The energy market is broken, but here’s how to fix it

The energy market is broken, but here’s how to fix it

Written by Evan Byrne, Senior Account Executive in Energy

The belief that the energy market is broken is now an orthodoxy that few would dare challenge. The Energy Regulator Ofgem has announced that they seek to go much further than ever before in tackling issues in the market particularly in light of the Government’s announcement on a future price cap.

Ofgem wants customers to be automatically switched to better tariffs, without any involvement from them. However, this proposal demonstrates just why the market is broken: “inertia” or non-engagement by consumers.

The basic model for competition in a market goes as follows: Two vendors are both trying to sell a product to a customer. Vendors can try to entice the customer to buy from them by beating the other on price or by providing a superior service or product.

Some customers will be won over by price; others will plump for a better service. The more vendors in a market, the more options a customer has to buy according to their own preferences.

However, this model fails if the customer only ever buys from one vendor and never another. The only motivating factor to amend your offering is the knowledge that doing so could entice customers you do not currently have into your tent.

If one knows that this will not happen, there is little motivation to do so. Likewise, if you have a large customer base, which is guaranteed to stay in your tent no matter what, then there is little motivation to offer either a cheap or good service, as you don’t run the risk of losing customers to competitors.

The energy market is in fact highly competitive, for the people who switch each year. Most fixed term contracts, reserved for new customers, are loss making. These are sustained by the majority of customers on termless Standard Variable Tariffs (SVTs) who will never leave a supplier, no matter how expensive those tariffs get. 

Therefore, the reason why most customers get a bad deal on energy is because not enough of them engage in the market, in order to drive down prices and foster competition. Thus, in order to fix the broken energy market, more customers need to engage with the market.

If the Government must intervene (and there is an argument that it should not), then they need to take steps to engage more customers with the market.

Ofgem’s plans for collective switching, fundamentally misses the issue, because it fails to engage customers with the market (it spectacularly does the opposite). In all likelihood, automatic switching will lead to a race to the bottom, as suppliers seek to undercut one another on price, in order to acquire new customers.

This would most likely benefit the largest companies as they are best able to absorb losses.

A sensible intervention is one in which SVTs (or any termless contract) are prohibited. Many suppliers already support this. By forcing consumers to engage in the market, there is a greater chance of more of them will be willing to shop around, which gives suppliers the motivation needed to compete with one another. This will result in a better or cheaper service.

It is not the Government’s duty to ensure everyone receives cheap energy, and certainly not while consumers have access to a free market. The energy market will remain broken until there is buy in from consumers, so we must seek to affect change first on the consumer side. 

Can a gentle nudge improve organisational effectiveness?

Can a gentle nudge improve organisational effectiveness?

Written by Gareth Morrell, Head of Insights & Intelligence

The recent news that the ‘Godfather of nudge’, Richard Thaler, had been awarded a Nobel Prize for his leading work in behavioural economics prompted mixed reactions. For some, his work is the catalyst for using evidence of how people actually behave in the real world to improve policy design; others feel that at best, these improvements are simply tinkering at the margins or, at worst, reflect the social engineering of a nanny state.

The reality is a balance: there’s some truth in all these positions and lots to learn from each of them for business communicators.

But first, what did Thaler do? Nudge Theory fuses the theoretical underpinnings of cognitive psychology and behavioural economics with the design and delivery of mass public policy. The starting position here is that as citizens we often make choices that are not best for us or for the communities or society we live in, but that there are a series of well-understood influences that policy-makers can tap into to help correct this. 

Seasoned advertising executives may wonder what’s new about suggesting that humans are not rational. But Thaler’s contribution was to bring this insight to the world of policy making in a way that could be measured. He realised that we could be ‘nudged’, through the minor re-wording of communications or the slight re-design of a process, into behaviour that has benefit for the individual and a wider social good.

A classic example is increasing proportion of people consenting to organ donations. The study is described in Thaler’s book: by simply switching the default option from not being a donor to being a donor, 82% of people consented to organ donation compared to 42% through the opt-in method. This taps in to a well understood bias known as ‘defaults’: we humans typically go with the pre-set option or what we’ve done before.

There’s a powerful and elegant simplicity in the improvements made by these sorts of behaviour change initiatives. So what are the critics concerned about? Firstly, they argue that nudging can only make a difference at the margins and that the interventions lack substance or political identity – it’s fiddling around rather than visionary change. It’s true that often, the impacts of a single intervention are small – but in aggregate, these changes can substantially improve outcomes as part of a wider political programme.

The second criticism is that changing people’s behaviour reeks of the nanny state. Why should we be (unwittingly) nudged into doing the government’s idea of what is the right thing for us to do? This is a danger and to counter this criticism, behaviour change initiatives have to not only be part of a wider political programme or vision, but one that has broad public support, as Andrew Rawnsley explains. Take the Organ Donor’s example: polling results across a range of countries suggest that an overwhelming majority are in favour of organ donation, so where’s the harm in changing the default to presumed consent in order to overcome our sluggishness in opting-in?

