The energy price review: keeping it simple and effective

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With limited time available, the newly announced review of energy prices should focus first on establishing a clear picture of how UK electricity prices for different types of consumer differ from those faced by their competitors

We learnt this week via the Times that Professor Dieter Helm, commissioned by the government to review the affordability of energy prices, is only being paid for 30 days’ work. That’s not long for any government review, there are probably corners of government that have spent that long deciding what office furniture to buy. It’s certainly not long when you’ve been asked to review much of the UK’s complex and rapidly transforming energy system.

The review’s Terms of Reference include all key factors affecting energy bills from generation to consumption, including “energy and carbon pricing, energy efficiency, distributed generation, regulation of the networks, and innovation and R&D”.

And that’s not all, there’s also how future technological change, the intermittency of renewables, regeneration of the nuclear sector, the growth of electric vehicles, installation of batteries, more flexible digitised electricity grids and wider societal and economic changes can all be managed while ensuring the UK meets its carbon targets at least cost and keeps the lights on.

If this exhausting list is divided up, that leaves a couple of days for each of the topics mentioned directly above, let alone all those indirectly inferred. Each on its own has warranted lengthy reports in the past.

Professor Helm is admittedly not starting from scratch, he’s already an acknowledged expert in this area, and one that industry figures welcome for his appreciation of the challenges of balancing decarbonisation with international competitiveness. There’s also the autumn budget and the Industrial Strategy white paper due in the coming months that it would be useful for him to feed into.

Prioritising

All the same, there are some outputs from the review that seem more urgently needed than others and indeed are important in arriving at sensible answers to other questions. For us, this work has to begin with a clear understanding of where there are disparities between the prices paid by UK firms for electricity and those paid by their competitors, and why.

Data from the UK government shows these disparities to be increasing, particularly for heavier electricity consumers. Companies in these categories are not surprisingly asking government for help to level the playing field.

Energygraph

Source: BEIS Quarterly industrial energy prices

However, the reasons for the disparities are hard to unpick across all three elements of electricity bills: wholesale prices, transmission and distribution charges, and the surcharges added to pay for social and environmental policies such as the installation of renewables.

Different EU countries approach all of these differently, and all divide up their industrial consumers differently when deciding how exposed they should be to the various elements. In Germany, firms can qualify for a range of discounts across network and policy charges on the basis of their consumption levels and energy intensity. France offers a certain volume of power at a government-regulated price and discounts based on a variety of metrics including exposure to international trade. The Netherlands provides discounts for, among other things, entering into an agreement with the government to improve energy efficiency. (The UK incidentally is unusual in imposing charges unilaterally and leaving it to utilities to spread them across users, with only a subsequent compensation/exemption scheme for the most energy intensive sectors.)

A solid starting point

Without knowing how UK and international bills break down for a variety of sizes and types of user, it is hard to monitor UK competitiveness on electricity prices, let alone start to address any reasons for divergence or achieve the Conservative manifesto pledge of trying to provide the lowest energy prices in Europe. The best evidence we currently have comes from studies compiled for regulators in different countries. This mix of overlapping data also leads to endless rounds of claims and counterclaims.

If we are to move forward sensibly from this point we need a single evidence base, accepted by all the key players, that can form the foundation for future action, and put these debates to bed. Metrics drawn from this work should then be used to check on a regular basis that UK pricing is not diverging further from its neighbours – something that is crucial given the extraordinary degree of change currently underway in the energy sector, and something our European competitors are already actively tracking.

If you’re trying to pick a path through a swamp, it’s best to check you’re standing on solid ground first.

* EEF’s CEO Terry Scuoler is a member of Dieter Helm’s advisory board in a personal capacity

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Head of Climate, Energy and Environment Policy

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