Why is UK Electricity So Expensive Compared to Other Countries?

28:27Gas sets the price because, if you like, it's the last thing that needs to be turned on to meet national demand. And that's why it sets the price. And what over time happens is that incentivizes the cheaper generation to get built because it can make profits. It can make gas money for wind energy, basically. Exactly, exactly. And that helped us a lot in the 2010s because it meant that gas was cheaper than coal. And in fact, from the 1990s onwards, we moved away from coal steadily over time because on that marginal pricing system, gas producers made more money than coal producers. So they built much more gas, which brought down the cost for everyone.

29:06So you can see how it's an efficient system, both in the short run and the long run. But at a time like this, there can be times when the gas price is high when it looks oh aren't we are we paying a bit too much because we have cheap assets earning gas sort of price and the government recognized that and intervened to put a windfall tax so as well if you're making too much money we can this sort of doesn't seem fair to your point for consumers so the government stepped in and took some of that money and you could argue you've spent that windfall money probably spent a lot more on helping people with their energy bills in the last crisis.

29:42But obviously you say we build more renewables so that we can use less gas, which will reduce the price of energy bills. But if we need like a million units of energy and one of those is a gas unit, the whole lot becomes priced like a gas unit, does it not? But, I mean, theoretically, but the reality is we, on a day without much wind, we need an awful lot of gas. And in a day with wind, lots of wind, maybe we don't need any gas at all, except just a little bit to balance the system. So over time, it can work. Now, the government looked at this, their review of energy market arrangements, and they looked at whether it was worth making changes.

30:24And it's worth looking at those documents because they concluded actually it wasn't worth making changes because the market was moving quite quickly to a position where gas would set the price less and less. So I said it's about two-thirds of the time. It used to be 90 % of the time. And that's just a few years ago. and it will come down to 50 % or less by 2030. So we're getting to a world where this matters less. And if the gas price is low or even medium, it doesn't have much of an effect either. So it's only at times when the gas price is high where people rightly say, is this fair? And you can go, hmm, not sure about that.

30:55And so the government can step in. And in fact, the government has also announced they are looking at whether they should change the way some of those contracts operate, particularly for some of the older renewables. to reduce that sort of, if you like, excess profit they're making at the moment. But as I say, the windfall tax in energy has also taken some of that excess profit away. I want to be really clear on how that system works, just so people can visualize it. If there's 10 units of energy, and nine of them cost one pound, I'm just using simple numbers, because they're green, it's solar or wind, but the system needs that 10th unit, and the only thing we have is gas, because it's quick to turn on and fire up and get it where you need it.

31:38But the gas costs 10. We pay 10 for every unit, not an average of the units. We pay the highest price for all of them, even though nine of them only cost one. That's right. But contracts for difference, which is the vehicle by which the government's been buying renewable power, wind and solar, since the mid-2010s, those contracts are fixed price for the generator. So actually that gas point doesn't apply. So when gas prices are high, the owners of those contracts essentially pay back money to consumers. So let's say their gas price is 100, but they had signed a contract for difference at 50 pounds.

32:24They're in the market, so they get that 100, but it basically comes back to consumers because they've signed a contract for 50. So they only keep£50. Now, the converse of that is if the market price is down at£30 or£40, they get a top-up. So there's a bit of subsidy on the moment. But that guaranteed price enabled us to build a lot of renewables at the lowest possible price because you're taking risk away from the developer. So you'll get a guaranteed price for 15 years. Government now says 20 years. And that means they can keep their costs as low as possible. And so actually that point you made was a very valid point around gas-setting the marginal price for one unit of 10, actually, if increasing number of those other nine are on these fixed price contracts, that point doesn't apply.

33:11They have a fixed price, and consumers benefit from that fixed price. And what's happened over time is maybe it was nine, that theoretical 10, a long time ago, with the renewables obligation. But when we move to contracts for difference, they are now filling up that nine and displacing, you know, the older contracts are coming to an end and the new ones are becoming dominant so they're trying to put in the new the new set of contracts in this new world where we know we get these high spikes in gas prices they're trying to put some kind of control in to stop that running away so there's a cap basically on or they agree to a fixed price which they agree to right up front before they even build the wind farm or the or the solar farm so that protects us against that gas price effect so sort of like an option yeah So of that two-thirds, I can't remember how much exactly.

33:58So right now, I think gas is generating about 40 % of our electricity as a country. And renewables plus nuclear is probably up to about 50%. But an increasing share of that 50 % is on these fixed-price contracts, including Hinkley, the big nuclear power station, when it gets started in a few years' time. So that's going to make a real difference to that point you're making. I think that's why when the government looked at this, they thought, actually, this problem is it's solving itself. Over what time period, though? Because you talked 2030 and you've said 2050. And, like, you know, these feel like the distant future in terms of people are struggling now.

34:39Right. And we're in the summer. It's not the winter yet. Yeah. And I recognize the pressure that a lot of people are under paying their energy bills, households and businesses. And the government to support those bills in an economy that can't really justify just continually, you know, shelling out money, building the national debt just to keep people's lights on. That's not sustainable, you know. I think the reality is that any significant changes to the energy market take time. You've got to change systems, change contracts, do legislation. so in the years that it would take to make those changes and the benefits of doing so sort of are falling quite fast um and i think there's there is merit in having a sort of stable system because then investors know what they're doing and you can invest with confidence that that gives you the money you need to to change the system and and at a lower cost than you'd pay if if there was uncertainty so i think over time it is it will solve itself and that's you know that's not off gem's judgment it's it's the sort of the government's judgment they looked at this in in detail

35:45Neil Kenward:you said that it's an efficient market but um as consumers we see like you drive up the motorway you see wind farms everywhere we hear about hydroelectricity and all these things um do you think it's a competitive market between the energy companies yeah so well there's different things There's energy, there's electricity generation, where for the renewables, they have to compete in auctions to get contracts from the government. That's definitely competitive. And then the wholesale market and electricity is competitive. You've got different things bidding into that. Gas prices set in international markets.

