Can Open Energy replace price caps?

I was a discussant at one of this year’s Beesley Lectures, responding to remarks by Ofgem’s Chairman Martin Cave under the title “How long will retail price caps last? Can they be replaced by Open APIs?”. Here is a lightly edited version of my remarks.

Whether energy price controls work or not, it may be politically very difficult to remove them. Although they’re supposed to be a temporary measure, with a sunset clause making them expire in 2023, that will likely be one year after a general election where both parties may pledge to keep them, whatever the evidence says about their effectiveness.

Because of that, it is vital to introduce other remedies that make the market work better so that, if price controls do become de facto permanent, they might also be irrelevant. A demand-side remedy that makes data more freely available for energy customers and third parties to use might do that.

Open Data and open APIs

Making information standardised, machine readable and publicly available is what I refer to broadly as open data. How you deliver that data can matter a lot too — putting a PDF scan of a bus timetable does, in principle, make that data “open” but it’s difficult to use as well.

An excel file might be a lot more useful than that, but these are still basically snapshots in time — not much good if it’s data that’s updated frequently. APIs, or “application programme interfaces”, are a standard way of delivering streams of data that change frequently, which other users and applications can plug into other applications for use there.

Closed and open APIs are both extremely common. When you check your email on your phone, your email app is using a secure closed API to access the server your email is stored on. When you ask Citymapper how to get home, it accesses TfL’s publicly available APIs, and APIs from other sources like Uber, to figure out the best routes home, and how much they’ll cost.

Because APIs can be updated in close-to real time, they offer more uses for sharing data with third parties on an ongoing basis. This is in contrast to the static CSV files that the original Midata was based on, which gave a historical record of a person’s energy consumption but did not allow for ongoing data sharing, and which was not adopted widely.

Using data to drive competition

There are two trends that make open data remedies desirable in some areas.

The first is that price discrimination and increasing choice in markets have made markets more complex and harder for consumers to make meaningful price and product comparisons in.

When taking out a mortgage, for example, you have to choose between different kinds — fixed, variable, trackers and discounted trackers — with different term periods, different early repayment charges, different rates and relationships to the Bank of England base rate, and so on. These kinds of decisions have proliferated across many markets and have increased the costs of making informed decisions for many people.

The second trend is that software can use user data to provide highly tailored services, including better price and product comparisons. It may be useful for a small business to be able to share its books with a lending platform, to demonstrate its creditworthiness, for example. It may also be useful, when product offerings are complex or numerous, for customers to be able to provide their own data to be matched with the best product for them.

Often this data is not available for users to share with other services. But for a few reasons we wouldn’t want to force every data holder to open their data up for customers to share. Open data can be useful, and can make markets work better, but we do not necessarily want to force all data to be open.

One reason is that the promise of having control over user data may incentivise firms to invest in better products. Data is not like oil — the supply of data is growing enormously every year, and data is non-rivalrous and non-consumable, among other things — but it is useful for things like targeting advertising, designing better products, and training machine learning algorithms on. Having exclusive access to customer data may give a firm a substantial advantage over its rivals.

Another reason to be cautious is that there are usually costs involved with sharing data. The best people to decide whether those costs are worth bearing are the users themselves, and in a competitive market they will be able to choose between firms that offer data sharing at a higher price, or firms that don’t at a lower one. Even firms traditionally seen as having few viable rivals, like Facebook, have made it possible to export most of your user data.

But these may not be sufficient in markets where competition is weak and new entry is difficult. Especially in markets that existed before the rise of IT and software, users’ data might be bundled up with other transactions and unavailable to third parties even when the costs would be worthwhile to most consumers.

This was one reason the CMA introduced Open Banking after its retail banking market investigation. But these factors are present in energy as well — in its energy market investigation, the CMA was clear that low levels of customer engagement and switching were among the most important causes of dysfunctionality.

Research by both Professor Amelia Fletcher and Professor Catherine Waddams Price suggests that an important cause of low switching levels is that customers are uncertain or ignorant about the savings they could make from switching, and consider the process a time-consuming hassle.

This cuts against the belief that people do not switch because they are poor or technologically inept — these may explain some of the phenomenon, but there are clearly many people who could switch but choose not to. In fact, one reason older people switched less was precisely that they thought the benefits would be lower.

So if the switching process could be more certain for customers about the benefits they would get and simpler, we may see more of it taking place.

Innovation in the energy market

We are moving more and more energy consumption towards electricity — thanks to the move towards things like electric cars, heat pumps, and battery storage, electricity may rise from being 22% of Europe’s total energy consumption now, to 60% by 2050.

