Zombies and market reform

The collapse of dozens of UK energy retailers amid a spike in wholesale prices suggests too many were operating with just enough money to cover their expenses. Or does it reflect a failure of market design or of government policy?

Listen to this week’s discussion about energy zombie firms and how to fix the UK’s energy market.

Guest: 

• Emma Pinchbeck, CEO, Energy UK

Transcript

Richard Sverrisson, Editor-in-Chief, Montel: 0:04

Hello listeners and welcome to the Montel Weekly podcast, bring You energy matters in an informal setting. In today's pod, we turn our attention to the UK soaring wholesale energy. Prices on the back of very expensive gas have already claimed 25 of the country's energy suppliers. Could more bankruptcies be on the cards? Is it time to rethink the wholesale market and the marginal cost model? Does the UK need a better assistance to provide backup capacity for when the wind doesn't blow and the sun doesn't shine? And is the regulator off gem still fit for purpose? Joining me Richard Sverrisson in answering these key questions is Emma Pinchbeck CEO of Energy UK, the Trade Association for the UK's energy industry. A warm welcome to you, Emma.

Emma Pinchbeck, CEO, Energy UK: 0:48

Hi.

Richard Sverrisson, Editor-in-Chief, Montel: 0:48

It's been a busy time for you, Emma. Retailers are going under people without power following the storms in the north of a country. These things are obviously keeping you fairly occupied. I assume,

Emma Pinchbeck, CEO, Energy UK: 0:58

yeah, they, I will say. And not glibly because it looks absolutely horrendous in the north of England and I feel for everyone trying to deal with it. But actually I don't, the only bit of the UK energy industry I don't have in my membership of the district network operators in the uk. So actually storm Marwan is one of the few things that have hap has happened this year. That is not in my wick to be dealing with the emergency response for, but certainly. The gas price crisis that you rec, that you just referenced, and what's going on in retail is very much our job at Energy UK as well as the wider energy transition. So yeah, it's been fairly relentless and you missed it from your list. But in the middle of all of that business as usual mayhem, we've had the cop, which is outlining a vision for the future economy and the future of energy, which is very different from the energy world we have today. And the UK government is focused on that. As well as dealing with the immediate risks and issues to hand. So it's felt pretty relentless, I think.

Richard Sverrisson, Editor-in-Chief, Montel: 1:54

Absolutely. We covered the cop in a recent episode, but I, 'cause I, today, I always thought we could more focus on what's happening in the uk. There's enough going there in a way. But energy is very much at the forefront of the media attention at the moment as well. Do you find that energy companies are getting unfairly slammed in some sense?

Emma Pinchbeck, CEO, Energy UK: 2:10

I came into this job two a year ago. God, it feels like two years, but it's, it is in fact only a year. I came into the job a year ago and hadn't done a huge amount of work on retail for several years because I've been working on net zero infrastructure and renewables for the last several years. And I was really genuinely taken aback at the attitude of retail relative to other bits of the energy sector. And in my job interview that, which was two years ago,'cause I was appointed on maternity leave, my chairman said to me, we want you to lead the net zero transition. We're, we want to talk about infrastructure and we want you to do all of that. But the thing that's going to be really pressing upon your time is the fragility of the retail sector in the uk because we think that there's going to be. A huge challenge coming and he was remarkably prescient in that. And, but also not prescient in that the sector has been making negative margins in the UK for the last few years. And they've been going into government and saying, the sector's really fragile. We're not making enough money to innovate. We're not making enough money to be sustainable. And they've been treated with something I'd say borderline dismissively by officials relative to what I see in other bits of the market. And so as someone who hasn't been working on retail for the last few years, they have become the bits of my membership I most want to champion because of the way that I've seen them being treated. By policy makers,

Richard Sverrisson, Editor-in-Chief, Montel: 3:33

would you say then, that the price cap needs to be reformed?