36:22Again, that's competitive. On the retail sector, we have got competition as well. It's actually a very vibrant, competitive retail market in the UK. which is great. It's generating lots of innovation and new products and services, new companies. The networks is the bit that isn't competitive. So they're essentially what we call natural monopolies. It wouldn't make sense to have two companies bringing pipes or wires to your home. So they are natural monopolies and that's why we regulate them to make sure they can't exploit that position to charge excessive prices. So we set the price they can charge you.

36:59Okay. So it's a mix of competitive and non-competitive markets. Because I do think it's surprising that, say, is it around 50 % of the energy that we generate in this country is from renewable sources now? Yeah, renewable plus nuclear is about that. Yeah, but it's this gas-dominant piece that kind of sets the price. And just to finalise on that point, because we've got loads of questions, you said the government have looked at it and basically have said, we don't think moving to a different pricing structure would benefit the consumer or our goal to build more renewable. So, you know, an average price of the units.

37:33So the government does look at this and they might choose to look at it again. But when they looked at it a few years ago, their conclusion was the benefits, the time taken to get there, by the time you got there, actually the benefits to consumers would be very small and the disruption to the market would be high. And actually the problem is solving itself already by the introduction of these fixed price CFD contracts, which have been running now for over 10 years. and the gradual, in fact, quite rapid reduction in the use of gas. So the percentage of time when gas does set that marginal price.

38:07So that is a big change over time. You said before about the 2015, you said the prices of energy will be the same then. Do you mean inflation adjusted that they're going to stay at these prices or that in real terms that they're going to be as big a part of people's household makeup as they are today? I just couldn't understand what you meant. So this is the Committee on Climate Change's work, and they did a cost-benefit analysis because they advised the government on how to achieve net zero carbon emissions by 2050. And in their latest advice, they did analysis to look at the costs of achieving that goal.

38:49And they said that overall for the economy, the costs were relatively small, but for individual household bills, they also did this modelling exercise. And they compared sort of household building 2025 with what it might be in 2050. And basically, in real terms, they say likely to be quite similar. So it's not the case that net zero, according to the CCC, net zero is going to end up with people having much higher energy bills. Well, I think people were expecting to get much lower energy bills. I think that's the point, right? Yeah. I think people are going to be quite disappointed to hear that by 2050 that this is the new norm in terms of energy price.

39:25So to clarify, I think their analysis shows that the energy bill per se will be lower in real terms than what it is now. And obviously, we hope people's incomes will be higher. So the actual effect will be lower still, the effective cost for people. But then the CCC, I think rightly, said, yeah, but also people will have to buy a heat pump. And heat pumps are a bit more expensive than gas boilers. So whilst they might be cheaper to run than gas boilers, you've got higher capital cost. and obviously the government helps with that at the moment with a subsidy but they basically, that's why the calculation came in so they do think that electricity should be cheaper per unit if you like than it is now.

40:07I mean naively I think you think we're entering a world where maybe we get energy abundance and the prices come down a lot but it seems like we're saying no. So I think in the long run that's what we should expect and what we should hope for. 2050 is pretty long. I mean I've been nearly retired at that. by then i think so this is a long my kids might benefit from the fact that i'm paying for this

40:27Neil Kenward:zero for sure this is a long-term transition do you not think it makes people lose faith in renewable and net zero because i mean we're living in a world of innovation ai robots all these things and we're like if we can't we just be 100 renewable energy by 2050 shouldn't that be the goal that we don't need gas at all we're fully renewable we don't need to import buy from overseas we're just self-sustainable and everyone's getting cheap electricity and not damaging the environment. That is the goal. And I should say also, as I was saying before, if you have a renewable space system or a clean energy system, you've got more stability.

40:59It matters far less if Putin invades Ukraine from a, obviously it matters for all sorts of reasons, but it matters less from a sort of volatility of your energy bill reason. We're protected, we're increasingly already protected from that volatility in international markets. And I think that's an important benefit. Plus, of course, the benefit to the climate and, you know, the environment more generally. But part of the problem with the renewable piece is the network is not able to deliver the energy where it's needed, right? Correct me if I'm wrong, but we generate quite a lot of renewable energy, say, in Scotland, the windy, wet parts of the UK, but then where it's needed in the south, we can't get it there, so we have to turn on a gas power station to supply that energy.

41:41That is correct. We actually pay renewable sources not to generate energy whilst we pay to... They get paid for their generation, whether we use it or not. That's the nature of the contract. That doesn't seem very efficient. So that...

41:56Neil Kenward:Like a wasted energy. Yeah, and the original, when that transition started, there was lots of spare capacity in the network. So it's just like, let's get this stuff built. And what we're now doing is accelerating, and have been for some years, accelerating the build of electricity transmission capability. That's the big sort of, if you like, the biggest cables that run up and down the country. and carry that power exactly from places like the north of Scotland or the North Sea to the main centres of demand, which are the cities and primarily southern Britain, where more of the population live.

42:29So that investment is now happening at speed and at pace, and Ofgem has been trying to make sure that happens at the fastest possible speed. That will increase our network charges as a result, but it will enable us to make better use of all those renewable resources and so overall it balances out and keeps costs lower. Is the technology there? Could we be in theory fully renewable and move energy around the country in an efficient manner? Is that possible in today's world or are we looking for certain technologies to deliver? So I think we already have or have in train all the technologies that we would need to get to that net zero energy system.

43:17the critical thing for us as a country is what do we do when the wind's not blowing in the middle of winter and it's cold so it's winter so you're not getting much solar it's cold so quite high demand wind's not blowing and in that situation either you need to burn a little bit of gas to give us that sort of power we need on those few days or weeks or you can do something called carbon capture and storage which is where you burn gas but you capture the co2 and you bury it and so there is a program underway in the uk to build those sort of assets as well i think they're doing that near liverpool where i live in southport it looks like there's an oil rig but i think it's pumping carbon into the under the ground where they pulled out and we've got lots of good assets in the north sea good locations for burying co2 um so that's you dig it all up and then you put it back in the ground it's kind of crazy isn't it yeah so we fill the holes that we made in the north sea with carbon in in a simple sense yeah yeah and actually you can get more carbon in than when you took it out.

