The Treasury should reset energy market administration in the Comprehensive Spending Review. It should free up Decc to work on strategy and policy, make Ofgem a pure regulator and hack back the overgrowth of energy market bodies. According to a think tank paper published today that would theoretically save hundreds of millions of pounds and make the system leaner, more accessible and fit for purpose.
The Policy Exchange report makes the case for rationalisation by pointing out the level of duplication and the glut of energy bodies trying to deliver government policy and a functioning market. The current set up, it notes, has spawned an industry of regulation specialists within multiple energy companies. In turn that has created a feedback loop that makes the market more complex and cumbersome.
Bonfire of the energy bodies
The report lists 22 energy delivery bodies, which currently cost the taxpayer £523 million.
It suggests reorganising the market with Decc at the top overseeing policy and strategy – but leaving policy delivery and energy system planning alone.
Ofgem meanwhile could be relieved of functions it has absorbed – such as policy delivery and advising on security of supply – and move back toward pure regulation.
The rest of the various bodies and delivery agencies could be streamlined into three main groups, suggests Policy Exchange:
- An Energy Delivery Body, assuming responsibility for the delivery and management (but not development) of energy policies.
- An Industry Codes Body, responsible for administering the eleven existing industry codes.
- An Independent System Operator (ISO), combining system planning and operation functions, with electricity and gas market settlement activities.
Deliver us from duplication
The delivery body, into which National Grid could be transferred, would take responsibility for everything from security of supply through subsidies, to energy efficiency and fuel poverty. Those policies are currently delivered by 10 separate entities but legacy entities could then be disbanded, says the report. Also, some delivery activities could be transferred from public bodies such as the Environment Agency, so the delivery body could handle activities including the EU ETS, CRC and CCAs, as well as Salix Finance.
The industry codes body would give one body power to manage the industry codes. That would mean faster market changes and reduced complexity with less potential for foot dragging by companies resistant to market change. It is also something that Ofgem and the Competition Markets Authority are already considering.
Having an independent system operator (ISO) would mean taking the system operator function away from National Grid and rolling it in with settlement, currently undertaken by Xoserve and Elexon. The new body would handle short-term system operation and planning – and also take a lead role in advising long term planning.
In addition to managing grid connections and directing investment in transmission infrastructure and setting charges, the ISO could also handle smart meter data functions – and potentially have a lead role coordinating distribution networks as the move towards demand side response and smart grid becomes reality.
Should Treasury consider adopting any of Policy Exchange’s recommendations it must mitigate the risk of further undermining confidence in UK energy policy, the report notes. There would also be transition costs to take into account, but these would translate to “significant savings over the medium term,” claims Policy Exchange, with a more competitive and efficient energy market to boot.
Read the report here.