Five issues shaping our energy market

By Helen Munro September 22, 2017 10:31 am

This article was first published in BusinessGreen

 

How do you regulate and legislate an industry in constant flux?

This challenging question was the starting point for an energy breakfast hosted by The Whitehouse Consultancy earlier this month. Clients and colleagues joined our panel of Conservative frontbencher James Heappey MP and Shadow Energy Minister Alan Whitehead MP, with Andrew Ward of the Financial Times moderating the discussion.

The focus was ostensibly on how technology was changing our electricity grid. But when it comes to these roundtables, the temptation to discuss everything from Hinkley to toasters is hard to resist. How can you consider the rise of distributed energy whilst overlooking importance of electric vehicles, and the decarbonisation of transport more generally? Similarly, considerations around a price cap, the Big Six, and the emergence of challenger suppliers seem incomplete without exploring the tentacular growth of global tech companies such as Google and Apple, intelligent devices, and how these should be regulated. The conclusion here is that energy systems are becoming fundamentally more interdependent and connected.

In exploring what this means for the sector moving forward, five themes emerged:

1. Managing Change: The Nokia Story

The reputation of Nokia was based upon engineering expertise in producing hardware. Far from being laggards, the Finnish company was actually the first to produce a touch-screen, internet-enabled phone in the late nineties. However, as the pendulum swung towards software and design, Nokia was crushed by the emergence of Apple’s iPhone. From being a market leader as late as 2008, Nokia’s resilience quickly eroded before its eventual sale to Microsoft five years later. On the other side of the fence, Apple launched its tenth handset this week.

The story is allegorical for the challenges facing energy companies. The shift away from centrally-controlled, fossil-powered generation will undoubtedly create winners and losers. We have seen unprecedented numbers of new companies entering the supply market, and the incumbents are now looking to respond to the shifting ground. Centrica sold its last big power station earlier this summer and will now focus on its flexibility and customer-facing services, whilst Drax’s acquisition of Opus Energy and push into batteries this week offers further evidence of a wider trend for diversification.

In this context, the government’s expected role – managing change through transitional arrangements, and clipping the wings of the vanguard – feels defensive. But those advocating a more aggressive approach from Whitehall would do well to remember the impact of Thatcherite policies towards deep coal pits in the 1980s. The closure of an entire industry within a few years was brave, but the lack of adequate transition planning resulted in enduring regional unemployment and deprivation. Many areas are still recovering. Greg Clark and his team must therefore navigate a complex course that avoids the pitfalls of rewarding incumbency but at the same time meets wider economic and societal considerations.

2. Tackling heat head-on

Whilst the trajectory is clear in some areas, heat policy remains ambiguous. Progress against decarbonisation objectives has stalled, and the Government currently lacks a credible strategy to drive down carbon in a sector which generated around 20 per cent of our annual greenhouse gas emissions.

Each of the main options such as hydrogen, district heating, and electrification carry significant drawbacks. But the consensus during our roundtable was that other ‘low-regret’ measures could deliver more immediate returns and needed political backing. Buildings under construction should not require retrofit within the next decade, for example, whilst the existing housing stock could be aggregated into more-investable bundles. Alan Whitehead lamented the scrapping of the zero-carbon homes standard by the last Chancellor, and said that the energy ‘train set of the future’ required certain decisions to be made now.

All eyes now turn to the Clean Growth Plan, which will set out the plan for meeting the heat challenge when published later in October. It was observed that the route to publication might be rather smoother now, given the overhaul in Downing Street advisors since the general election. Former Chief of Staff Nick Timothy’s latest article for the Telegraph confirms the worst fears around his scepticism towards climate change and dislike of renewables. After a year-long delay and with Timothy out of the picture, many in the sector will hope the plan is worth the wait.

3. The Smart Money

In a continuing environment of capital restraint, how can government money achieve the maximum impact? The dramatic cost reductions – and increasing deployment – we are seeing in renewables will lead to the gradual withdrawal of subsidies. The Conservatives have redoubled efforts into R&D, signing up to Mission Innovation at COP21, and pledging to increase spend in clean tech to £400m per year by 2021. The hope is that through initiatives such as the Industrial Strategy and the Faraday Challenge, the state can kick-start a programme of work before the private sector takes over the heavy lifting.

Labour are willing to take a different approach – introducing locally-operated energy companies to catalyse action on efficiency and the retail market, and giving a clearer endorsement of specific types of generation. This featured prominently in the Party’s general election manifesto, whilst other ideas promoted by the Shadow team include procuring up to 6GW of gas-fired power stations to ensure security of supply in the mid-2020s.

These divergent examples highlight the very different visions on the role of the state presented by Jeremy Corbyn and Theresa May. A consensus on where government efforts are best directed is likely to remain elusive.

4. Making this stuff a political priority

Getting many politicians (and the voters) to recognise the value of essential upgrades in energy infrastructure is a big barrier facing the industry. This contrasts to Whitehall policy in other areas such as the superfast broadband roll-out, where there are few detractors. A recent debate on rural broadband in Westminster Hall featured enthusiastic contributions from nearly 20 parliamentarians, yet when network and transmission charges are discussed, you can regularly count the attending MPs on one hand. High turnover among energy ministers and shadow ministers does not help, with the portfolio often perceived as a stepping stone onto better things.

Most people would recognise that access to clean, cheap and reliable energy is just as essential as a good internet connection. But communicating this message in a busy parliamentary calendar (further crowded by Brexit) is clearly more important than ever.

5. Playing in the regulatory sandbox

Finding a compromise between responsiveness and certainty is never a straightforward task for regulators, but Ofgem is beginning to develop a roadmap. During the roundtable, representatives acknowledged that the role must change, and presented the work of Innovation Link, an Ofgem scheme that supports companies looking to enter the market with new innovative products. At the core is a ‘regulatory sandbox’ –  a kind of play-area for businesses to explore propositions without the usual levels of regulatory compliance. This type of controlled experimentation should be welcomed and well-publicised (the second round opens in October).

The themes listed above pose difficult questions to those of us working at the interface between politics, policy, industry and the public. This new landscape is fundamentally more disrupted, distributed, digital, and most importantly, uncertain. But at the same time, these themes offer exciting opportunities for those companies willing to embrace challenge and lead from the front.

Helen Munro is managing director of communications agency The Whitehouse Consultancy.

The Whitehouse Consultancy will be hosting several more breakfast events this year. To register your interest in attending, please email Stephen.Roberts@Whitehouseconsulting.co.uk

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