44:15So we've got, you know, we can put hundreds of years worth of emissions down there if we need to, yeah. Okay, and so the part of the bill, can you remind me how much of the£100 is the network cost? So maintenance of the network. It's 28. It's quite a large chunk, right? So why hasn't there been these upgrades in the network prior to this? And why can't that 28 % include the upgrades that we need? Why is it that the network costs need to increase? It feels a bit like the water supply issue of, you know, everyone pays for the network to be upgraded, but now the water companies are going, oh, no, we need billions to upgrade the network because it's all fallen apart.

44:56It's like, well, what happened to the money that we allocated for 28 % of our bill or whatever? Why hasn't that been enough? Yeah, well, 28 % is not out of line with other countries. That is just the cost of running the networks. I'd say we're in a... But our costs are higher than those other countries. So that implies maybe their networks are more efficient than ours. I don't think that's the main source of difference in prices for us and with other countries. We think the networks are broadly efficient, and we think that's broadly the right amount of money, the sort of fair price for consumers to pay for the cables, for the pipes that bring gas and electricity.

45:33And yes, they have to spend more, particularly on electricity now. but that is that's delivering on that net zero mission and it's as essential as you say in order to connect all these new sources of um of supply okay so would you think then uh you know all of the things being equal that we're going to see pressures on those network costs increase to get to the point we want to be so we might see bills increase further so what we have we've set out a plan for the electricity transmission network which i'll say these big really big cables up and down the country and actually for the gas networks um from 2026 to 2031 it's the five-year price control period and we've basically given them um they've made they've submitted business plans we've told them what we think is justified and we've approved a level of spending and we'll like unlock more spending if it's needed during that period, that would lead to network charges going up to make those essential investments.

46:39But by making those investments, we bring other costs in the system down. So we have to spend less, as you say, turning off renewables plants that can't connect to demand. And we enable more renewables plants to get on the system, which, as we were talking about earlier, means less gas, brings down those, means gas sets the price less frequently, So you get all those good things happening in the market that makes overall that transition cheaper. I think is it gas by 2030 you think will be 5 %? I don't know if not you, but say. The government is hoping to minimise. So obviously they've got their Clean Power 2030 target and they're hoping to get it down to that sort of level, 5 % gas on the system.

47:26But then it would still set the price. It would still set the price sometimes. So it doesn't matter. It only stops being this big impact if it gets to zero. But like I say, all the new generation coming on stream now is that fixed price generation. The CFD thing. Exactly. So the gas price is the issue. That issue does go away over time.

47:46Neil Kenward:Just to play devil's advocate, is there a reason why we can't just have the average price of electricity? I think I might have missed it, but if wind power costs 10 and gas costs 100, is there a reason we can't just say, okay average price for all electricity is 50 like right in the middle of all of the different energy sources because people think that's fair yeah and i can see i can see why but that doesn't deliver so the market is dynamic so what we need changes over time it changes literally people buy and sell electricity on a half hour basis okay so but can it just fluctuate and we We need that.

48:25So the market is an efficient way of delivering energy at least cost. We've got a structural issue right now, as you've been describing, where gas is setting the price for lower cost renewables benefiting. But as I say, that issue does go away over time. So there are various people suggested various solutions that could cut through that. But as I say, the government looked at those. it concluded that the benefits would take a long, you know, those changes would take a long time to make. And by the time you've made those changes, actually most of the issue has gone away and the impact of that gas price setting has diminished a lot.

49:07One criticism of, not criticism, one criticism of moving to an average price that I saw was that the belief that the cheaper would basically move to the higher price. at the minute they they're basically you you go out to the market and you go who's got the cheapest energy and they all rush in and go we have we have we have and then they know that the last unit will dictate how much they get paid for for that unit so if you say average price those cheaper guys are more inclined to go well i'll just set my price like it's gas at the start yeah so that's the that's the efficient point of the market but as the regulator could you not regulate against that so you're exactly right that the current system is considered efficient as in it gives every participant in the market all those generators the incentive to tell the truth about exactly what their cost of generation is because they want to be in the line they bid in that at their cost and it's it's the incentive on them is i say to tell the truth whereas if you do some sort of average price scenario they have an incentive to try and game it and that that is less efficient it could push up the overall price we wouldn't necessarily know what their actual costs are um so as a regulator it would be really hard you'd end up in a sort of gaming situation with with the sector um i don't know of any markets that use that approach the average price the this kind of um this you know the last the most expensive sets the price is this common across appears internationally it is that it's considered best practice because in the both in the short run and the long run it sort of delivers the right incentives to all the players in the market and therefore hopefully gives the lowest price to consumers now we've talked about the structural issue where it looks looks like that sometimes doesn't happen now but i think it is it is the best practice sort of market design okay thank you one element of that that gas is that we're dependent we're an importer of of gas so we're dependent on other markets which is the issue right we're not independent in our gas production yeah we got a question from jconner 619 you'll get used to the usernames um they basically said why are we not exploiting the natural resources that we have in the north sea could we not you know get gas from there so that we don't have that dependency on on the external market yeah so this is a very political question and if you'll let me sidestep this one because it so often we regulate as i say the networks and the supply of energy we don't do anything upstream so we're not involved in upstream production of oil and gas i know it's very controversial politically so i might just as an independent regulator stay away from that question no that that's that's fine and perfectly valid and i appreciate it um one one thing that um i want to speak about is you were speaking about the incentives of these companies and and you you regulate quite a specific slice of the the energy chain yeah but a lot of the people that you regulate in that slice operate across the whole chain so you know there's business big businesses of centrica yeah they they are whole they they they've basically own the whole energy supply chain yet you only have an influence over them in this little bit how can you correctly regulate these people so they're not just pushing the costs into other areas because you will say oh we will only allow them to make a three percent profit this is what we build into the bill yeah But then you hear record profits in other areas.

