The creation of a Scottish public sector energy company is very welcome initiative, but the suggested model lacks ambition and is unlikely to tackle the failed energy market.
On 10 October last year the First Minister announced the Scottish Government's intention to set up an Energy Co. by the end of this Parliament in 2021. They commissioned consultants Ernst and Young LLP to prepare a Strategic Outline Case, which has recently been published.
The strategic case for Energy Co. is based on the significant challenges that exist in the Scottish energy market, including high electricity prices, a lack of consumer switching and significant levels of fuel poverty. The strategic case demonstrates that the creation of the Energy Co. has the potential to successfully address some of these problems.
Their analysis indicates that the pre-tax profit margins made in the retail energy market are limited. This may present challenges to the Energy Co. in a highly complex and competitive market. However, if the Energy Co. is able to provide competitive pricing, together with positive and trusted branding as a public provider, it would be well positioned to develop a sufficient customer base. Particularly with disengaged customers that would otherwise have remained on an uncompetitive tariff.
Energy Co. could also encourage energy efficiency more successfully than existing suppliers. Promoting energy efficiency as a way of reducing energy consumption, as opposed to reducing energy costs, is another means of tackling fuel poverty. Energy Co. also has the potential to support economic growth by supporting local energy generation and efficiency, using the lower cost of capital available to government and local authorities.
The paper suggests a number of delivery models ranging from using an existing supplier, a Government company or a hybrid option involving municipal energy companies. The operating model could be a simple 'White Label' branding of an existing supplier, to a full capability licensed company. The former would have low start up costs and risk, while the latter is more costly in year one, but has greater flexibility and operating scope.
In fairness to the consultants it may have been the brief, but the report is very modest in scope. There are also a number of uncertainties, not least the impact of Brexit and the effect that will have on the current market arrangements. Energy regulation is reserved to Westminster and while the Tories are taking baby steps in reforming the market, Labour is developing much more radical options.
Setting up another retail option in a crowded market is a very limited model. As with municipal energy companies, they need to be in generation and energy efficiency as well. I would also argue that distribution networks could be more local on European models, but that option isn't currently available. The 'Topco' model in the paper has some merits in developing common billing and other systems, but we should be wary of over centralisation, which would negate the innovation and localism of municipal energy.
Having energy efficiency as a National Infrastructure Priority hasn't added much so far, although the Scottish Government has just published a new Route Map to an Energy Efficient Scotland. In addition, one of the brand selling points of Energy Co. ought to be its low carbon offer. Sadly the paper is pretty light on this. The same can be said of how it deals with heat, just as important going forward as electricity.
Developing a new state Energy Co. within the constraints of the current energy market and EU restrictions will always be challenging. We need a much more radical approach to energy reform including public ownership of the transmission and distribution system, public investment in new forms of generation linked to a new industrial strategy, as well as public energy supply companies.
The risk in this Strategic Outline Case is that we end up with a modest dabble in the market that fails to address the real problems facing Scotland's energy sector.