Utility Week

8 | 18TH - 24TH OCTOBER 2019 | UTILITY WEEK Utility of the future: Regulation Dermot Nolan on Ofgem controversial area around the payment of Renewables Obliga- tion Certi cates (Rocs), which have been blamed for sending some rms under. He said Ofgem had written to the Department for Business, Energy and Industrial Strategy to ask if these could be made pay- able every month – or perhaps once a quarter – because paying them on a yearly basis had not been helpful. The challenge of net zero – Ofgem to act One di‚ culty being highlighted is the fact that Ofgem has no legal duty to drive net zero car- bon and when it comes to choos- ing between costs of bills and acting on climate change, it was bound to choose the former. Again, the NIC report is calling for new duties to promote net zero. Nolan believes that it is already within Ofgem's power. "Net zero is an enormous chal- lenge for the energy sector and the board decided over the sum- mer to be more proactive in this regard," he told the audience. "We will consult in more detail what we think that means for regulation, before Christmas and I expect to have clari ed our views early in the new year." Nolan said that because it was Ofgem's duty to protect cur- rent and future energy custom- ers, that in itself had given the regulator a mandate on driving zero emissions for the future. But he said "it would not be unhelpful to have further clari- cation of our statutory duties", again picking up on industry calls for a more formal change in Ofgem's‹remit. There was the expected sting in the tail of course: decarboni- sation yes, but there will no blank cheque. In another break out from Ofgem's perceived comfort zone, Nolan said that going forward the regulator also sees as part of its role provoking public debate about energy use and climate change and who will pay for the transition. remove it as e' ective competi- tion evolves." Nolan said he understood concerns about socialisation of costs – the tab others, and therefore consumers, have to pick up when a company fails – but these "have been relatively minor because by and large there is a ready market for rms to take on customers. "I'm also aware that we've set a price cap at a level so that not many rms are making money at the moment and we were clear that would happen." He said the price cap was always set to encourage rms to become more e‚ cient in the market and when that happens pro ts will ' ow. "But it may also see some rms obliterated from the face of the earth – and that's ne – that's the nature of markets." One area that Ofgem wants to see change, he said, was in the continued from previous page ENERGY MARKET STATISTICS source: Ofgem DECARBONISATION COSTS THAT CONTRIBUTE TO AN AVERAGE DOMESTIC DUAL FUEL BILL MARKET ENTRIES, EXITS AND CONCENTRATION LEVELS PROPORTION OF SMART DOMESTIC METERS IN OPERATION ON 30 JUNE 2019 2018 average Wholesale costs Network costs Operating costs Environmental and social obligation costs VAT Supplier pre-tax margin Other direct costs 80 70 60 50 40 30 20 10 0 -10 Continuing active suppliers Supplier entries Supplier exits HH1 Electricity (secondary axis) HHI Gas (secondary axis) Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Smart Non-smart Smart Non-smart Electricity Gas 27% 73% 70% 30% 2018 average Wholesale costs Network costs Operating costs (inc DA) Environmental and social obligation costs VAT Supplier pre-tax margin Other direct costs Total bill: £1,117 Total bill: £1,184 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 £108 10% £134 11%

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