Policy, regulation and public interest outcomes in energy and water: navigating a disrupted world

The Fourth Industrial Revolution. Climate change that may exceed 1.5° warming unless 'rapid and far-reaching measures are taken.'What Michael Gove has called 'the unfrozen moment'.

What do these three disruptors – technological, climate and societal - mean for the UK energy and water sectors and what challenges do they pose for policy makers and regulators?

Technological change and digitisation are causing disruption across the economy. Much of this is clearly positive.In energy and water, digitisation is enabling increasing targeting and personalisation.With more data companies can now tailor services to meet individual needs.Multiple experiments can more easily be run to trial and develop new approaches that better fit our requirements and are in tune with actual behaviours.

Communities can use new tech to help them develop services that meet local needs and, with distributed energy, are bottom up and in their 'control' rather than top down and one size fits all.And new tech such as hydrogen in energy, fertigation in water and heat from sewage can open up cross vector / whole system solutions that may deliver wider benefits.

All good.However, digitisation can also lead to increasing cost reflectivity and the unwinding of cross subsidies that may have previously protected certain social groups.At the same time, many of the people in these groups may be seeing their livelihoods challenged by insecure and temporary jobs, zero-hour contracts and increasingly by automation, robotics and AI.

Digitisation also enables differential pricing. This may adversely impact those who are unable or unwilling to shop around.Increasing tariff complexity may result and it can be difficult to assess the assumptions and basis on which the AI that drives some of these prices and offerings works. This may have limited impact if it was only one sector. However, if experienced across essential services, it may have a cumulative negative affect.

New technologies are enabling challenger businesses to more easily enter the market.This can be great for innovation, choice and diversification. But these new businesses may not be subject to the same social and environmental obligations as existing players.For incumbents and for investors, existing assets may become stranded. And without open systems and inter-operability, different actors may not be able to fulfil their potential.

Whilst early adopters and those with the resources to buy 'enabling' kit, EVs etc may be able to benefit – those without broadband access and skills, on low incomes, in some rural areas and many living in the private rented sector may not so easily be able to take advantage of the smart world.Sticky customers may end up picking up the tab for others.

Although the global impacts of climate change are not always as immediately obvious as those from technological change, in our complex and inter-connected world they are already being – albeit sometimes indirectly - felt.Yes, the green economy can lead to new exciting jobs and some small-scale enterprise. However, the costs of adaptation and mitigation are likely to increase affordability pressures, and in some areas more than others. As demand-side measures become more prevalent, and peak / seasonal tariffs are developed, once again, those without access to smart tech may be left behind.

As we experience more extreme and unpredictable weather, shocks to the system are likely to have the greatest impact on people in vulnerable situations that don't have a financial cushion to fall back on. The 'Beast from the East' freeze/thaw impacts point the way.

Society itself is also going through significant disruption and is becoming increasingly fragmented and polarised. There is now a wide spread perception that we don't all 'play by the same rules' and that the institutions that are meant to protect and serve the people are remote, rigid, sclerotic and no longer fit for purpose.That the root causes of the 2008 Financial crisis and the EU referendum have not been sufficiently addressed with power still concentrated in the hands of the few.

As a result, there is rising dissatisfaction with the 'system.' The 'establishment' is increasingly seen as ineffective in the face of events and corporate collapses such as the VW emissions scandal, BHS, the Panama Papers, Carillion and Grenfell.Across the economy there is a crisis of legitimacy and accountability.As we have seen, even charities (such as Oxfam) and the NHS (think Gosport hospital) are not immune.

In this febrile environment, social media is giving rise to new voices: the young, the previously unheard and those willing to take an extreme view.Shock-jockery attracts and retains audiences and sells. These new platforms and assertiveness are morphing and evolving at the same time the energy and water sectors need to re-think communication if they are to really flex demand-side muscles in order to manage future costs.

Regulation in the eye of the storm

Taken together, these three disruptors – technological, climate and societal - are blurring the boundaries between sectors on public interest duties, outcomes and freedoms, creating and reshaping 'externalities' and challenging institutional remits and governance.

The old divisions between consumers and citizens are being blown apart; it is no longer clear where the lines between economics (the field of independent regulators) and politics (the domain of policy makers) should begin and end.The neat roles and responsibilities that pleased the often tidy and technocratic minds of accountants, economists and engineers are melting away.

Sector specific independent economic regulation sits right in the eye of this storm.The status quo is no longer an option.In our turbulent and shifting society, five fundamental questions are now being asked of the future of regulation:

  • 1.What does efficiency look like - when:
  • a)the boundaries and way of framing the problem / market / sector are changing; and
  • b) more social, integrated and circular business models are increasingly needed?
  • 2.How important is optimal efficiency in essential services compared to a focus on relative benefits and distributional impacts?
  • 3.What weight should be given to wider factors? Crucially, social and environmental.
  • 4.How should risks and costs best be pooled in terms of who pays for what, when and how – national taxpayer, bill payer, specific communities or peer to peer?
  • 5.Given the speed and pace of change, how to best use data – real time or historic - to solve emerging problems – and not stay focused on tackling yesterday's issues?

And for each of these questions: what in this new world should be the respective roles of government / the state, the devolved governments, local government, regulators, companies and consumers / citizens?What role should collective solutions play compared to giving individuals the freedom to make their own decisions?And where does this leave more technocratic approaches?

This is all clearly complex and highly political.But if we therefore brush it aside and put it in the 'too difficult' box, we run the risk of foreclosing future options and reducing the time and space for considered debate. If key actors don't speak up and explain their thinking and what they plan to do outside of the regulatory 'bubble', calls for more extreme solutions are likely to grow.

Sustainability First considers that in order to navigate our way through these complex questions we need to stay focused on the 'desirable' long-term public interest outcomes for the sectors.Our New Energy and Water Public Interest Network, New-Pin, identified these as being: VFM; quality services; clean services; resilience; place-based well-being (think Industrial Strategy); and fairness (within and between generations).

New-Pin also identified that policy makers and regulators can't deliver these outcomes on their own.Our new major Fair Futures project is exploring what more energy and water companies can do to demonstrate corporate leadership in anticipating change so that they are better able to address the politics of fairness and the environment in the sectors.In the Autumn we will be publishing a straw-man 'Sustainable Licence to Operate' to outline our early thinking in this area.We will then 'road-test' the straw-man with key stakeholders and against good practice from other sectors and overseas.Watch this space.