House of Commons Energy and Climate Change Committee The Big Six Energy Companies

Oral and written evidence

Tuesday 7 December 2010

Phil Bentley, Managing Director, British Gas, Paul Spence, Director of Strategy and Regulation, EDF Energy, Paul Golby, CEO, E.ON UK, Guy Johnson, Director of Regulation and Public Affairs, RWE npower, and Alistair Phillips-Davies, Energy Supply Director, Scottish and Southern Energy

Ordered by the House of Commons to be printed 7 December 2010

HC 670-i Published on 25 November 2011 by authority of the House of Commons London: The Stationery Office Limited £8.50

The Energy and Climate Change Committee

The Energy and Climate Change Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department of Energy and Climate Change and associated public bodies.

Current membership Mr Tim Yeo MP (Conservative, South Suffolk) (Chair) Dan Byles MP (Conservative, North Warwickshire) Barry Gardiner MP (Labour, Brent North) Ian Lavery MP (Labour, Wansbeck) Dr Phillip Lee MP (Conservative, Bracknell) Albert Owen MP (Labour, Ynys Môn) Christopher Pincher MP (Conservative, Tamworth) John Robertson MP (Labour, Glasgow North West) Laura Sandys MP (Conservative, South Thanet) Sir Robert Smith MP (Liberal Democrat, West Aberdeenshire and Kincardine) Dr Alan Whitehead MP (Labour, Southampton Test)

The following members were also members of the committee during the parliament:

Gemma Doyle MP (Labour/Co-operative, West Dunbartonshire) Tom Greatrex MP (Labour, Rutherglen and Hamilton West)

Powers The committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the Internet via www.parliament.uk.

Publication The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the internet at www.parliament.uk/parliament.uk/ecc. A list of Reports of the Committee in the present Parliament is at the back of this volume.

The Report of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in a printed volume. Additional written evidence may be published on the internet only.

Committee staff The current staff of the Committee are Sarah Hartwell-Naguib (Clerk), Dr Richard Benwell (Second Clerk), Dr Michael H. O’Brien (Committee Specialist), Jenny Bird (Committee Specialist), Francene Graham (Senior Committee Assistant), Jonathan Olivier Wright (Committee Assistant), Edward Bolton (Committee Support Assistant) and Nick Davies (Media Officer).

Contacts All correspondence should be addressed to the Clerk of the Energy and Climate Change Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 2569; the Committee’s email address is [email protected]

List of witnesses

Tuesday 7 December 2010 Page

Phil Bentley, Managing Director, British Gas, Paul Spence, Director of Strategy and Regulation, EDF Energy, Paul Golby, CEO, E.ON UK, Guy Johnson, Director of Regulation and Public Affairs, RWE npower, and Alistair Phillips-Davies, Energy Supply Director, Scottish and Southern Energy Ev 1

List of written evidence

1 Centrica Ev 20 2 EDF Energy Ev 28 3 Scottish and Southern Energy Plc Ev 31

cobber Pack: U PL: COE1 [SO] Processed: [24-11-2011 17:00] Job: 009792 Unit: PG01 Source: /MILES/PKU/INPUT/009792/009792_o001_michelle_Corrected EnCC 7.12.10.xml

Energy and Climate Change Committee: Evidence Ev 1

Oral evidence

Taken before the Energy and Climate Change Committee on Tuesday 7 December 2010

Members present: Dr Alan Whitehead (Chair)

Dan Byles Albert Owen Ian Lavery Christopher Pincher Dr Phillip Lee ______

Examination of Witnesses

Witnesses: Phil Bentley, Managing Director, British Gas, Paul Spence, Director of Strategy and Regulation, EDF Energy, Paul Golby, CEO, E.ON UK, Guy Johnson, Director of Regulation and Public Affairs, RWE npower, and Alistair Phillips-Davies, Energy Supply Director, Scottish and Southern Energy, gave evidence.

Q1 Chair: Good morning, gentlemen. Welcome to have said they would expect to see average energy this Committee hearing this morning. We have bills up between 15 and 25% by that time. welcomed you and discussed these matters with you Paul Golby: I would add to that, in terms of E.ON on previous occasions. I’m sorry to see this morning customers, they’ll be paying at the end of this year it is the Big Five, not the Big Six. I understand Mr exactly what they’re paying today because we have Campbell spent 14 hours at Glasgow airport no intention of increasing prices this year. Like British attempting to get here today. We very much appreciate Gas, we’ve seen significant reductions in energy his effort and appreciate your effort also in being here consumption as we work with customers to improve this morning. Could I ask you to introduce yourselves, the energy efficiency of their homes but unfortunately please, for the Committee record? We will start with the inevitable direction of wholesale energy prices is you, Phil. upwards. So, in terms of tariffs, I think we will see Phil Bentley: I’m Phil Bentley. I’m the Managing continuing rises through the next decade and the only Director of British Gas. real way we can combat that, of course, is through Paul Spence: I’m Paul Spence. I’m Director of energy efficiency measures and helping customers Strategy and Regulation for EDF Energy. keep warm but consume less energy. Paul Golby: Paul Golby, Chief Executive of E.ON. Guy Johnson: On behalf of RWE npower, we in fact Guy Johnson: Guy Johnson, Director of Regulation, haven’t increased our prices now for more than two RWE npower. years. Our customers are paying some 7% less than Alistair Phillips-Davies: Alistair Phillips-Davies, they were paying two years ago. I should make the Energy and Supply Director, Scottish and Southern small caveat that there are less than 200,000 online Energy. direct debit customers who had a price increase. But with that exception, we haven’t increased our prices now for more than two years. Indeed, there have been Q2 Chair: Thank you. Perhaps, I could start. How price reductions over that two-year period. I think, in much do you expect the average customer is going to terms of the 2020 question, the issue very much be paying for their gas and electricity by, say, the end depends on the review that is currently being done of of 2010 and then by the end of, say, 2020? Any the market and the extent to which the outcome of takers? that review drives what I would call “affordability Phil Bentley: I didn’t catch that, Alan. Could you just outcome”; as well as issues, obviously, of security of repeat what you said? supply and decarbonisation. So I think it is important Chair: How much do you think the average customer that we try and create, through that electricity market will be paying for their gas by the end of this year review, a competitive framework in which low-carbon and then by the end of 2020? technologies are developed based on their levelised Phil Bentley: Certainly, from our side, British Gas is cost, their economic criteria, in order to ensure that we the largest supplier of gas into the UK market. We’d minimise the increases over the next 10 years or so. expect to see bills this year on average to be just over Alistair Phillips-Davies: On behalf of SSE, an £600. We have seen consumption of gas falling in our interesting question that’s got two parts. I think one is customers’ homes as we’ve been doing a lot more what the wholesale costs are, the cost for us to import energy efficiency. We’ve seen consumption fall by gas. I think by the time we get to 2020 we will see 20% over the last five years and we might want to talk probably 40% of the gas coming into the UK from about energy efficiency. I think if you look forward to LNG and a significant amount, additionally, from 2020, we’re all expecting to see higher wholesale pipelines from Norway and Europe as well. So I think prices and we’re all expecting to see higher the wholesale cost is going to be very driven by what transmission and distribution charges across the happens globally. You’ve got issues such as shale gas, industry as we have to make much larger investments which is clearly driving prices down in the US, and in the industry. So we’d expect bills—I think Ofgem then the development of some of the BRIC nations, cobber Pack: U PL: COE1 [E] Processed: [24-11-2011 17:00] Job: 009792 Unit: PG01 Source: /MILES/PKU/INPUT/009792/009792_o001_michelle_Corrected EnCC 7.12.10.xml

