Utility Week

UTILITY Week 30th October 2015

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UTILITY WEEK | 30TH OCTOBER - 5TH NOVEMBER 2015 | 11 Policy & Regulation "We can't predict the future, nor should we try to. Instead, we need an agile regulatory framework able to adapt to whatever the future may throw at us." View from the top Dermot Nolan, chief executive, Ofgem W hen Ian McCaig, chief executive of First Utility, introduced me as the final guest speaker at Energy UK's annual conference on 21 October, he quoted the three letters hanging over the energy indus- try: C-M-A. Perhaps the comments were directed towards me. Aer all, one of my first acts when I joined Ofgem in March 2014 was to refer the industry to the Competition and Markets Authority because we did not think it had been working in the interests of all consumers. We still have concerns. Wholesale gas prices for this winter are their lowest for six years (right). This has resulted in better deals for many consumers on fixed tariffs. But for the 70 per cent or so on standard variable tariffs (SVTs), prices have fallen very little this year. This issue was at the heart of the CMA's provisional findings in July. The CMA found evidence that the large suppliers are exploiting their market power by over- charging inactive customers who are on standard vari- able contracts compared to those on fixed deals. Since then – and even as wholesale gas prices continue to fall – most suppliers have failed to respond by cutting SVTs. Maybe suppliers are trying to prove the CMA right. Because in a properly functioning market, when costs fall, competition should be driving down prices for all consumers, whatever tariff they are on. We look forward to seeing the CMA's final remedies next year. But we're already looking ahead to a post-CMA world. Tomorrow's energy system will be more innova- tive, complex and interconnected than ever before. The challenge for the industry is to ensure all consumers ben- efit from this transformation and that no-one is excluded. Smart meters will be a big test of whether we have succeeded in bringing consumers with us on this jour- ney. We want consumers to embrace the chance to con- trol their energy consumption and save money. But if consumers feel that smart meters have been imposed on them – or worse, they do not think of them at all – we will have failed. Major changes are already happening. Almost 11 per cent of households now buy their energy from independent suppliers. A decade ago, less than 1 per cent did. The growth in solar capacity has exceeded all expectations. Today, around 8GW of capacity has been installed, more than 15 years earlier than forecast. A mass rollout of energy storage is possible as battery costs fall dramatically. In the future, homes and businesses may not just be passive consumers of energy – they could produce, store and release it, too. This would have big implications not just for how electricity is generated but also for how it moves around the network. The business model of supplying energy itself could come under threat. The value could come through get- ting consumers to control their energy costs with smart meters. Or through aggregators balancing the system by incentivising large energy users to consume less energy at peak demand. There will be other changes which no-one has thought about. We don't have a crystal ball – we can't predict the future, nor should we try to. Instead, we need an agile regulatory framework able to adapt to whatever the future may throw at us. Regulating for a changing energy system will require us to change, too. We want to move away from a box- ticking approach to regulation, which stifles innovation. We will rely more on principles to achieve better out- comes for consumers, putting the onus on suppliers to work out how best to do this. This is not a so option for suppliers. They will have to obey not only the letter of the law but the spirit too. And if they fall short, we will take tough enforcement action to protect consumers. It's right that the letters C-M-A are occupying the industry's minds. But the investigation should not be an excuse for inaction. Major change is already happening and more is on the way. The challenge for Ofgem, the industry, consumer groups and the government is to ensure that all consumers are at the heart of the future energy system and no-one is le behind. Let's work together to make this happen. CLOSING WINTER AHEAD NBP GAS PRICE (PENCE/THERM) 2009 2010 2011 2012 2013 2014 2015 75 70 65 60 55 50 45 40 35 30 Data: Icis Energy

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