Government must 'radically simplify' energy regulation to cut costs, expert says

Oxford University academic Professor Dieter Helm has made 67 recommendations to address this discrepancy. These range from phasing out the existing system of feed-in tariffs (FiTs) and contracts for difference (CfDs) in favour of a "unified" capacity auction system, to introducing a universal carbon price at a level that would enable the UK to meet its international climate change targets.

Energy law expert Jeremy Chang of Pinsent Masons, the law firm behind Out-Law.com, said that the report proposed "some pretty radical solutions that will give both government and industry food for thought".

"The review notes that the government strategy of 'picking winners' to essentially choose what technology becomes successful is not a good approach for the long-term," he said. "Investors are currently unable to make their investment decisions based on wholesale cost alone and instead have to navigate labyrinthine measures, incentives and regulations, which means increased costs in the long term."

"The proposal to ring-fence these legacy costs and transition from the existing support mechanisms to a universal carbon price is an elegant solution that simplifies the picture and would let the market decide what technology should be brought forward. If it is possible to accurately set the price of carbon and impose this, it would create an environment where the whole energy industry is truly incentivised to set itself on a path that moves away from carbon-heavy methods of generation firmly towards renewables," he said.

Professor Helm was asked by the government to review energy costs in the UK, with a particular focus on how the energy industry, government and regulators can keep the cost of electricity as low as possible while still ensuring that the UK meets its domestic and international climate targets. The review follows commitments made by the government earlier this year in its Industrial Strategy, which said that the UK should become a global leader in battery technology.

Helm was asked to consider the whole electricity supply chain of generation, transmission, distribution and supply. The recommendations in his report consist of immediate and longer term actions to be taken by the government, the independent Committee on Climate Change (CCC) and energy market regulator Ofgem.

According to the report, households and businesses have not fully benefitted from the falling costs of gas and coal, the "rapidly falling" costs of renewables or "efficiency gains" as a result of the growth in smart technologies. Helm has concluded that this is due to a combination of "legacy costs, policies and regulation, and the continued exercise of market power".

To address this balance, Helm first recommends that the "legacy costs" of green energy programmes be "separated out" and "ring-fenced", charged separately and explicitly on customer bills and allocated to a 'legacy bank'. Industrial energy consumers should be exempt from these charges.

FiTs and other low-carbon CfDs should be gradually phased out and merged into a new "unified equivalent firm power" (EFP) capacity auction, according to the report. This would incentivise intermittent energy producers to partner up with storage, back-up and other 'demand side' technologies, in order to provide the capacity that they have committed to. A universal carbon price should also be set, harmonising the multiple carbon taxes and prices that are currently in place.

The new system should be overseen by an independent national system operator (NSO) and regional system operators (RSOs), and generation, supply and distribution licences replaced by a simpler, single licence, according to the report. One effect of this would be to "significantly diminish" Ofgem's role in network regulation, Helm said.

"The scale of the multiple interventions in the electricity market is now so great that few if any could even list them all, and their interactions are poorly understood," Helm said in his report.

"Complexity is itself a major cause of rising costs, and tinkering with policies and regulations is unlikely to reduce costs. Indeed, each successive intervention layers on new costs and unintended consequences. It should be a central aim of government to radically simplify the interventions, and to get government back out of many of its current detailed roles," he said.