Ev 2 Energy and Climate Change Committee: Evidence

7 December 2010 Phil Bentley, Paul Spence, Paul Golby, Guy Johnson and Alistair Phillips-Davies particularly China and India where they’re taking announce a price increase. We were the lowest-priced more and more gas, and other countries over in the gas provider in the UK up until that point. The Far East. What prices will be in 2020, I think, is very principal reasons for us doing that were that we’d difficult to determine. been losing money in that business for a number of The other key factor will be the non-energy costs in years. Indeed, last year, we lost about £60 million. We there. Since 2005, we’ve seen something like a 20%- had had the lowest price. It is a competitive market. plus increase in tariffs arising from non-energy costs, Different people clearly have different behaviours and which are things like network costs. The energy that is what you’d expect in a competitive market. We efficiency measures, which we’ve all talked about, are felt that we had to stem the losses in that business. partly funded through costs in the bill and our estimate We are seeing significant cost pressures. Wholesale going forward—we’ve only done that to 2015—would prices have risen even on forward markets by 25% to be that there’ll probably be a 14% or 15% rise in the 30% since we last cut prices in March of this year. If non-energy costs between now and 2015. I think that you look at prices this summer versus summer 2009, will probably continue as we invest more and more in they’re 50% to 60% higher. If you look at prices for energy efficiency and improving the housing stock in the winter that we’re in now, they’re again over 50% the UK. Currently, on prices, our prices are very, very higher than they were a year ago for the winter that similar to those of British Gas; so a little over £600. we saw in 2009. So there are very significant cost Paul Spence: I can close out for EDF Energy. We pressures in the wholesale market, as well as the areas announced a price freeze to protect our customers that Guy referred to earlier. And a combination of from any price rise over this winter. Looking forward those factors led us to conclude that we had to get to 2020, just to echo what Guy said, the critical thing back to earning a reasonable economic return in our is to make sure we add the right lowest-cost energy to gas business. the system as we invest over the next decade and the electricity market reform is the key to make that Q4 Chair: But I have to say that wholesale prices are happen in the most affordable way. still substantially below the level they were in 2008 and, even though they are fluctuating, there certainly Q3 Chair: Moving from that, I think a number of is a perception that the retail prices that you are people will be rather puzzled about the fact that, given putting out do not follow the changes in wholesale the arrangements for wholesale prices are reasonably prices sufficiently closely, not to the Swedish extent; clear across the various energy companies, some of but certainly a view that the wholesale price you are freezing prices and some of you have reductions are not reflected in what happens as far as increased prices to a very considerable amount. Why retail prices are concerned and that there is, shall we is that? In theory, should your prices not follow each say, some banking going on as far as the difference other in a very rough manner? between the two are concerned. How do you respond Paul Golby: Let me pick that one up. We all hedge to that? our prices to try and smooth bills for our customers. Alistair Phillips-Davies: Well, we reported to Ofgem That’s quite different to, for example, Sweden where that we lost £60 million in our gas business last year. my company operates. They have a system there Ofgem themselves concluded that, for over 50 of the where retail prices follow the wholesale prices almost last 74 months, margins have been negative in the day by day. So customers are paying a very volatile retail market and that is not sustainable. So I think the price following the wholesale price. I think in this view that people are making excess profit is entirely country most energy companies buy ahead and we buy wrong and none of the analysis supports that. One of ahead over some quite long periods of time and also the issues that we clearly have about people looking short periods of time and we’ll all have slightly at wholesale prices is none of us ever charged a different hedging policies. So I think that substantially wholesale price that would’ve effectively recovered a explains why some companies are able to maintain reasonable amount of money from the peak prices prices a little longer than other companies: they have shown in 2008. In the run-up of prices in 2008 versus bought differently in the market over the past few the early part of 2007, prices were up close to 200% years. at one stage and retail bills never went up to that Guy Johnson: But certainly from our part—excuse extent. The clear evidence is the losses that a number me, I can’t comment on our future plans on pricing, of us are reporting in our business and the analysis obviously, in view of competition law issues—there is that Ofgem have done that clearly backs that up. no doubt there are substantial cost pressures. Ofgem, Guy Johnson: If I could just reiterate, our domestic in its recent report, referred to an 8% increase in supply business was loss-making in 2009. We will wholesale costs between September of this year and make a net loss this year as well. The Ofgem analysis March of next year. Equally, network costs, which itself shows substantial periods of negative margins. make up about 20% of the bill, are increasing And I think it should also be said that the Ofgem probably in double-digit terms next year. We’ve talked Probe Report of October 2008 showed that there about CERT costs, which are a smaller percentage of wasn’t a differential lag, if I can put it that way; in the bill but, in turn, are increasing in double digits. So other words, that there was a differential speed there is no doubt that, while we all try to delay passing between passing on price reductions and passing on on any cost increases to our customers, there are price increases. Ofgem found no evidence of that. substantial cost pressures. Phil Bentley: Obviously, it’s a difficult time for Alistair Phillips-Davies: I’ll give this answer and then everyone at the moment. I think we all recognise that I’ll take any other questions. We were the first to and it’s one of the reasons why, in British Gas, we cobber Pack: U PL: COE1 [O] Processed: [24-11-2011 17:00] Job: 009792 Unit: PG01 Source: /MILES/PKU/INPUT/009792/009792_o001_michelle_Corrected EnCC 7.12.10.xml

