The focus of policy makers on short-term solutions to rising energy prices is risking the long-term sustainability of the energy sector and leaving the public vulnerable to increasing costs according to Gareth Miller, CEO of Cornwall Insight.
Current solutions, including the Default Tariff Cap, only attempt to deal with failings in the existing energy market design, and, at best, delay risks and costs or at worst they increase them. To future proof the sector, safeguard against continual consumer price hikes and protect the wider economy, Cornwall Insight has identified three areas that should be examined as a long-term response to the crisis:
- Reforming the wholesale markets so they will better respond to volatile gas driven balancing costs as we move away from fossil fuels
- Developing a better understanding of the changing inter-relationship of wholesale prices with consumer costs, and determining the fairest route for recovery of costs over time
- A concerted communication exercise that explains to the public the multi-generational return on investment that underpins net zero,
These three areas should be addressed in further detailed policy work framed around what are nationally significant objectives. This includes adopting a sustainable approach to achieving net zero, maintaining commitments and our reputation for stable, competitive markets; and creating justifiable and equitable financial impacts on households and businesses in the long run.
Gareth Miller, Chief Executive Officer at Cornwall Insight, said:
“The current energy crisis is of economy wide concern, having a potential impact on business competitiveness, general inflation, and household affordability. It is vital that the magnitude and speed of actions match the scale of risk faced by the economy from the current situation, and that attentions turn away from quick fixes, and instead focus on large scale reform of the energy system.
“It is not helpful for government to keep pointing to the Default Tariff Cap when pressed on what action it is taking. The cap will not protect consumers from increases in gas and power prices in the long run. Certainly, the cap has delayed the burden of these costs to consumers, but they will face them anyway as the default tariff cap rises in a lag to the rise in gas and power prices. We must also remember that the default tariff represents the regulator’s view of a “fair” price for energy. So, if it is rising, this suggests the regulator thinks that an appropriate response is for suppliers to be able to charge this rate to consumers. If the costs of supply are rising but deemed fair, but the impacts on households will create hardship, this cannot conceivably be dealt with through the energy bill or market mechanisms. At that stage, the government should attempt to alleviate pressure on vulnerable households through the tax and welfare system.
“In any event, to avoid repeats of these issues in the coming years, we need to look again at how wholesale markets price energy, as the current system was designed for a different supply mix. We need to reconsider our strategy for buying and storing gas, and the balance between importing from abroad and the benefits of using our own resources. Particularly as where we get gas from is irrelevant so long as we stick to a declining usage as we move to net zero. We also need to look again at the type of low carbon technology mix that minimises exposure to volatile international fossil fuel prices, and how we encourage a lot more energy efficiency and demand reduction.”
“These activities are by no means easy and will require upfront investment on top of levies and costs already being paid by consumers. It is essential that the government is open and honest with the electorate, about the profile of costs but also the accumulation of benefits of net zero. There should be some acceptance of what is controllable and what isn’t, and what are the uncertainties that may change the trajectory as we make progress. Surveys and polls say time and again that people buy into the big benefits of decarbonisation, and see it as a really important issue. But a lack of transparency on the return on investment for households, communities and the national economy may begin to put that support under pressure.
“None of this is politically easy, and of course the immediate focus is on the real crisis about to impact households in the here and now. However, we urgently also need to look to long-term reforms if we are to avoid lurching from winter crisis to winter crisis in the years to come.”
–Ends
Notes to Editors
For more information, please contact: Verity Sinclair at v.sinclair@cornwall-insight.com
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About the Cornwall Insight Group
Cornwall Insight is the pre-eminent provider of research, analysis, consulting and training to businesses and stakeholders engaged in the Australian, Great British, and Irish energy markets. To support our customers, we leverage a powerful combination of analytical capability, a detailed appreciation of regulation codes and policy frameworks, and a practical understanding of how markets function.
