Consumers will not be ready to take advantage of the redesign of the EU’s electricity market without strong political direction, writes Simon Skillings.
Simon Skillings was formerly director of strategy and policy at Eon UK. He is currently an independent industry consultant and associate with the environmental think tank E3G.
We are approaching a critical moment for the European Commission as it attempts to follow through on proposals to create an Energy Union and move from vision to reality.
Only last week, Vice President Šef?ovi? announced that one of the first concrete initiatives to emerge from the Energy Union strategy will focus on redesigning the EU’s electricity markets. Earlier this year, he emphasised his intention to create “an Energy Union with citizens at its core, where citizens take ownership of the energy transition, benefit from new technologies to reduce their bills, participate actively in the market, and where vulnerable consumers are protected”.
Enabling consumers to become active players in electricity markets is indeed a bold and inspiring objective. And it chimes well with the increasing awareness of the opportunities afforded by the smart homes and building automation agenda. However, I wonder whether the Commission really understands the implications of this ambition and whether it is prepared to drive through the reform agenda that it implies.
Policymakers have a poor record when it comes to thinking from the perspective of the consumer. Despite many years of market liberalisation, the vast majority of energy customers remain passive, distrustful and disengaged. Markets are designed to suit the characteristics of large power stations, and consumers are assumed to act as perfect rational economic agents – with their actions determined purely by market price.
The myriad of “expert” working groups currently grappling with promoting a more flexible energy demand are focused on trying to “level playing fields”, “remove barriers to entry” and “sharpen price signals”. These attempts to establish the correct economic signals ignore the realities of individual and business psychology. Of course there will be a spectrum of behaviour across customer classes, with some large commercial organisations and sophisticated individuals able to devote the time and effort that leads to more rational economic decisions. However, the majority of businesses and citizens will take quick decisions that are plagued by psychological biases.
Pursuing the reform agenda initiated by the current energy market liberalisation packages will inevitably restrict participation to large or very well-informed consumers. This may deliver some improvements in market efficiency, but it will fall far short of maximising the system benefits from demand side engagement and will completely fail to deliver the wider economic and social benefits associated with a smart, IT-enabled society. Once the technologies that make it easy for consumers to improve comfort and convenience are readily available, they can spread through society like wildfire – providing a massive stimulus for new low-carbon industries.
The vision set out in the Energy Union communication speaks to the engagement (or protection) of all consumers. But if we do want to engage all consumer classes, then we must fully understand their needs first. This is the fundamental challenge; only through acknowledging what this means will the Market Design Initiative be able to unlock the grand prize. However, we must accept that this is likely to strike at the very heart of the beliefs that have underpinned the liberalisation agenda hitherto.
We need to move to a system in which consumers have clear and simple choices about how they consume energy rather than merely who they buy it from. It must be easy for them to grasp the opportunity and identify and adopt the choice that makes their lives better.
This is likely to require a single point of contact for consumers who can present the options available to participate in the market in a clear and simple way. The complexities of energy system operation must be resolved internally within the industry rather then left as a burden for the consumer. It is not obvious how this might be achieved through the current unbundled and deregulated system.
Moving on from the market liberalisation agenda will not happen without widespread acceptance of the need for change and a top-down, political commitment to drive through the required reforms. This is already happening elsewhere, for instance in New York State where the “Reforming Energy Vision” drives an overhaul of the industry to embrace the opportunities presented by decentralised energy production and dynamic consumption. However, this can only happen in Europe if we change our approach. Policymakers need to think beyond the current paradigms and challenge the existing direction of market refinements – often characterised as “price and pray”.
A more engaged consumer base will not emerge at the pace and to the extent required to fully harness the opportunities available without strong top-down political direction. The businesses that will enable this transformation require confidence in the political direction of travel. They need this to establish a clear market opportunity that will underpin the investments in products and services that are necessary to drive down costs and improve the value case for consumers.
There is an important role for EU-level institutions in ensuring consistency with the development of the internal energy market. They can help leverage learning across member states and support national governments to make the necessary adjustments to regulatory frameworks.
If Europe is serious about delivering the vision set out in the Energy Union, it must move beyond the current approach to market reform. An EU-wide target for the proportion of electricity demand that is able to respond dynamically to a price signal could be adopted to embody the top-down commitment, along with updated building and appliance standards. It is equally important that national governments adapt current approaches to network regulation and impose appropriate obligations on licensed parties to ensure the targets are achieved efficiently.
It is critical that we set out with an ambitious agenda as soon as possible. The Energy Union vision has set a challenge that will take the incumbent energy industry and policy makers outside of their traditional comfort zone. With the right scope, this summer’s Market Design Initiative can ensure that we embark on a process in which new businesses and consumers will be the ultimate winners.