The day DECC died…. And some thoughts for the new energy department

The day that the Department of Energy and Climate Change (DECC) was shut down was one of the strangest days of my professional life.

It was July 14, 2016, four weeks after the Brexit referendum. Theresa May had just become Prime Minister, after the sudden withdrawal from the leadership race of Andrea Leadsom. One of the new PM’s first acts was to appoint Amber Rudd, then my boss at DECC, as Home Secretary (much to Amber’s surprise).

Rumours had already circulated that the department was about to be axed. And plenty of people were poring over a recent blog by May’s Chief of Staff, Nick Timothy, where he called the Climate Change Act a “monstrous act of self-harm”.

But on the Thursday morning, Number 10 had still not announced what would happen to the new department. And in a quirk of the Parliamentary timetable, we had DECC oral questions in the House of Commons that morning. For those of you who don’t know, oral questions are when MPs from both sides of the House get to quiz the ministerial team about any aspects of the department’s activity.

Some of these are known beforehand, but most are not. For many ministers, this is a daunting moment, where they are up in front of their peers and need to demonstrate they are a) on top of their parliamentary brief, and b) why their policy positions are right, and c) they know how to entertain and galvanise their own side and play a bit of knockabout politics. All of this is available on TV and only a hastily clipped YouTube meme away from humiliation. A normal department would have three of four ministers to answer questions, so you can share the load during the hour or so of questions.

But because Amber had now left the department, it was left to Andrea Leadsom, our sole junior Commons minister to handle the whole hour herself (we, for reasons lost in the mists of time, only had one Commons minister and one Lords minister in DECC). Remember, Andrea had herself had a pretty bruising few days, as she had withdrawn from the leadership contest because of some unguarded remarks about motherhood and politics. This was her first public outing since, and she was going to have to do the whole session by herself.

For my part, this looked like this might be my last day in Government. I was a ‘Special Adviser’ (SpAd), which means I was a political appointee. If the department was disappearing and my direct boss, Amber, was going to the Home Office, I was facing unemployment, from a job I loved and was just getting the hang of. Unlike my fellow SpAd, Mo Hussein, I had decided not to try and follow Amber to the Home Office — energy is my thing. So, this could well have been my last day in Government….

Knowing that, I went to help with oral questions. As a SpAd, you have a role sitting in the ‘box’ in Parliament during oral questions for your department, just yards from the main action. You are there to pass notes back and forth to ministers in case there is any breaking news they may be asked about or a piece of information they suddenly need. It is an incredible place to watch the action from and you really experience the abrasive bustle of the House of Commons, which you do not get from TV. This makes it even harder for ministers as the never-ending low-level babble goes on as questions ping back and forth. But not a bad setting for your last day in a job…

I met up with Andrea and the team briefing her beforehand and talked through the likely areas of questioning: Hinkley, onshore wind, cuts to energy efficiency as usual; but this time rumours of the department being closed during the oral questions, perhaps an historical first; and any questions about her comments the previous weekend. This was a high-profile moment for her, and high risk. She now had to answer questions for an hour, by herself, in a very public setting.

She absolutely bossed it. She was funny, charming, playfully rude with opponents, on the front foot when challenged and showing many of the attributes that had got her very close to being Prime Minister.

After that session, I sauntered back to the department. My plan was to hang around the department until forcibly removed, but a senior official wisely advised to make myself scarce. So, I messaged two SpAds who had already been defenestrated in the reshuffle and we went and had a coffee in Embankment Park, sharing war stories in the sunshine. We watched the reshuffle in the RSA, and worked out if there might be opportunities in the new departments. I still have the napkin we captured the reshuffle on somewhere…. By the end of that whirlwind day, I had miraculously and graciously been offered a very similar job by Greg Clark in the new Department for Business, Energy and Industrial Strategy (BEIS). I then got drunk.

