Utility Week

10 | MARCH 2022 | UTILITY WEEK Interview by pointing to the supermarket sector, which he will know well given that his wife Baroness Harding is a former senior executive at Sainsbury's. In retail, unlike energy, most consumers benefit by riding on the coat tails of those who are looking for a bargain, he says. "If you go into a supermarket and choose a pot of jam or a tin of coffee, if I'm a regular switcher and you don't, I still get the same price because the supermarket knows it's got to price keenly so I get the same benefit. "That's not what is happening in energy at the moment and that's what needs to happen, so if you are not a switcher you can still coat tail on the prices of people who are. "Markets are not like the law of the jungle or the laws of physics – they are man-made. "In any sector, we take for granted that if you want to take something back you can. That didn't just hap- pen, we invented that rule, and everybody accepts it is normal and fair, so all markets are based on rules we have made up. You can either make those rules help consumers or leave the door open for rip-offs. Any rules need to be the most pro-consumer, most anti-rip-off and pro-competition because that is ultimately the way consumers get a good deal: I don't see any conflict or inconsistency." However, as Penrose has already pointed out, price regulation won't "completely solve" the problems of the energy market and is only "part of the answer". Among a "whole bunch of things" that need to hap- pen, he highlights the need for what he describes as a "wholesale reform of wholesale energy". "The problem at the moment is that if you are run- ning a wind farm, your costs haven't changed in the past couple of years and may have come down as you optimise and invest in it, yet the price you are able to sell energy at has gone through the roof. "The reason is that the wholesale market works off the wholesale market for gas, which is clearly bonkers for all other kinds of energy where costs haven't changed in quite the same way." A "fundamental reset and rethink" is required, the 57-year-old says: "We can uncouple ourselves so that everything isn't priced off the marginal price [of gas], which is currently set by decisions made in Moscow and is a falling percentage of our wholesale energy costs. Yet it's completely leading the entire market and that can't be right. It's fixable but you need to make wholesale change to the wholesale market." Exposing the wider sector to competition Other changes include greater localisation of energy pricing, which he believes could reduce costs "quite dra- matically", and extending competition across networks to a greater extent than now. "We need to expose as much of the energy sector to competition as we can, even if it's the incomplete com- petition we have today, because it's a best way of driving good outcomes for customers," he states. "There are some areas where it's hard to get full competition in the networks, so we probably can't do it comprehensively, but we can probably do more than we do today and we should." Of course, energy policy is currently a major hot potato within the Tory party where a noisy group of backbenchers have come together under the banner of the Net Zero Scru- tiny Group to push for fracking. Penrose acknowledges the validity of the group's concerns about the costs of decarbonisation. "There is a finite amount of fossil fuel we are commit- ted to use in order to hit our net-zero targets. The planet doesn't care whether that supply comes from the North Sea or Siberia: the issue is how much we use. "They are absolutely right that there are probably 300 different paths to net zero in 2050: it clearly makes sense for all of us to choose the two or three paths that are least costly to households and our economy. "We shouldn't be focusing only on the fastest and not care about the cost. We have to care about costs, produc- tivity and efficiency. That all matters, and so it should in a democracy." Greater reliance on homegrown production could be good for the economy, security and stability, while "not sacrificing sustainability", Penrose says. But the woes of the current market shouldn't be laid at the door of the 2050 net zero target, he says. "It is hard to argue that the spike in wholesale price of inter- national gas, largely driven by decisions made in Russia, is because of decisions made in Glasgow at COP26, but they are right to say that any one who pretends that the price of net zero doesn't matter is just wrong." The ex-minister is confident that business and energy secretary Kwasi Kwarteng is working on a wide-ranging reform of the energy market, an announcement on which he "hopes and expects" to see "soon". "It's important that it's soon because details need to be worked through. Jonathan Brearley and Ofgem need to do whatever they need to do. "You have to plan for at least six years and ideally 26 years to make these decisions work." And the government cannot duck the issue by opting for sticking plaster solutions, Penrose says. "If you don't go for market reform that maximises competition and gives maximum pressure for reduced prices for consum- ers, you end up with answers that require ever more subsidy and taxpayers' cash. None of that is a very good way to get re-elected. "Nothing big and thoroughgoing is going to pass the sniff test with people whose bills are going through the roof and want to see the light at the end of the tunnel. "I will be encouraging him to be as radical and competition-based as he can be because that ultimately is the only sustainable answer that gets politics right out of the sector. "The price cap as it currently stands politicises energy prices in a way that is never helpful for any product – energy or anything else," he says, adding that energy should be no more a "political football" than fruit. "Wouldn't it be great if energy were no more politi- cally or regulatorily controversial than cars or coffee or donuts? If energy were as boringly normal as anything else we take for granted in our lives, wouldn't that be lovely? "If politicians get out of the way and everybody competes for consumers, that's a far better way of giv- ing people a good deal and reducing their bills than anything any politician could do with clod-hopping intervention." We're sure a lot of energy bosses would agree. "There are probably 300 different paths to net zero in 2050: it clearly makes sense for all of us to choose the two or three paths that are least costly to households and our economy." continued from previous page

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