Household bills should reflect lower costs of renewables sooner, Ovo boss tells government
The boss of Big Six supplier Ovo Energy has urged the government to speed up plans to separate electricity prices from gas prices, so that the lower costs of renewables are reflected on household bills.
Speaking exclusively with City PM, Raman Bhatia, chief executive of Ovo, argued that the government should act on its review of electricity market arrangements (REMA) and help drive down bills for customers.
He said: “We are concerned about everything which impacts customers. One such area is price signals for customers, including adoption of electrification. I think we need to accelerate the REMA conversation around decoupling electricity prices from wholesale gas.”
As it stands, power prices for electricity are dictated by the UK’s energy mix, which remains highly dependent on gas, the chief source of heating for 85 per cent of domestic households.
This means soaring fossil fuel prices have caused electricity bills to skyrocket, even if power is sourced from renewables, with households facing record bills to heat their homes last year.
Ovo is not the only supplier calling for reforms, with Octopus Energy having previously raised concerns over the role of gas in power prices.
Last month, the Department for Energy Security and Net Zero (DESNZ) published the conclusion of its first REMA consultation, which took responses from the industry between July and October last year.
It revealed that over 80 per cent of respondents believe the current market arrangements are not fit for purpose.
However, there was a split within the sector, with 47 per cent of respondents supporting a split market while 38 per cent disagreed.
Opposition to extensive reform raised concerns over the amount of time it would take, as well as disruption to the market and possible unintended consequences due to a lack of any precedent in the sector.
Many respondents also referenced current market arrangement that offer a level splitting, such as contracts for difference (CfD), which could be expanded to include a wider range of renewable generators.
DESNZ plans to publish a second consultation on the issue later this year.
REMA reforms risk ‘falling by the wayside’ despite Ovo’s latest push
CfDs are the government’s chief mechanism for supporting new low-carbon electricity generation projects, designed to deliver low carbon deployment at low-cost to consumers – so that when wholesale electricity prices are higher than the price agreed in the CfD, generators pay back the difference.
Industry body Renewable UK is one of the leading voices calling for an expansion of the CfD scheme.
Renewable UK’s economics and markets manager Michael Chesser said: “Nearly all new renewable projects operate under a CfD, which effectively decouples power prices from gas, and renewables are now our cheapest source of energy. REMA needs to evolve that model further to boost investment in a flexible, clean power system that benefits consumers.”
Adam Bell, head of policy at Stonehaven, told City PM that REMA risked “falling by the wayside” because it has proven so difficult for DESNZ to come up with alternative to the current market – with potential all ending up in the “too hard” pile.
“If Ovo wants to do it, they will need to find a way of doing it themselves – just to give DESNZ the intellectual kick they need. The alternative is to just go hell for leather on the CfD, which gives you a de facto market split even if technically everything in the CfD is on the wholesale market,” he said.
He argued that a meaningful REMA – which could drive down prices – would require “constructing a whole new market from sackcloth and testing options within that”.
If Ovo wants to do it, they will need to find a way of doing it themselves – just to give DESNZ the intellectual kick they need.
Adam Bell, head of policy at Stonehaven
Bell suggested a market that’s administered by a system-operated auction for five-year fixed price contracts. But he recognised this could cause massive market disruption – with the government needing to find a way to organise the transition with assets already on CfDs
Meanwhile, Energy UK deputy director advocacy, Adam Berman, believed that rather than reforms, boosting the role of renewables in the supply mix was the easiest way to drive down costs
He said: “The best way of decoupling electricity prices from gas is to rapidly increase our homegrown clean energy generation. Building more renewables will decrease electricity prices further, particularly if the government pursues an expansion of the CfD scheme on a voluntary basis, which could further decouple the price of electricity and gas by up to 40 per cent.”
The government has been approached for comment.