Written evidence submitted by the Institution of Engineers in Scotland (WIN0012)

The Institution of Engineers in Scotland is a multidisciplinary organisation with members drawn from all engineering disciplines in industry, consultancy and academia in Scotland.  It was founded in 1857 to encourage the sharing of knowledge between professionals at a time when engineering was progressing at a great pace and practitioners needed to keep up to date with recent developments.  A lot has changed in 165 years but the benefit of collaborative information exchange remains as strong now as it was then.

We asked our members for their opinions on the call for evidence on preparing for the winter and received a range of responses, as would be expected from a diverse group of engineers with a variety of experiences.  Some of their thoughts and feelings about the call are summarised below.

  1. What role did the UK grid play in the high domestic prices of winter 2022-23?

It seems that allowing electricity prices to rise in proportion to gas price rises was fundamentally wrong.  This is not really the fault of the grid – “don’t shoot the messenger” but the system of pricing that resulted in the high domestic prices was also partly driven by the use of gas for generation while wind source was being curtailed.

  1. What more could have been done to prevent price shocks being passed to consumer bills?

Creating a pricing model that correct captures the past and future costs of all types of generation and charges consumers appropriately is essential.  For example the true cost of wind power is not only the operating and maintenance cost on the day that it is windy but the cost of owning and operating the plant that will step in on the day that is not windy.  This seems very complicated but it could immediately be implemented by charging for wind sourced electricity based on the O&M cost at the time of generation plus an intermittency charge based, say, on the previous two weeks of actual operating data, minus a loading incentive (perhaps only available to certain consumers for example for charging electrical vehicles overnight) to give an aggregate unit cost that was only what it was likely to cost to run the system in the long term while encouraging helpful consumer behaviours in the instant.

  1. How should energy companies respond if customers cannot pay their bills and what actions should they not have recourse to?

They should be required to consider each case on its specific circumstances.  They should be able to use smart meters to set a maximum daily consumption as a first step and should be able to apply for government support funding (or allocate some of their own funds) to a hardship fund either to pay that minimum or to fund any excess over the minimum.  They should not be empowered to break into people’s homes on the basis of alleged non-payment, particularly when that could be result of an administrative error by a third party.

  1. Has Ofgem got its priorities right in addressing customer protection?

No information to comment on.

  1. How effective is the Government's approach towards supporting the sector and delivering a functioning energy market?

Based upon press reports and government statements the energy market seems to be seriously dysfunctional but it is difficult to say what’s wrong in detail.  It might be the suboptimisation that is bound to occur by leaving the operation of a strategic national asset to market forces which will always ensure that money flows away from the enterprise and reduces the amount of capital investment in the system.  This is not only the case for the energy market; the same thing seems to be happening in the water supply and waste water treatment businesses where large company profits and large shareholder dividends are announced at the same time as lack of investment is creating operational difficulty.  Government ought to be able to require that dividends and bonuses can only by considered once a sufficient cache for reinvestment has been lodged, with the size of the cache being stipulated by government who after all have given the companies licence to use our national assets for their profit.  The government statements about windfall taxes had a very serious adverse effect in this regard.  It was said that government couldn’t impose a “windfall tax” because this would discourage potential investors.  That is complete nonsense stemming from a misrepresentation of a “windfall”.  By definition a windfall is something that exceeds expectations: investors would only be driven away if they had been counting on making such egregious profits and were prevented from doing so.  If that is really the case then they are definitely not fit to take control of our national assets.  A windfall tax is by definition taking additional resource from profits which far exceeded expectation.  It still leaves the company returning a better than expected result.

  1. Is the legislative framework on pricing controls suitable for protecting consumers?

No information to comment on.

August 2023