petrol or diesel equivalent.
So the saying that saving the planet doesn’t have to cost the earth – may really be true.
I will now talk briefly about Ofgem’s other two key objectives.
One of these is to enable competition and innovation which drive down prices and result in new products and services.
In the retail market, that means doubling down on competition and doing everything we can to empower consumers to get a better deal.
We are also increasingly applying the benefits of competition to our energy systems and networks.
For example, we are developing a competitive market for flexibility where participants are incentivised to provide services like demand side response.
But competition needs to be sustainable and must always benefit consumers in practice.
That’s why we are tightening up our licensing regime to drive up standards in the retail market and reduce the harm – and costs – of supplier failure.
We have seen customer services standards slip over the last year, particularly for smaller suppliers.
This week we announced enforcement action against four suppliers who have failed to make their Renewable Obligation payments.
If they – or any other supplier - fail to meet their obligations to the wider market, we will revoke their licence if necessary.
While in many cases competition is the most effective instrument, it is no longer the only tool we use, nor always the first we reach for.
This brings us onto our third objective - to protect consumers, especially the vulnerable.
The price cap is a good example. So severe was the detriment to customers on default deals that Parliament insisted that Ofgem intervene directly to cap prices to ensure they pay a fair price for their energy.
According to the price cap legislation, this protection can only be lifted before 2023 if “the conditions for effective competition” are in place which would prevent a return to the detriment of old.
Later this morning we will present the criteria we have published today setting out how we will establish whether these conditions exist.
We will make this determination to the best of our ability in an entirely independent way, and next summer we will publish our first assessment, although the decision to lift the cap rests with the Secretary of State.
We have also said that whenever the price cap is lifted, some backstop protection may need to remain in place for vulnerable or other groups of customers who may struggle to find a fair price in an increasingly complex digital market.
We will publish a new decarbonisation action plan early next year alongside our annual Forward Work Programme document setting out our overall plans in more detail.
As we set out on the long road to net zero by 2050, we are all custodians for future generations who don’t have a voice.
My grandson had not even been born when my term as Ofgem chair began a year ago.
But he’s far more likely to witness whether we hit the target than many of us in this room – and certainly me.
The decisions we make now – whether at Ofgem, government, industry or other stakeholders – will shape the legacy we leave for the generations to come.
Making the right decision for the planet is no longer just a moral imperative.
With the net zero target enshrined in law, it is also a legal one.
As we regulate to support the drive to decarbonise at the lowest cost, it will increasingly become a regulatory requirement too.
With the right policy and regulatory framework in place, a wave of investment, innovation and competition can propel us to our destination.
There will be obstacles on the road and short-cuts may be few.
There will be huge opportunities too, and jobs created.
We urgently ask you to join us on this journey.