Energy markets must work for the people they serve

Nor, it seems, did the majority of consumers require Mr Hunt’s exhortations. E.ON, the UK’s second-largest supplier with some 5.6 million customers, has reported reductions of 10 to 15% on seasonal averages in recent weeks.

Against this backdrop, UK Business Secretary Grant Shapps has said that customers cutting back on energy use to save money should not face an increase in their direct debits. In a letter to bosses across the energy supply sector, he said he was “disturbed” by reports of rising bills, adding: “I am interested to understand how you intend to ensure that your direct debit system does not overestimate charging”.

Grant Shapps has written to the bosses of the UK's energy supply sector (Image: PA)

The UK Government is also set to make an additional £1 billion of funding available for home insulation projects from early next year, widening access previously only available to the poorest households. This is positive acknowledgement of the economic realities facing all but the most affluent as the upfront costs for greatly-needed energy efficiency improvements simply can’t be financed from budgets falling prey to double-digit inflation.

That said, there is a generous dose of government self-interest in this policy as well, with billions more in public support for household bills required from January following the latest increase in the energy price cap.

Under the Energy Price Guarantee (EPG) that took effect in October, the typical UK household is currently paying £2,500 a year for energy. Without that support, last week’s price cap increase by regulator Ofgem would have taken that figure up to £4,279 from the start of next year.

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EPG assistance will be reduced in April after Mr Hunt scaled back on the original plans of his Conservative predecessors, putting the typical household bill at approximately £3,000 until March 2024. Analysts at Cornwall Insights have estimated the full cost of 18 months of this scheme now stands at £42bn, up from £38bn less than two weeks ago.

“This highlights the nature of the wholesale market risk that the Government is taking on by deciding to extend the EPG,” said Craig Lowrey, principal consultant at Cornwall Insight.

No surprise then that the current system has been deemed unfit for purpose, prompting the Department for Business, Energy & Industrial Strategy (BEIS) to launch its Review of Electricity Markets Arrangement in July. Known as REMA, one of the review’s central aims is to design a market that ensures the falling cost of renewable energy is passed on to consumers and not retained as “super profits” for generators, traders or energy suppliers.

In this regard, the extension of the windfall tax on oil and gas companies to include electricity generators is a bit like sticking plaster. Mr Hunt announced this temporary fix in his Autumn Statement earlier this month by increasing the levy on oil and gas companies to 35% and introducing a new 45% rate for electricity generators, with both to run until March 2028.

Chancellor Jeremy Hunt has said energy proposals to reform the energy market are coming 'very soon' (Image: PA)

According to researchers at University College London, large generators operating directly in the UK wholesale electricity market saw their revenues roughly double to £30bn between 2019 and 2021, with that figure likely to top £50bn this year. This is because the price for all electricity – whether it is generated from cheaper renewable sources or more expensive fossil fuels – is dictated to great extent by wholesale gas costs that have surged since Russia’s invasion of Ukraine.

The UK already generates more than half of its electricity from renewables – rising to upwards of 60% in Scotland – but gas-fired electricity is still required to meet the last bit of demand and cope with fluctuations in renewable energy production. The structure of the market means that the wholesale cost of the “last bit” – gas – sets the price for all types of generating technologies.

Billed as the “biggest electricity market reform in a generation”, REMA is still in its early stages. The initial consultation period opened in July and closed on October 10, with feedback from this currently under analysis by government officials.

Even so, Mr Hunt indicated last week that reforms are due to be announced “very soon”.

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“The solution is to move faster on nuclear and renewables to encourage energy efficiency, but also – and this is all going to be set out by the Business Secretary very soon – to look at the fundamental reforms that we need in the energy market…because it hasn’t been operating as it needs to,” he told the Treasury Committee.

There have been two major rounds of reform since UK electricity supply was first privatised in 1990: the New Electricity Trading Arrangements introduced in 2001 to address concerns about a lack of competition in the market, and the Electricity Market Reform of 2014 which brought in various mechanisms to drive investment in low-carbon technologies such as renewables.

Less than a decade on, major change is once again on the agenda as the creaky process of review and reform has failed to keep up with world events and technological advances.

During what has been described as the first “truly global energy crisis”, the durability of REMA is at serious risk of becoming a victim to haste. Vigorous action is needed lest the majority of the UK population is squeezed into permanent fuel poverty, but this can’t come at the expense of judiciousness.

Consumers and businesses have proven capable of reducing their energy consumption, and they need a system that delivers rewards for that change in behaviour. Markets – be they energy, financial, or otherwise – must work for people, not the other way around.