Emma Pinchbeck, CEO, Energy UK: 3:36

It's bigger than the price cap. I think the u, the uk, as the UK has a price cap. It's the thing people default to when they're asking what the issue is with our retail market. But I think it's bigger than that. So you have to start with what the UK government thinks of as success in our market and for the last. Five to 10 years and certainly post privatization. And then around the time the price cap was bought in, the view was that the number of people who were switching suppliers, so the number of times people were willing to switch, and the number of market participants that we had in addition to how low the prices were, these were the metrics that marked out a successful retail market. Now, obviously if we'd had very high rates of switching or automatic switching, or we were measuring the market on that right now, it'd be a real problem because the way prices are, we'd all be being switched to unsustainable suppliers firstly. And secondly, the way prices are very difficult to switch. So switching in itself doesn't really do anything to tell you about the overall state of the market. Instead of looking at single mechanisms like the price cap, we want instead a market. For retail, which reflects the wider tary transition. You want a set of retailers that are sustainable, that offer fair, effective services to customers, but also are able to innovate for a future where price and switching might not be the metrics for retail success in a net zero world. In a world where you want to be accessing EVs, where you want low carbon heating systems, we think it's going to be much more about energy services. And so the kind of obsession in policymaking is what is seems to orientate in an idea of retail. When we still had six energy supply companies and it was a very different market about selling a commodity, what we've been saying to government is you need to build a sustainable industry that can move with a more volatile market and reflect pricing more accurately. Yes. Also that can build for a future where the world might be about services more than about the commodity. And for that you need, trusting, enduring relationships with your customers and a different metric for what competition is delivering. The price cap is part of that conversation and we're arguing for some reform of the methodology for sure. But in terms of what you do with the wider environment and how long the price cap stays, that's a question for having some imagination about what retail is for.

Richard Sverrisson, Editor-in-Chief, Montel: 6:02

Do you find that government is listening to you, Emma, or is it also treating you dismissively?

Emma Pinchbeck, CEO, Energy UK: 6:07

Not anymore. I think, I mean there's something about going in and saying that the retail market is just fragile and then watching the number of failures we've had, which sort of illustrates your point. Frankly, I wish we could have made it in another way than this.'cause it's hugely disruptive for customers at this time. The costs of this period for bill payers will be, enormous. Even if you wanted market consolidation or change, this isn't the way you go about doing it. So I feel no satisfaction whatsoever in this moment. We're just really worried about getting people through it in the uk. I do think on the other side of it, government will realize they can't go back to the old world of retail. So in that sense, I think there is an appreciation that policy has to change. And we need to really, rehabilitate retail as a, as an engine for delivering much of what the government is trying to do on net zero and in other parts of the economy. They're key intermediaries for everything else, the retailers. So yeah, I think there has been a change in mindset for now. The real challenge is making sure our customers stay supplied, that we try and as much as possible, keep the costs of this, which are policy related, the kind of mutualized cost of the failures, and all that kind of thing. Limited on bills and to make sure that the industry in the UK is sustainable for the next year or so. Whilst we're plotting what that future looks like

Richard Sverrisson, Editor-in-Chief, Montel: 7:27

and what reforms would you like to see then further down the line after we got through this year that energy bills aren't too unsustainable and the markets still. Operating what needs to change?

Emma Pinchbeck, CEO, Energy UK: 7:37

So actually that's a really an interesting point because another observation of mine is we're much less clear on what retail should be other than what we know, what it shouldn't be, which is, a world of thinking about only a commodity and lots of switching. The easiest thing to do here is to think about what the infrastructure will be. So in 2030 in the UK we're going to have a, an electricity system, which is one on its way to being net zero, where our incumbent form of generation is likely to be domestically sourced. Green electrons produced in, around 40 gigawatts of offshore wind, onshore winds, solar. We are likely to be making green hydrogen here at that point. We're approaching a quarter of the market. At the moment of new car sales in the UK is plugin. You can see that being much higher, maybe even 50% or more with an EV ban coming in 2030. So this world is one of a much more vibrant demand side where we're going to need a much more flexible system, where we're going to need price signals that are passed from cheap production at the wind farm through to the consumer. And where we've got lots of different technologies in consumer homes or people wanting to access them. And therefore probably wanting services like agile tariffs or load shifting off the back of them, both so that we can keep our grid operational, but also because that will reward customers for doing the right thing and perhaps even finance the access to these technologies for many. So the retailers are in the heart of that transition and the big question is, can you design a retail market, which is about those services and about, services both to the grid in terms of. Bundling up consumer demand and offering things like load shifting. But also services to the consumer in terms of, discounted energy efficient and low carbon heating products and EV charging points and so on. And the services that make them work. So things like agile tariffs. So you can charge when power is cheap in the uk That is the world that we are building, physically building in 2030. And what I'm saying is that our retail policy has not reflected that at all Now. What that actually looks is really challenging. And so we are putting our minds to it in Energy uk I think government will be putting their mind to it now

