Opening up the energy markets; speech to Energy UK
This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Edward Davey delivered his speech on energy markets to the Energy UK conference.
I want to start today by saying how crucial your work is to the country.
You produce and supply the energy that keeps our society running.
That heats our homes, lights our streets and powers our working lives.
Every single day, working together, you supply the country with one billion kilowatt hours of electricity.
Enough power to make 50 billion cups of tea every day. Or cook over 750 million meals.
But it is not only the power you produce that people need.
It’s the 103 billion pound contribution to the economy you make every year.
The taxes you pay.
The 660,000 jobs the industry supports.
The new, modern, climate-friendly energy infrastructure you are building to make sure Britain is energy secure.
So a Britain of blackouts remains a memory of our past, not part of our future.
And now the economy is growing again, I expect this contribution to grow too – more jobs, more tax revenue, more investment in essential infrastructure.
And today I want to talk about this energy security challenge we face.
To ensure we have secure and affordable supplies of energy while we reduce the carbon emissions that cause climate change.
Serve the public
But I have also come today to deliver a tough message.
Trust between those who supply energy and those who use it is breaking down.
You’ve admitted as much to me.
For it is so difficult for people to work out what exactly they are paying for, that they fear the big energy companies are taking them for a ride when bills go up.
Fair or not, they look at the big suppliers and they see a reflection of the greed that consumed the banks.
So this is a ‘fred the shred’ moment for the industry to avoid the reputational fate of the banks.
You deliver an essential public service, so your industry must serve the public – and the public must have trust in what you do.
And we want to see that trust rebuilt.
The Government and Ofgem have been acting to open up the market, to increase competition, and put consumers in control of where they get their energy, and how they use it.
I want the energy companies to be part of that effort as well.
And that means opening up.
Opening up the wholesale markets, opening up the retail markets and opening up your books.
To rebuild trust Government and society will not accept a closed shop in energy.
And so I want to talk about the changes we are putting in place to make sure the market work for consumers – keeping prices and bills as low as possible as we make sure energy supplies are secure.
But let me start first with that energy security challenge.
Because just as we need to work together to restore trust, so we need to work together to keep the lights on.
Energy Security Challenge
You are all well aware of the scale of the task we face.
Energy is the largest infrastructure programme across government.
We face a decade or more of structural transition as 20% of our old or polluting power stations go off line.
Replacing that capacity and moving increasingly towards low-carbon generation, as our climate-change commitments require, will be a herculean task requiring £110bn of capital investment between now and 2020 alone.
Everything we do has to ensure that we drive investment into the system – not scare it off or freeze it out.
But that is also why energy is one of the biggest opportunities this country has to boost economic growth, speed up the recovery and create new high quality jobs in every nation and region of the United Kingdom.
This includes upstream extraction as well as infrastructure and networks.
We are providing the right conditions to make production in the North Sea commercially attractive with a system of incentives and tax reliefs worth billions of pounds.
Capital investment this year is expected to hit a record high of £13 billion with 167 new licences granted.
The indications coming out of Sir Ian Wood’s Review, which will report fully next year, suggest there is still more we can do with the potential to boost future returns by at least £200 billion.
Onshore, we are at an early stage with shale exploration – but it could also to add to indigenous energy supplies with significant benefits to the economy and energy security.
So we have put incentives and the framework in place to ensure that the necessary investigations take place to establish viability in the context of safe and environmentally friendly extraction.
But by far the biggest energy security challenge is to make sure that we create one of the most competitive and attractive electricity investment markets in the world that drives the transition to a cleaner, low-carbon energy system.
And that is exactly what the Energy Bill going through Parliament is for.
This is putting in place the most robust and comprehensive legal, financial and political framework for energy policy this country has ever had.
And – despite all the noise in the current debate over consumer energy bills – the Government’s Energy Bill is supported across the political parties.
Significant political consensus, worth reminding people of.
