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Reshuffle 2020: Opening the doors to Boris Johnson’s new Cabinet
Reshuffle 2020: Opening the doors to Boris Johnson’s new Cabinet

Archive for the ‘Energy’ Category

As Ofgem turns up the heat, what will reforms mean for the energy sector?

Parliament may be paralysed, but in the world of regulation, change is afoot. In a bid to catch up with the way the energy market is evolving, Ofgem has announced a raft of new proposals to better protect consumers from the possibility of their supplier going into administration. New plans under consultation until December 2019 would require small energy supplier to meet more stringent requirements to take on new customers, enhance financial disclosure rules and strengthen the safety net for customers in the event of a supplier’s failure.

Under these new reforms, energy suppliers would have to prove they have the right resources for customer growth when they reach thresholds of 50,000, 150,000, 250,000 and 500,000 to 800,000 customers. Ofgem is also planning to tighten its “fit and proper” requirements, with more scrutiny on the fitness of senior management staff, and bringing in a new openness and cooperation principle.

The new proposals, published at the beginning of the week are in response to over a dozen energy providers going into administration since January 2018 – Toto being the latest to cease trading on Wednesday – and the bill that has been picked up by customers as a result of these collapses.

If the proposals are accepted, it would bring existing energy suppliers into line with new market entrants who have been under additional scrutiny since similar proposals were introduced in June 2019. The final decision on whether to take the proposals forward will be taken in early 2020, but implementation is unlikely to take place before 2021.

Ofgem have long been caught in a dilemma between protecting consumers from market failures and encouraging competition in the energy sector. These proposals are an attempt to find a balance, but as always, the devil is in the detail, and there are some differences of opinion within industry about what this detail should be.  Unsurprisingly, while energy retailers have overwhelmingly supported the ambition of Ofgem, there are different ideas on how financial and operational resilience should be measured.  Where the dial comes to rest will undoubtedly affect what the sector looks like in terms of the number and scale of market participants, and the industry’s overall stability.

Earlier this month, Ofgem warned that Delta Gas and Power, Gnergy, Robin Hood Energy and Toto Energy would be unlikely to meet their Renewables Obligation late payment deadline. Toto ceased trading shortly after and as the example of Solarplicity, which collapsed in August shortly after it was banned from taking on new customers earlier in the year, helps illustrate, Ofgem has already shown that it is not afraid to step into the market where it thinks necessary to do so.

These proposals will give the regulator more scope and power to intervene and could therefore have serious consequences for the industry.

For more information  on what impact these proposals could have on the domestic energy market and advice on how you can engage and prepare, please contact our investor services and specialist energy team.

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The electric vehicle infrastructure problem

As set out in the Road to Zero Strategy, the government plans to end the sale of petrol and diesel vehicles by 2040, and for all vehicles to be zero-emission by 2050. This is a significant commitment to electric vehicles and is part of the government’s wider Clean Growth Strategy.

The government anticipates that most drivers will charge their electric cars at home or at their place of work. But these options are not available to everyone; many people do not have access to off-street parking, nor does every workplace have the capacity to provide electric vehicle charging. These problems are particularly pronounced in urban areas, which suffer the most from low levels of air quality.

The government believes that if electric vehicles are to become truly mainstream, there will have to be provision for on-street vehicle charging. Delivery of this infrastructure has been left to local authorities and the private sector (with some funding available from central government), but many local authorities do not have the money or the expertise to build it and have struggled to coordinate with network companies. This has meant the electric vehicle charging network lacks size and geographic coverage.

A further issue is that increased use of electric vehicles will increase the pressure on the UK’s energy network. The National Grid is confident that new capacity, and reinforcement of the existing grid, can be brought online in time to meet any increase in demand. However, this will require significant investment in new electricity generation capacity and in ‘smart charging’ technology. The latter is particularly necessary to ease the burden on distribution networks that could be subject to local overload.

The development of infrastructure can also be encouraged from the demand side; increased demand for electric vehicles should be a catalyst for greater provision of charging infrastructure. More electric vehicles on the road provides a greater incentive for firms and local government to work together to install electric vehicle charging points. However, the government has recently decided to reduce the subsidy for electric vehicles, and tax incentives relating to the use of electric vehicles remain limited. The government believes that the price of electric vehicles will fall as battery technology improves, but a lack of demand side support is likely to constrict growth of electric vehicle ownership and charging infrastructure.

Money, knowledge and planning are issues that affect all government infrastructure projects, particularly ones that involve a significant amount of coordination between different levels of government and the private sector. However, there is a more fundamental problem that has received little attention: how to make long-term infrastructure decisions when faced with technological uncertainty? Current government policy is to end the sale of petrol and diesel cars by 2040, but this is over 20 years away. In 20, or even 10 years’ time, how we use cars and roads might have completely changed. The danger for the government is that it might be doing the equivalent of investing in CD players, with digital streaming just around the corner.

The government recently announced that it wants to have self-driving cars on UK roads by 2021. While this is an ambitious target, it signals a technological revolution that could completely alter the way we use vehicles, and therefore the infrastructure those vehicles need. Should vehicles become truly autonomous, there may be no need for individuals to even own their own car. Driverless cars could be used like taxis and charged in out-of-town charging centres when not in use. Privately owned autonomous cars could drive to charging stations when not being used, negating the need for on-street charging.