Richard Sverrisson, Editor-in-Chief, Montel: 9:47

of Chairman has been criticized for its handling of the price spikes and its response to some of the suppliers going bust maybe for a lack of teeth in general. Do you think regulations with two laxs allowing too many UNH participants in

Emma Pinchbeck, CEO, Energy UK: 10:00

Yeah. You said at the beginning of this, is it one of those things where everyone's having a go at industry? Actually, no, not so far.'cause I think people recognize that. I'm sure on the other side of this we'll find some bad practice. You always do in moments like this, but generally I think people are acknowledging that there has been a failure of policy or regulation somewhere here and just on the point of market conditions, really important to note that it is a very well-regulated market. The UK in general. It's why investors want to be here. We, there's a 200 page supply license. It's not just plug and play in the uk it's difficult. In theory to get in here versus some other markets. However, I think it is clear that we have been chasing the wrong metrics, as I said and government was very keen to have lots of suppliers in the market and thought that would drive competition and therefore better service. And I don't think we are convinced of that argument. What. We are worried about very much in the spring is making sure that you don't have, bad practice or zombie companies or companies coming into the market and kind of capitalizing on what will be a fragile situation as the gas price starts to fall again. So I think it's right that off Gemma proposing to look at suspending supply licenses in the UK for a period of time just to give the market some stability. And to give those that are stepping up in this crisis, time to stabilize themselves and look to next year in the long run. I think that's a question for the regulator. And actually bigger than that, I think it's a question for government. They talk about the market doing its job in terms of setting the number of companies, but that's misses how regulated this market is in the uk. And so if they want. Lots and lots of companies, that's one regulatory model. If they want fewer sustainable companies, that's a different regulatory model. The point is, government kind of has to decide what it thinks the size of the market should be and the right way to regulate them. We welcome anything to bring stability over the next period particularly given what we're going through thereafter. It's a decision for government and the regulator.

Richard Sverrisson, Editor-in-Chief, Montel: 11:59

Turning to the wholesale market. Now, Emma, you mentioned offshore wind, some elements of onshore wind and providing a lot of power to households and industry in the UK and then the services that go with that. But is it time to take a look at the marginal cost model in the wholesale market? Because a lot of what you're talking about here and what will happen. As we go towards net zero is zero marginal cost generation. So what will happen, what will that do to the wholesale market?

Emma Pinchbeck, CEO, Energy UK: 12:24

Oh yeah. This is a personal view because I don't think we're fully there yet. But again, if you think about, I would encourage listeners, who come from markets beyond the UK to contemplate. This world, which is one in which the incumbent form of energy generation is likely to be low cost renewables producing renewable green electrons. It's not a fueled world anymore. It's one where the caps of the infrastructure is a cost. And then the future system is driven by a very different commodity to molecules we dig up and burn. And so when we talk about things like price cannibalization or marginal costs, I wonder whether actually having a market or orientated around fossil fuels might not be the market you'd design if someone told you that the system was going to be, in the UK the system's going to be 60, 70% plus renewables, plus EVs on the demand side, plus a significant degree of heat electrification. Plus, hydrogen, a lot of which we might manufacture with those same turbines. Would you design a market and financial rewards in that market and values in that market around anything other than electrons? And what does that look like and that, and look, that's, that, that sounds quite pie in the sky, right? Because a part of a global energy market, so the wholesale price is wholesale price, but at the moment, for example, in the uk, electricity is tracking the gas price, which. Makes it very difficult for us to demonstrate that decarbonizing heat by getting off gas might be a good idea, even though electricity is theoretically cheaper at the moment than the international gas market. So there are some really fundamental questions about energy market design that this technology shift should be asking, and I don't hear enough people talking about them. It's a similar thing, by the way, with how you value flexibility in the market, which is the other key characteristic. That's where the value will be. Is, rapid dispatch, flexibility technologies, storage technologies, dynamic price signals and on the demand side and agile tariffs. What, how do you make sure those things come forward too in a world that has historically been driven by the need to build large infrastructure and the price signals thereof. So it's really complicated. That's a very personal, abstract thought about what the world might look like in 2050 in the interim. We are gearing up in the UK to look again at our electricity market reform, EMR, which is our kind of package of things like our capacity market, our contract for difference auction, and the other markets we have in the uk. I think we're gonna go through a period of incremental change out to 2030, and then maybe in a position to ask ourselves some of these bigger questions.

