Inaccurate Government figures, conflicts of interest and a shady network of activists have corrupted the Review of Electricity Market Arrangements
DAVID TURVER
As we have covered before the Government is considering changes to the electricity market under its Review of Electricity Market Arrangements (REMA). One of the main points being considered is whether we should move away from national wholesale electricity prices to a form of locational pricing. This would be either a small number of zonal prices or a more complex approach with perhaps hundreds of what are termed nodal prices across the country. The chief executive of Ofgem, Jonathan Brearley recently appeared on a podcast and said that “zonal pricing is the best way forward.”
Octopus Energy has lately stepped up its support for locational pricing too, with their Director of External Affairs, Clem Cowton claiming zonal pricing will fix our high energy prices. The official Octopus Energy account has also claimed (see Figure 1) that “independent and peer reviewed analysis by FTI for the independent energy regulator [Ofgem] found that locational pricing would reduce bills in all regions.”
But has there really been a robust and independent process that we as consumers can rely on? As we shall see, an in-depth analysis of the players involved and the reports that have been produced suggests that the process is fatally flawed because of a toxic mix of fundamental errors, conflicts of interest and a nexus of connected people asserting undue influence over the process.
We will begin with a presentation produced jointly by global professional services firm FTI Consulting (FTI) and Government sponsored Energy System Catapult (esCatapult) in June 2023. The presentation was used to support a series of workshops with Ofgem. The presentation (p40) calculated that CfD payments would be about £7bn per annum in 2040 under a national pricing model, but about £10bn in a nodal pricing model, an increase of about £3bn. But the underlying assumption for CfD strike prices (p39) was based on the Government’s Levelised Cost of Energy, which are currently only about half of what was awarded to new projects in Allocation Round 6 (see Figure 2).
The higher strike prices being awarded will massively increase the subsidies paid under CfD contracts compared to FTI calculations. If, for instance, market prices were £30/MWh and strike prices were £40/MWh, then the CfD subsidy payment would be £10/MWh. If strike prices rise to £80/MWh, then subsidies go up five-fold to £50/MWh. If market prices were £50/MWh, then a £40/MWh strike price would lead to generators paying back £10/MWh, but with strike prices at £80/MWh, the generator would receive a subsidy of £30/MWh. Of course, we pay these CfD subsidies through our bills so the calculation errors will directly impact customers.
FTI and esCatapult then submitted a joint report to Ofgem in October 2023. This report claimed £13-24bn of societal benefits would be delivered by nodal pricing or £6-15bn from zonal pricing between 2025 and 2040 compared to sticking with national prices. This report repeated (see para 5.87) the same mistake of relying upon the Government’s assumptions about the cost of renewables and using those as the strike price. Therefore, the original error under-estimating the cost of CfD subsidies was carried through to this second document.
Ofgem then produced its own Assessment of Locational Wholesale Pricing for GB report in October 2023. The report found that “locational pricing is likely to produce significant benefits for society compared to current arrangements.” The report mentions the term “FTI” on 193 occasions and the headline benefits (section 4.18) are simply a repetition of FTI and esCatapult’s flawed analysis. It is clear that Ofgem’s conclusions about the benefits of nodal or zonal pricing are entirely reliant upon the work of FTI and esCatapult. Octopus referred to this report in the evidence it gave to Parliament recently arguing for locational pricing.
In October 2023, Octopus also published a report on locational pricing. However, this report was also produced by FTI and as we covered before, famously claimed that some users would receive almost free electricity if nodal pricing were introduced (see Figure 3).
It is simply staggering that FTI can effectively claim that some users will get almost free electricity and overlook the full cost of subsidies being borne by others. In the small-print they admit their figures do not account for the cost of CfD top-ups (subsidies) or what they term intra-GB congestion rents – effectively the price charged to use internal transmission lines when the wholesale price differs wildly between zones or nodes. Ignoring these costs undermines their entire analysis.