With these caveats, it is also possible for businesses to harness the power of well-established behaviour change influences such as making public commitments, reciprocity, loss-aversion or social norms. As with the policy realm, these initiatives need to be aligned to a broader corporate strategy and a vision for internal culture, one that employees buy into. If these initiatives appear random and uncoordinated, employees may resist; if they actually are random and uncoordinated, they will likely produce unintended consequences and confusion.

In the next blog on this subject, we’ll look at some specific examples of how thinking about behaviour change can improve organisational effectiveness – evidence-based and low cost solutions for an uncertain and austere business climate.

Dieter Helm’s ‘Cost of Energy Review’: yesterday’s solutions, tomorrow’s problems?

Dieter Helm’s ‘Cost of Energy Review’: yesterday’s solutions, tomorrow’s problems?

Written by Matt Dolman and Tom Reynolds, Madano Energy

Published yesterday, the independent Cost of Energy Review compiled by Professor Dieter Helm is clear – the cost of energy is too high.

In short:

  • The UK’s energy costs are higher than they need to be to meet the UK’s climate obligations.
  • Consumers are shouldering higher prices because renewable technologies receive too much subsidy, whilst older technologies are locking the UK into contracts that are too long-term.
  • The costs of intermittency on the central transmission and distribution (T&D) network are currently accounted for in customers’ energy bill.

The problem here is that Helm’s review is an analogue analysis in a digital age, running the risk that its findings will fast become irrelevant. 

madano.com

Cost of Energy Review, p. 143

Helm’s proposed “default tariff” to replace Standard Variable Tariffs (SVTs), as well as a cap on suppliers’ profit margins, is partly based on assumptions that the cost of a centralised T&D network will have to be paid for in future.

However, the UK is developing an ever smarter energy system that will see homes and businesses increasingly pair their own renewable generation assets with battery storage. We could also see the potential for peer-to-peer energy trading via electric vehicle charging as we move to a low carbon transport system.

Such changes will potentially result in reducing consumers’ reliance on the central electricity grid.

With an energy system shifting in this direction (for those who can afford it), is it fair or realistic to offload potentially disproportionately higher T&D costs onto those consumers who find themselves stranded on an under-utilised future grid?

If Helm’s findings are based on outdated assumptions and analyses – the review itself reveals that there are “no new facts to discover” – then their relevance will quickly start to be questioned.

Despite its length, Helm’s review takes us no further towards understanding how a fair and equal energy system can be achieved. To get to this point, a forward-looking analysis of how future energy prices could change in a digital world is desperately needed.

Madano is a strategic communications’ advisor to clients across the energy sector.

Political Briefing – Conservative Housing Policy

Political Briefing – Conservative Housing Policy

Missed our briefing on Labour’s housing policy? Read it here.

Although housing market failure continued to grab political headlines during the week of Conservative Party Conference in Manchester, the response from senior politicians has been, at best, limited and lacking in imagination. 

The Conference played host to over two dozen housing themed fringe events, as well as receiving mentions in speeches from the Chancellor, Communities Secretary and  Prime Minister. However after nearly a decade at the top of the political agenda, the  debate sounds to many in the industry like the proverbial stuck record. 

In his Sunday afternoon keynote speech, the Secretary of State for Communities, Sajid Javid, made just four substantive housing policy announcements: 

  • Mandatory membership for every landlord of an ombudsman scheme, either directly, or through a letting agent. Giving all tenants access to quick and easy dispute resolution over issues like repairs and maintenance.
  • All letting agents to be regulated in order to practice. Letting agents would be required to satisfy minimum training requirements and comply with an industry code of conduct. 
  • New incentives for landlords who offer longer term tenancies. The Autumn Budget will contain a new set of incentives for landlords who offer tenancies of at least 12 months. 
  • Consultation with the judiciary on the case for a new housing court to streamline the current system and meet the aim of saving time and money in dealing with disputes. 

Speaking at a subsequent Conservative Home fringe event on housing, Mr Javid conceded that Government had failed to deliver the conditions for housing growth and acknowledged that without bold steps to deliver a major step change in building, the issue would count heavily against the Conservatives at the next election.

He also attacked the culture of Nimbyism which had stalled planning delivery  across the UK although provided no immediate solutions to the problem, which many believe was fomented by the 2007 Conservative Manifesto which promised to abolish local plans and the need for housing targets.  

Addressing the issue of viability he agreed that lack of transparency undermined  confidence in the system, although he defended the need for a flexible and  commercial approach. He also trailed plans for a forthcoming review of the process for land-use-value-capture to help fund infrastructure delivery – another vexed  problem which has been under active political debate for a number of decades  without resolution by any party. 

