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Cost of the Electricity Market Reform

How Will Charges be Passed On?

The changes we need to make to the energy market are going to cost a lot of money, and customers will end up paying in one way or another. In this guest blog, economist Lisa Waters looks at the different ways this cost could make its way onto your bill.

As discussions on the electricity market reform continue, it is becoming clear that customers need to brace themselves for increasing bills. New support for renewables, Feed-in Tariffs (FITs) with contracts for difference (CfDs), and the capacity mechanism will all add to customers’ bills.

The questions DECC is currently wrestling with are:

  • How to get the suppliers to pay?
  • How to charge customers?

The problem with the cost of any new energy policy is that the “mechanism” for support will pay out money to generators (either for being green or adding the capacity to generate more energy) before it can bill the suppliers. This therefore means there is always cash shortfall.

The suppliers can be billed in different ways, for example by their market share, their forecast peak power demand, or their power position on the day. They can also be billed on a weekly, monthly or quarterly basis.

However, policy reallocates costs, and suppliers pass the costs on to customers. This rebilling issue is already being seen with the current Feed-in Tariffs, where some suppliers charge it as a line in the bill and others do not.

So, how will suppliers pass these new costs on? What sort of explicit pass through do customers want? Should customers expect to see a bill with lines of extra costs: taxes; use of system charges; FITs; renewables obligation; capacity; green deal; smart meters; and others? Or would customers prefer a bundled price?

I think this is a difficult one. Suppliers will want to say that bills going up is all up to the government, so don’t blame us blame them! On the other hand, a bundled price may allow some to add extra uplift that the customer cannot verify as a real pass through policy cost.

My view is that I do not care if one retailer has different costs to another, but I do care about the end bill. That said, given the competition concerns and the energy regulator’s views on transparency, customers may want Ofgem to check that cost pass through is what is really going on, not cost plus.

If any customers have a view on the way government should allocate these costs now is the time to tell DECC. Policy formulation is well underway, but policies are not set and customers have as much right as energy suppliers and generators to put forward their views.

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