BEIS has now disappeared in the latest Machinery of Government change, and a new department the Department for Energy Security and Net Zero created. The challenges facing the new department are in many ways very different from those of 2016 (although debate about how to pronounce the acronymised name of the department feels familiar). Obviously, the context of the international energy crisis is profoundly different. The size of the challenge of net zero is much greater than that of an 80% decarbonisation world. I am not sure the sector and the political class have really grasped how tricky Carbon Budget 6 (CB6), which largely brings forward the 80% target by 15 years, is. However, many of the top official team in the new department are, unusually for Whitehall, familiar faces from 2016, which is a huge asset for the new department in a sector where institutional memory is particularly important.

So, what should the new department be focusing on? The in-tray is certainly overflowing with urgent issues, and there is no shortage of unsolicited advice. So here’s some more — but trying to draw out the big strategic questions facing the new Department:

1. What to do about the retail market? The conventional wisdom since 2005 has been that success in the retail market was measured by: a) the amount of switching; and b) lots of suppliers in the market. Everything, from the fact that obligations like ECO and WHD did not kick-in until hundreds of thousands of customers, and the low barriers to entry for new suppliers, followed that logic.

Such an approach is not wholly without merit, of course, but it has led to razor-thin margin and poorly capitalised businesses taking on risks they should not. In volatile times, this structure means lots of suppliers go bust. Nothing wrong with that, of course. But the fact that the risks of that collapse in the UK energy market are currently socialised (again for all sorts of sensible reasons) means everyone else in the industry picks up the bill for poor billing/hedging by suppliers, rather than shareholders or investors in a conventional sector. In the extreme conditions we are living through, this led to Bulb being taken over by the Government as it was too big for these costs to be shared across the industry. This is not a good outcome.

A key question for the new department is whether switching and low barriers to entry remain the key determinants of success. Our view is that, because of the changing nature of technology and the challenges of net zero, suppliers will likely have a more sophisticated relationship with both consumers and the wider energy system, for three key reasons:

· In the very flexible system we are heading towards (as the CCC have set out), we need an actor as an interface between customers (both domestic and non-domestic) and the wider energy system, invisibly balancing all that flexible generation with storage and flexibility assets (and the companies, be it aggregators or others, that will provide them).

· We also need companies that are going to hold the hand of consumers as they take significant investment decisions, towards a net zero home, be it low carbon heating systems, electric vehicles or a ‘smart home’.

· We need to manage the transition for vulnerable customers. This does not mean that we patronisingly ‘protect’ vulnerable consumers and keep them away from new technologies. Rather we must unlock the huge opportunities for innovation in providing a better energy experience for them now, while being sensitive to their needs.

Now these functions don’t necessarily have to be delivered purely by suppliers, and there are loads of incredible non-supplier innovators looking to deliver these services, as well as exciting offers from the likes of OVO, Octopus, EoN, EdF and other existing suppliers. Government should certainly not prescribe the exact type of supplier it wants. But you are likely going to need some kind of actor that integrates all of this into a simple consumer proposition, as well as overseeing key functions like metering and billing.

This vision of more sophisticated suppliers, or energy service companies, managing commodity, flexibility and asset-financing risks, harnessing the potential of digital technology and turning all that into simple, integrated propositions, is a profound change from the current market. It should also mean they should be rewarded fairly in the market for the increased risks of managing that complexity. We cannot have a sustainable, innovative retail market which is loss making year after year, as it currently is (despite what some headlines say). If companies feel that any consumer-friendly innovations, leveraging digital/smart technologies will be clamped down as soon as they are profitable, they are less likely to experiment. We will stifle innovation, which is bad at any time, but particularly bad if you are trying to switch 26 million homes to low carbon technologies and balance a much more complex grid.

“But” screams the conventional wisdom, “the last few years have shown that these suppliers are all useless. You can’t have a company like Avro in charge of deploying heat pumps or balancing the grid.” Guess what — if you design a system that just incentivises low margin chancers, that is what you will get*.

Thinking through the kind of consumer experience you want from a future energy market and creating the regulatory and market structure that allows companies to innovate around it is an essential piece of work for the new department.