In his own speech to conference on Monday, Chancellor of the Exchequer, Philip  Hammond, announced a further £10bn funding to the existing Help to Buy scheme, stating it would help an estimated 130,000 homebuyers in coming years. 

The plans came under almost immediate attack from senior Conservative party figures including former Cabinet Minister and London Mayoral Candidate, Steven Norris, who called the proposals “economically illiterate”. Others criticised the plans for inflating  prices rather than deliver new homes. 

In a widely trailed announcement, on the final day of speeches, the Prime Minister just about managed to choke out an additional £2bn to  be added to the affordable housing budget and that councils would be encouraged to bid for funding to build new council and social housing, adding detail to a promise which first appeared in this year’s  Conservative Election Manifesto. What little shine that announcement may have had was soon tarnished by a Conservative Research official who confirmed at a post-speech press briefing that the money would deliver, at best, 5,000 new homes per year. 

Overall, the package of housing announcements has been received by many in the industry as lacklustre and lacking the aspiration and clout of Labour’s promise to build 1 million homes. In 1951, Prime Minister Winston Churchill challenged Harold McMillan to build 300,000 homes a year – a target the party leadership had been forced to adopt following a popular revolt by the membership and many MPs during the 1950  Conservative party conference. McMillan famously rose to the challenge, keeping the party in office for another 13 years. A feat which the current administration looks  somewhat unlikely to match. 

With the pressures of Brexit and a loudly ticking electoral clock it is difficult to see how these limited interventions can make substantive change in an industry which is  notoriously slow to respond to interventions.

Madano works with a number of clients across the Built Environment. For more information on how we can help, contact us here

Political Briefing – Labour Housing Policy

Political Briefing – Labour Housing Policy

Missed our briefing on the Conservatives housing policy? Read it here.

In keeping with the wider themes of the Conference, the Labour Party stuck to addressing the housing and planning agenda through the prism of social breakdown and market failure. The Shadow  Secretary of State for Housing, John Healey, did not deliver a keynote speech but the issue was woven through various events and  speeches. With the blackened shell of the Grenfell Tower looming large at all times. 

There were no new policy pledges or headline-grabbing announcements. In an unusual display of discipline, the Party stuck to the core policies set out in their May General Election manifesto and earlier mini Housing Manifesto – resisting the usual political urge to offer the sort of policy gewgaws that generally litter the auditoria of  political conferences. 

In his Leader’s address to conference, Jeremy Corbyn referenced the failing market but cleverly grounded his remarks in the human  impact of the problem. Rent controls, greedy landlords, homes unfit for  habitation, ballooning homelessness and the mounting fears of a young generation unable to access home ownership or even home rental were the key themes of his speech. On Grenfell specifically he confirmed that John Healey would launch a review of social  housing policy – its building, planning, regulation and management. 

Notably, particularly given the forthcoming London Borough  elections in May 2018, he attacked the swathe of estate regeneration currently rolling out across both Labour and Conservative Boroughs in the capital. Mr Corbyn promised that under a Labour government, existing tenants would be guaranteed the right to remain on their estate under the same conditions and that local authorities would have to win a ballot of tenants before estate renewal could proceed.

Shortly after conference, Shadow Housing Secretary John Healey, published a short article in Huffington Post adding clarity and detail to the broad themes of his Leader’s speech. The cynical interpretation might be that Healey was seeking to moderate and contextualise Mr Corbyn’s emotive comments and mollify the anxiety of local  authorities and the housing industry.  

On estate regeneration he confirmed that “These are not rules to tie the hands of  councils who are regenerating now under the pressure of Conservative constraints and funding cuts, but part of a package of measures that Labour in government will introduce to support the building of new homes to benefit local people.”

Specific promises included:

  • New flexibility on housing spending and receipts
  • New powers for compulsory purchase and land assembly
  • Additional regeneration funding

On the review of social housing he noted that the party would “be looking for the widest possible input, not just from experts but tenants, community groups and the public as we shape our social housing review to tackle the big problems that the Grenfell Tower fire means we must now urgently confront.” 

Whilst lacking the traditional headline grabbing announcements, Labour’s approach to the housing agenda at Conference was arguably successful in that it took an issue which for years has been couched in terms of complex policy arguments and grounded it in the concerns of voters across the economic spectrum.  

Whilst those in the industry might find this approach lacking in depth, shorn as it is of serious policy proposals to fix the problem. Nevertheless if it captures the imagination of non-traditional Labour voters, harnessing the same fervour that carried the  Conservatives to victory in 1951, it will have done the job.

Madano works with a number of clients across the Built Environment. For more information on how we can help, contact us here