On March 20, 2024, Ofgem, the UK's energy regulator, announced that £4.3 million in financial assistance from penalties for non-compliance with market rules would be distributed to 22 organizations fighting energy poverty and climate disruption. A good public relations operation, but highly questionable in terms of collective effectiveness.
The UK Voluntary Repair Scheme
Since 2018, Ofgem has been organizing a Redress Scheme designed to redistribute fines levied on energy companies that fail to comply with the terms of their operating license. Under this procedure, offending companies can make payments to a Fund in lieu of (or in addition to) a financial penalty. Beneficiaries of the Fund are vulnerable energy consumers and developers of products and services designed to reduce the environmental impact of energy production.
License violations are varied. They range from overcharging customers, to the inability to repair a power cut caused by a lightning strike, to sending incorrect consumption statements, and to unacceptable call waiting times. Payments to the Fund run into millions of pounds.
The beneficiaries of the aid granted are also very varied. Examples include Macmillan Cancer Support for programs to tackle fuel poverty following cancer, Warm and Well for supporting 8,200 vulnerable households with energy advice, and the Research Institute for Disabled Consumers for research into how disabled consumers can have better access to sustainable energy. Since the creation of the Repair Fund, over 500 projects have benefited from £102 million in funding.
An annual survey of aid applicants reveals a high level of satisfaction, both with the principle and with the way in which the aid is granted.
Targeted assignment or revenue pooling
Many countries apply the principle of non-assignment in public finance management. This principle prohibits the use of a specific revenue to finance a specific expenditure. All revenues must be paid into a common pot, to be used for all expenditure. In fact, as always, there are exceptions to this rule. For example, the French transport infrastructure financing agency collects a share of revenues from fines - automatic radar devices. On the other hand, when the French competition authority imposes fines for market infringements (cartels or abuses of dominant positions), the proceeds are paid to the State. These revenues are then added to the general budget to finance education, the justice system, hospitals, etc.
By not restricting the use of tax revenues, the non-assignment principle allows the money to go where it's needed most, to select the best good projects. Earmarking revenues for specific expenditure, which are potentially not the best ones, is thus detrimental to collective efficiency. On the other hand, assigning these revenues into the government’s budget dilutes incentives to pursue the missions entrusted to public officers. Nevertheless, ethical codes (see, for example, Ofgem’s role and responsibilities), changing attitudes and awareness-raising campaigns are broadening the scope of public servants' concerns. We can therefore hope that Ofgem's efforts to combat non-compliance with operating contracts will be encouraged by the social and environmental use made of the funds collected. There are still problems of neutrality and competence in the use of the Fund. Can agents specialized in detecting and investigating infringements objectively and effectively determine who "deserves" to receive financial assistance? Ofgem has solved this problem by entrusting the management of the Fund to the Energy Saving Trust, an organization founded following the Rio Summit (1992), which promotes energy efficiency and clean energy.
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Making companies pay will always get good press, especially if they fail to meet their contractual obligations. Combating energy poverty and climate change is bound to win public support. Linking the two through a principle of earmarking revenues seems highly virtuous. But as with any partial policy, it is more costly for society than if the collection and management of these funds were dealt with on a global basis. The British Reparation Fund is just one of many examples of the divergence between economic optimization and political arbitration in search of public approval.