And that consensus, on the fundamentals, was confirmed once again by the Opposition front bench only last week.
So we expect the Bill to become law by the end of the year.
And the detailed proposals for implementing Electricity Market Reform we published last month will provide further certainty to industry and investors.
This builds on the progress over the summer with the publication of draft strike prices for renewable electricity under Contracts for Difference, a draft of the contract itself, and detailed proposals for the Capacity Market.
The fruits of bringing this greater predictability and certainty to investment are already showing.
Latest estimates suggest that at least £35 billion has been invested in new electricity infrastructure since 2010.
And much more is in the pipeline.
Renewable electricity capacity has increased by almost 40% since 2012.
Renewables are now supplying a record 15% share of electricity generation.
Halfway to the objective of generating around 30% of our electricity from renewable sources by 2020.
In the past 12 months alone, we have provided consent for seven major energy infrastructure applications worth about £20 billion, with the capacity to generate electricity for more than 6 million homes.
That, of course, includes last month’s announcement that we have reached key commercial terms with EDF for the first new nuclear power station in a generation at Hinkley Point C.
So we are providing a framework for investors and the energy sector that gives long-term certainty with predictable returns, lowering risk and the cost of capital.
This is the market stability the Government is creating for the energy industry, to ensure energy security.
So, yes - the market has to work to meet our energy security needs and our historic infrastructure challenge.
Yes – we have to use the market to drive the decarbonisation that is imperative to meet climate change obligations to future generations.
So we do need our energy companies to be profitable.
So they can invest in our energy infrastructure, secure the energy supplies of the future, develop more energy efficient technologies, and create jobs.
But it is imperative that the markets, both wholesale and retail, deliver for the end-user.
Because ultimately markets that fail to meet the test of affordability for customers are markets that are broken.
Centrica’s Chief Executive, Sam Laidlaw, talked last week of the energy sector being in the ‘eye of the storm’.
Sam and I don’t always agree, but on this he is right.
When people see energy bills rising way above inflation year on year, you can understand the anger and frustration this causes.
People fear shareholder interests are being put in front of the needs of families and the fuel poor.
I am clear that the industry needs a reasonable rate of return.
Because without profit we won’t get investment.
And without investment, we risk a return to blackout Britain.
But those profits cannot come at the expense of the elderly, the vulnerable, and the poorest in our society.
Customers are not just cash cows to be squeezed in the pursuit of a higher return for shareholders.
And frankly, the latest round of bill rises have not been fully and openly justified.
And the public are right to challenge us, both Government and industry, to look at everything we are doing to see if we can bear down on rise.
So let me start with what the Government is doing before looking at what we expect you, the industry to achieve.
We do the country no favours if we resort to knee-jerk, quick fixes that won’t work.
Some on the right wants us to turn our back on our social and environmental responsibilities by axing programs to help the fuel poor and boost green energy.
The left is in danger of reverting to type by bashing business, and proposing to fix prices.
But neither of these approaches actually solves the problem in the long-term.
Cutting energy bills by scrapping outright social and green levies punishes the fuel poor and punishes the future generations who will confront the full force of climate change.
If we were to pull back on our ambitions for tackling fuel poverty and energy efficiency, we would actually be hurting people.
And as I told the RenewableUK Conference last week, the level of support for investment incentives for renewables will remain as planned and as published because these are essential for investor confidence in the renewables sector and our commitments to a low-carbon economy.
Of course, as the Prime Minister has said, these subsidies and obligations shouldn’t exist one second longer than necessary – and that is why we keep them under continuous review.
And there is a valid debate about the method through which these policies are paid for – through bills, through taxation, or some other means.
So it is right the Government looks at how we can reduce the impact of policies on bills and we expect to make announcements on or before the Autumn Statement in December.
But I am also clear that the role of Government is not to fix prices.
This will have a huge detrimental impact on the investment we need to deliver secure energy supplies.