Energy and Climate Change Committee: Evidence Ev 3

7 December 2010 Phil Bentley, Paul Spence, Paul Golby, Guy Johnson and Alistair Phillips-Davies didn’t raise prices for our most vulnerable customers. one is it? Was there no differential lagging or is it a But I think the thing also to remember: the market mechanism that doesn’t allow you immediately to here in the UK is delivering the lowest prices for gas pass on those drops to the customer? to the end customer in Western Europe. So, even Phil Bentley: There isn’t a difference between lagging though it’s an international commodity that we have going up and lagging going down and Ofgem had a to buy the gas from, we’re still delivering to UK recent probe into that and concluded the same point households the lowest prices in Western Europe. So I and that was the reason why I say that. There was no think that’s one positive about the way the market evidence. We’ve had 17 inquiries since 2001 and works competitively. None of us want to have to raise there’s never been any evidence that suggests that the prices and, indeed, as we’ve said, despite having put energy companies are slow to pass on reductions. prices up recently, our prices are still £100 lower than That’s why we’ve been able to lower prices by £200 they were a year ago. in the last two and a half years, because we were able to pass that benefit through to our customers. Q5 Dr Lee: You talk in terms of 2008–2009. Clearly, in this market, the size of your companies, you Q9 Albert Owen: So you’re confident that you’re presumably take a decade look at things; a strategic passing it on as quickly as possible? look at your return on gas and your electricity over a Phil Bentley: Yes. very longer period than 2008–2009. Does the data exist in terms of comparing a system where Q10 Albert Owen: And is that the case for companies hedge with a country where they pass on everybody? the price immediately over a 10-year period and does Paul Golby: I would concur with that. Ofgem have Britain do well out of the fact that your companies looked at this several times and have come to that hedge, if that data exists, or do the Swedes have it conclusion. They’re probing the market again, as you right? know very well, and let’s see what comes from that. Phil Bentley: We’ve got the lowest prices across But I’m confident they will come to the same Western Europe and have had in gas for over 10 years. conclusion again. So I think the UK customers have benefitted. Q11 Albert Owen: Okay. Well, we will have to await Q6 Dr Lee: Is that because you’re hedging, though, that and, obviously, I’m pleased that there is another or is that because of the way in which the market inquiry because the anecdotal evidence doesn’t match is structured? that. That’s what I’m saying. At that time, there was Phil Bentley: I think it’s because we’ve got a a response from yourselves that the mechanism wasn’t competitive market. Customers have choice and right. The market: you had to pay that price—and you because we’re all competing to one- talk about hedging—but you couldn’t pass it on immediately to the customer. I don’t have the Q7 Dr Lee: My point is, if you didn’t hedge, would evidence in front of me, but that was the response we have even cheaper gas? from your companies. What has changed, or wasn’t Phil Bentley: We absolutely have to hedge because that the case? there isn’t enough gas available at very short notice to Paul Spence: I’m not sure we’re behaving any meet the needs of the country. If you take today, it’s differently today to the last time we gave evidence a very cold day. That gas will have been bought two and the last time we answered the same questions. We years ago, three years ago, at prices that prevailed at have the same policies in terms of hedging the supply that time and we need that certainty to know that that of energy and the same policies in terms of how we gas is going to be delivered to the UK market on a price for our sale to domestic customers. We’ve been day like today. So we will continue to hedge forward consistent, consistent when prices have risen and to assure delivery of supply. when they fall. Paul Golby: If I can answer your question. We’ve Albert Owen: Okay, we’ll have to await the probe. done some of that analysis and the analysis shows that, broadly, whether we hedge or do not hedge, the Q12 Chair: Two thoughts that have gone into the cumulative price is very, very similar. What we do question of price rises are, firstly, the question of through hedging is to give customers greater certainty environmental levies and the extent to which they and stability, rather than having to pay very volatile affect the prices and, secondly, the extent to which prices. you may be using price rises to bolster your investment in new capacity. Would you like to Q8 Albert Owen: I’m still not clear on this issue and comment on either of those thoughts and whether I take Mr Johnson’s point that Ofgem looked at the they, indeed, are substantial factors in price rises as differential lagging. But the reality is, when oil prices some have suggested they are? go up, usually fuel prices follow it straight away. Paul Golby: Again, maybe I’ll kick this off. Some of When they come down, there is a period of time when these levies, of course, do affect prices. The renewable a customer doesn’t—You are nodding your head, but obligation puts about £12 a year on to the average I’ve got bills at home that could demonstrate this and electricity bill. Some of the social measures, CERT so have my constituents. This is what’s happening. and these measures, add about £48 for the average When this was raised in 2008–2009, the response customer. So yes, these measures do end up being from your companies was that it was to do with the passed through to customers. But, other than the mechanism, that it didn’t allow them to fall. Which renewables obligation, none of those measures at the cobber Pack: U PL: COE1 [E] Processed: [24-11-2011 17:00] Job: 009792 Unit: PG01 Source: /MILES/PKU/INPUT/009792/009792_o001_michelle_Corrected EnCC 7.12.10.xml