Richard Sverrisson, Editor-in-Chief, Montel: 15:03

There have been certain noises in, in parts, other parts of Europe that questioning the marginal cost model. When you have, for example, when certain companies are making a lot of windfall profits because if the price of electricity is coming off the back of gas when wind, you have wind power operators earning quite a lot on the basis of that model. So I think the discussions probably. Not an advanced stage, but it's certainly in the early stages, they're looking at what is best to take us to 2050. But Emma, another question here that certainly is important for the UK's neighbors or surrounding countries that are coupled to the UK by Interconnectors. I'm just wondering what kind of progress has been made between the UK and the eu? At resolving the issue of the decoupling of the markets.

Emma Pinchbeck, CEO, Energy UK: 15:47

Yeah. Not enough. Okay. So n not nearly enough. So far, the UK carbon price has in our new independent ETS, has roughly tracked the ETS, which means the relative fragility compared to a link market of a non-line market hasn't been as clear though that has shifted, in recent weeks starting to see some price divergence. I think it's a difficult, it's one of those things that's not yet been top of the list, and there are other issues in. The Brexit withdrawal agreement that I know that the UK government is negotiating on at the moment with the eu. So it is possibly one of those things of lack of resource, but certainly as far as we are concerned in the UK there are massive benefits to UK consumers and to everything else we're trying to do to have those markets linked. So we are pushing for linkage. The thing to have an eye on is market reform. The EU is talking about extending their carbon market into things like, heat and other areas the same. Noises have been being made in the UK around how we finance the low carbon transition for things like heat or agriculture or transport. And whether you could do it through an ETS mechanism versus, carbon taxes or some other measure. And I just think, the more those markets diverge in terms of what they cover, and the more the price diverges, the harder it'll be to link. So we are putting as much pressure on as possible, but as you say, not nearly enough has been done so far.

Richard Sverrisson, Editor-in-Chief, Montel: 17:06

I'm talking specifically about the market coupling of the cables, the interconnectors to the uk,

Emma Pinchbeck, CEO, Energy UK: 17:11

the Interconnectors, as far as I know, the Interconnector conversation, they're bilaterals, right? So in that sense, there's a limited amount that you can do a national level apart from articulate. The fact that you want them and how many you need and create a positive relationship to get them built. I think tho those conversations are progressing. In the uk we know we need interconnection and we're interested in it now because of the scale of the offshore wind industry in the North Sea and the ability to do things like meshed grids eventually as well, which then jurisdictionally means that it's not just a kind of bilateral conversation that's commercial and between two countries, it becomes something which is. Much more about North Sea Corporation. So we want to see that North Sea body that was supposed to be looking at things like mesh grids and interconnection really get off the ground. And again, progress has been slow there. But that's as much as I can say about Interconnectors'cause they are. So much subject to just those kind of bilateral talks.

Richard Sverrisson, Editor-in-Chief, Montel: 18:04

No, absolutely. It's a bit of a, I dunno, tricky subject here. I'm obviously Monte's based in Oslo, in Norway and amongst, right? For Norwegian customers they're seeing their power and price increases.'cause there's a lot of, it's flowing to the uk. But I'm sure there'll be, be moments when that is reciprocated, especially with the,

Emma Pinchbeck, CEO, Energy UK: 18:20

actually more and more yeah, I can promise you with the scale of the wind fleet that we're building off the shore of the shores of Scotland and the East coast here, that there will be merit for European markets in having interconnection with the UK just because of the sheer amount of capacity we're gonna have here that we won't necessarily be able to use. I think there are reasons to think for those of you in Oslo, that it's a good thing to be interconnected with the uk, even if right now it doesn't seem the way.

Richard Sverrisson, Editor-in-Chief, Montel: 18:44

Exactly. So I think there's a light on that cable further down the line. Yeah. Emma, in terms of, you mentioned the EMR, what kind of work would you like National Grid to be doing to adapt the capacity market to take on more renewables?

