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Social value and the energy sector

© Shutterstock / 3rdtimeluckystudioImage representing social value.

Nathan Goode, Chief Strategy Officer, Social Value Portal takes a close look at the energy sector and maintains that embedding social value would provide a solution to the current crisis.

A search for Centrica’s annual report takes you to this bold statement: “At Centrica, we’ve been at the forefront of supporting homes, businesses and communities with their energy needs for more than 200 years.”

News perhaps, to those who would date the birth of one of the UK’s largest energy companies from the privatisation of British Gas in 1986. But there is a corporate lineage that goes all the way back to the Westminster Gas Light and Coke Company, founded in 1812.

It’s good to know Centrica remembers its local roots so well; it will need to rediscover them in the years to come.

Fast forward two centuries. Where were you in August 2012?

If you were one of the lucky ones, you were in London, taking in the 2012 Olympics, or even volunteering, one of the many success stories of those feel-good Games.

In 2012, oil was around $100 a barrel, with talk of Peak Oil and fossil fuel scarcity powering an increasing appetite for renewable energy. Fuel poverty was a real concern – around 4.4m households (about 20%) were estimated to be in fuel poverty in England.

By 2017 oil had dropped to about $50 a barrel. But that same year, Professor Dieter Helm still predicted the end for traditional, vertically integrated, energy utilities.

“The conventional electricity utility model”, he declared, “is gradually going bust”.

And there was progress on fuel poverty – the number had dropped to 2.5m English households (10.9%).

More pain to come

Five years on in 2022, the price of oil is pretty much back to $100 a barrel. But it certainly doesn’t feel like 2012. Perhaps if in the intervening decade we had built a flexible and resilient energy network for the UK, capable of withstanding market shocks and smoothing the peaks and troughs for consumers, we wouldn’t now be facing spiralling energy costs beyond our worst nightmares.

Take a look at this chart, which tracks wholesale and retail energy prices since 2012.

We know prices are shooting up, but the really scary bit now is the gap between wholesale and retail prices. The retail price is already painful, but it is nowhere near enough to compensate for the price increases in the system. There is more pain to come.

The other thing this chart shows is that the gap between retail and wholesale prices has been slowly widening since 2012 – from a consumer perspective, but then the market appears to have been getting less efficient anyway.

Big 6 control around 83% of the retail markets

Dieter Helm talks of a brave new energy world of disaggregated generation and energy supply. He may well – eventually – turn out to be right. But right now, the industry looks much as it has done for years. We still have a “Big Six” of energy companies that control most of the retail market.

Although SSE and nPower are gone, and two new entrants (Ovo and Octopus) have taken their place alongside the old Big Four of Centrica, EON, EDF and Scottish Power, the new Big 6 control around 83% of both the electricity and the gas retail markets. That is a lot of power concentrated in a few hands.

Ovo and Octopus are rare challenger brand success stories, though. A staggering 52 new entrants went bust from 2016 to 2022 (28 last year) serving around 20% of the retail customer base. And that’s not including the ones that quietly threw in the towel behind the scenes.

So, what’s this all got do with social value?

Incidentally, 2012 was the year the Social Value Act came into being (in hindsight, that was a pretty good year!).

Market energy pricing is rampaging out of control like a forest fire. A charity has warned that more than 8 million households are expected to fall into fuel poverty, following the October price cap increase. That’s one third of UK households. That’s crazy. Something is clearly broken.

At the same time, our ponderous energy industry architecture is slowing down our ability to switch to more agile, resilient, decentralised and low marginal cost solutions. Another anniversary – 20 years since the introduction of the Renewables Obligation in 2002. We have had two decades to fix the UK energy system.

If the solution to this crisis (which will not be short-lived) is to come from within the energy industry itself, social value has to be part of the answer. It has to be collective and radical social value – much more than just lip service to corporate social responsibility by individual companies. It will mean a total rethink of the function and purpose of energy companies.

Time for action. And time to get back to your roots.

Nathan Goode is Chief Strategy Officer at Social Value Portal

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