Overview

  • Clark sees a future of zero subsidy, where low-carbon energy is the cheapest option.
  • Overall lots of agreeing with Helm’s Cost of Energy Review (CoER) which had a ‘compelling vision for the future’.
  • Clark focused on three key recommendations – the Firm Power Auction, independent System Operators, and dealing with a system dominated by fixed costs.
  • Clark came up with four principles that should guide policy formation into the future
    • Market winners: That the market should decide which technologies are the winners in meeting decarbonisation and security of supply concerns.
    • Energy exceptionalism: That energy is economically and socially significant and government should “design an approach that is sufficiently flexible to allow to purchase the system benefits of insurance and optionality. This means that, although the government’s role in electricity markets may shift, it will not be stepping back from intervening altogether.”
    • Agile regulation: The need for regulation to be faster-moving and flexible – to facilitate the deployment of smart/digital technology/data.
    • No free-riders: This is a question of the importance of who pays fixed prices now that the fundamentals of the market are changing and on more broadly levelling the playing field.

CoER Key Recommendations

  • Firm Power Auction: a Firm Power Auction would have businesses decide how to deliver low-carbon capacity rather than ask government to make technology choices (replacing the CM & CfD auctions). Dieter argues this will increase efficiency and lower bills by having a single market to procure all capacity. Clark agreed with this approach but noted questions of pace and of wider strategy, and that it would be a gradual ‘transition’ to this approach.
  • Independent System Operators: Clark backed greater independence for network operators as ‘the right long-term approach’ and emphasised that there shouldn’t be a conflict of interest between the network operator and the network equipment owner. It’s worth noting that there are already several independent SOs in North America (Ontario, ERCOT, PJM, California .. ).
  • Dealing with a system dominated by fixed costs: Clark supports Ofgem’s work considering the future of network charging (especially when some take advantage of behind-the-meter benefits), doesn’t support a shift of decarbonisation costs to general taxation, and aims “for a fair distribution of costs, with good incentive properties, to ensure that we are actually minimising system costs and not just shifting them from one person to another”.

Market winners

  • Clark stated that the market alone should decide which technologies are the winners in meeting decarbonisation and security of supply concerns
  • The CoER was firm on how successive gov’t intervention had led to policies picking winners, with unintended consequences so there is a link here.

Energy Exceptionalism

  • Clark stated that energy is economically and socially significant and government should “design an approach that is sufficiently flexible to allow to purchase the system benefits of insurance and optionality. This means that, although the government’s role in electricity markets may shift, it will not be stepping back from intervening altogether.”
  • Clark stated that intervention wasn’t necessary in the gas market, as even with security of supply concerns the market had responded adequately.
  • However, on nuclear he felt that there was a need for intervention to restart the civil nuclear programme, and that the government was exploring the Regulated Asset Base Model in future projects.

Agile Regulation

  • Clark stressed the need for regulation to be faster-moving and flexible – to facilitate the deployment of smart/digital technology/data
  • On CoER, Clark backed greater independence for network operators as ‘the right long-term approach’ and emphasised that there shouldn’t be a conflict of interest between the network operator and the network equipment owner.
  • To help realise this new principle Clark committed to:
    • A review of supply licences
    • A joint review between BEIS and Ofgem of the retail market
    • A review of industry codes and code governance w/a possibility of legislative changes

No Free-riders

  • This is a question of the importance of who pays fixed prices now that the fundamentals of the market are changing and on more broadly levelling the playing field
  • Clark directly referenced Helm, saying “as Dieter rightly points out, the share of fixed costs grow, output prices matter less than they used to and fixed access charges matter more. Who pays shared costs becomes a broad question of economic policy, with complex distributional and incentive effects”

Reception

  • The media focused mainly on the comments around the demise of the energy policy trilemma and are awaiting a policy/white paper fully addressing the CoER recommendations.

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