52:34And I think the consumer just thinks, they're having my pants down somewhere else, basically. And the CEO of British Gas, which is part of Centrica, received a£3.6 million bonus last year. Obviously, he's got a big job and an important job. And there's a commercial rate you have to pay for talent. But when people hear record bills, you know, and then they see those kinds of bonuses, they think, how are you regulating the profits? so we have the sectors that we can directly regulate network where we're actually as i said because it's natural monopoly we're very hands-on in regulating that sector in retail we set the price cap and as you say there's there's a profit allowance in that it's actually about two and a half percent which is pretty modest for a competitive market given the risks that the companies are carrying and they often don't make that two and a half percent but you're right that these are vertically integrated companies so some of them own generation assets as well as they pump it they refine it they ship it you know like they're everything in the chain and that so to be honest that helps them to to manage their risks so they might have a bad year in one part of the business and it can compensate that in in in the other part of the business so it's quite sensible risk mitigation from a company perspective enables them to understand different bits of the market so their retail arm can buy energy at the most efficient way.

54:03We think that's fine because we have enough data across the different companies that we understand what their costs look like. We don't think they can significantly gain that even if they are vertically integrated. Now, I can see why consumers go, well, that company is making huge profits. Now, they don't make huge profits. in the regulated bit, in the bit that we regulate. Is it already too late by then, though? It's like, you know, you've only got limited control over a tiny slice of what they do, and all the money's being made upstream. Should you focus there? Yeah, and look, there are times when the upstream businesses will make huge money when, you know, these geopolitical events happen, and times probably when they don't make much money at all if the gas or oil price or whatever it happens to be is much lower.

54:47But that's a very different market. it's not one that Ofgem are involved in or regulate in any way. Yeah. Why do you think it gets that scrutiny versus other industries that might have that level of profit, you know, goods and bad times, as you say? Yeah. I think they get particular scrutiny because when oil and gas prices go up, everyone in the country is going, oh, I've got to pay more for my petrol for my energy bill. And they look around and some companies making profits. But then that's where the government steps in and does things like impose windfall taxes or whatever it is. But that's a political choice, how to handle that challenge.

55:23It's not something that we as an independent regulator get involved with. You think the price cap is the way that you can influence that and protect people, you would say? We protect people, but it's really important to understand that the price cap doesn't... We can't guarantee people get low bills. What we can do is guarantee fair bills so that they reflect the costs that the suppliers have to meet in order to supply electricity and gas. So it is, you know, I think in the early days with price cap, lots of people might say, oh, how come the price cap is going up often? Why are you letting it go up?

55:58We are just passing on the costs, but we're making sure they are fair costs. So as I say, that history where there were some companies taking advantage of inactive customers, that can't happen anymore. If you compared it to, say, supermarkets in the recent inflation spike, I think a lot of people felt that prices probably went up quicker than maybe there was like profiteering within it. What you're saying is the price cap eliminates that ability to profiteer by going, oh, our costs have gone up 3%, but we're going to stick on a 10 % because you're basically saying you can only make so much profit.

56:31Neil Kenward:Yeah. I mean, you talk on natural monopolies and oligopoly might be the term for the energy suppliers. You move to an area and you've got a few different choices. Why do you think that there should be any profit within this part of the system? So in order to make, you know, it's a private sector, it's a privatized industry. And that delivers a lot of benefits because you get new companies. So Octopus entered the market just over 10 years ago, and it's gone from nothing to the biggest retailer of energy to households in this country. It is an incredibly successful multinational company based in this country.

57:14It's a world-leading company. It's innovating, providing new flexible products, new EV tariffs, heat pump installations, solar. the rest of the industry is now also doing other stuff and there's more new small companies sort of coming in behind it like fuse and others you know we've we've got a really vibrant competitive sector that delivers benefits to consumers so in order for that sector to function it's a world leading energy retail market they need to be able to make some money it's as simple as that and it's not a lot of money compared to the profit margins in other sectors two and a half percent is really

57:49Neil Kenward:quite modest we have a listener's question um from hydro hobbyist oh god good luck he says what about standing charges why do they increase the standing charges frequently i'm paying as much to maintain the cable and pipe in the footpath than what i do for what comes out of them yeah and i completely understand that there's a lot of frustration around standing charges and particularly the fact that they've gone up in recent years. Just to be clear for anyone who doesn't understand, your energy bill has two basic components. One is a fixed component, which is called the standing charge. It doesn't matter how much you consume, that's what you pay.

58:29And then there is the unit rate that will vary exactly with how much you consume. You consume more, you pay more. The standing charge is there because the energy supplier has some costs that are fixed for them as well. So the critical ones are, you know, every customer has a meter that has to be read or updated or whatever. It doesn't matter how much you use, it's not going to change how often you call the call center or their billing system or, you know, every bill payer, every household imposes a certain cost on the energy supply that they have to meet. and we also have an element of electricity network charges also paid in that fixed way so because suppliers are exposed to those costs as fixed costs we enable them to recover most of them through that standing charge in the price cap now as I say I understand that that is frustrating for some people particularly at time when energy prices are high you want to reduce your consumption to reduce your bill you find you can reduce it but you've still got this element that doesn't change so i understand that frustration at the moment if you are on dual fuel typically across the country you pay um a bit less than a pound a day for your electricity and gas combined about two-thirds of that 60 60 pence roughly per day is electricity and about 30 percent 30 pence per day roughly is gas for the standing charge for the standing pound a day Exactly, just under a pound per day.

1:00:04So we recognise, as I say, that a lot of consumers consider that, they get very frustrated by it. So we have looked at what could be done. We've looked at various options, and we have a pilot project that we're doing with suppliers where they will offer lower standing charge tariffs into the market, and we'll see how that goes down, see how they get adopted. so I think that's an important solution and we're also doing a longer term project looking at the underlying cost structures in the sector and whether we might change for example how that electricity charge network charge is recovered it doesn't have to be that share doesn't have to be fixed in the same way so that those are the sort of questions we're looking at and I recognize the frustration we are looking at it.

1:00:53Are they making profit on the standing charge? So it's all part of that bill i don't think we separate out profit on the starting charge versus the the unit rate but we do the price cap has to let the energy companies recover their costs so how would that be calculated would you say we look at the fixed costs of an average energy supplier and then we add that we break that down as a rate and then add it into the bill as a standing charge that's pretty much it yeah and you're saying that the standing charge covers you know the fixed costs of the business not the delivery of the energy and the cost of that it's the call centers it's the it's the fixed costs the the metering side which um which has some cost and as i say it's some of

1:01:35Neil Kenward:the electricity network charges so those are the main components what are the costs in metering because i just report my i just report it straight to them upload it yeah they used to come over and we need to read your meter which i understand is a cost but now we just upload it onto the system they just slap me with a crazy bill to incentivize you to call them for the meter reading now So the traditional meters, obviously, people have to come around and read the meter, etc. Smart meters, that can all be done remotely, so that's great. So that makes it more efficient. But the smart meter themselves has a cost and a cost of installation because a person has to come around and install it, etc.