Ev 4 Energy and Climate Change Committee: Evidence

7 December 2010 Phil Bentley, Paul Spence, Paul Golby, Guy Johnson and Alistair Phillips-Davies moment have anything to do with building new think we particularly see cross-subsidisation of supply capacity. And that’s where the energy market reform margins driving investment. But, at the end of the day, discussions and decision by the Government are going if we are going to invest the sort of monies that people to be very important over the next six months or so. want over the next 10 years—the £200 billion, Guy Johnson: But I think it is very true that there has something of that nature—that is going to have to feed been a substantial increase in a number of social or through into wholesale prices in some way or into energy efficiency measures. In particular, we are very some sort of support mechanism to drive that capacity, conscious of the expansion of CERT. We’ve spent carbon floors and so on, and those are ultimately £300 million on CERT since 2002 and—sorry, we’ve going to end up in a consumer’s bill. I don’t think spent £500 million on CERT since 2002 and we plan they particularly do at the moment. I think the to invest a further £300 million over the next two consumer benefits from the fact that there are very, years. So you can see the substantial expansion there. very low capacity margins in the market; very, very Equally, I would say that CERT is a hugely low spark and dark spreads. important programme. Of course, 40% of that expenditure—in our instance Q13 Chair: The bottom line, after all that, is that 50%—is spent on the priority group. I’m simply retail margins, according to Ofgem, after recent price making the comment. I’m not suggesting that that rises, are rising to £90 from £65. Is that something isn’t extremely valuable expenditure and, for example, you accept? the fact that cavity wall insulation will result in a Alistair Phillips-Davies: I think the basis of their saving of some £110 a year for a customer for an calculation is reasonable, depending on the level of average three-bedroom semi-detached house means consumption that they assume. But I think the level that it is, I think, a hugely important enduring part of of consumption that they assume in making in that the energy efficiency measures that we can make to calculation—both Ofgem and DECC have recently address fuel poverty. put out figures that indicate that the 16,900 KWh that In terms of your second comment about investment: they used for gas is too high and a number more like in fact, last year we invested three times our profit in 14,300 would be acceptable. If you adjust for the sort the UK in improving our generation fleet; updating, of volume figures that you’re seeing, I suspect the decarbonising our generation fleet. So it wouldn’t be margins in December, currently where we sit, will be true, I don’t think, to characterise at least RWE something like £60 for a dual-fuel customer. If you npower in terms of profitability from its supply roll forward to next March, they’ll be substantially business being invested into its generation business. lower because wholesale prices for next year are That’s not the case. substantially in excess of where they are. So I think Alistair Phillips-Davies: From SSE’s point of view the number is closer to £60. We did put a short note and my point of view, as Paul has said, you probably into the Committee about that at the end of last week. have £80 or £90 worth of electricity costs that are Phil Bentley: I think it shows the volatility in the currently coming from environmental levies, ROCs, market. Since Ofgem produced their report the price carbon, CERT and CESP schemes, things of that of power has gone from £47 per MWh, which was nature. As I said earlier, the increase in that since 2005 has probably been a little over 20% and, going only two weeks ago, to £64 today. On gas, spot prices forward, we would expect at 2015 another fairly were at the time 50 pence a therm; now, they’re 61 significant increase in the proportion of the bill that pence. So what Ofgem calculate is a theoretical comes from those areas as we increase all those margin for the next 12 months, but in reality the measures. There’s a potential for putting a carbon market is much more volatile than that. Three months floor in that we’ll probably discuss later and the ROC before, the margins were 50% lower than Ofgem regime will continue to add more costs there. calculated and in the same chart that they had, as So, all in all, you will see additional investment in you’d see, we’ve shown negative margins across the decarbonising the economy on the demand side and industry from August 2004 to August 2009. So back on improving build, but all of those things will to your point about longer term; that is the reality of ultimately end up in a consumer’s bill. And things longer-term margins in the retail energy business and, such as solar PV and the Feed-In Tariffs: I suspect at of course, we want to make sure that we keep prices the moment they only add less than £1 to a as low as possible. But we have a huge amount to consumer’s bill, but over the next two or three years invest to, as we say, decarbonise the market and that might rise to something like £5 per annum to a ensure that all our customers are using less energy. consumer’s bill. Obviously, paying Feed-In Tariffs at That is the secret to lower bills: make our homes more £400-plus per MWh is going to be expensive. We’re energy efficient. Britain has the worst housing stock going to have to fund those and they will ultimately in Europe because we’ve a lot of old Victorian homes end up in the consumer’s bill in order to put those and we’ve a lot of post-War, concrete-poured social pieces of kit on people’s houses. So I think there is a housing. I’ve spent a lot of time in those estates and significant uptick in environmental costs that will go I’m afraid we still have a lot more work to do to bring through, but they should move to decarbonise the them up to the standards that anyone in Britain should economy and reduce our dependence on fossil fuels. expect to live in. So it’s right that we have the On the investment case, I think that’s a separate matter obligation of CERT and CESP. It is right that we are at the moment. Clearly, the investment case is very investing to insulate and do the energy makeovers a poor because the generation margins are so high in lot of homes require and what I can tell you is it has the UK, but I think that’s a separate issue, and I don’t a massive impact to that individual homeowner when cobber Pack: U PL: COE1 [O] Processed: [24-11-2011 17:00] Job: 009792 Unit: PG01 Source: /MILES/PKU/INPUT/009792/009792_o001_michelle_Corrected EnCC 7.12.10.xml