And an investment squeeze would mean a huge blackhole in Britain’s energy security – risking blackouts and higher prices in the long run.
Price fixing would crush competition rather than encourage it.
Putting small suppliers out of business as they struggle to manage unpredictable rises in wholesale prices.
And, in the way it has been proposed by Labour for 20 months while they work out what to do next, it will have no permanent effect.
It’s a sticking plaster with no sticking power – it’s a con.
And, in my view, one of the most irresponsible proposals from a leader of the opposition made in modern times.
The best way to keep bills as low as possible for the long term is to continue to pursue our twin track strategy.
First energy efficiency – to help people use less energy and therefore pay less – through initiatives like the Green Deal, ECO and energy demand reduction.
We are creating the first energy efficiency market in the world – so it will take time.
But there will be no backing down on energy efficiency – because this is the way to bring bills down permanently.
The second is through robust and rigorous competition in the markets to bear down on costs and prices – keeping them as low as possible.
And that is what I want to concentrate on now.
We’ve seen small suppliers gain substantial business on the back of this year’s high price rises.
And today’s announcement by EdF lays down another welcome competition gauntlet.
People should switch to get better deals from companies who don’t deliver on price or on good customer service.
And I will do everything I can to enable that choice.
And make that choice more available to the most vulnerable in our society too – through collective switching and working with trusted third parties like the Citizens Advice Bureau, Age UK and National Energy Action.
For competition and switching will only work well when there is a relationship of trust between suppliers and consumers.
And only when consumers have real choice and can control who they buy from.
So let me deal first with the issue of trust before turning to choice and control.
The Government’s commitment to look how our policies impact on bills must be matched by a commitment in industry to open up your books and set out exactly how you are bearing down on your own costs to make bills as low as possible.
As Sam Laidlaw said, “the starting point is about transparency, and the energy industry does not have a good story to tell here.”
There is nowhere near enough scrutiny of how supplier operating costs and profits are made up and why these costs are justified.
The industry must be much more transparent and Ofgem will have our full support to introduce whatever regulations are necessary to deliver that greater transparency.
Ofgem already require the big energy suppliers to produce annual statements showing the costs and profits of their generation and supply activities.
This makes the market clearer for consumers so they can see the margins energy suppliers make on the different parts of their business.
But the overall transparency of financial flows within companies remain opaque.
Ofgem will deliver by spring next year, a full report on the transparency of the financial accounts of the energy companies and ways that that could be improved, building on the work already completed by accountancy firm BDO.
So I urge you to engage fully with the current Ofgem consultation.
This should not be a reactive process.
You need to come forward with ideas about how you can open up too.
And that includes issues such as how direct debits and bill credits are managed.
That is why I’m pleased, after meeting with Greg Barker last week, that Energy UK has agreed to develop and take forward a best practice model with its members.
Because the more you demonstrate what you are doing to keep bills down, the quicker trust will be rebuilt.
But trust is only one part of the equation.
Today’s highly regulated market must be improved to boost the competition that we know delivers for consumers.
To deliver a real ability for people to control where they get their energy from and how they pay for it.
Retail market reform
People have to be able to easily compare prices and to switch to a provider and tariff that gives them the best deal.
Ofgem’s Retail Market Reforms will do away with the complex web of hundreds of tariffs and confusing information on bills.
By December Ofgem’s cap on the number of tariffs suppliers can offer will be in place and by the end of March consumers will have clearer bills showing the cheapest tariff suppliers offer.
But we can go still further to make sure that retail competition operates effectively by working together to unpick the laborious switching system which deters people from acting in their best interests.
That is why I have challenged the suppliers to deliver faster switching.
I met yesterday with Energy UK and representatives from many of the suppliers and I’m encouraged by the commitment to make this happen.
But people also need a choice of who to switch to and that is why I am determined to help dilute the dominance of the big six over the retail and wholesale markets.