1:02:12So there is a sort of ongoing fixed cost per customer from the meter. Correct me if I'm wrong, but wasn't there a promise from Ofgem or a commitment to reduce or remove standing charge by the start of this year? So we have been trying to find the right solution, and we've made a lot of progress, but we're trying not to do anything that's going to destabilise the market, but also meets that requirement or the desire of customers to have an option for a lower standing charge tariff. One of the tricky things here is that these costs have to be recovered somehow. So if you reduce the standing charge, you have to increase the unit rate.

1:02:50So it's not like the cost goes away somehow. So we did surveys, obviously, of the general public on this issue. And, of course, everybody, if you say, do you want a lower standing charge? Of course. And wouldn't everyone? But then if you explain to them that your unit rate then goes up and that overall, on average, people will pay the same, then... Less people are going, oh yeah, I've got to get rid of my sound charge. Now we see that even in that circumstance, people who want to try and reduce their bill, as I said, they aren't able to reduce it as much as they'd like because this fixed element remains.

1:03:25So we are looking at options, but it's a tricky one to solve, it really is. Yeah, to the people that it's important to, that are really making those decisions to try and drive down their bill, you know, the ability to do that is, you know, potentially really impactful on their lives, right? To someone like me, who might not be too worried about my energy bill day to day, I don't like it going up, but it's not, I'm not there thinking, how can I cut this bill down? I would rather go hire a unit based on consumption to give those people the ability to actually meaningfully get the bill down if they can.

1:03:56And that's the sort of issue we are looking at. Especially if you're not in your house for six months. Do you know what I mean? I don't know. People move around with work, and then they've got this bill that's just not even using the consumption. And no one's coming out to their house and fixing pipes and checking meters. We totally understand the frustration. And as I say, it's a difficult problem to solve, but we are looking at it, and we're hoping to make progress. But there was some form of commitment for January 2026. Did you just change your minds around that? So with apologies, I can't remember exactly what we're doing.

1:04:33But look, we are... It's a difficult problem to solve. We're working through options. And as I say, we're bringing forward this pilot with some energy suppliers who will be offering tariffs with lower fixed rates and seeing how that goes down in the market. Options would be good. Octopus won because they gave customers more options. And if you said to a customer, we will remove the standing charges, but you pay a high unit cost, you give them the ability to make that decision, don't you? Exactly.

1:05:02Neil Kenward:So that's one of the things we're looking at. You said with the smart meter, for example, there's a cost of that and they've got to install it. But you think, say you're with Octopus or British Gas for three years, eventually you've paid for the cost of that meter. Like the meter can't cost, it has a fixed cost. So let's say it costs 100 quid. After 100 months or 100 days of paying one pound a day, you've paid for the meter. So then you could be like, after 100 days, we get rid of the standing, or we reduce the standing charge because you've paid for the meter. Yeah. Yeah. Because Simon asked, why don't you disclose a breakdown of daily standing charges, which you kind of did a little bit.

1:05:34Neil Kenward:We do. Yeah, so now that we know the breakdown, surely once you pay for the smart meter, what are their ongoing costs after that? Yeah, so most energy suppliers, they contract their smart meters with a third party. and they pay an ongoing charge for the smart meter. You can see it from their side because smart meter installation maybe costs hundreds of pounds up front. And if they paid all of that and then the customer switches the next day, they've made a big loss. So they tend to pay third parties and pay a sort of ongoing charge. Yeah, which probably is more expensive in the long run, but it reduces the risk in the short term.

1:06:17I mean, arguably, you get more efficiency as well from them procuring in a competitive market for smart meter installations and smart meter supplies. But yeah, I can see there's a trade-off there. Why do smart meters need to be specific to a particular energy company? Couldn't a home just have a smart meter that whoever plugged into? So there wasn't that kind of... And we've got full interoperability. So it doesn't matter which energy company put the smart meter in, any energy company can now operate that smart meter so that it's not like they are very specific to each energy company they are interoperable because a pound a day for that technology indefinitely i know obviously would it's not a pound a day just for that but it seems like a high cost because these are like cheap little things right yeah and and and look to be really clear the smart meters offer huge benefits to consumers right you and and make the whole system more efficient you can see what energy you're using for electricity you can see it on a half hourly basis and this future world we're moving to where as i say energy electricity will be cheaper when the wind is blowing the sun is shining it enables people to turn up demand if you like bring forward their demand when when the price is cheap uh and delay it when the price is is high and save money by doing that um and those products are already coming into the market so smart meters are essential for for delivering that they're also a much better option for someone who's on prepayment.

1:07:43The traditional prepayment meters, there's quite a lot of hassle about getting tokens, getting credit on those systems on the traditional prepayment meters. But a smart PPM, you can just do it from your phone. You can do it much more easily. The supplier can monitor your usage, so it can spot if you might be having troubles and having to self-disconnect. there's a lot of improvements with this sort of smart uh smart meters including as i say for for prepayment customers we we're speaking a lot about we've spoken sorry a lot about you know residential clients what about businesses you know how how do you look after that environment because one thing i look at is you know we're demanding growth and that but to operate a business here the energy costs are so high a lot of the businesses that we probably want which the AI and technical stuff are so energy hungry.

1:08:34How does the regulator kind of help? So our basic approach is, actually, it's similar to domestic households, but we don't have a price cap in the business sector because, as I say, we introduced the price cap for the domestic sector because there were two thirds of customers not actively choosing their energy supply and at risk of being paying more than they should. I'm one of those people, so I'm probably on the cap. Well, that's it. Exactly. That's why it exists. I've never switched energy suppliers, naively. But in business sector, we assume that businesses are savvy. If they care about their energy bill, they can proactively go out.