Energy and Climate Change Committee: Evidence Ev 5

7 December 2010 Phil Bentley, Paul Spence, Paul Golby, Guy Johnson and Alistair Phillips-Davies the lower bills start to come through, and they are So you’ve got low fixed costs, high variable costs. doing. We’re going to move to low-carbon, zero-carbon, Chair: Thank you. Perhaps we can move now to the wind and nuclear where the cost of build is very high structure of the energy markets. but the variable cost of the fuel is very low. So we need a reform of the industry and that’s what Q14 Albert Owen: Just before I do, can I just have energy market reform is about. How do we move to clarity? There were a couple of answers that were not low-carbon, high capital cost, low variable cost, quite the same from different companies there. The intermittent, in the case of wind, markets? That’s the current price rises we are seeing has nothing to do challenge when we have to withdraw coal plant and with investment in new capacity. Is that right, from all old nuclear plant over the next 10 years, some 30% of you? Okay. So there are other factors that relate to of current generation capacity. Energy market reform that. How do you think the current market is to say, “What is the investment environment needed arrangements are promoting real competition? The to make these huge investments—one nuclear plant, next question I’ll probably ask is: what do you want £4 billion—and very long-term payback?” You’re to see in the market reform mechanisms that we see probably talking 35 years for a payback on a nuclear going forward? I mean, is it competitive? Are you plant. So that’s why we need reform. We need an happy or do you think there are restraints? investment regime that provides some certainty for Paul Golby: Let me kick off again. I think the levels these huge investments that are now needed to of customer churn still remain very high: 17% for decarbonise our industry. electricity, 18% for gas; slightly lower than 12 months ago but customers are exercising their right to switch. Q15 Albert Owen: I am sure we’ll get the Positively, I think 67% of customers now say, when opportunity to discuss that over the coming months. they switch, that they now go to a better deal. That’s But if I could just mention something that you raised up from 62% 12 months ago. So I think there is again, Mr Johnson, with regards to, “We’re fairly consistent switching in the marketplace. Certainly competitive because we’ve got the Big Six”. If you’re from my point of view, it feels a pretty competitive not a member of the Big Six club, if you’re one of market out there. the smaller ones, they feel quite crowded out. There’s Paul Spence: Can I just echo the point? It feels evidence of that. How would you respond to that? competitive out there and, as well as the evidence of Phil Bentley: All I would say is margins, on average, switching, if you go on to one of the online sites and have been negative over the last five years and in a ask for comparison of the different tariffs that are good year we might have retail margins of 5% or 6%. available, you don’t only have the five of us or the six So you’re asking new entrants to come in, to buy the of us who would’ve been in front of you offering energy, the risk around hedging: is it going to be prices. You have something up to 10 other companies colder; is it going to be warmer; are we going to buy who are offering to supply you gas or electricity. So more energy than we need, than our customers use? there is real new entry into the market as well, which There’s a lot of risk there. We’ve got to build. We’ve I will argue is another signal of a competitive market got to collect the cash and the margins— for domestic supply. Guy Johnson: If I could just take care of that. The Q16 Albert Owen: The point I’m making is you reality is, as Phil has said, that we have among the have the vertical integration of the market now and lowest domestic gas prices, among the lowest there are issues affecting liquidity and the newer domestic electricity prices in the EU15. There is a lot players feel crowded out. That’s the issue I’m talking of talk about the Big Six but the reality is that six is about. I know the general issues that you’ve raised. more, I think, than any country in Europe, with the Paul Golby: I would suggest in my trading business exception of Slovenia and Denmark, in terms of we offer energy supply to those smaller companies companies with retail market share in excess of 5%. and we’re currently trading electricity four times Of course, the annual switching rate doesn’t just physical and gas a lot more than that. So those compare well with other European countries. It products are available. The issue with some of the compares well with other retail services in the UK. At smaller new entrants is the credit risk. Unfortunately, 18%, it compares very well with telecommunication, as Phil was starting to explain, this is a market that insurance products, mortgages, and so on. But I think brings quite enormous capital requirements with it; the best evidence, as I’ve said, is the competitiveness maybe in some ways similar to banking where you of the profitability position. I’ve talked about our need a firm capital base in order to operate in this domestic supply business making no money last year. marketplace. That seems to me to be the best evidence of just how Albert Owen: I was agreeing with Mr Bentley then. competitive the UK is. I didn’t cut him off because I didn’t agree with him. I Phil Bentley: There might be a bit of a misnomer here was cutting him off because I understood it. about the energy market reform, because the energy Paul Golby: Okay, right, and I think that is the issue: market reform is about the wholesale market and how many of the smaller competitors just do not have the do we ensure that we decarbonise the generation capital base in order to compete in this kind of market. industry to meet our binding CO2 emission reduction targets. That’s the issue and what that means is we’re Q17 Albert Owen: Okay. Another point that Mr obviously going to have to move from burning fossil Phillips-Davies made with regards to cross-subsidies fuels where the cost of the input, cost of the fuel, is between generation and the supply arms: did you say high and the cost of building the plant is quite low. it doesn’t exist? Is that what you were saying? cobber Pack: U PL: COE1 [E] Processed: [24-11-2011 17:00] Job: 009792 Unit: PG01 Source: /MILES/PKU/INPUT/009792/009792_o001_michelle_Corrected EnCC 7.12.10.xml

Ev 6 Energy and Climate Change Committee: Evidence

7 December 2010 Phil Bentley, Paul Spence, Paul Golby, Guy Johnson and Alistair Phillips-Davies

Alistair Phillips-Davies: Yes, I don’t think—well, figures between the upstream and downstream your implication was that we were subsidising the markets? generation arm potentially from the supply arm and I Paul Golby: I would argue, in our case, that we’ve don’t think that’s the case. The margins that we’ve been doing that for a number of years and, of course, earned in supply, shown by most of the evidence, are the segmental reporting to Ofgem now is in place. relatively small. We’ve consistently had— So I think that transparency has been there for some companies for some time and, in the future, will be Q18 Albert Owen: Sorry, “relatively small”. Does there for all companies. that mean it does go on, but only to a small extent? Is that what you’re saying, with the subsidy? Q22 Albert Owen: Is everybody comfortable with Alistair Phillips-Davies: No. No, sorry. I said the that, because that’s what the consumer wants? margins are relatively small. I didn’t say there was Alistair Phillips-Davies: Fine. You’ve got an Ofgem any cross-subsidy, sir. I said— report that gives you a clear view; well, at least for two of us anyway. You’ve got a view of what our Q19 Albert Owen: Is that the case in general? statutory accounts say and it reconciles what we have. Paul Golby: Certainly that’s the case in my business. For SSE, the only thing I would add is that we manage We lost money in 2007–2008. In our sales business our generation and supply business as one entity and, 1 last year, we made about £50 million . That’s £50 therefore, the figures that we report to Ofgem: an 2 million on £8 billion sales; so that’s a margin of accounting exercise. We do not operate internal less than 1%. There is no way that sales businesses transfer pricing. We operate the entire business as one can cross-subsidise investment in upstream activity. large portfolio. So that’s probably where we do differ from some of the other people. Q20 Albert Owen: So what is the cost of buying Phil Bentley: Sorry to interrupt. British Gas has been your own generated energy and how does this affect the only company that’s disclosed its energy supply the market price? You do buy it? margins for the last 10 years. So we would welcome Paul Golby: Yes. And, in my company’s case, we that transparency, because I think it is part of building have a centralised trading activity for all of our the trust that customers and, rightly, Parliament needs European businesses. We trade that in the to have in the energy industry. So we welcome all of marketplace. Two added components of what we do: that transparency. I think you’ll find—and I spoke to we’ve been reporting segmental profits for a long time Ofgem last week—that they have all the info they now—so we say very clearly where our profits are need already through the reporting of margins on a coming from—and, being an international company, regular basis to Ofgem. So I think it’s now incumbent we have to justify that to the Inland Revenue to make on them to explain fully the margin performance of sure that the profits are being made in the right these businesses and explain that these margins are country for taxation purposes. So we very openly trade on very clear market numbers. not perhaps as high as some of the public perception Phil Bentley: If you go back to that point we were might have it. making about the input fuel costs, the variable costs of generation, you’ve seen coal prices go from about Q23 Albert Owen: Mr Spence, did you want to add $60 per tonne to over $100 per tonne. That’s an input anything? fuel cost. And you’ve seen gas for gas-fired, again, go Paul Spence: I was just going to make exactly the up from probably 35 pence to over 50 pence, 50 to 60 same point, which is that the rules and the segmental pence, per therm. So even though you think, “Well, reporting from Ofgem is very clear. On that basis, we the price of gas has gone up; therefore, gas generation are reporting the contribution of the different parts of must be more profitable”, it isn’t, because that fuel our business and that’s the transparency that we cost has gone up. And, therefore, what we call “spark believe is needed. spreads”, the spread of converting gas to electricity, are at historically low levels. Q24 Albert Owen: Mr Johnson, I don’t want to leave Guy Johnson: The only comment I was going to you out, otherwise people will say you are less make is: about 90% of our generation and our retail transparent. volume is traded through the wholesale market. So we Guy Johnson: That’s right. They show the revenues, don’t have that self-supply situation that I think you the cost, the profits in our generation business and in were talking about. We have been trying to encourage our supply business, split between electricity and gas. a number of other markets that allow commodities to That’s the obligation that we now have. We filed those be traded. There’s a thing called N2EX, which is accounts in the middle of last year, the middle of this something that we particularly have been behind and year. We’ll do so again in the middle of next year. there is evidence that increasing volumes are now going through that. Q25 Albert Owen: So you would be happy for it to go further; for Ofgem to go further and have full Q21 Albert Owen: I don’t dispute anything that has transparency between the profit figures for the been said in the last couple of answers. Why isn’t upstream and the downstream elements of your there proper transparency then? Why can’t you all lay business? your books bare so we can see the separation of profit Paul Spence: We would be. 1 Note from the witness: “Should read £30 million” Guy Johnson: Yes. 2 As above Paul Golby: Yes. cobber Pack: U PL: COE1 [O] Processed: [24-11-2011 17:00] Job: 009792 Unit: PG01 Source: /MILES/PKU/INPUT/009792/009792_o001_michelle_Corrected EnCC 7.12.10.xml

