Why is central government continually surprised that when the big energy companies are asked to ‘do the right thing’, they instead do what is right for them?
Central government seems to love handing responsibility for delivering energy reduction targets over to the big energy suppliers. The scheme names come and go – CESP, CERT and ECO – but the common factor has been to require energy companies to invest in energy efficiency measures such as loft insulation, and cavity wall insulation for homes.
Pause for a moment to think about it. You’re asking a business to do things to reduce demand for its own product – energy. How surprised should be we be that that foot-dragging, missed targets and ineffective measures have been the result?
In 2014, many of the energy suppliers were fined for failing to meet their targets to install insulation. British Gas was fined £11million, a development which their PR department brazened-out as a charitable donation. One is left wondering if the energy companies see these fines a small price to pay instead of helping people spend less on energy.
With the government’s new proposals for a Smart Export Guarantee (SEG) are we again about the make the same mistake by asking the big energy companies to decide what the ‘market price’ for electricity exported by householders and businesses with solar panels?
Why we Need a Smart Export Guarantee
Many people in the solar industry that I speak to have pretty mixed feelings about the Feed in Tariff. They recognize the transformative effect of 19 years of subsidy on the industry, helping it to achieve scale and cost-competitiveness with fossil energy. At the same time, they regret the reckless way that the scheme has been managed. Successive ministers at DECC and then BEIS have inflicted real pain on many good people who had invested their time, energy and money in solar businesses an effort to be part of the solution.
As a consequence, the industry is genuinely looking forward to a future where it no longer needs ‘help’ like that from government and the technology can stand on its own feet as a significant contributor (maybe the dominant contributor worldwide) to the clean energy revolution.
It remains crucially important for the sector that householders and businesses that invest in solar are able to sell generated solar energy that they cannot use themselves. This makes possible efficient and cost-effective solar systems that minimize the cost of energy rather than being sized to just meet demands in the building at times of peak output.
So, as the Feed in Tariff (FIT) draws to a close on March 31st, government is consulting on a new scheme, the Smart Export Guarantee (SEG) – that requires larger energy suppliers to purchase excess solar energy from small generators at a fair market price.
There is much to welcome in the proposals for SEG
- the Microgeneration Certification Scheme is thrown a life-line as the only way to qualify,
- there is to be no requirement for the building to achieve a certain energy efficiency level (EPC), a requirement in FIT that excludes many older and listed properties
- installations that occur after the FIT closes but before the SEG is available will be able to join the SEG as soon as it opens
- export will be metered and not estimated (as in the FIT), rewarding people that install larger systems
- a central database of solar installations will be maintained beyond the FITs
- the high price for bought in electricity compared to the low value of exported will encourage the deployment of battery storage and electric vehicle charging (when compared with other arrangements, for example net metering)
Concerns About the Detail
However, there are two big concerns with the proposals as they currently stand:
- Smart metering IT systems are not up to the job at present
- The reliance on conflicted businesses to set a market price
Smart Metering Systems
At recent Solar Trade Association meetings we were astonished to hear that the SMETS1 smart meters that have so far been installed ‘go dumb’ as soon as you change supplier. Although second generation SMETS2 smart meters fix this problem, the IT infrastructure that collects the data is not yet ready to a point where this data can be shared between an energy supplier and a separate company that you have signed your SEG deal with.
It would be just like government to say ‘well, we’ve done our bit’ as they launch a completely theoretical SEG scheme, which nobody can use in practice because the billing arrangements are not ready.
That’s why we need something – dare I call it a ‘backstop’ – that makes the SEG work from day one and creates an incentive for energy companies to sort out the IT, rather than having a strong incentive to drag their feet and take as long as possible to prevent the SEG ever happening.
A backstop could look a lot like the export tariff part of the current Feed in Tariff:
- A fixed value, for example £0.04 /kWh
- A deemed export 50% of generation
This would create a strong incentive for the energy companies to pull out their fingers because they are likely to be over-paying for generation where they cannot meter it.
Setting a Market Price
Electricity costs vary during the day as supply and demand varies. The industry would be absolutely delighted if export was paid a fair market price at the time of export – that is a price set between a willing buyer and a willing seller.
The preferred option in the SEG consultation is to simply leave it to the energy suppliers to set the price, with the only control being that the price is higher than £0.00
My concern is that the proposed mechanism will not result in a fair market price, because the companies that are being relied upon have every incentive to keep the amount of solar installed as low as possible. They are conflicted because every time a household or business installs solar it will buy less power from the energy suppliers. Setting a higher price for exported energy would make solar a more appealing investment and harm the business models of the energy suppliers.
The energy companies do not meet the requirement of being a ‘willing buyer’ for the power and a fair market price will not result. There is a market failure and government cannot leave pricing the invisible hand of the market – except that it can, it just needs another way.
The ‘market’ already sets a price for electricity – and one that is free from the conflicts set above. For example market exchange Nordpool publishes day ahead pricing for wholesale electricity on an hourly basis. These prices could be better taken as the ‘market price’ for electricity between a willing buyer and a willing seller. Energy companies should be required to purchase from microgenerators at the wholesale market price.