1:09:19In the same way, domestic, it's a really competitive business. There's lots of offers out there. But we do monitor the sector. but I recognise that businesses also face high energy costs in the same way that households do and the government has stepped in for the most energy intensive industries like manufacturers, potentially data centres to say actually we'll reduce some of the charges you have to pay because otherwise you wouldn't come to this country, you wouldn't invest in this country, you wouldn't stay in this country. So they have taken steps to try and ease the burden of high electricity costs in particular for heavy industries and high energy users.

1:10:01Specific sectors, you know, like AI or whatever they're trying to attract, but not everyone. Do you think the business environment will benefit from a cap? Because, I mean, like, you know, I think a business is in, your AI data center is probably going to be all over energy because that is their main input, right? But, like, hairdressers or small independent companies might not be. They are like individuals, really. You know, they're the same individuals that then go home and sit on the price cap at home. So why would they be doing it within their business? So it is a price cap intervention is quite a heavy intervention in any competitive market.

1:10:39So I think we have to be really convinced that there was a serious problem. And we tend to see, as I say, the business sector as one which is competitive. Companies can shop around and we think it's sort of up to them to get the best deal. And what we see is that most of them are actively sort of choosing their energy suppliers. Okay, thank you for that. Do you want to ask another question for you?

1:11:01Neil Kenward:Yeah, I was thinking DeFruc. What DeFruc? Sorry, that's his name. What DeFruc1 wants to know is, where do you see technology moving in energy storage solutions to manage peaks and troughs in generation such that electricity generation can be fully decoupled from fossil fuels? and how long do you think till that technology is going to be economically viable on the scale required so this is a great question about how the energy sector is developing so this is electricity specific and on as i say on days where the wind is playing the sun is shining britain is likely to have in the future more electricity than we currently use and then when the wind doesn't blow we don't have enough clean electricity so storage is the answer to that right So on days we have surplus, you shove it into a battery or some other form of storage, and then when the wind stops blowing, you release that back into the system.

1:12:00Historically, electricity storage has been really hard and really expensive, but the cost of battery storage in particular has fallen dramatically in the last 10, 20 years, really dramatically. And it's changed the nature of the system. So the costs have fallen dramatically. and this means now that there's lots of companies bringing forward battery story projects for development and deployment in the uk and that will mean that for increasing amounts of time we can take that surplus and use it in those times when we need it and we won't need to burn gas because that's the alternative but in the in the points where we haven't got enough clean energy we burn gas so that'll help us use gas less and less because batteries will be filling that gap instead it will be really hard for batteries they're very good at like four hours maybe eight hours of of covering a gap they're not good yet at multi-days and and maybe they'll never make it into sort of a week or two weeks they start losing power yeah they once they've used the power they've used the power right so you know there's a limit but there are tens of gigawatts which take it from is a lot of battery storage projects coming through in the UK in the next few years.

1:13:13And that will really help smooth our system and make it adjust to a more renewables-dominated system. What about like water-based batteries, you know, like a dam where you move the water up the hill and drop it back down? So that kind of technology instead of maybe, you know. Yeah, and before batteries, the lithium-ion, the sort of batteries, you might put a phone, but a massive scale, before those batteries became cheap, that was the best way to do it sort of pumped hydro move the water up a hill and then drop it back down again exactly right and we have facilities for that in Wales and in Scotland they're good and they're efficient but the UK is not the best place we don't have quite enough high mountains Norway has a lot more of this stuff the Alps have a lot of it we don't have quite the same level of mountains you need a big hill you need a very big set of mountains And a place where you can flood off of the countryside.

1:14:06And we have enough rainfall in those places, but we don't quite have enough mountains set up in that way for pumped hydro. So there are projects in the pipeline to expand pumped hydro in the UK. But they're quite capital intensive building these things now. And it might be that the sort of lithium-ion batteries at scale can provide, or other types of batteries can provide more cost-effective storage. So it's good that we've got options. And what about nuclear? Obviously, you mentioned the one bit we're doing at the minute I've seen. Was there commissions or plans to build some of these kind of modular or the smaller plants?

1:14:46Yeah, exactly. So obviously, the UK had a history of building nuclear in the 50s, 60s. I think we were the leading economy. We were the first to sort of have used nuclear power for electricity generation. So we scaled that up and then actually gas started to dominate. So we didn't build nuclear for a long time. So what the government has been doing over the last few years is developing major new nuclear power stations. First one to deploy will be Hinkley and then Sizewell after that. They're huge and they're quite expensive to build. which is why they're looking, as you say, at modular reactors that could be smaller, but you could build lots of them and bring down the unit cost by doing that.

1:15:33So there's the hope that we can get cheaper nuclear power by doing that. And nuclear provides a sort of baseload. Now, obviously in a renewables-dominated system, baseload serves a sort of different purpose, but obviously it would be there at those times when the wind doesn't blow, and that's useful. And do you feel the public perception around nuclear has shifted now? why do you look at that yeah so i mean i'm sure the government looks at public perceptions and and there's there seems to be a lot of support for nuclear and if it can generate cheap clean electricity you know why not i think there's a lot of support for cheaper energy bills and people probably look at france and think why didn't they get hamled and they obviously went more into nuclear than we did that's right but what and and what i think is important is to make sure because these two big new power plants nuclear power plants they are expensive to build and i think it's important to to minimize the costs and that's what we'd so our role in in the size world project will help to bring our regulatory regime helps to bring down construction and the cost of those sort of projects for consumers but then in the long run yeah maybe there's there's even cheaper ways to bring forward nuclear power and that will obviously be good for the system my understanding of size well as well because i criticized the overrunning of the cost in a video once because it's a lot over the budget that was set the people who worked there kindly in my comments said that basically they expect future developments to be cheaper because they have the mold essentially of how to build it and the logistics and all of the things that we needed to set up so yeah they would expect it to be cheaper to build a similar development going forward yeah there's there's definitely a sort of fleet effect the more of a particular design you build the it can help bring down the costs over time and that's we are seeing that with hinkley which was the first of this french epr2 design to be built in the uk and size well is it should be cheaper to build than than hinkley has been so they you know that's definitely one of the ways that costs can come down for nuclear over time how long does it take to build a nuclear power plant a long time yeah there's a huge amount of well there's a huge amount of planning and everything first then there's you know enormous earthworks i think the hinkley plant is like you if not the if not europe certainly uk's sort of biggest construction site um it does take time and obviously you know it's nuclear power you've got to get it right yeah i think there was a quote from david cameron of like why would we build nuclear who will only see the benefit in 15 20 years and then here we are with an energy crisis absolutely cooking for a nuclear power plant but yeah so a couple of final questions before we let you go and thank you for being generous with your time the first one is do you ever see energy bills going back to pre-2020 levels so i think there is scope to bring uk energy bills down over time and we can see that with you know as as low and low carbon power potentially gets cheaper as we might hope in in time and we can get that more efficient system with more flexibility etc um we are so we look at what's happened in the price gap between pre-crisis so say 2019 and now and basically the price cap has gone up almost 50 and that's due to all the factors we've been talking about today um now of course people's income so in real terms it hasn't gone up by 50 it's more like 15 and people's incomes have also gone up quite a lot and depending only recently though yeah so so basically energy bills are a huge affordability challenge for a lot of people we completely see that and it's sort of we can't solve the affordability challenge in Ofgem it has to be a sort of we can help by the way we regulate the system we can keep costs as low as possible but ultimately it becomes a government choice about interventions like the warm homes discount to help households that are struggling to pay their energy bills.