Energy and Climate Change Committee: Evidence Ev 7

7 December 2010 Phil Bentley, Paul Spence, Paul Golby, Guy Johnson and Alistair Phillips-Davies

Alistair Phillips-Davies: It’s not how we manage our and we generate somewhere between 40 and 45 TWh business. We don’t manage our business like that. I’m of power. However, of that 40 to 45 TWh of power, not happy at having to employ another accountant to we probably churn that in the market five or six times. make up a set of numbers. So our total turnover in electricity would be maybe £4 billion or something like that. Our trading volume in Q26 Albert Owen: But can you give your existing electricity would probably be north of £10 billion. accountant a bit of extra work and just tell them to— So, therefore, we’re a very active trader and, as Paul Alistair Phillips-Davies: Well, that’s exactly what we said earlier, if people want to buy power off us at any do. All I am saying is we are not managed point in time, I think we’re one of the most active Albert Owen: Because the customer doesn’t want to traders in the UK electricity market. In one of these pay for your extra accountant, but it does want to see fancy investment banking trading magazines, we won your figures published. the award this year for being the most active trader. Alistair Phillips-Davies: Sure, but our figures are: So, although you could argue that two-thirds of our we’ve more than doubled our customer base because customer base is supplied from our own stations, we we’ve offered better prices than virtually every other do buy and sell an awful lot of power as well and put company in the market consistently over the last five an awful lot of liquidity into the market. I’d be happy or six years. That’s the reality of what our promise to share with anybody any statistics on that. has been to our customers. We’ve offered the best Christopher Pincher: Okay, so it is reasonably service and we’ve offered some of the very best prices liquid, but there is some differential between the and that’s because we don’t spend too much money companies. on things like extra accountants when we don’t need Chair: Can we turn to metering now, Christopher? them. Q29 Christopher Pincher: Metering, yes Chair; a Q27 Christopher Pincher: Just a quick question on very popular topic. Can we talk about metering, both vertical integration, following on from Albert’s points: smart metering and prepayment metering? If we start I think, Mr Johnson, you said that you buy 90% of the with prepayment meters, I think something like 20% energy that you supply to your customers from the of people who have their energy supplied to them use wholesale market. Therefore, presumably, 10% comes prepay meters, which is—if the figures that I have from your own vertically integrated generator. Does are correct—something like 8.5 million people live in that apply to the rest of you, gentlemen? What is the homes where they use prepayment meters. A lot of percentage of the energy that you supply, which is those people are going to be at the lower end or the generated by yourselves internally? lowest end of the income scale. A lot of those people Phil Bentley: If you take British Gas: the gas that we, are going to be, for example, disabled; so they have if you like, make upstream, as we call it, is about 15% no real opportunity of getting out of the lower end of of our sales to British Gas customers in the domestic the income scale. So I just wonder how easy is it to and B2B market and in electricity it’s about 20%. So switch from prepayment metering to, for example, I think this idea that we’re all 100% vertically direct debit payments where you have the best tariffs integrated isn’t the case. The other thing just to watch available? out for as well is in gas production from the North Phil Bentley: There is probably another one of these Sea, profits there are taxed at a higher rate than supply myths around prepayment meters, because remember margins. So if we take our largest gas field, the tariff price for prepay now is the same as a credit Morecambe Bay, it’s taxed at 75%. So, again, you’ve meter. So there used to be a time when you paid more got to recognise that, after tax, the returns from for a prepayment meter, but that’s not the case today. upstream aren’t that high. Even though the infrastructure of a prepayment meter Paul Spence: Like Mr Golby, we have a separate and collecting the money through the retailer and the European trading business, EDF Trading, which is banking costs the industry more, customers don’t pay responsible for trading out all of our production and the differential. So that’s the first point to make. We buying for us through the wholesale market. So we find that a lot of our customers choose prepayment use them as our interface and trade the majority of our because they like to be able to budget; particularly the activity through them. students in shared houses, for example, prefer to use prepayment. It helps them budget. Q28 Christopher Pincher: Right, but what is the Your point about vulnerable customers or disabled percentage? customers is a very good one. We have what we call Paul Spence: Similarly, over 90%. a home energy top-up system; so you can top up your Alistair Phillips-Davies: On gas, we’ve only recently card in your home. You don’t have to go out into the entered the gas business. So when we complete the wilds of the night, as it were, to top up if your card purchase of our gas assets we could potentially have has run out. So, generally, we would say prepayment 5% of our gas supply coming from fields that we own. meters have been a good thing to give choice, help Unfortunately, all our gas is currently sold through people to budget, and there’s protection there for long-term contracts to other people. So, therefore, we vulnerable customers who find it difficult to get out source 100% of our gas either through the market or during the day. through long-term arrangements with major suppliers who are LNG producers. Q30 Christopher Pincher: But if you wanted to On the electricity side, we probably supply between leave your prepayment meter and move on to a 60 and 65 TWh of power to our entire customer base separate form of paying, how easy is that to do? Is cobber Pack: U PL: COE1 [E] Processed: [24-11-2011 17:00] Job: 009792 Unit: PG01 Source: /MILES/PKU/INPUT/009792/009792_o001_michelle_Corrected EnCC 7.12.10.xml

