Juliet Davenport, founder and CEO of Good Energy and Darren Braham, founder and CFO of First Utility here call for a rethink on certain elements of proposed energy retail market reforms, which threaten future innovation when it comes to encouraging more intelligent energy use.
“If we are to have an energy system that’s going to keep the lights on in the future, we need to address how we give people greater stewardship over their energy use and more direct ways to reduce their increasing energy bills and carbon emissions – a smarter energy system than we have now.
“A smart grid can help the UK’s transition from an energy system that is stuck in the early 20th century to one that is firmly rooted in the 21st. Using digital technology to gather, distribute, and act on information about the behaviour of suppliers and consumers, the grid can operate far more efficiently, driving down costs as well as emissions.
“A hugely powerful tool, a smarter grid enables energy suppliers to create innovative tariffs that are aligned with consumers’ usage; by making it cheaper to use electricity at ‘off-peak’ times, consumers can save money and the electricity system becomes more efficient, reducing our reliance on the most carbon intensive 'peak' electricity generators – such as gas.
“The problem is, however, that Ofgem’s current plans to simplify energy tariffs – suppliers will only be allowed one standard, variable rate tariff - will restrict this type of tariff innovation. ‘Smart tariffs’ are by their very nature variable and just wouldn’t work in the fixed-rate, fixed-term format which Ofgem wants to impose. While we agree that the UK needs a simpler, more transparent energy market that puts the customer first, the plans, in their current format, are unlikely to deliver that. In fact they may risk making the situation worse, because they will favour the larger incumbent energy suppliers (the Big Six) over smaller, more innovative suppliers like First Utility and Good Energy which are developing new ways for customers to take better control of the energy they use.
“This is a significant missed opportunity, because the potential benefits for smart-grid linked tariffs are huge.
“The key problem today is that with a non-smart grid, most customers pay a flat rate for their energy. So while they have an incentive to reduce their overall consumption, and hence their bills, there’s no encouragement to shift energy demand to 'off-peak' times or to other times when the cost of energy should be lower. Customers therefore often feel powerless in the face of rising prices. If they could choose to save money by changing their usage patterns, then they would become more engaged.
“Other markets have developed to show how ‘smart technology’ can deliver genuine consumer benefits – from mobile phones to digital TV –– and our energy market can do exactly that too.
Certain types of consumer in particular would benefit from smarter tariffs linked to a smart grid: for example people who have microgeneration technology, such as solar panels or heat pumps; those who are rarely at home in the daytime; people on a renewable energy tariff and would be prepared to match their consumption with solar or wind output to save money; and people who want to pay a fixed monthly amount for their power.
“But the benefits are more widespread that for just individual customers. A smarter grid could allow local communities to match their consumption with local output – linked to a local generator, say a wind farm. This would also reduce transportation costs and losses, translating into cost savings for those communities.
“Clearly the market would benefit from a range of different innovative tariffs which suit different types of customer – particularly as microgeneration technology improves, giving people and businesses greater control of their energy. They deserve innovative tariffs too, but this requires flexibility, so that customers have the assurance that they can opt out of tariffs which aren’t working for them, and suppliers can adjust tariffs if unforeseen consequences occur. Without this, both suppliers and customers are likely to be far more cautious.
“It is vital that the industry helps consumers willing to engage more with their energy use, whilst protecting those who cannot. But the danger is that in its rush to simplify tariffs certain elements of the retail market reforms risk restricting innovative and genuinely beneficial tariffs, and doing more harm than good.
“We’d like to see a simpler approach to our energy market, yes, but not in a way that stifles the benefits to be brought about by retail energy tariff innovation and competition.”