1:19:42So I think I'd be surprised if we can get energy bills back down to where they were. But they have been coming close, partly with government interventions. In real terms, they've been coming closer to what they were before. But the key thing is, you can't solve that problem as a regulator. You're just trying to make sure that people are getting the fair price and that the network is up to scratch. That's how you would see your place in that. It's not your job to find a way to make energy bills cheaper just to make sure that they're fair. We can't make commitments on energy bills. That's government space.

1:20:18They have more levers to pull in that space. We just try and, given the sort of context of government policy and international markets, we help to make the system as low cost as possible to run and therefore energy bills as low as they can be. Go on, do you want to ask that last one?

1:20:35Neil Kenward:I was going to say, yeah, for me, because unlike Damo, I actually do change energy providers and I care about my energy bill. I mean, I care about it. You care, you just pay it anyway. You're like, oh, whatever, oh, it's doubled on. That's fine, tap, tap, tap. What's a good way to reduce your energy bill for me and our consumers and all? Well, as you said in your question, actually looking at the market and seeing if you can switch to a cheaper tariff that is at most points in time a guaranteed way to save a bit of money so particularly if you're on the standard variable tariff this sort of default tariff um the price cap tariff there's almost always a tariff in the market that'll be cheaper than that and often 100 pounds or more cheaper for an average household yes per year because honestly i've always found it quite confusing the pricing and stuff um i might be alone now maybe because i haven't looked at it properly but it always just felt like quite obtuse all the pricing and all the different prices and i just i never really felt like i was getting a getting a fair deal it's not like you know i mean it's almost like the mortgage market you're kind of there like what it can all these different fees and things it can be confusing so you shouldn't be paying fees i don't think no um but price comparison websites so the potentially the tricky thing is you need to know roughly what your energy consumption is in order to get an accurate quote from a price comparison website.

1:22:00But once you've put that in, they should be giving you tariffs from the best providers, different prices, and then you can make a choice depending on what sort of tariff you're after. And as I say, in normal times, people can save usually over£100 versus the price cap if they switch. And how would someone know what their consumption is? Would they look at their latest bill and measure over like a quarterly period and input that the best thing to do is look over a whole year yeah because obviously you consume a lot more in the winter than the summer and you want to make sure you've captured that whole year's worth of consumption but that's that's the right way to do it and check what tariff you're on you you might be on a good tariff already if you're already on a fixed tariff you might have to pay an exit fee to leave so it might not be worth doing that but but shopping around is generally something we we do advise customers to do.

1:22:50Another really important thing to mention is that there's still quite a big chunk of households, millions of households pay their energy bills quarterly. We call it standard credit. And it's a sort of, they pay quarterly after the consumption. So they get a bill in the post and they write a check and they send it off or they do a bank transfer or something. That's the traditional way to pay energy bills rather than now direct debit is for most people. But if you're on standard credit, you are paying a significantly higher bill because the costs to the supplier of the standard credit payment method um partly because debt is it higher in in standard credit the costs of that are higher so through the price cap as i say we let them recover they have they have to recover the costs they incur so if you're paying through that sort of quarterly bill and check or quarterly bill and bank transfer stop doing that so just pay monthly instead sign up to a direct debit that'll reduce your bill straight away would that reduce everyone's bill because you're basically saying that people are we're paying for the fact that people haven't modernized their payments so people on direct debit are not paying for the costs the extra costs of people on standard credit um the standard credit yeah exactly so switch to direct debit will save money even better if you if it doesn't work for everyone but if you want to the prepayment so smart prepayment or smart pay as you go basically that is a even cheaper way so we have we intervened in the market to make sure that ppm tariff is the cheapest under the price cap