Ev 8 Energy and Climate Change Committee: Evidence

7 December 2010 Phil Bentley, Paul Spence, Paul Golby, Guy Johnson and Alistair Phillips-Davies there a cost associated with moving on to direct debit, if I can ask you all—what you’re doing to ensure that for example? you reduce the instance of self-disconnection? Alistair Phillips-Davies: Some suppliers charge Phil Bentley: We would say no customer in Britain money, I know we didn’t for a while and we’re today should be self-disconnecting. There’s a huge thinking of reintroducing charges for switching amount of support available. Just to give you any meters. But, generally, we will switch meters for number: anyone over 60 we will insulate their home people as long as they are reasonably creditworthy. A for free. We have a social tariff, which is £130 lower lot of housing is perhaps in rented accommodation. than an average bill for low income. We will do a We sometimes get significant problems with debt. I benefit check analysis for vulnerable customers, think that happens across the industry. Everybody else because there’s £8 billion of unclaimed benefits for bears that problem and, therefore, sometimes we do which customers are eligible, and we’ll continue to install prepayment meters in those properties. As Phil give energy efficiency advice. We would argue the has said earlier, we obviously all took quite a big hit— winter fuel payment should be directed at those on I mean for our company it was probably £20 million low income and not just paid to people who over- per annum—when we levelised charges. Prepayment winter in the Caribbean, for example. But with the meter infrastructure is more expensive than normal winter fuel payment collectively, there is no reason credit meter infrastructure but I think all of us now whatsoever why citizens in Britain, customers in have levelised those charges so that they’re the same Britain, should be self-disconnecting. There’s a huge credit meters. amount of help available. We also spread debts and Also, I think one other issue is that a lot of people on recover them over a two or three-year period if prepayment issues tend to use less electricity or gas necessary; for example, if someone has lost their job. in the average. There are a lot of fixed costs in the So there is a lot of help and I think it’s one of those industry. We were talking earlier about standing myths, again; that the public aren’t aware of how charges and fixed charges in electricity and gas. much help is available from the energy companies. You’ve got fixed charges or fixed costs of supplying Paul Golby: I’d just echo what Phil said; I think close to £200 per customer, which we don’t really there’s an awful lot of help there. We work very hard recover fully because we don’t have standing charges so that there isn’t any self-disconnection and the real of that level, or blocked rates at that level, and I think issue is in improving the energy efficiency of people’s that’s a significant problem going forward as well. In homes. That is the fundamental issue here, because order just to have an electricity or gas supply into your most people who get into that situation are living in house, there is a significant cost associated with that very poor-quality accommodation and that’s what’s to do with networks and Econserve and things of driving their energy bills upwards. Help is there and that nature. we certainly concentrate that help in the over-60s and more vulnerable customers. Q31 Christopher Pincher: You say that people using prepayment networks use less energy. Is that Q33 Christopher Pincher: But how do you because they self-disconnect more regularly? advertise that? Because I had a surgery last Friday in Alistair Phillips-Davies: I wouldn’t have thought so. my local Morrison supermarket and two people came It’s pretty rare that we see self-disconnection. We to see me, both of them concerned about rising energy certainly do put a lot of effort into avoiding self- prices and what they were going to do to keep their disconnection as a company. I don’t know about other energy prices down over the cold period, as it was companies but last year we actually called out to getting colder in Tamworth last Friday. So how do you several thousand consumers, the most vulnerable, who advertise what you can do to help people so that the had prepayment meters in their houses. We sent them special top-up keys. We talked to about 2,000 people most vulnerable know? who we thought were disabled or had things like Paul Golby: Certainly in my case we run various oxygen machines in their homes and made sure that campaigns. We are currently running an Energy Fit they felt comfortable with the services that we offered campaign that is helping people reduce energy usage; and the fact that they weren’t going to be subject to campaigns around insulation. So there’s a lot of things like self-disconnection. So we do work hard on information out there for people but it does need to be that. Do we get it right every time? No, but we do more joined up. We need to work with local work extremely hard at that. We’re starting our authorities and other agencies to make this work. We campaign for this Christmas or we will probably be can’t just do this on our own. It really does need a starting it next week now because our call centres more joined-up approach across local government, as have been quite badly hit by the snow in Scotland. well as the energy companies. But we’ll certainly be ringing out to those customers again and it is an issue that we’re acutely aware of at Q34 Christopher Pincher: Are you doing that? this time of year. Paul Golby: Yes we are. Phil Bentley: I think there is one thing, from this Q32 Christopher Pincher: Because something like Committee’s point of view, to reflect on, or maybe 16% of people say that they will self-disconnect at a two points. Firstly, private landlords are probably not point during the year and something like 5% say that as incentivised or nudged enough to do more on they will disconnect fairly regularly. So I take your energy efficiency. That’s one area you might want to point that you’re doing certain things to try to make think about: how do you get private landlords to step it easier for people not to do that but I just wonder— up to the plate in insulating, making those homes that cobber Pack: U PL: COE1 [O] Processed: [24-11-2011 17:00] Job: 009792 Unit: PG01 Source: /MILES/PKU/INPUT/009792/009792_o001_michelle_Corrected EnCC 7.12.10.xml