Emma Pinchbeck, CEO, Energy UK: 18:56

I would say this is not National Grid's job, right? This is a regulatory job In that National Grid responds to whatever government and the regulator says the capacity market should be. You know that the, the energy systems operator, so the independent bit of National grid that runs the system obviously sets things like the margin out and saves what we need to commission each year, but they, I give this to National Grid. The margins in the UK are always pretty good. They do a good job. We're looking at a fairly crunchy decade, as I said, in terms of security supply and doing the transition. But there's, our system operator is very good at managing those risks and even in this year, given all the challenges in the market, there has so far been no security of supply. Risk in the uk. So I think in that sense, national grid of fine, it's the regulatory framework for the capacity market. Yeah. Should it have more renewables in, that's one of the big questions about a world where you've got more and more technologies able to do the functions of the other technologies. So I don't know about that. If you've got things like green gases and hydrogen coming in, do they sit in a capacity market? Is that the best place to fund them? Or do they need something like a CF, D mechanism to drive them, things like carbon capture and storage and hydrogen in the UK looks like it's gonna be done through something like a CFD auction. On the other hand, you've now got renewables, which when coupled with storage and as they get frequently, are co-located or co-located with Electrolyzers and making hydrogen, are they a different kind of asset to other kinds of renewables? So should they sit in a capacity market if they can provide that kind of service? Or should they sit in the CFD or should there be rules about, which and both. And I think over the last five years or so, we're starting to see a blurring of those markets and what they're for. And that's one of the questions for these incremental changes in EMR. Now, I don't yet have the answer to that 'cause I only ever, unless I say it's my opinion I'm got a reflective views of the members and we've obviously got quite a range of views, but we have just kickstarted our EMR 2.0 work with the membership of Energy uk. So you'll start to see some of that coming forward. I think everyone acknowledges that the current framework is creaking to deliver what we need it to do. So there's a, it's a good time to look again, whether or not it is the time to scrub the. Blackboard clean and draw something new. Difficult to say because you do also want to keep that kind of stability that we've got in the UK and that investor confidence,

Richard Sverrisson, Editor-in-Chief, Montel: 21:10

but make use of the energy crisis to create new reforms or to change to make important changes. Final question, Emma, really, you highlighted all the key changes that are required, but to what extent will we still need to rely on gas in the next decade? In the uk,

Emma Pinchbeck, CEO, Energy UK: 21:26

we can just default to the Committee on Climate Change here. So in the UK we're modeling a energy system where we'll have, so at the moment on the demand side, we've got 80% of UK consumers on gas boilers. I would argue that the gas crisis has indicated our dependence on imports in the UK for gas. And given the shift to domestically produced electrons over the next decade, it makes sense to try to help households get off gas as much as possible and just reduce our dependency in the system. So that's the first thing, and I think that's something the government has also said in response to the crisis. The other thing in terms of gas in the system though, is that we, it's still there in most of the models. So even in a net zero power system model, we've got the committee on climate change has got, unabated gas plant in for emergency events. So if you have two weeks in the middle of winter with no wind, for example. We don't have another form of long duration storage. There is a proposal to keep on unabated gas for that kind of moment. Similarly, we think you need to invest in gas plants so long as it's gas plant, which is going to convert to zero carbon compatible hydrogen or carbon capture and storage technologies over the next decade. And that's because in the UK most of our system models show a mix that's about 70% renewables, sometimes 80% renewables, but it gets quite difficult to do the last 15, 20% because of the system costs of managing that much variability. So then we've got nuclear in the mix, plus a bit of something else, which usually comes out as being CCGT with carbon capture or biomass with carbon capture, or. Hydrogen. And then plus this elevator gas for real system challenges. So that's the picture in the uk. So yeah, we're all of the above over here, so long as we get emissions right down and then beyond 2030, who knows? But a lot's changed in the last 10 years,

Richard Sverrisson, Editor-in-Chief, Montel: 23:23

exactly. Who knows? Emma, best of luck with that and thanks very much for being a guest on the Montel Weekly podcast this week.

Emma Pinchbeck, CEO, Energy UK: 23:29

Thank you.

Richard Sverrisson, Editor-in-Chief, Montel: 23:30

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