Dieter Helm's Cost of Energy Review Published

27 Oct 2017 03:15 PM

Study concludes that current policy, regulation and market design are “not fit for purpose” and are cause of high costs.

Independent government-commissioned study concludes that energy costs are “significantly higher” than necessary and that current policy, regulation and market design are “not fit for purpose”.

According to Helm, the government has “moved from mainly market-determined investments to a new context in which almost all new electricity investments are determined by the state through direct and often technology-specific contracts.”

Consumers are not fully benefiting from the falling costs of gas and coal, the rapidly falling costs of renewables or the network efficiency gains coming from smart technologies. Helm blames the complex nature of our power market for rising costs and urges government to streamline green energy policy to encourage cheap, consistent power.

To rectify the situation, Helm sets out a suite of 67 recommendations, including:

• Feed-in tariffs, contracts for difference and the capacity market auction should all be merged into a unified equivalent firm power (EFP) capacity auction. Low-carbon generators would be forced to bear the costs of their intermittency. This would support converged service offerings stimulating the market.
• The government should establish an independent national system operator (NSO) and regional system operators (RSOs) under public ownership. They should take on a number of duties currently undertaken by distribution network operators (DNOs) and Ofgem.
• The RSOs should be responsible for securing local energy supplies and should do this by contracting out system requirements.
• Carbon taxes and prices should be harmonised by setting a universal carbon price across the whole economy. There should be a border carbon price to prevent emissions being exported.
• The government should consider how to develop and enhance integrated pollution control to bring greater consistency between the CCA targets and the other policy objectives.
• Separate licenses for generation, supply and distribution should be replaced by a simpler, single license, at least at the local level.
• Standard variable tariffs should be superseded by default tariffs based on an index of wholesale costs, the fixed cost pass-throughs, levies and taxes, and a published supply margin. The government’s proposed price cap should take the form of a cap on the supply margin.
• The broadband USO requirements should be assessed alongside the smart meter roll-out. BEIS and the Department for Digital, Culture, Media & Sport should coordinate the timings and scales of these investments .
• The market in the back-up for intermittency to assist the renewables should be further encouraged, so that the intermittency can be met through a portfolio of contracts. This market should further bring into play demand responses, storage and back-up generation. These suppliers of services will then be able to match up with the expected intermittency of the renewables generators. The renewables can then bid for less de-rated EFP contracts.

Helm rightly notes that our power sector is going through a technological transformation, with technical change happening at such pace that predicting what this transformation looks like is a challenge. His recommendations seek to avoid picking winners – a condemnation he makes of current policy – and instead calls for a focus on the framework within which the private sector can bring new ideas, new technologies and new products to the end users. Helm views current uncertainty as a positive. Suggesting that the design of energy policy and the inventions required to achieve objectives should be driven by this uncertainty around the detail of our decarbonisation pathway.

Helm suggests governments role should be to design infrastructure and industrial strategies that follow generic paths; rather than predicting future winners and creating scenarios in the hope of stimulating the market. Government should develop polices which “go with the grain of digitalisation", focusing on the use and regulation of data, as well as R&D and innovation policies.

Helm suggests a package of measures which are a major shift from original energy market design and the EMR. They would create a simpler, more competitive structure, where rather than low-carbon technologies being grafted onto a fossil-fuel based system, a new system backed up by new technologies, data, and new energy services can be created.

Whilst recommendations seek to incentivise decarbonisation, digitalisation and smart demand a question remains around how to incentivise developments which the market may see as uncompetitive; but are a necessary component of future innovation (eg smart meters). There is also no comment on how to manage increasing convergence between sectors and the impact it will have on infrastructure planning. Once area where this is already being seen is EVs and connected and autonomous vehicles.

The report does take time to focus on digitalisation and smart technologies, which is welcome. In particular Helm identifies the need for complementary broadband requirements if we are to realise the ‘information-age’ of energy and associated new markets, in particular driven by smart meters. However greater focus on the evolutionary impact, now and in the future, of ‘smart’ is lacking. In particular he underestimates the fundamental shift that had already occurred and misses an opportunity to identify policy failures in developing the digital infrastructure (beyond just broadband) required to unlock markets. Helm also fails to focus on the importance of standards development and the important role Government can play in identifying priority risks, and convening industry to identify core principles which technical solutions must deliver upon.

Helm has recommended a near total rethink of our power market, suggesting changes to how the market is structured and regulated, as well as how new capacity is procured. Government now has to answer the question of ‘what next?’.

The full report is available here.