Simultaneously, the roll-out of smart meters also make time-of-use pricing possible — where the amount charged varies over time, so that prices are higher when demand is relatively high, like in the evenings, and prices are lower when demand is low, like in the middle of the night.

These are mutually reinforcing trends. Time of use pricing makes it more economical to own electricity-powered devices because they’ll be cheaper to charge at off-peak times. This is, I think, an under-appreciated benefit of smart meters, and a reason to think that they will eventually become common even if the current roll-out has had its difficulties.

This makes renewable generation much more economical as well, as people will be able to take use of excess generation during off peak times. Going a step further, real-time pricing — where the cost changes according to supply and demand there and then — would make renewables like wind and solar that have intermittency problems more viable as well.

A recent study from Hawaii suggests that time-of-use pricing could significantly shift the calculus in favour of renewables as I’ve outlined. That study estimated that the electricity generation mix could be 79% renewable energy by 2045, absent environmental interventions. Once you add something like a carbon tax to price in the costs to others of using fossil fuels, you could be approaching 100% of the mix.

Open data as pro-competition market remedy

Bringing these threads together gives us, I think, quite a strong rationale for an open data remedy in the energy market.

What I have proposed under the name of “Open Energy” is a three-step reform:

1. To make market data like tariffs available to allow customers to access all offers on the market
2. To gives customers control over their smart meter data, so that they can navigate and assess what the best offers are for them, in a meaningful way
3. To give customers the power to allow intermediaries to act for them, to lower the amount of effort they have to expend to shop around.

The simplest application of this reform would be to make the price comparison system less uncertain. You plug in your smart meter information to Compare the Market, and you get a price projection that is highly tailored to you. Maybe even one that is guaranteed, within reason.

The benefits of this under a fixed tariff system would be modest, but thanks to the easy transfer of information they would be non-negligible, as anyone who has had to look around for an old energy bill to find their annual usage will agree.

But under a time-of-use system the benefits could be quite high, with quotes given based on past usage, perhaps adjusted to reflect other people’s usage as well, along with quotes or tariffs offered if the customer also installed an electric vehicle or home battery to allow them to shift their electricity usage to when it’s cheap.

Effective demand management is one of the key benefits from open data in energy, and smart home devices need data to know when to run, too. An electric car that charges during off-peak periods needs to know what your tariff and other use is.

Without an Open Energy approach, there is a real danger that suppliers will either come to this far too late, or do so in a fragmented way that does not work for customers. Better to set out standards now.

This could have the advantage of lowering the cognitive load on customers even as the market itself becomes much more complex.

Time of use tariffs may not even be something that ordinary people have to think about. Reliable access to usage data may allow firms to handle most considerations for you — installing a home battery that that company manages the charging of, and offering a flat price to the customers themselves.

Agency powers for intermediaries should be part of an open energy package as well. These would allow customers to delegate switching powers to a company like Flipper or Labrador that would move them between suppliers according to whoever is offering the best deal for their particular energy usage.

There are clearly some concerns about this just shifting market power from suppliers to intermediaries, but there are revenue models that could avoid this already being tried out by some of these firms, like flat rate payments. Or they could charge a fraction of the saving made against a benchmark, so they earn more the bigger the saving they’ve found is.

Either way, given the amount of increased engagement that this would take, this strikes me as a good problem to have.

Other applications may be simple, like budgeting applications that prompt you when you’re using a lot of energy, or more sophisticated, like applications that plug individual households into the grid to lower overall load balancing costs.

Can APIs replace price caps?

In the longer run, as more data is opened up across different markets, financial platforms like Monzo might handle all of this for their customers, and could generate useful insights by combining information from many customers across different markets.

There are two potential challenges with the approach I’ve outlined.

The first is if nobody uses it. Disengaged customers may remain disengaged no matter how much better the system is — although I would note that one extra feature of the collective switch trial was that the switching process was extremely simplified compared to usual, so this may be evidence that simplification does work on currently-disengaged energy customers. Certainly the high cost of Open Banking compared to the, so far, low take-up is a sign that even if you build it they still might not come.

The second challenge is if some people do all this, and end up exacerbating inequalities in the market even more.

This is a harder problem to grapple with. If Open Energy makes the market more efficient and competitive, and boosts innovation, but produces less equal outcomes as well, then reasonable people can disagree about whether it’s worthwhile.

This is one reason that I am reluctant to say that it could be a wholesale replacement for other approaches — but rather that, if we try it and get lucky, it might be one that makes them unnecessary.