Utility Week

14 | NOVEMBER 2021 | UTILITY WEEK Energy Reset Time to reshape energy retail As part of Utility Week's Energy Reset campaign, Laura Sandys discusses how the current energy crisis provides an unwelcome but unmissable opportunity for a root- and-branch review of the retail market. Comment Laura Sandys T he principle that we have been guided by through- out our work at ReCosting Energy has been that the whole system needs to be "re-engineered" from the plug (as such) not the power station. Consumers front and centre. The current system is regulated and managed in silos, not as a normal supply chain. However, if we get the right incentives at the consumer end, the rest should and must be driven by user outcomes not supplier inputs. We need to focus on outcomes: • Deliver millions of decarbonised assets in people's homes who cannot afford the upfront costs – moving from commodities to services. • Less is more – we should be driving business models that optimise the utility of the commodity, reducing the amount and cost to consumers, and rewarding quality of outcome, not quantity of input. • Risk appropriately allocated – it is a crazy system where consumers take on so much badly managed risk that they have no agency to mitigate or avoid. • Cost and value appropriately allocated. Some con- sumers are using a lot more of the system's capacity while poorer families without snazzy assets have to pay for their rich neighbours' costs. In addition consumers are being short-changed for their actions as we don't account for the whole system value of their "work". • Redefine fairness by being much clearer about what is the "essential" energy service. This is why the system needs a total rethink and by learning from other sectors there are some key opportu- nities for reform. Services, not just commodity retail Service propositions are desperately needed in the sec- tor, offering tailored products and outcomes to consum- ers, with risk sitting with the retailer, enabling deploy- ment of decarbonisation assets and efficiencies without the prohibitive upfront costs. Where the motivation of the retailer is to optimise a customer's energy use – more is most certainly not more for the service provider. We need to move to a system where risk sits with the service provider to manage costs; where the service provider is motivated to come and fix a heat pump not just leave the customer to fend for themselves; and where differentiated propositions can be tailored to the customer. Whole system costings Currently consumers are being short-changed and not rewarded for their whole system value. This is bad for consumers but also for the whole system costs by not providing any incentives for optimising the utility and capacity of the system. Through a digital energy system these values can and should flow across the supply chain, always rewarding those who are reducing the cost for all. Helping to address inequalities by defining what is the essential service The essential service obligation has been a universal provision to date, as there has been a very marginal differential between customers in their required capacity (unless you are running a cannabis farm!). However, with very variable loads on the system and the signifi- cant investment required to deliver to high electricity users, we cannot smear the investment cost across those consumers who are using less capacity. This requires decoupling the provision of an essential service and a premium service, driving down the price significantly on the essential service by capturing the fixed price of renewables, while opening up and allowing for significant innovation across the premium services. A different regulatory approach In this new world we will need to take a new approach to regulation. Driven by risk not process, drawing on existing regulatory frameworks from the financial services sector, mobile phone regulation, car leasing experiences and not least digital. This is the start of a merging and blurring of regulatory environments. While this will require change that is starting at Ofgem, there will need to be some vigilance over regulatory "gaps" that sit between the financial services and energy regula- tion. It is the buck passing between regulation that will potential be where the problems lie. Utopia Imagine an energy system that unlocked the capital costs of all these decarbonisation assets through afford- able leasing, service or higher purchase agreements with the energy embedded into the contract. That the whole supply chain was designed for and shaped by consum- ers' actions and needs, anticipating and adapting to their changing preferences, served by frictionless retail- ers rewarded for outcomes not inputs. That low energy users who didn't have all the gizmos would not have to pay for the richest highest energy users, and where consumers could have a whole system carbon account revealing their carbon consumption. I will continue dreaming… Read the full version of Laura Sandys' comment piece at: https://utilityweek.co.uk/ time-to-reshape-energy-retail/ Laura Sandys CBE is the founder of Challenging Ideas and chair of the government's Energy Digitalisation Taskforce. She was formerly a Conservative MP and last year co-authored the ReCosting Energy report.

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