2. What follows from considerations about retail are fundamental choices about the wholesale power market. The Review of Electricity Market Arrangements (REMA) — the Government has just put out its summary of consultation responses — raises important, detailed questions about future market design. But it is essential that before ministers get stuck in the weeds of locational pricing or split power markets, they take a step back and think about the challenges and opportunities of a future system and how you overcome them. That is why thinking about the future of the retail first is so important.

At the heart of all this is a strategic choice on how you think the UK can have the best chance of meeting its carbon reduction obligations in the most cost-effective way, and that encourages the greatest innovation for UK plc. In my mind, there are two broad options:

· Centrally directed. In this world, Government continues to hold on to more and more big choices about the technology mix, and liberally reaches for risk-reducing instruments like Contracts-for-Difference (CfDs) for renewables, nuclear, CCUS, storage and flexibility. There will an incredibly important and expansive role for the Future System Operator (FSO), particularly around system planning at the national, regional and local level. In this world, the FSO will also be the ones burdened with the increasingly tricky challenge of planning and balancing the grid in a very windy system. If the Government concludes that wholesale market reforms that increase risk to investment in generation is undesirable, the risk of balancing the grid will be increasingly transferred to more esoteric, centralised and bespoke markets (e.g., balancing market and monopoly innovations like Demand Flexibility Service (DFS)), with an ever increasing role for the FSO and Government in choosing technologies.

· Pro-consumer, growth and innovation. In this world, Government focuses on outcomes and is more relaxed about the mixture of technologies that provide it (although it will still have a key role in enabling early deployment of important new technologies). Effort will be focused on aligning market design as far as possible with the decentralised physics of the emerging technologies, and a more electrified, flexible demand-side. This could risk increasing, in the short-term, the cost of capital for generators (although this could be managed through a clear roadmap of reform — investors tend to adapt to new market arrangement pretty quick) but should lead to a lower overall cost system, which will be passed on to consumers. This would potentially reinforce the UK’s position as a hot bed of demand-side innovation on storage, flexibility and consumer propositions, where it is already strong with companies like Flexitricity, Octopus and Electron, and many more. It may also be the best response to the risk created by the Inflation Reduction Act, by creating a more agile regulatory and market environment that is pro-innovation.

Obviously these two strawmen are not mutually exclusive. And the nature of the energy system means we need both significant planning and markets. But how far you want to go towards one or the other end is a crucial choice for the new Department (See this great blog by my colleagues Tom Luff and Tim Chapelle for the key argument).

3. In either of these worlds, if the Government is going to have a chance of making the targets, it is going to have to get serious about making it easier to build stuff. And that means planning — at national, regional and local scales. That is everything from new renewables and nuclear power stations to new transmission and distribution lines. Even in the most pro-flexibility view of the future world, we are likely to have to at least double the size of our electricity system (see the recent, excellent CCC analysis). That is a lot of power, likely being generated far away from where it is needed. That means a lot of new stuff being built. The Government is looking at this through the Electricity Network Commissioner (ENC) work (which ESC is closely involved with).

But, as the Skidmore Review made clear, they also need to make a strategic decision about the different role of national and local actors, including in planning. Ofgem’s recent consultation was a very welcome step forward on this, including thinking about the role of the FSO. But Government, not just the Energy Department, needs to make a call on the balance of local and national responsibilities and how they work together. My view is that without greater empowerment for local areas at the appropriate scale, net zero will not happen. It is needed for planning, as well as engagement and political consent (as well as unlocking the benefits of locally-produced energy).

So, while the in-tray will be over-flowing, supporting consumers through the immediate crisis (as well as important, but less high profile things like code reform and getting Great British Nuclear up and running), these are the big three questions I would advise spending every spare moment grappling with and will help ministers make short-term decisions about how to respond to the crisis. Direction on these questions will be essential for creating a future energy system which is resilient to the kind of price shocks we have seen in recent years, as well as moving us as smoothly as possible to a secure, low carbon energy system.

* To be clear, I take my fair share of blame for this, as someone on the inside for a few years. I wrote many a ministerial speech celebrating the fact that switching was at record highs and wasn’t it wonderful how many suppliers we have in the market.