Information comes in many forms with various claims to ownership. The volume of data and the variety of contexts that transform it into information and knowledge has evolved beyond recognition since Hayek’s seminal work on “The use of knowledge in society”. However, the importance of the availability of knowledge to the individual, whether person or business, has, if anything, increased and reinforced Hayek’s point that free but informed decisions and economic effectiveness go hand in hand. It is therefore important for policy to address the ownership and access to information to tackle the ensuing asymmetries in decision making and power as exemplified by the energy market.
This topic relates to the important work done by Jo Swinson and Ed Davey during the Coalition to make getting a better utilities deal easier. The current energy market in the UK is a morass of poorly thought out regulation, awkward implementation and skewed market mechanisms. A move towards nationalisation is not the answer. The situation and elements of a solution have recently been set out clearly in a report sponsored by the Federation of Small Businesses. The report, “Open Energy: Using Data to create a smarter, cheaper and fairer energy market”, compiled by Fingleton Associates, covers the needs of individuals and service providers as well as businesses.
The diagnosis of the current malaise is that the market is complicated and unpleasant to interact with. It is rife with problems of overcharging and consumers being stuck on the most expensive, and certainly not the best, tariffs. The volume of information needed to determine the tariff rates means that the market suffers from information asymmetries that often prevent individuals and businesses from getting on the best deal and concentrates power with major incumbent suppliers.
The proposed solution is Open Energy. This would mean the government allowing businesses and domestic energy customers greater control over their energy data and easier access to tariffs available on the market by:
- Standardising tariffs and other relevant market information in machine-readable formats to allow automated comparisons of energy tariff offerings
- Making smart meter data available through a secure standardised Application Programming Interface (API) to approved third parties
- Allowing energy customers to delegate contract switching powers to third party intermediaries
These are smart recommendations. They use regulation to free the flow of information and provide standardisation that enables new intermediate services to flourish as well as to reduce barriers to entry for new suppliers and generators.
The major challenge is that to be effective the reforms need to be holistic and proportionate, covering regulation, standardisation, technology and the sustainability dynamic interaction between technology and all stakeholders. A key aspect will be to review the roll-out of smart meters that currently are too closely tied to incumbent suppliers. The smart meter provision needs decoupling from suppliers with ownership of energy data generated remaining with the individual while relevant aspects are made available to the supplier.
The challenges are addressable and this form of smart regulation and standardisation provides an example, with wider application, that enables the market to function to the benefit of the individual consumer and the environment. This provides a starting point for policy formulation that addresses market complexity and is distinctly Liberal.
* Dr Robert Johnston is a Liberal Reform Board Member, member of the Association of Liberal Democrat Engineers and Scientists and Fellow of the Institute of Physics.
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5 Comments
The whole energy market is flawed because it is based on the premise that a fair return on capital is five percent… so the higher the prices, the higher the turnover, the higher the money they take out of the system.
I would like to see a cap on energy prices defined as a ratio of the final price to the actual energy cost (in gas and electric it is between 3 and 4). Once that has been set, every year for the next ten years that ration would have to decrease, forcing efficiency into a market that is more cartel like that free market. True some of the big energy companies also produce the actual energy as well so there would have to be huge fines if there was any attempt to run a cartel.
Would also like to see all standing charges abolished as they penalize low energy users (there are three companies who already have no standing charges but rates are consequently a bit on the high side due to lack of competition) and do not make it easy to compare tariffs (the lowest tariffs usually come with the highest standing charges).
Even better, given the rip-off, predatory pricing over the last decade, the first ten quid’s worth of energy each month should be free! Just about possible if you have solar panels to avoid the electric bill under that regime.
If I understand this proposal correctly, the idea is to help people faced with a complex and technical market to become ‘better shoppers’. And, if they put their mind to it, I’m sure it would help to that end.
But … the assumption that, if only people were ‘better shoppers’, all would be just dandy is a standard neoliberal position and it’s wrong. Very wrong.
Even those fortunate enough to be technically and commercially savvy, will rarely be a match for company professionals with their detailed insider knowledge. Change the regulations and the tricks and loopholes those insiders find will change to match, but the average consumer will remain outmatched.
Also, let’s not forget that markets cost real money to operate. That’s justified only if the savings from competition are greater than the cost – which they often aren’t. AFAIK each switch costs around £40 to the energy supplier but often more to the consumer because the cost-comparison companies have an agenda too and more again because many end up on non-optimal tariffs, almost certainly biased towards those who can least afford them.
The one regulatory approach that could work would be to allow each company only one tariff for each area (different by area because actual distribution costs vary) which might be local authority areas. In that scenario, companies would have to offer their best tariff in each area or face a catastrophic loss of market share.
The opposition from the companies would of course be intense so I’m not holding my breath. Ordinary people’s interests are well down the pecking order.
Electricity is an ideal commodity for a market. Electrons are identical so customers are only interested in price. The government chose to prevent a perfect market to make it profitable for an oligopoly by requiring everyone to have a contract with one supplier at a time. There is no reason why the grid should not act as a market in which a price is constantly being negotiated between producers and consumers. Big players would make the market but we would all get the best price.
The article discusses Time of Use tariffs, but these can only reflect average cost of producing and distributing electricity at different times in the day. The actual cost relates to the National Grid spot price, which balances supply and demand, and varies with other factors such as the weather (e. g. wind and solar) and power station breakdowns.
The Fingleton Associates paper mentions “Real-time marginal cost pricing programmes”, but not potential real-time tariffs based on the spot price. If these spot prices were made available, then humans and smart products could more effectively time-shift usage to the benefit of both that customer and all users (because less backup capacity is needed). The potential benefit would be much greater if a central unit made price predictions available, based on all available information.
Electric car chargers are an obvious potential smart product (where the user puts in their requirements in terms of how full a battery they need,, and by when). The smart charger uses price predictions to decide when to charge. There are many other potential smart products.
For example a smart freezer could avoid using electricity when prices are predicted to be high, by lowering the thermostat an hour or two in advance. Slightly more electricity is used, but to the benefit of all. When there is a risk of blackouts, prices will go very high and the scale and duration of the thermostat adjustment can be increased.
There is more detail on this policy proposal in:
http://www.aldes.org.uk/wp-content/uploads/2015/03/ALDElectricityRTTs215.pdf
Time-shifting can also be achieved with batteries, but real-time tariffs are cheaper.
Thanks for the information and link Stewart.