Power Up: The framework for a new era of UK energy distribution

The Adam Smith Institute has published a research report I wrote for them, Power Up: The framework for a new era of UK energy distribution. From the press release:

The report … argues that new technologies such as smart grids and distributed energy production can revolutionise old models of energy distribution and pricing, in the same way that apps like Uber are disrupting traditional models of transport.

In a world of expensive of energy prices, the report suggests regulators should encourage experimentation with new technologies, rather than cutting them off at inception. Regulating the market too heavily – often justified by claims that consumers are being ‘ripped off’ or overwhelmed by the number of tariffs available – closes down consumer experimentation and prevents technological and economic progress, which keeps energy prices high.

The paper envisions a world of choices in the energy market; where smart meters that relay real-time price changes to encourage better energy use are just the beginning. The author, Dr Lynne Kiesling, imagines consumers being able to see where their energy is coming from, and to choose what kind of green-grey energy mix they want.

Most important, Dr Kiesling argues, is for OFGEM to adopt a structure of ‘permissionless innovation’ – which allows companies to experiment freely without being granted permission from regulators. In the early days of the internet, no-one envisioned a world of Amazon, iPhones and Uber; but these inventions were able to thrive, as there were not limited by regulatory barriers. OFGEM, Kiesling argues, needs to adopt a more relaxed regulatory structure that dismantles the barriers that have been created.

Increasingly throughout the economy we see how decentralized technologies empower us to make decisions and to automate our decisions, leaving us free to pursue other projects with our time. We also see how producer and consumer experimentation with new products and new combinations of products and services are the essence of a vibrant, value-creating economy. In electricity the electrons won’t change, but the applications and services we layer on top of the electrons and bundle with them are changing dramatically, and in ways that can lead to a cleaner and prosperous future if barriers to entry and to innovation are lowered.

ASI’s Charlotte Bowyer wrote a summary of the report in City A.M., and she made some trenchant points:

Digital sensors and two-way devices allow automatic, preset heating and lighting, while dynamic pricing and smart meters will allow households to adjust the type of energy they use with real-time changes in electricity costs; for example, switching to renewable power when it reaches a certain price.

These innovations can reduce waste, improve efficiency, save money, and allow households to move towards cleaner energy useage, tailoring a “green-grey” mix to suit their budget.

However, such technologies will only proliferate within the right regulatory environment – one which the UK currently lacks. According to a new Adam Smith Institute report – Power Up: The framework for a new era of UK energy distribution – the electricity market’s current model of regulation severely limits the level and rate at which large-scale innovations can occur.

The current regulatory model was borne out of the privatisation of a vertically-integrated industry, where everything from electricity generation and transmission to distribution was performed by a single utility. The future of electricity generation and distribution will be nothing like this.

And in supposing a natural monopoly and applying a static model of innovation, even well-intentioned interventions have an adverse effect on competition, creating an institutional framework in which supplier innovation is severely hampered.

I am pleased to be extending the application of the idea of permissionless innovation to the electricity industry, and I am grateful to the Adam Smith Institute for inviting me to engage in this research.