Energie thermostaat

Energy market must up its regulatory game to restore consumer confidence

Opinion 2 minuten

The energy market must ensure that end users are not adversely affected by power suppliers going bankrupt, because such harmful consequences undermine consumer confidence while for the energy transition to succeed consumer engagement is critical.

by Bert Willems

In recent months, high energy prices caused a handful of power suppliers to go under. These suppliers had promised consumers fixed and relatively low energy rates but could not make good on that promise. Buying energy on the volatile short-term spot market, they were running a higher risk: rising energy prices would compel them to sell at a loss and their financial buffers were inadequate to absorb the price spikes. Their subsequent downfall harmed their customers. True, their power was not cut off and they were given new contracts with other power suppliers, but they often had to pay premium rates for continuity of service. And consumers who had opted for fixed rates in an attempt to hedge against price fluctuations had gone to the effort and expense in vain.

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The occasional power supplier going bankrupt is not a catastrophe and the situation is not unique to the Netherlands . But when end users are disproportionately inconvenienced, market confidence is eroded at a time when consumer engagement is essential to a successful energy transition. In the not so distant future, customers will be expected to generate some of the energy they use themselves, to adjust their consumption to wholesale prices, and to not charge their car batteries all at once. These expectations are realistic only if consumers conclude contracts and manage their risks with confidence. That confidence, that trust, has now been shaken. That is why the end user market must be regulated anew.  

Consumer engagement is essential to a successful energy transition

Lessons from the banking sector

The banking sector offers key learnings. It, too, relies on trust, and for its customers, too, it is hard to gauge how prudently their money is being handled. That is why such safeguards as capital adequacy requirements and a deposit guarantee scheme apply.

Similar measures should be introduced for the energy sector:

(1) The regulator should monitor the risks power suppliers take and require them to have adequate financial buffers for uncovered risks.

(2) The sector would do well to cooperate and create insurance that pays out when a participating power supplier fails, compensating consumers for the price difference between their old and new contracts.

These measures will help restore consumer confidence and enable them to hedge against price risks.  

Resilient and flexible energy system

But price risk control is not the only factor that is relevant to the Netherlands. A resilient energy system must also be flexible: it must be able to absorb external shocks. This can be done systemically, for example by investing in technologies that convert high-calorific gas into low-calorific gas, but consumers also have a role to play. Consumers could reduce their consumption or shift their consumption to other times or technologies. A fixed-price contract holds no financial incentive for them to do so. Future-proof regulatory adjustment ensures that consumers who use energy frugally in times of scarcity can feed the surplus of contracted power back into the grid in exchange for financial compensation. 

The energy transition is a long-term challenge and while it relies heavily on technological innovation, regulatory innovation is essential, too. All of the advantages, benefits, and risks of the transition must be properly allocated to the government, consumers, and businesses while leaving ample room for innovative initiatives.  

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