Energy switching has failed – regional public ownership is the answer
Smart meter in the kitchen of a UK home (Alamy)
5 min read
The UK is now in the midst of its second fossil fuel price spike in five years, exposing again how woefully underprepared the country is.
As prices spiral, moving away from gas – and towards electricity – is critical. But the structure of the energy system needs reform too, not least to maximise fairness to households.
The liberalisation of the energy retail market, where consumers shop around for the best tariff from competing suppliers, was never central to Britain’s energy privatisation. In fact, it was almost an afterthought.
Competition fully opened up to consumers only in 1998, and a “free market” as such never emerged for long. A handful of firms dominated the market until reforms in 2012 triggered a wave of new entrants – followed by a mass exit in 2021-22, which left the market little more populated than before and cost the Exchequer £2.7bn through the “Supplier of Last Resort” mechanism. Today’s market is heavily regulated, from the post-2022 capital adequacy requirements to the price cap protecting customers who are still on default tariffs – more than half the market, and disproportionately lower-income – from being overcharged.
At the same time, the transition to a clean, decentralised energy system has changed what we need energy suppliers to do – housing retrofit, rooftop solar and batteries, smart local energy systems. But these developments are variously stalling or being botched. Responsibility is split across too many different actors, and their incentives often don’t align. As a result, the current liberalised market appears to be creating more problems than it solves.
New research by Common Wealth recommends an overhaul, replacing the retail market with publicly owned Regional Energy Boards (REBs) to deliver a fairer, more flexible energy system. All consumers in a given distribution network would buy their energy from the same board.
These boards could harness “economies of scope” – the efficiency savings gained from producing a range of products or services – and reduce transaction costs. This would also accelerate the bundle of investments needed to rapidly decarbonise and reduce bills.
Consider changes to the home. Currently, we are trying to deliver housing energy efficiency (e.g. insulation) through local governments, and smart clean household energy deployment (rooftop solar, batteries, smart heat pumps, smart EV chargers) through suppliers. This creates several problems.
First, splitting up the task in this way prevents whole-home solutions. Secondly, in both cases it is left to households to find a tariff that lets them feel the benefits of those investments. Third, retailers are disincentivised from providing long-term financing for those investments when the customer is liable to switch supplier, making it harder to recover the costs through bills.
Regional Energy Boards could be the solution. They would have an ongoing relationship with each home and automatically put customers on the best tariff, cutting out poor-value deals.
Boards could also relieve the growing pressure on local grids, in which national retailers have little stake. Smart Local Energy Systems (SLES) are being trialled to manage increasingly complex local energy systems – where homes both use and generate power. But the challenges are daunting. The system is expensive to run and revenues are difficult to divide up fairly. The rules governing energy suppliers weren’t designed for this kind of system, where energy flows in multiple directions between homes, grids and suppliers. Private suppliers also struggle to encourage customers to shift their energy use via incentives like lower tariffs at night. Boards, working closely with distribution system operators, could facilitate a coordinated approach instead.
But dysfunction in the energy retail market is not just holding back the future. It is harming low-income consumers in the present, as the energy transition unwittingly enlists us all in a competition against each other. Increasingly, households are no longer just customers – they’re treated as traders, be it solar power from their rooftop or consumption flexibility. In practice, it is overwhelmingly wealthy, tech-savvy households that are enjoying the benefits of smart, clean energy in the home. The risk is that they are being cross-subsidised by poorer, less engaged households. When wholesale prices go negative in the middle of a windy night, the rich get paid to smart-charge their Teslas, and it is unlikely that wind farms ultimately pick up the bill. Regional Energy Boards can help ensure the transition works for everyone.
Regional Energy Boards could be set up quickly and cheaply within this Parliament, requiring very little public investment as the retail energy sector has essentially no fixed assets. Reams of red tape would be eliminated, and social policies targeting fuel poverty relief could be delivered far more simply. Innovative incumbent suppliers could continue to offer value by selling business-to-business services to the boards.
Area boards have successfully delivered enormous transformations in the past. The great gas conversion programme of 1967-77 converted 35 million appliances across 13 million households from town gas to natural gas. For customers and stakeholders, gas had one face – that of the regional gas board.
In a transition this complex, households once again need something stable to interface with. Regional Energy Boards are the solution.
Chris Hayes is chief economist at the Common Wealth think tank
