November 24, 2009
This first blog in hopefully a series raises the issue “who regulates the regulators” in the power industry. The begining may seem a bit off topic – but stick with it.
The UK government hoped to have reached a decision on FITs before COP15. However, due to disagreements between different departments this no longer seems to be possible. The argument is primarily between the UK Treasury and Ofgem versus DECC. The reasons for the dispute are complex but resolve into time, cost and (in the case of nuclear) that FITs would undermine the case for new nuclear stations.
During DECC consultations on FITs’ introduction, Ofgem made a submission claiming that FITs offered bad value for money. The organisation suggested better value for money would come from loft insulation and smart meters. Ofgem also said that the aim of offering a return on investment to households of 5-8% was “disproportionately high compensation”. The “going rate” in Germany (a country that the UK would like to emulate in terms of RES) is around 10%. This begs the question “disproportionate to what?”. Quote from Alan Simpson, Miliband’s (DECC minister) special advisor on RES:
“The trouble is that the Treasury, Ofgem and government officials have driven this (RES) policy with a towering lack of ambition.”
“The aim is to get 2% of electricity from microgeneration. If they were five times as ambitious, it would only cost the average family another £2 a year. But energy companies and Ofgem don’t want to go down that path – they have created a cosy oligopoly which produces non-renewable energy and ever-spiralling prices.”
Ian Goodwin, renewable energy services director at energy saving and generation firm The Mark Group quote:
“It’s a source of deep concern that DECC and OFGEM seem to be forever failing the UK renewables industry. After the disaster of LCBP (low carbon buildings programme) we were hoping for smooth transition to FIT, which would have kick-started the industry 10 years after the Germans lead the way,”
Previous PWR articles have profiled the relationship between Ofgem and the power companies (Summary of the Project Discovery report plus comments on Ofgem and relationship with “big power” – CCS & Power AB34) In summary, the relationship between Ofgem and the large power producers could be described as that between servant and master. Or expressed anothere way (and reflecting the comments in the link) Ofgem is operated by the large power producers for the benefit of the self same power producers. Readers that find this comment unreasonable may wish to contrast it with those given above, publicly, by a UK ministerial advisor.
The issue (regulation of power companies) extends beyond the UK. The Ofgem “case” raises concerns about regulator impartiality with respect to an “unbundled” power industry. The UK power industry (and its deregulation) is held up as an example for the rest of Europe to follow (PWR has attended a range of conferences where the UK industry is admired for this). It seems clear from the above and the linked PWR article that there are very serious flaws in the UK “model”. As the commentator in the linked article noted,
If you look [at Ofgem] steering groups you will see a plethora of Chief Operating Officers of the big six ‘leading’ [power generators] the policy decisions just like the bank regulators had with city bankers sitting on policy making in banking regulation
Ofgem has a track record of poor policy making. For example, in an effort to breath life into UK power distribution company R&D (which was all but eliminated following privatisation) the organisation implemented two funding initiatives, IFI and RPZ. The RPZ was a total failure (admitted so by Ofgem). It was supposed to fund projects that supported distributed generation but failed since the conditions were too tight. In the context of the current FITs problems this should sound familiar. Impartial observers of Ofgem’s distributed generation policy could be led to think that it is designed to fail since success would, ultimately, impact on the profitability of Ofgem’s main clients, the large generators.
This leads on to ERGEG, the organisation representing Euro regulators. If UK power de-regulation is held up as an example to follow then it would be interesting to know how it was being followed by other “regulators”. If regulation in other member states is starting to resemble that mentioned by the UK ministerial adviser (energy companies and Ofgem ………have created a cosy oligopoly which produces non-renewable energy and ever-spiralling prices) then perhaps it is time for DG Competition to take a close look at power regulators, their links to power generators, their policies and the effectiveness of these policies with respect to supporting a wide range of RES, which, oddly, is a core EU policy to address 2020 climate goals.Author : Mike Parr