Dieter Helm review calls for wide-spread energy market reforms

The much-anticipated review into the cost of UK energy by Professor Dieter Helm has been published. The review follows on from the UK Government's Industrial Strategy Green Paper and assesses the entire electricity supply chain.

Dr Helm has put forward a series of proposals to reduce costs in the electricity system, whilst making sure the UK is also on track to meet its targets for carbon emissions reduction.

Helm argues that the cost of energy is too high, and that households and businesses have not benefited from the falling costs of gas and coal, or the significant price reduction of renewables. He states that efficiency gains in network and supply costs from smart technologies haven’t been passed on to consumers either.

Helm blames legacy costs, ever-changing policies, and regulation for rising costs. He cites complexity in the market as being “a major cause” of increasing prices and believes that the multiple interventions in the market have added new costs and complexities with minimal gain.

Dieter Helm review suggests major energy reforms

The aim of Government, the report says, should be to “radically simplify the interventions”. Helm cites a number of ways to do this, including:

  • Separating and ring-fencing legacy costs from the Renewables Obligation (RO), Feed-in-Tariff (FiT), and Contracts for Difference (CfDs). These should be charged individually and explicitly on bills, with industrial customers exempt.
  • Set a universal carbon price which will be “significantly lower” than the cost of the current multiple taxes in place. Introduce a border carbon price to address the consequences of adopting a unilateral carbon production target.
  • Gradually phase out FiTs and CfDs and merge into a unified capacity auction. As the cost of intermittency will then fall on generators there will be an increased incentive to invest in Demand Side Response (DSR), storage, and back up capacity.
  • Stop periodic reviews of the current RIIO (Revenues = Incentives + Innovation + Outputs) framework going forward.
  • Establish an independent National System Operator (NSO) and Regional System Operator (RSO), and, where possible, open as many of these bodies’ functions to competitive auctions, inviting bids for network enhancements, generation, storage, and DSR.
  • Replace generation, supply, and distribution licences with a single simpler licence.
  • Introduce a default tariff to replace the Standard Variable Tariff (SVT). This should be based on an index of wholesale costs, the fixed cost pass-throughs, levies, taxes, and a published supply margin.
  • Capping the supplier’s profit margin as part of this new default tariff construction would meet the objectives, enhance competition, and encourage new entrants.
  • Government should issue an annual statement to Parliament, outlining required capacity margins and guidance for NSO and RSOs.

Helm believes the role of the energy regulator Ofgem should be “significantly diminished” as a result of the above changes.

The full report can be viewed online here.

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