Dermot Nolan is a self-confessed nerd. It is a role the boss of Britain’s energy regulator readily admits to, with only a hint of apology. He is, after all, an economist turned academic turned regulator, who has been in control of the industry’s complex regulatory levers for almost four years.
“Again, I’m about to go on a nerdish rant here, so forgive me,” he sighs.
Over multiple cups of tea in Ofgem’s sunlit offices on the north bank of the Thames, Nolan is outlining his vision for a radical overhaul of the energy market. This is Nolan at his most passionate and adamant: the energy system is changing, and the combination of competition and technology holds the promise to drive a shift akin to the telecoms revolution of the late Nineties. By the early 2020s the way households buy their energy could be transformed, and Ofgem is preparing for that.
“We could see a situation where many other types of company, perhaps from the tech sector, could come in and start selling energy, perhaps bundled with other commodities. I think that is very exciting, in so far as a nerd like me finds these things exciting,” he adds.
The upending of the energy market cannot come soon enough. For years political concern over the rising cost of energy has driven the issues of bills, profits and public mistrust higher up the national agenda. The political glare has turned up the heat on Ofgem too, raising questions over its ability to keep energy bills fair and keep the costs of network operators down.
Ultimately, it will fall to Ofgem to enforce the interventionist appetite of governmentCredit: Jeff Gilbert
On both counts Nolan has been forced in recent weeks to offer a mea culpa, of sorts. He revealed last month that he would not receive his annual £15,000 bonus as part of a public apology for not bringing the number of people on poor-value standard energy tariffs down fast enough, or capping bills for those less likely to switch. He has also admitted that the revenues made by energy network owners, which are levied on consumer bills, have been higher than Ofgem expected them to be when it set the industry’s price control. The returns need to fall in the years ahead, he says.
However, there was no apology for last week’s 5.6pc hike for 5m of Britain’s most vulnerable energy customers. The regulator’s newly created “safeguard tariff” caps bills only slightly above the rising cost of supplying energy in a bid to protect consumers from unfair prices – but even fair prices can rise.
“We’ve said a number of times that price caps lead to falls as well as to rises. No one finds that desirable. But it comes down to confidence that costs are being reflected efficiently and accurately. That’s the key point going forward,” he says.
The scrutiny this tariff faces will only rise under government plans to extend the cap to 11m homes currently using standard energy deals by next winter. It is a move Ofgem refused to implement itself after the competition authority stopped short of backing a market-wide cap. Nolan has insisted that the Government will need to legislate to bring a market intervention of this magnitude into effect. Ultimately though, it will fall to Ofgem to enforce the interventionist appetite of government.
“Do I think that Ofgem’s independent role has been reduced? No, I don’t. First of all, regulators need to be aware of the public mood. We still have independent powers and we still exercise them in an independent way. Myself, my chairman, my board. We are all very careful about that,” he says. “We’ve consciously stated that capping bills for vulnerable customers is our plan to make the retail market better for customers. If government wants to make an intervention that is entirely up to it – but we will work closely with it.”
Tackling higher than expected returns for network operators, whose revenues are set by Ofgem, is a job entirely down to the regulator. It is an area of increasing scrutiny due to the large part it plays in the costs behind the average energy bill.
“The returns have been higher than expected and that is obviously an area of concern for us. Over the last 25 years the system of network regulation has worked well for Britain, it’s driven down costs which are roughly 17pc lower than they were and radically improved performance. The record in that regard has been good.”
Big Six profit margin for household energy
But network operators including UK Power Networks and Western Power Distribution are on notice: Ofgem will tighten the screws on revenues in the next price control period. The regional monopolies will be forced to open up to more competition. Ofgem will publish plans to maintain a stable investment environment, but a more competitive one, in the next few weeks. “You’d expect to see quite a long, complex and perhaps – if I can use the phrase – ‘nerdish’ document. But none the less one which will set out very clearly the next price control, and how returns will come down,” Nolan smiles.
Lowering network costs is just one part of building the energy market of the future; one which will not need regulated prices caps. “All roads lead to the price cap,” he chuckles wryly.
“Will it kill the habit of switching? And if so, how could it ever be abandoned? I think these are fair questions but they are answerable ones. It’s up to the regulator to ensure that the seeds of competition remain alive over the next few years.”
Another question hangs in the air: will Nolan remain in post to see the price cap through? “I have no idea. I wouldn’t speculate about my future or indeed anyone else’s,” he says. He believes the pace of change in the sector offers salvation to the chronic lack of public engagement which has allowed the conditions in which a two-tier market has flourished.
Engaged customers receive lower-rate energy tariffs by searching for the best deals. Disengaged customers, many of whom are the most vulnerable in society, are stuck on higher-rate standard variable tariffs. It is here that we return to Nolan’s “nerdish” rant.
Improved data access will open up consumers to a more informed choice of energy supplierCredit: Eddie Mulholland
“If you look at the success of Amazon and Facebook, in their different ways a lot of it has been about the usage of data, and the power of data, and indeed monetising data. I have a very clear vision here that anyone who is supplying energy will need to have very high-quality data on their customers and will need to reflect on the fact that they do not own that data, that data belongs to the customer,” he says.
By taking control of their data customers will soon find a plethora of routes and services which will make switching to a better deal easier, faster and – in some cases – automatic.
“They could give this data to a price comparison website, to a supplier, with one or two clicks of a button, and know that their data is theirs, not their suppliers’. This is going to be a key area for us in the next two years,” Nolan says.
Tomorrow Ofgem will launch a series of trials which will test how new technologies supporting data use can be applied to shake up the industry. The most radical is a plan in which Ofgem will force a major Big Six supplier to sacrifice the data “nuggets” of 50,000 people who have been stuck on a standard tariff for more than three years. A third party will then auction the customers off to the supplier which offers the best deal, based on the actual consumption patterns of each customer. “We haven’t seen this level of change for years. This is perhaps too easy an analogy but it’s almost like the kinds of changes we saw in the communications space in the mid to late Nineties. So ensuring this benefits consumers is the single biggest challenge that we face in the next few years,” Nolan says.
What is the energy price cap - and what does it mean for bills?
“It’s the kind of vision that can be achieved within the time-frame of a price cap. I think it would then be easier to remove.”
But the data step-change in an industry once dominated by physical pipes and wires has implications for the type of company which may enter the market too.
“In four or five years, I could be manifestly wrong, but I can see a situation in which it’s possible that the licensing framework for energy is somewhat different. There could be different kinds of companies selling energy. There could be more local energy suppliers. We could see the distinction between price comparison websites and suppliers break down,” he says.
“These are complex issues but they are interesting ones. And these next few years are when we plan to resolve them.”
For now, at least, Nolan is just the nerd for the job.
