Utility Week

Uberflip 15 11 13

Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government

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Page 14 of 31

Policy & Regulation Market view In brief Keep it constructive Annual assessments could help ensure energy is competitive, but not if it leads to knee-jerk reactions, says Filippo Gaddo. T he announcement of an annual market assessment for the energy sector is potentially a welcome development. The market assessment, to be led by Ofgem working with the Office of Fair Trading (OFT) and the new Competition and Market Authority when established, could lead to additional transparency in the market, provided it is not just a simple extension of the work Ofgem is currently doing as part of the Retail Market Review. Details of the metrics to be used will be decided by the regulators (Ofgem and the OFT) at a later stage. The authority of the assessment – whose remit is "to examine the barriers encountered by new suppliers entering the market, scrutinise prices and profitability, and evaluate how easy customers are finding it to switch suppliers" – will need to be such that it instantly gains credibility with consumers and reduces the potential for the issue to continue to be a political playing field. The review should inform a debate based on evidence and centred on an assessment of what is required in the energy sector. Difficult choices are required to address the energy trilemma of security, sustainability and affordability, as there are no easy solutions and all stakeholders need to have at their disposal the best possible instruments to make informed choices. In this debate it is also important to understand that the UK is part of a global market. International market influences such as the supply and pricing of LNG determine a large part of the energy price. Also, investments are mobile – energy companies need to compete for funding and only profitable companies can do this successfully. In the context of the £110 billion (as estimated by Decc and Ofgem) to be invested in the energy sector and more than £300 billion (as estimated by the LSE) by 2030 to deliver the low carbon economy while keeping the lights on, this must be the paramount objective of any government. Considering the lower than average performance by utilities (at European level) over the past five years – both in terms of net earnings and stock prices – any action that undermines the attractiveness of the UK as an investment destination should be avoided. Nevertheless, in the "new normal economy" (of lower than average economic growth and only moderately rising income for households), affordability for energy has become the priority. Recent data from the Office of National Statistics shows the energy expenditure share of disposable household income has increased from 4.4 per cent to 5.8 per cent over the past ten years, with signs that this share may increase further. Any effort of governments, regulators and energy companies must ensure that the impact on affordability is carefully considered, especially as there is evidence that over the past five years more than 50 per cent of the price rise is due to the increase in third party charges (that is, network charges, policy costs and taxes). Let us also keep in mind that the UK has benefited in the past ten years from one of the lowest (if not the lowest overall) prices for gas and electricity in Europe. If prices had been at the average European Union level for the past decade, British consumers and businesses would have had to pay an extra £4 billion a year. Furthermore, in most of the assessment of the level of energy market competition in Europe performed over the past ten years, the UK has always come up at the top. If the market is showing signs that a lack of competition is stopping consumers getting the best deal, than intervention may well be required. At the same time, the government and energy companies have already taken significant steps in the right direction over the past few years (in terms of more transparent accounts, better billing, fewer tariffs, and stopping certain practices). Sudden policy changes and reversals might jeopardise recent gains. The current debate has been helpful in bringing to light important factors driving prices and in highlighting the potential for improvement – let us work to ensure it continues to be constructive and does not lead to unhelpful reactions. Filippo Gaddo, senior energy economist in Transaction Advice, Arup Emissions Carbon budget should stand The Committee on Climate Change (CCC) has told the government there is "no legal or economic basis" to reduce the fourth carbon budget. In its latest report, the CCC said there had been no significant change in climate science since the fourth carbon budget (2023-27) was set in 2011, and Lord Deben, chairman of the CCC, said the current budget "remains sensible". Emissions 2030 target 'should not exceed 35%' Europe should set an emission reduction target of no more than 35 per cent in 2030, the EU energy commissioner said last week. Gunther Oettinger said ambitious climate targets were not his policy and he did not want to "hurry" towards the 80-95 per cent cut already determined for 2050. He expressed greater concern to lower energy prices for heavy industry in Europe, to help them compete with rivals in countries like the US that enjoy cheaper energy. Electricity £5m boost for energy storage Two energy storage companies have been awarded £5 million from the Department of Energy and Climate Change to help spur innovation in the sector. REDT UK has developed a technology to store electricity from wind turbines, while Moixa Energy has developed small battery-based storage units, which could be installed directly into people's homes to store power and re-use it at times of peak demand. UTILITY WEEK | 15th - 21st November 2013 | 15

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