Utility Week

UTILITY WEEK | 10TH - 16TH NOVEMBER 2017 | 9 Policy & Regulation Analysis T he standard variable tariff (SVT) is dead, long live the default tariff. That's one of the myriad messages in profes- sor Dieter Helm's review of energy costs, which was published a fortnight ago. In the chapter of the 240-page long report that is devoted to supply, the Oxford Univer- sity professor of energy policy challenges the accepted wisdom that smart meters will encourage switching – the premise that underpins the government's plans for a tem- porary price cap. He argues that the devices "will not in themselves add much to the incentives to switch". Therefore, Helm argues that default tar- iffs will continue to be required to "cater for those with better things to do than trawl the internet trying to comprehend the myriad deals and offers". Moves by the likes of Eon to scrap SVTs "miss the point", says the review, because many customers currently on such tariffs will simply shi to another default tariff: "[Sup- pliers] cannot simply disconnect customers who take no action – and if they did there would be a justified outcry." The report outlines Helm's own proposal for a default tariff that he believes would bet- ter expose the underlying costs that drive energy bills. He proposes that this default tariff would consist of six building blocks. These include distribution, supply, transmission and wholesale costs. Also, the tariff would encompass green levies and subsidies such as those through capacity auctions. Ofgem could set the form of the default tariff, which would focus competition on a more limited range of variables – the sup- plier's own margin rather than the cost of the overall bill. He writes: "Customers simply need to select the lowest offered margin. It is simple, transparent, and pro-competition." The virtue of Helm's proposals, in his own eyes, is that suppliers would compete on the costs they control rather than those they have to pass on. Helm takes a pot shot at another sacred industry cow by rejecting the idea that com- petition should be the overriding goal of pol- icy if this means suppliers are overcharging most bill payers in order to lure more foot- loose customers by offering cut-price deals. "It requires customers to pay excessive costs in the interim until the arrival of a fully com- petitive market." But his own proposals offer a quicker route map to a more sustainable market, Helm believes: "By focusing on any fat margins that exist, the default tariff will accelerate, not impede, the development of competition." So does Helm's package offer a template for the government's price cap? Ryan Thomson, a partner at consultants Baringa Partners, sees merit in the academ- ic's analysis of the supply market. "Rather than being billers and cash collectors, we are asking them to be social engineers. If you stripped a lot of that out, you would make the role of the supplier a lot more transpar- ent and would potentially reduce costs. We have the most complex supply market in the world and it's not getting any simpler. It would be good for the regulator to take note of the complexity of what suppliers have to manage on top of getting billing right." Things get more complicated when it comes to Helm's solution, though. Tim Yeo, former chairman of the House of Commons energy and climate change select commit- tee, says the proposal bears the hallmarks of Helm's work as an academic economist. The default tariff in practice In the second of a three-part series examining Dieter Helm's wide- ranging recommendations set out in his energy review, David Blackman considers how scrapping SVTs might work in practice. "It's quite complicated and I'm not certain how it would work. I would like to see a bit more clarity." Helm's proposed default tariff would be "very difficult in practice" to introduce, Thomson says: "These proposals are unreal- istic in the context of the timelines the gov- ernment is suggesting." Thomson suspects that with competition restricted to margins, which make up a small slice of the average bill, there will be little incentive for customers to switch or for sup- pliers to persuade them to. In this scenario, he believes, the energy market will become more like fixed line broadband, where competition is not focused on the core service but on value- added offers instead. The outcome will be a reduction in the number of suppliers that operate in the market, one academic suspects: "There will almost certainly be some exits from this market, which is not necessarily a bad thing – you protect competition not competitors. If [suppliers] are there because profits are expensive, you want them to leave." And what will investors think? Thomson says: "If it simplifies the business model and reduces their risk, investors might be will- ing to apply a lower discount on the margins that suppliers make. The chance of making margins becomes more certain." Greg Jackson, founder and chief execu- tive of Octopus Energy, says Helm's focus on transparency is misplaced because if the industry can get the price right, customers don't really care how they do it. "Transparency wouldn't matter if people got good prices. At Tesco or Aldi, I am pretty confident I am getting a good price. I have no idea what the cost of their supply chain looks like, but it doesn't matter because that market appears to deliver good value to consumers. "This is the critical thing the energy mar- ket has to deliver. Otherwise we may end up with forms of constant tinkering that make things ever more complicated rather than solving the core problem of giving consum- ers good value." Industry observers are divided on Helm's ideas

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