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Trust individuals and take more imaginative approach to consumer protection

Posted by Matthew Rhodes on 30 March 2012 at 9:50 am

When markets have large numbers of small businesses, all innovating and desperate to compete and survive, consumer protection becomes much harder. DECC (the department of energy and climate change) can monitor and fine the big six utilities relatively easily, but it’s much harder to control a market of thousands of local companies.

The key here is to be more imaginative and to trust end customers more.

Historically, most consumer protection schemes designed by government assume all end customers are highly vulnerable and uninformed, and that Whitehall has to act as their proxy and control as many aspects of the ‘customer journey’ and delivery process as possible. Hence with mechanisms like the Green Deal we end up with everything accredited (products, processes and companies) not to mention accreditation for the accreditors and two ombudsmen. The whole scheme is effectively designed around centralised consumer protection. This approach creates costs and barriers to entry for small firms, and pushes up the minimum economic scale for any enterprise in the sector.

Worse, it acts to deskill the front-line delivery people and disempowers end customers. Both of these impacts are fatal to efficient low carbon energy markets because the two factors which have most impact on the energy performance of any building (accounting for more than half of UK CO2 emissions) are the attention-to-detail and skills of the construction workforce who do the retrofitting, and the commitment and engagement of the building occupants and users. In promoting national standards, DECC is seeking to answer an impossible question (“what is the best mix of technologies for any building?”) which is inevitably very expensive and time consuming (because it’s the wrong question) and undermines efficient market operation.

So with one hand DECC is designing mechanisms that act to make it very hard to deliver low carbon measures effectively, and then it is forced to fund separate programmes to encourage user engagement in energy efficiency – funding which would not be necessary if the original mechanisms had been designed to encourage such engagement in the first place.

Is it possible to design mechanisms which protect consumers without these negative effects? Of course it is. DECC just needs to think a bit more carefully about what they’re doing (and maybe the new Secretary of State can help directly here, as he’s just come from a post as Consumer Affairs Minister at BIS).

Here are some ideas to start with:

1. Drop the word ‘consumer’ all together in all DECC policies and communications. We are asking individuals and organisations to invest in energy efficiency measures, and the country to invest in a transformed energy system, so we should treat them and think of them as we wish them to behave, as investors. Let’s start talking about “investor protection” instead.

2. Reduce the reliance on national standards for building energy assessment and investments, and focus much more strongly on professional skills and accreditations. The performance of energy investments, particularly building energy investments, is highly sensitive to context, so the critical quality factor is the competence of the person doing the work (just like in medicine or financial advice). We need to replace excessive focus on accrediting methods and products, with a much stronger emphasis on accrediting individuals.

3. Increase the penalties for misleading investors. Coupled with a shift to individual accreditation and skills, we need much stronger penalties for mis-selling and abusing investor trust. Individuals should be struck off registers and prohibited from working in the sector again. Companies should be able to be fined significant sums, sufficient to put them out of business, and the directors should be liable for jail sentences. We need to create a strong message that speculators and chancers should not enter the market.

4. Give investors power and incentives to choose long-term quality suppliers. For all its design and implementation faults, the feed-in-tariff scheme includes one over-riding virtue, which is that it pays investors simply in proportion to the number of green kWh generated, measured directly through a meter. There is a direct link between the policy objective and the measurement and incentive system. In other words, the higher the quality of the work, and the better the system is maintained, the more money flows to the system owner. The consequence of this is (after a little volatility while the market learns how it all works) that investors do a lot of the accreditation and quality assurance for the government, because it is in their direct interest to do so.

In contrast, most previous government mechanisms to encourage investment in anything in this sector have reduced to some form of grant scheme. Grant schemes rarely link eventual performance to the quality of the work effectively, as all the effort goes into the award process. They encourage applicants who are good at completing forms, not ones who are best at delivering and managing successful projects, and there is no incentive to make sure any investment is well-maintained over the 20-40 year life of many energy assets.

5. Hold your nerve. People aren’t always as stupid as the government fears. For example, in the recent feed-in-tariff gold rush there was much hype and rhetoric around cowboys offering “free-pv” schemes which exploited end customers and secured excessive returns for the financiers and speculators. In practice, most customers (particularly in the social landlord sector where Encraft was working) were wise enough to consider what was on offer carefully, analyse it, and come to the conclusion that they would be better off funding and managing their own scheme.

With new markets and innovation, the government should expect a period of market learning and settling down, and avoid knee-jerk regulation. Stronger penalties for mis-selling and making a few early examples should help. With more emphasis on incentives for individuals to take responsibility themselves for making sure they get quality work, DECC can also shift most of the investment it makes in exhorting people to engage into helping educate them as strong and informed investors – this will always be the most efficient (and cheapest) way to build a long-term resilient marketplace.

This article was first published on Encraft Viewpoints 

Photo by Andrew Michaels

About the author:

Matthew Rhodes is chief executive of Encraft

If you have a question about anything in the above blog, please ask it in the comments section below.

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