Potential price cap and consumer measures
At the Conservatives’ Spring Conference, the Prime Minister signalled her intention to take further measures to bring down energy prices for consumers. Backbench Tory MP John Penrose has suggested a relative price cap which would limit the difference companies were allowed to charge between their cheapest deals and their ‘standard variable tariff’. With such political pressure on consumer prices, it’s almost certain that there is a fairly major intervention coming down the line, thought to be part of the upcoming Consumers and Markets Green Paper which is expected in late April.
Beyond the obvious consumer agenda, there are the behind-the-scenes companies operating in the market to provide tech solutions to innovative new energy firms and switching sites. These are playing an important role in facilitating a liquid energy market which politicians see as the holy grail of the liberalised energy system. These tech and switching sites provide an interesting opportunity for investors with new entrants joining the market on a regular basis. With a clear political drive for innovation and competition, there looks to be a positive regulatory future for firms supporting these consumer agendas.
Often highlighted by industry as one of the reasons for increasing energy prices, and responsible for 25% of a typical energy bill, the cost of the wires and pipes that make up the energy network are also under serious scrutiny. As network companies have regulated profits, they have traditionally provided a reliable return for investors. However, they are now caught up in Ofgem’s review of how charges for the network are levied on the market.
In addition to the charging changes, the networks face more existential change as they begin to transition to Distribution System Operators, with greater responsibility for managing local generation. Electricity generation is becoming increasingly decentralised with smaller plant distributed around the country, embedded in the distribution network or even industrial complexes and homes. This morning we heard Rachel Fletcher at Ofgem saying that “We need to stop seeing customers as the end of the supply chain.” The market is much more diverse than it used to be. Rapid technological progress in demand-side response technologies means consumers can use less at certain times or shift their energy use to different times of the day. These shifts in how energy is being used means network operators need to play a much more active role in the system which brings a range of challenges and opportunities, but means a very uncertain future.
In building the energy generation, guaranteeing a secure supply of energy for the future is one of the government’s most important priorities. There are a number of possibilities for investors in this sector: peaking plant offering short, sharp bursts of electricity often backed by a Capacity Market contract, gas generators trying to build new CCGT power stations and, of course, the huge nuclear projects being developed. But for all the government’s good intentions around delivering more energy generation, there seems to be little optimism in industry and the investor community about building new capacity. With calls for yet more changes to the Capacity Market, nuclear decommissioning scandals (which risk further inflating the costs of new nuclear) and Ofgem’s charging review making embedded generators think again about their plans, finding energy policy which supports a certain investment outlook is more important than ever.