Why the liberalised energy supply market won't offer effective balancing of renewables
And how public ownership of energy suppliers can do the job
Everybody knows - or should know - that as the proportion of variable supplies of renewable energy increases we need better means of balancing them with demand. This will be done partly by encouraging consumers to alter their demand patterns. Yet what is not readily acknowledged by the neo-liberal imbued people who run or advise the energy system is that there is a basic contradiction between liberalised energy supply arrangements and energy security.
Our liberalised (and privatised) electricity supply system is ill-suited to produce the electricity balancing services that we need. Patterns of consumer demand should be shifted away from the times when there is less wind or solar and towards times when there is, or at least in stored form, more renewable energy. Monopoly public ownership of energy supply (note: as distinct from energy generation) offers advantages in balancing renewables compared to liberalised electricity supply markets. Nationalisation should, in my view, involve a monopoly supplier for each domestic energy consumer.
Essentially, liberalised markets work by each supplier trying to serve their interests, but what they do not do is serve the national interest of providing secure energy supplies. We saw this during the gas crisis where reliance on liberalised markets to build gas storage capacity failed because it was not in individual companies’ interests to build much of them, despite it being very much in the national interest.
Indeed, there is no reason for having a competitive domestic electricity supply system quite apart from the issue of balancing renewables. As I argue in my forthcoming book ‘Energy Revolutions, Profiteering versus Democracy’:
‘the costs (to the alleged ‘competing’ energy suppliers) of trying to market to many small consumers are more than any gains that can be made by the companies. Moreover, many consumers are not sufficiently interested in playing the market, which further reduces the utility of the so-called competitive arrangements. Indeed, why should consumers have to spend their time chasing deals on the internet? The majority would prefer not to do this, and it leaves the suppliers using loopholes in regulations to penalise loyal consumers. This is demonstrated in the UK by the fact that the majority of consumers do not bother to switch suppliers. Bringing in retail energy supply into public ownership should be cheap for the state to achieve since the companies involved have few tangible assets’ (page 20-21)
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My book goes on to argue that: ‘A crucial shortfall in the liberalised market arrangements is the difficulty in organising effective demand shifting through time-of use tariffs …………(i.e., varying electricity prices according to half-hour trading). This is important to balancing fluctuating renewables. It is no good if regulators simply assume that competing electricity suppliers will offer half-hour time-of-use tariffs as an option for the consumer. This has to be organised through offering incentives to all consumers to engage in demand flexibility; something that is unlikely to happen if only some suppliers offer an effective demand-side flexibility service’ (page 21)
An especially damning problem with trying to organise effective demand shifting in the domestic retail system is that whereas some suppliers (currently led by Octopus) can organise time-of-use-tariffs, such activities can only release part of the potential for demand shifting. This is because of the ‘free rider’ effect. If one supplier achieves demand shifting, electricity prices for all consumers will fall. That in itself limits the economic gains and incentives for the supplier who is offering what should be half-hour based time -of-use-tariffs. The suppliers in a liberalised market will only strive to shift demand up to a certain point short of the national balancing interest. This is because the financial gains will be shared by other ‘free riding’ suppliers, whose prices will also fall.
It follows that a monopoly actor, which can act on behalf of all consumers, can maximise the amount of demand shifting that can be done. A monopolist can garner the full rewards of the reduction in wholesale power prices that results from demand shifting. It therefore has much greater resources to incentivise consumers to shift their demand from periods where there is a lot of wind and sun (or battery stores of the same) to times where there is less renewable generation.
Of course this is only going to happen with a regulated requirement for flexibility and appointment of the right managers. But there is much greater scope to encourage a much broaders and deeper range of DSM (demand side management) measures in a national monopoly electricity supplier compared to our current liberalised market.
A big pointer towards the truth of this proposition is that an effective (so far small) programme of demand side flexibility services (involving half hour savings sessions) has been organised by the National Grid Electricity Supply System Operator (NGESO). See here. This ran over last winter. This was only possible because NGESO is a monopoly body. The NGESO can defray the costs of the incentives it offers individual consumers onto the shoulders of all consumers through a small levy.
As the proportion of renewable energy increases, the amount of flexibility services that need to be put in place increases. The liberalised electricity market will not be able to deliver the potential of demand shifting that is viable if the national interest is taken into account. The so-called liberalised electricity market has already had its failed competitive system curbed by the consumer price cap (introduced in 2019).
There has to be a big increase in national intervention to ensure demand flexibility. Our liberalised market already exists in a partially embalmed state by virtue of the price cap. However, it will become even more mummified because the NGESO will reduce the relevance of so-called liberalised market even more. It would be best to bring into public ownership and organise it effectively so that a monopoly supplier could cooperate efficiently with the NGESO. The reluctance of some suppliers to participate in flexibility services beyond their narrow perceived immediate interests will only slow down the energy transition. It certainly will not cost much, if anything, to nationalise domestic electricity supply. There are few assets to buy and the state will avoid having to bail out suppliers when they go bust.
The main thing that stands in the way of this pragmatic change in policy are the blinkers which energy system operatives have to wear to display their adherence to the religion of neo-liberalism. This ideology decrees that some form of trading through invented, unworkable, markets is needed even when it makes no sense. Let’s take off the blinkers.
When Octopus Energy tariffs shift thousands of homes out of peak, and the price drops for all participants, it doesn't matter that other suppliers can now sell more volume at a slightly lower price, marginally nudging the price back up. This is just how marginal pricing equilibria works.
The system still benefits from reduced peak demand, lower balancing costs, and more efficient dispatch.
Yes, a bit less windfall for Octopus but that’s precisely the point of a liberalised wholesale market: it internalises system savings in the price signal.
Consumers who don’t switch still pay less, because the entire system got cheaper to run (lower wholesale prices feed into lower fixed prices offered by suppliers).
Why would we complain that non-participants “steal” cheap electrons? If households want to save, they can sign up for time-of-use deals. If they don’t, they still benefit. That’s good public policy, not market failure.
Of course its easy to hand wave about evil suppliers working 'against the national interest'. Why don't we support the public monopoly mandating a total shifting on demand off of Sundays. We can all shift our demand to the other 6 days of the week and not pay anything on Sundays! That way we only have to pay for 6 days of electricity a week.
Once you start appealing to vague notions of the 'national interest', you can justify any absurd top-down directive. Why stop at Sunday? Maybe we should all boil kettles at 3 a.m. to support the grid. The problem with this line of argument is that it ignores both opportunity cost and diminishing marginal returns that prevent nonsense policies from being taken seriously in any real system.
The point of a market isn’t to oppose the national interest. It’s to reveal the cost of supplying electricity at any moment in time, based on actual scarcity and demand. If prices are high on Tuesday evening, that reflects something real, not sabotage by greedy suppliers. You can’t centrally plan demand away from expensive periods just because you wish it were cheaper. Mandating total demand shifts by fiat, rather than incentivising them through prices, destroys the very signals that tell us where and when flexibility is most valuable.