Helm: Government should cease electricity market intervention… and start running the system

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Dieter Helm’s government-commissioned energy market review recommends scrapping most of it and starting again with a decentralised, public-private core. Perhaps most significantly, stepping beyond energy, Helm also urges a common carbon price across the economy to deliver carbon budgets.

By not following his recommendations, Helm suggests policymakers run the risk undermining security of supply, carbon budgets, UK industry, the transition to electric vehicles, hurting the fuel poor and locking in high costs for UK bill payers.

Beis, and other departments, are now mulling the 242 page document. Whether current or future governments have appetite for scorched earth policymaking remains to be seen. But the report makes insightful, reasoned and entertaining reading.

Bonfire of everything

Tasked with finding the most cost-effective way of meeting carbon targets, Helm  delivers a scathing assessment of interventions to date. Market auguries have been misread and expensive technologies pursued over the cheaper ways of decarbonising  the economy, he states. Poor assumptions and modelling from government and regulator have have driven up costs, the report underlines.

Nothing new there, and recommending that the state steps away from interventionist policy is possibly the Oxford economist’s least surprising proposal.

However, Helm also recommends public ownership of the organisational function of the transmission and distribution networks, taking some of the responsibility from market incumbents and introducing greater competition to their core roles, effectively reducing them to ‘contractors’.

These entities would run competitive auctions for security of supply and network services, thereby increasing competition and driving down cost, in Helm’s view.

Other recommendations include pooling all current low carbon and renewables subsidies into a single mechanism – an ‘equivalent firm power (EFP) capacity auction’ – which Helm believes will put the cost burden of balancing the system “back on those who cause them”. 

That would encourage investment by renewables generators in smart technologies and capabilities such as storage and demand-side response, he suggests. Furthermore, Helm urges caution over procuring firm capacity, suggesting that procuring flexibility may be more appropriate.

Helm also says low carbon and renewables subsidies should be “separated out, ring-fenced, and placed in a ‘legacy bank’ and charged separately and explicitly on customer bills” with industrial firms exempt. “Once taken out of the market,  underlying prices should then be falling,” he states.

On retail prices, Helm recommends a default tariff replaces Standard Variable Tariffs, based on the index of wholesale costs, the fixed cost pass-throughs, levies and taxes, and a published supply margin. A published supply margin, he has argued previously, means customers just need to look at that to work out where to find the best deal.

Wires crossed

Helm posits regulated network owners, national and regional, might be earning more than was assumed by those setting price controls, something others have also highlighted. He points to “the valuations infrastructure funds report to their investors, and in the premia to RABs [regulatory asset bases] in takeovers” to substantiate that theory.

The review sets out three redress proposals for Ofgem to consider to address outperformance and thereby cut costs to consumers in the short-to-medium term: “do nothing; arm-twisting; and a one-off resetting” of allowable revenues.

State-owned system operators

In the longer term Helm suggests the current price control formula has “run its course” and that “something much more flexible is needed” to regulate energy networks, i.e. not Ofgem.

He suggests a fundamental change to the structures and functions of networks and their regulation: semi-public ownership. That approach would mean much of Ofgem’s network regulatory role “at a stroke is no longer needed.”

The report recommends creating National System Operators (NSOs) and Regional System Operators (RSOs), with licence distinctions between distribution, generation “abandoned at the regional level, to be replaced by a single, simpler licence”.

Regional operators would then “be free to engage in generation and supply, and hence incentivise choices between investment in new-generation capacity, including renewables, and networks”, the report states.

Publicly-owned RSOs would be responsible both for security of supply and overseeing distribution, while DNOs “could in effect become contractors, and one among many competitive suppliers.”

A positive side-effect, Helm suggests is that regional supplier-distributors would then “sort out the misallocation of the smart meter programme to supply and not distribution”.

While “there is no need for a radical cliff edge: the introduction of the system operator model can be evolutionary, with a great deal of continuity built in,” Helm says it is “implausible for the NSO and RSOs to be owned by the current private network companies”.

Retreat and gain ground

The review is certainly radical. Implementing some of its proposals around harmonisation of subsidies and carbon taxes (which the government is starting to look at) would be relatively straightforward.

Taking ownership of public utilities, or removing some of their roles, might be less appealing. But taken as a package, and worked through, Helm dangles a carrot for the business and energy department:

“BEIS can gradually retreat and close down many of the activities it has taken on, on the back of the plethora of policy interventions,” he suggests.

Crucially, by raising the spectre of hitting energy companies – and the regulator – where it hurts, Helm gives the government all the ammunition it needs to make some much needed short-term gains.

Read the full review here.

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