1:24:19Neil Kenward:so uh what's ppm paper month pre-payment meters where you're topping up a card at like your shop or whatever yeah but as i was saying if you do that on a smart meter it's super simple and um for lots of people it's the you know i talked to energy consumers and a lot of people say actually they prefer to do to do to use prepayment sort of pay as you go they have more control over their energy bill so we think that smart pay as you go so a smart meter not the traditional ppm which i recognize are quite difficult for people but the smart ppm is the cheapest tariff uh under the price cap i've always associated ppm with punishment it's kind of like you've not paid your bills and now you're on the meter kind of thing we're trying to we're trying to change that as i say we try and talk to real people uh a lot and understand their experience and i've spoken to um for example this this woman in south wales who had a disabled daughter at home and she was telling me she's asking her suppliers to switch to smart prepayment um because she feels she has more control over her energy bill that way more control over her energy spending um and she thought it was a really convenient way to pay so i think that is quite an important point to say that that is also now the cheapest tariff under the price count and you top up directly from your smart meter you don't need to go to a shop and load up a card exactly if it is a smart meter you can use your phone to do the just add credit exactly and you can ask any provider first if you don't have one you can ask any provider do they all provide a smart meter now yes yeah because i've lived in houses with the prepayment meters in the past and you would just be sat there and all the lights would go i did that was like playing playstation and then the next list are you're going to the shop i went last time and it's like he's gonna go put the money in and you know over time we're hoping that those traditional prepayment meters get phased out because they're not as convenient for people um so but we think smart pay as you go has a hasn't it won't be for everyone but it has an important role to play in the market and and people can choose that and as i say our assurance is that under the price cap it will be cheaper than any other tariff probably make you much more aware of your consumption and like for someone like me i would be more interested and then sorry we'll let you we will let you go after this but do you think people like a lot of my friends are looking at solar panels and batteries in their homes and all this stuff because they're they they're worried about energy and they want energy independence in some form does the regulator think that this is a good move for individual homes that that kind of technology upgrade and pursuit of independence on an individual level is a sensible thing long term so what we are finding is that so the cost of solar panels as well as those sort of in-home batteries that's come down quite a lot over the last few years so it can make sense for homes if you if you have the roof space the ability a sort of south-facing roof is quite important um for for solar panels to be sensible but if you have that capability it can certainly reduce your energy bills um uh but you should look at you know make sure it's a reputable company installing make sure you get a good price for the installation get some quotes and do your make sure you do some calculations to make sure you're comfortable with the savings that it it makes because it might not pay back it might take many years to sort of pay for itself if you pair it with a battery solar plus battery that will potentially make a quicker payback um uh but obviously it's a higher upfront front expense as well but i'd encourage everyone to do their sums there's the sort of advice you can get on on the internet on on how to um how to get the the best deal for these sort of installations but broadly coming back to what you said about switching because i'm going to do this afterwards is a fixed rate typically better than a variable the variable or the uh the cap rate you know so you would always get a better deal if you if you go out and pick a mark pick go out onto a price comparison website or just speak to your own supplier because almost all suppliers have fixed rates and they have to.

1:28:25We require them to offer the same competitive fixed rates to existing customers as new customers. So you can check what is the best deal in a market and get it. Now, it's worth saying that the market's going to get more complicated. It is getting more complicated in one way in that you were talking about, you know, the sort of standard variable rate, the price cap rate on the one hand and fixed tariffs, which are competitive, you can get a better deal. there's also increasingly new products and services coming out with flexible tariffs agile tariffs that respond that mean you get cheaper power if you consume it overnight for example so people with evs charging their cars on the drive yeah i like those kind of exactly or even ultra ultra flexible tariffs that move with every half hour and you sort of you agree to be exposed to those prices but you get a cheaper rate overall if this is the thing that confuses me because i'm just like what the hell i've got that on sundays for some reason like they've got

1:29:17Neil Kenward:half price electricity on sunday so we do all our washing like the house is just full of laundry especially after podcasting just got t-shirts everywhere but then we do all our washing on well not all but as much as we can on sundays because it's half price and just got the washing machine going all day and and that's sort of an example of what's coming to the market this this um where energy companies are going to be offering people cheaper deals if they consume at different is that to encourage people to use energy at non-peak times exactly right exactly right okay So those sort of products and services are increasingly available in the market.

1:29:49And it's great that people have those opportunities to save money. I put my washing machine on a timer so it goes at night. Because I was told that the energy was cheaper. It's only cheaper if you're on a tariff where it's cheaper. David just paid on the nurse. I like the noise of it as well. You know, when I'm in bed, it's like... I can find it quite therapeutic. On that note, thank you so much for your time. Thanks so much. Cheers.

1:30:16Shall I tell you the story about how that interview came about? Go for it. So basically, Google asked me to go into the YouTube kind of headquarters in London and talk to government departments, the communication side, about why they should engage more with long form content. And Ofgem were in there, one of the social media people, because they tend to focus on the short form stuff. and I said I think it would be really good if you got some civil servants not politicians some people that actually really know the topic to come onto the podcast and talk about issues in detail that people want questions answering and that was the first of those because the energy regulator were more forthcoming than everybody else I think it was really cool to get like a slice

1:31:03Neil Kenward:peek behind the curtain because we all think why can't you just do like this why is it so expensive Why can't it be simpler? And actually asking the questions and seeing it from the other side and seeing how the energy companies make money and all these things and different standing charges. It was really interesting. Eye-opening. Yeah, I found that the kind of, if so, maybe around bills by 2050, I didn't find that very encouraging. Didn't like that. It sounded basically like, oh, your bills are going to be higher. But they did say off camera afterwards, your energy consumption is likely to be twice as high by that time.

1:31:37so the bails being the same might be a reduction in the total cost but yeah i what i wanted them to say was oh no yeah bills are going to get much cheaper once we've gone full renewable but it didn't really feel like that did it yeah but hopefully people like that kind of interview and we can bring more people on like that that are behind the scenes that are in the know um that can answer questions from yourselves and we just want to say thank you to everyone that submitted a question as well they were really good and we're sorry we couldn't answer them all my favorite was

1:32:04Neil Kenward:the fuck one that's a great name yeah yeah you said it like three times just in case you didn't hear that mr off gem the fuck one i like the guy that was like hydro energy whatever i was like oh you're in for it now yeah i love the usernames he's like does that guy hydro energy whatever it's like yes i've been waiting for this moment it's like the time that someone said do you have a question for the energy regulator or do they change their usernames just just to fit yeah bring my bring my time my bills down one yeah yeah yeah yeah yeah it was defraq defraq it was wasn't it was it defraq it was defraq but we'll leave it as well and a little reminder just before you go.

1:32:59If you've got five minutes, it will be great if you can fill out our survey, which you can find in the description. Normally, this is where we'd say this isn't financial advice, and it really isn't. But if you want to speak to a good financial advisor, then we might be able to help.

1:33:15Neil Kenward:We've partnered with a few advisors to offer a range of services, from one-off flat fee guidance to ongoing advice. I'm actually using the guidance service to sort out my finances. If you'd like to understand your options, there's a link in the description where you can answer a few questions and then book a free call with my colleague Will so you can figure out what might be right for you. This episode was produced by Ruth Edwards and it was filmed and edited by Ben and Jack at Flowspire. See you next week.