Competition works best when established companies are challenged by innovators, forcing them to adapt their practices to make sure they continue to deliver for their customer base.
That is why the contraction of the number of suppliers under the last Government from 14 majors in 2000 to just 6 in 2010 was so damaging.
Freeze out new entrants and you freeze out new business models and new ideas that can deliver better, faster and cheaper for customers.
So our reforms are opening up the retail market.
In 2010 there was no independent domestic supplier with a customer base greater than 50,000.
Now we have three independents with more than 100,000 customers, and a further eight companies have entered the market since May 2010.
I am determined that this trend continues.
With 98% of domestic customers still with the big six, there is a lot of room for greater competition and diversity.
To do that we also need to make sure that the market is accessible to independent generators on a fair basis in the wholesale market.
Ofgem’s reforms in the wholesale market may have received almost no attention but I regard them as critical in our fight for consumers.
Wholesale market reform
Thanks to improvements achieved already in the last year or so – led by Ofgem - the big barrier for independent generators is clearly no longer the day-ahead market but the forward markets.
Here the UK’s performance is poor.
This is where there is now great scope to drive competition and drive down prices.
Ofgem have now set in train an ambitious package of reform.
The proposed Market Maker reforms will provide independent generators and suppliers greater access to the power generated by the Big Six and other large power producers, enabling them to purchase and deliver cheaper energy to consumers.
This transparency in the way electricity is traded will give independent generators a foothold in the UK energy market and encourage new players to invest.
And I am prepared to use the powers we are taking in the Energy Bill to improve energy market liquidity should Ofgem’s proposals be delayed or frustrated.
So I would urge companies to work with Ofgem to implement these proposals as swiftly as possible.
And how can we make sure that the raft of reforms from retail to wholesale are having the desired effect?
Well that is the purpose of the new annual competition review.
The first of the new competition assessments will be delivered by spring next year.
The assessment will be undertaken by Ofgem, working closely with the Office of Fair Trading and the Competition and Markets Authority when it comes into being.
Now the exact metrics for the review will be a matter for the regulators.
But I have made it clear that they should look in depth and across the energy sector at profits and prices, barriers to entry and consumer engagement.
The Government has equipped the regulators with strong powers to deal with unjustified barriers to competition.
If abuses are found they must be addressed.
I speak as the former Minister for Competition, who made and drove the decision to establish the Competition and Markets Authority and reform Britain’s competition law.
So I can be clear with you.
The CMA has teeth.
And the annual competition assessment is an innovation I expect they will cut their teeth on.
So trust is about playing by the rules.
And rules have to be enforced.
Companies that play outside the rules will be penalised and fined.
With our Energy Bill, Ofgem has powers to require energy companies to make compensation payments directly to consumers who have lost out, but we can and should go further.
So we intend to consult on the introduction of criminal sanctions for anyone found manipulating energy markets and harming the consumer interest.
This is the proper way for Government to intervene in the markets.
Set the right rules and enforce them properly.
That is what we are doing.
That is what will have lasting effect delivering for generators, suppliers and consumers alike, in the years ahead.
Making sure investment continues to flow, that industry can flourish and that the markets deliver for consumers.
So I accept this is a tough message I’ve delivered today.
It’s a message I have also given in the House of Commons.
These are very difficult and complex issues we are working through.
There is no quick fix.
And I reject the counsel of those who say you must be either on the side of consumers or the side of business.
That is the bad old days of conflict and division.
We need to make sure we keep bills affordable.
But we also need our energy sector fit and healthy.
Delivering the power we need.
Delivering jobs and economic growth.
Building the modern climate-friendly energy infrastructure that will keep this country running far into the future.
And with the stability and certainty the Government is providing, now is the time to grow and invest and improve.
And I know that you are rising to this challenge.
So let’s together meet the challenge of affordability too.
Making sure that well regulated and competitive markets deliver for the hard-working citizens of this country.