This presents a puzzle for government: should it invest billions of pounds in a charging network that may only have a useful lifespan of a decade? While this may seem like an unattractive option, the alternative may not be very palatable either. If the government adopts a ‘wait and see’ approach and does not fully commit to on-street charging in the short-medium term, there is a danger that the take-up of electric vehicles will stall. This will directly affect the UK’s ability to achieve reductions in greenhouse gas emissions and could slow the growth of an important emerging industry in the UK.

The government is in an unenviable position. It will need to invest in on-street charging technology to keep to its promises on climate change, and to stick to its Industrial Strategy aims. But, thanks to rapid technological change, it may only be able to reap limited rewards from this investment. This dilemma tells us something about the role the state can play during periods of technological uncertainty. If private actors are unwilling to invest in a new technology due to concerns over its long-term profitability, investment from the state may be necessary to bridge the gap and allow greater gains to be realised in the future. This investment may only provide short-term or limited benefits directly, but it could lay a foundation on which private sector investment can then build. On-street charging infrastructure may not be a permanent fixture on our streets, but it may be required if the electric vehicle industry is to succeed in the UK.

Rather than assessing government investment in new technological infrastructure on a case-by-case basis, we should be content with a broader view. It is almost impossible to accurately predict the path of technological development, and under such conditions there will always be wins and losses from government investment. Rather than being distracted by the noise surrounding each individual decision, we should focus on whether government investment supports innovation and growth throughout the economy.

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Turning up the heat on climate change policy

There’s a new kid on the block in UK politics. Climate change and the demand for radical, green policies has burst onto the political stage and into our discourse in recent weeks. This has been driven by the Extinction Rebellion protests which took over London in a huge display of civil disobedience, capturing the eye of the media and dominating the debate as MPs returned from recess.

Research by Greenpeace found that two-thirds of people in the UK recognise there is a climate emergency, and 76 per cent say they would cast their vote differently to protect the planet. Once Brexit has been dealt with (or kicked sufficiently into the long grass), and as parties begin posturing for a general election, will climate change feature as a primary focus of the Conservative Party’s agenda?

Labour have already staked their ground. Keen to talk about anything but Brexit and focus on bashing the Tories on austerity, Labour have linked their green policies to their narrative of protecting workers and ensuring fair outcomes. Labour’s headline economic policies – such as nationalisation – are also underpinned by a criticism that companies are not doing enough to protect the environment.

Tackling climate change with a radical shift towards a clean, green economy fits perfectly into Labour’s narrative, but it is less of a natural fit with the Conservative’s.

Yes, the government’s Road to Zero, Clean Growth and Industrial Strategies outline an ambition and roadmap to follow, signposted by big policies such as banning petrol and diesel cars, and marked by achievements such as the UK running without coal for a week for the first time since the Industrial Revolution. But despite this, they are constantly criticised for not doing enough. The Committee on Climate Change, the government’s official climate adviser, found that current policies are not sufficient to meet existing targets – never mind their new recommendation of net-zero emissions by 2050. 16-year old climate activist and de-facto leader of the new climate movement, Greta Thunberg, also accused the government of “creative carbon accounting” by excluding certain emissions in headline figures.

The Conservatives have never been the party of the environment but, in their time in government, they have certainly now shored up some green credentials – or at least they have a policy record to talk about on the campaign trail. The swell of public attention to climate change, the fragility of the Conservative government, and Labour’s strong, radical alternative, might force a change of tack from the Conservatives.

Ideologically, the Conservatives are simply not willing to intervene in the market with a heavy hand, something climate change activists are calling out for. However, as there has been a growing recognition that markets are not working for consumers, regulation has increasingly become a feature of Theresa May’s government – particularly around consumer protection. Will the next focus of regulation be on markets not working for the environment?

With May’s leadership on a knife edge, the next leader will decide how the party handles the climate question. Reusable coffee cup in hand, Environment Secretary Michael Gove has overhauled his image with a stream of initiatives coming out of the Department for Environment, Food and Rural Affairs. Despite criticism that these policies were tokenistic, Gove has proved his political ability in navigating the Brexit-dominated arena and the Treasury’s austerity spending constraints to push relatively substantive policies out of his department. If Gove, currently standing at 8/1, becomes the next leader he will no-doubt capitalise on this with the environment featuring as a main item of his platform. It is also likely Gove could throw his weight behind another leadership candidate and become an eco-warrior Chancellor – if he doesn’t get distracted.

As for the other candidates (bearing in mind most Conservative MPs have thrown their hat into the ring already) this is less clear. Liz Truss, zealous advocate of the free market, would be unlikely to suggest massive state intervention on behalf of the environment but other, more moderate, Conservatives may rethink intervention and regulation’s role in managing climate change. More broadly, newly promoted Rory Stewart is a proponent of considering climate change in development aid funding – an interest also held by grassroots favourite Boris Johnson. As the leadership contest gains pace, we’re sure to find out more.

With climate change now integral to our political discourse and championed by opposition parties, the Conservative Party will be forced to respond out of political necessity. However, they will certainly face a challenge in balancing a green vision with the pro-market beliefs which underpin their ideology.

But what does this mean for business? While this debate hots up, businesses must demonstrate how they are already facilitating the shift to a carbon-free future and acting in the common interest. In many ways this is already happening, but, as public and political pressure ramps up, businesses are certain to be in the spotlight.

Businesses should capitalise on this new-found momentum to put pressure on government to acknowledge the challenges they face. Those with climate friendly policies and breakthrough technologies must clearly set out their role in enabling both parties’ future vision. Climate change is firmly on the agenda, businesses must adapt or face interventions of varying proportions from across the political spectrum.

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