So, what does all this mean? First, we have Energy Systems Catapult. This is one of the organisations in the Catapult Network that is sponsored by Innovate UK which in turn is run by UKRI that is ultimately funded by the Department for Science, Innovation and Technology. We have a Government-funded body producing joint presentations with FTI for the independent regulator Ofgem based on fantasy prices for renewable energy from another Government department. The regulator, Ofgem is then using the same flawed analysis to parrot the same fake benefits of locational pricing to advise the Government.
Now we turn to FTI whose report was heavily relied upon by Ofgem to produce its own report. At the same time, FTI was also working for Octopus. Of course, as we saw above, Octopus is one of the most vocal proponents of locational pricing and is regulated by Ofgem. It is quite astonishing that FTI was advising both poacher and gamekeeper on locational pricing. Many years ago, I held quite a senior position in a professional services firm and I believe that our conflicts of interest policy would not have allowed us to carry out work for both regulator and regulated on the same topic.
It is simply staggering that Ofgem’s report relied so heavily on FTI’s work when FTI was also working for Octopus. Did Ofgem know about this conflict of interest when it was producing its own report? If so, what did it do to manage this conflict and if not, why not?
Now we turn to another twist in the story. Lucy Yu has what one might term a portfolio career. Most notably, Ms Yu is the Chief Executive of the Centre for Net Zero, which is Octopus Energy Group’s captive think tank. Lucy is also a member of the Ed Miliband’s Clean Power 2030 Advisory Commission which will no doubt express an opinion about locational pricing. Lucy Yu is also a non-executive director of E3G which is funded by a range of green philanthropic organisations including the Children’s Investment Fund, the Bill and Melinda Gates Foundation and several Government departments. E3G is owned by Nick Mabey whose time as a senior advisor in the Prime Minister’s Strategy unit in the early 2000’s overlapped with Ofgem’s Jonathan Brearley. E3G also lists Bulb energy as one of its funders which was of course bought by Octopus Energy. E3G has produced its own report calling for locational pricing citing the flawed October 2023 report from FTI discussed above as part of its justification. It certainly looks like the tentacles of the giant pink Octopus stretch very widely indeed.
If you only read the material produced by Octopus Energy, its proxies, FTI and indeed Ofgem, you might think that locational pricing has almost universal support. However, there is significant opposition to locational pricing. In an open letter to Ed Miliband last year a consortium of groups including MakeUK, Ceramics UK, RenewableUK, Solar Energy UK and Scottish Renewables warned that zonal pricing would undermine investment in low carbon energy and would penalise energy intensive industries. SSE also commissioned its own report from LCP that warned of increased prices if locational pricing was implemented. SSE’s Group Head of Policy, Alistair McGirr has recently attended a DESNZ seminar about REMA and has publicly expressed his concerns about the plans.
This has not stopped CEO of Octopus, Greg Jackson dismissing critics of locational pricing as “bloated incumbents.” In a supreme twist of irony, Greg Jackson was on Question Time last year complaining about the impact on democracy of tycoons owning propaganda platforms and he also bemoaned the major threat to society from misinformation.
The whole REMA process is built on sand. The first error is that the supposed benefits of locational pricing rely upon fake Government figures about the cost of renewables. Second, there are obvious conflicts of interest with the main advisor to Ofgem also working for one of the main advocates of locational pricing. This obvious conflict clearly taints the Ofgem report. Finally, it certainly looks like there is a network of activists connected in one way or another to Octopus, that have infiltrated the REMA process in an attempt to get their own way.
The Government’s Generation Cost report should be withdrawn because the faulty figures within it are being used to support fundamental decisions about how the electricity market should work. The rest of the REMA process should be scrapped and begun again using realistic costs and advisors untainted by conflicts of interest.
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This article (REMAgate: The Tangled Web at the Heart of REMA) was created and published by David Turver and is republished here under “Fair Use”
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