The EIUG encourages the review to recommend including in Ofgem’s KPIs whether its regulatory changes have impacted specific consumer groups disproportionally, in particular energy intensive industries (EIIs), instead of a welfare economic approach only. The latter analysis too often leads to the conclusion that, if there is a positive net present value, the regulatory proposal must be good for all consumers. This is not necessarily the case.
Ofgem should publish regular reports comparing how UK industrial energy prices compare internationally, including a breakdown of their components, would also increase transparency and its accountability. UK industrial electricity prices are high relative to those in other countries despite the various relief measures introduced by the Government to reduce the industrial electricity price differentials.
The EIUG strongly urges Parliament to introduce regular scrutiny by Parliament of Ofgem’s performance. At a minimum, the relevant select committee in the House of Commons and House of Lords should invite Ofgem to present their annual report and its account and performance therein, but preferably, the select committee should invite Ofgem on a quarterly basis to discuss its performance and its regards to the strategy and policy statement. Additionally, one of the select committees could launch an inquiry into Ofgem’s remit, performance, and alignment with Government alongside or following the Government’s review of Ofgem.
The EIUG welcomes that Ofgem has put in place a team that looks after issues for non-domestic energy consumers. This conveys an acknowledgement that there are also consumer issues in the non-domestic market and not only the domestic market.
The EIUG strongly urges Government to include those EIIs exposed to the risk of carbon leakage in the Ofgem duty to protect the interest of certain customers. This will align Ofgem’s remit with Government’s objective and policies to minimise the risk of carbon leakage. The actions of Government and Ofgem are currently not aligned and are even contradictory at times. For example, Government introduced a scheme to compensate certain EIIs for network charges. Such alignment with Government has only become more important since Ofgem also has the Net Zero Duty.
The EIUG has also noticed that Ofgem does not always have the most strategic approach to regulation but instead has a more of a wack-a-mole approach; i.e. tackle one regulatory issue at a time regardless of whether the changes have any negative impact on other regulations. The TCR is a good example again: to address the proportion of the residual element under the TNUoS charge, Ofgem regulated Triads away, which was a form of demand-side response to minimise inefficient investment in network capacity. As a result, the NESO demand flexibility scheme is now costlier than it would otherwise would have been. Also, Ofgem’s and Government’s ambitions to increase volumes under demand-side response have been undermined.
In terms of what Ofgem might do to support an environment of falling energy prices, it could take the following actions:
- Openly challenge Government for introducing policy costs on retail prices, as this ultimately undermines its primary objective;
- Encourage more long-term gas supply contracts to the UK to minimise gas price volatility;
- (Re-)introduce Triads or a similar instrument to minimise potential inefficient over-invest in the transmission network;
- Allow an increase in the value for the various demand-side response incentives.
To support higher growth in the wider economy, Ofgem should accept and incorporate the risk of carbon leakage in its regulatory decision-making process to avoid non-domestic consumers face a cumulative cost impact of individual regulatory decisions. This will lower energy prices for those most at risk of carbon leakage and likely attract investment by EIIs, which will have a multiplier effect on the wider economy.