Short term, the most significant changes to the energy market won’t be caused by Brexit
Turn on the news these days and you could be forgiven for thinking you had fallen asleep for several months such is the pace things are moving. The past few weeks have seen events likely to have a major impact on the generation, supply, use and regulation of energy in the United Kingdom. But it’s not the EU referendum that will have the biggest impact. Ministerial changes and significant publications by the Competitions & Markets Authority (CMA) affecting the energy market are what will demand immediate attention.
Following the European Union (EU) referendum vote, there are several questions facing the UK energy market. Not least, what will the impact be on prices and the environment? The price of oil and gas is set by international markets as opposed to the EU, so we don’t expect to see wholesale change here. Nor does the EU have any mandate on the energy mix of a member state, meaning the UK is and will continue to be free to define its means of generation, be it nuclear, wind or shale for example.
Where the UK and EU are particularly entwined is through the development of common infrastructure and climate change policy. However, it is unlikely that any future Brexit will have much impact on the former.
What will impact the energy market is the abolition of the Department for Energy and Climate Change (DECC). While the UK has historically led on much the implementation of environmental legislation within the EU, there is a now a risk that climate change no longer appears to be high on the government agenda. It is quite feasible that this will manifest itself in a reduction in the investment of low carbon initiatives or even in carbon targets and green subsidies.
What will certainly drive change in the energy market in the short term was somewhat buried between the referendum and party leadership campaigns. It was the publication of the Energy Market Investigation by the Competition & Markets Authority (CMA) which sets out significant changes for energy suppliers and as a consequence, for Ofgem too as the market regulator. The headlines from the CMA’s report include:
- Suppliers must now identify customers who have been on expensive tariffs for three+ years and share their details with rivals who may get in touch with them and encourage them to switch provider
- A price cap to be introduced on prepayment tariffs to
- Suppliers are no longer limited to offering only four tariffs to a customer.
So what does all this mean for the market, the regulator and for consumers?
For all three groups it will mean significant changes. For consumers, it should result in tangible financial savings. With the removal of tariff limitations, price comparison websites are now able to negotiate exclusive rates with energy suppliers, which in turn could increase competition and drive down prices. Engaged customers should find themselves in a position to make considerable savings. However, the question remains, how easy will a non-engaged consumer find it to wade through the array of new choices to be made available?
It can be argued that the CMA report does not address the key issues of making switching easier and more transparent as far as it could have. It is also possible that the results of the CMA report will lead to increased customer confusion and a storm of junk mail and unwanted contact as suppliers battle to attract rival customers on the three year tariffs. However, there is cause for optimism and the price cap should be watched with interest to see how it affects the most vulnerable energy consumers.
For Ofgem, the challenge is to react to the changes in the most practical and efficient way possible. It is likely that in the near future license conditions will require change and with this comes a requirement on the regulator to understand how to effectively monitor and ensure compliance against them. Add to the mix, a move to a more principles based approach to regulation and it becomes clear that Ofgem will need to continue to adapt at pace.
The introduction of principles is designed to put greater responsibility on suppliers to deliver value for consumers while giving them the flexibility to deliver greater innovation to the market. How the relationship between supplier and regulator evolves over the next few years is one to be watched keenly, however, with less hand holding and prescription, we should see both sides keen to ensure there is a clear understanding of what is expected. While consumers of course will be hoping the ultimate outcome is a better deal for them.