Energy and Climate Change Committee: Evidence Ev 9

7 December 2010 Phil Bentley, Paul Spence, Paul Golby, Guy Johnson and Alistair Phillips-Davies they rent out more energy efficient. And I think that’s herring and we can get all the meters to talk to each certainly an area you might want to think about. other. All we need are some straightforward rules The other thing to consider is the data that’s held by about telecoms protocols that should come out of the the DWP. The industry ran a trial run earlier this year consultation on the Smart Prospectus in January of where we did data matching. So we take our database next year. And, if we get that, with the right interim records and we take DWP database records and we arrangements that allow early switching, then the UK selected “customers over 75 on guaranteed income can get behind it. We would argue that in a support” and you get the match of the data. Then we competitive market we’re more likely to compete in all put £85 on the bill of that individual matched that space and innovate and offer time-of-use tariffs account. That’s the way to get the help to where it’s and all the other things that come with smart meters. needed. DWP know who’s claiming what and what The sooner we have policy clarity, the sooner we’ll people are entitled to and we know how to put the all be competing to roll out these real transforming money on the bill. The problem with paying a winter items in the market. fuel payment—and I don’t want to keep going on Paul Golby: I would concur with that. We have a about it—is that it’s paid as a cheque, paid before phrase in my company, which is “start properly, finish Christmas, and it’s not selective on who should get it. early”, and we need to stop talking about this; get Our argument is that more could be given to fewer. the policy instruments in place and get on with it. Only 18% of those that receive a winter fuel payment Particularly for the Government and Ofgem, setting are regarded to be in fuel poverty. So we’ve got over up the data communications company is absolutely 80% receiving it when they don’t need to. DWP is critical if we’re not going to have to rework some of the answer. these systems going forward. That has to be a clear Paul Spence: I think if I can, I’d just echo the points priority for both Government and Ofgem. And I made by Paul and Phil and just re-emphasise the equally welcome the fact that DECC are now seizing points about working with local authorities and the control, so to speak, and Charles Hendry, in working with organisations like the Citizens Advice particular, is focusing on this. So I’m looking forward Bureau to make sure that the schemes we offer are to some action, as opposed to talking, over the available and that people like your constituents know coming weeks. about it. We all do that. We won an award yesterday Guy Johnson: If I can just endorse that. We obviously evening for work that we have done with local are very supportive of smart meters. We can see some organisations in the southwest to try and raise more mundane elements of benefit, if you like. For awareness of what is available. example, we spend an awful lot of time at the moment encouraging our customers to send us actual meter Q35 Christopher Pincher: Working with the fire reads in the booklets we leave with them when they service too, I would suggest, is a good move. Shall become new customers. Whenever we issue a bill we move on to smart metering? We had a based on an estimated reading, that section of the bill demonstration of smart meters in this Committee a highlights that an actual reading should be sent. But few weeks ago, which was very interesting, and obviously manual readings of meters are a nuisance clearly British Gas is leading a charge in rolling out for customers. As a result, reads aren’t frequent smart metering. But I just wonder whether, in doing enough and, as a result, bills aren’t always as accurate that, there is a danger that those smart meters will as they could be. So smart meters read automatically not be interoperable with other smart meters. Are you clearly makes a huge difference. We are currently confident that you’ll be able to interoperate with fitting a smart meter with a stand-alone display unit your metering? as a trial. We’re trialling it in certain areas for the Phil Bentley: You’re right. I think we all believe as moment but would intend to roll that out. an industry, not just British Gas, that smart meters are And you talked about PPM meters before where we absolutely needed for the industry. The technology is all now have equalised our PPM costs with our receipt available to allow absolutely accurate bills to be of sale customers. But, nevertheless, there is no doubt calculated from the meter. It allows customers a link that we are substantially subsidising our PPM to a VDU in the kitchen or on your laptop or iPad to customers at the moment. There is no reason why we see exactly how much energy you’re using and, in shouldn’t do that, but obviously the cost will come time, should be able to allow us to see what appliances substantially down when we have smart meters for are using what amount of energy. So it’s a real our PPM customers as well. So I think there are huge opening up of the mystery behind the energy bill. benefits. We have concerns about interoperability. One We’ve seen in the UK, we’ve had three years of of the issues is whether the asset itself should be consultation. In Italy they rolled out smart meters in owned by the distribution network rather than by the three years. We’ve spent three years talking about it. supply companies. But it’s something that we do need So time is of the essence now, where the UK runs the to get on with and it clearly brings the financial risk of being left behind. benefits to our customers. One of the reasons why British Gas chose to go early, Phil Bentley: If you wait for everybody in the at its risk, is that we wanted to get the industry industry to agree, you will lose time. So all I would moving. And we certainly welcome the announcement urge is: set the policy and have companies compete. yesterday that DECC will take over the responsibility Alistair Phillips-Davies: Just briefly, I think Phil and for policy and roll-out of smart meters because, Paul are right on setting the policy quickly. The fact frankly, there isn’t the certainty of how the transition that Centrica has gone early, as Phil said, is at their will work. We all believe that interoperability is a red risk but it shows the market is competitive if they’re cobber Pack: U PL: COE1 [E] Processed: [24-11-2011 17:00] Job: 009792 Unit: PG01 Source: /MILES/PKU/INPUT/009792/009792_o001_michelle_Corrected EnCC 7.12.10.xml

Ev 10 Energy and Climate Change Committee: Evidence

7 December 2010 Phil Bentley, Paul Spence, Paul Golby, Guy Johnson and Alistair Phillips-Davies willing to invest significant money in trying to a technology that can give you 100% coverage; can differentiate a customer experience. That shows that cover the Shetlands, the Western Isles and things like there is something there. that, which will clearly be a big issue for us because One word of caution, going back to the phrase that we’ve got an awful lot of customers there. Paul uses in their company is about starting well. I Phil Bentley: You’ve got 49 million smart meters to think we do need to try and get the standards agreed be put on the wall between now and 2020; so let’s and I think the particular piece at the moment that get cracking in the areas where you’ve got the better would concern us the most is the fact that they want reception. I’m absolutely convinced, and I know it to us to roll out maybe 20 or 25% of the meters across be the case, that mobile network companies and fixed- the country under one communication standard and line companies are investing every day on improving then switch to a new national one partway through. I coverage. So you will find a situation very soon, I’m think that presents a very significant risk to the certain, where you’ll have more smart meters in the programme and to a sensible delivery of the homes than you’ll have homes on the gas grid; so I programme. That’s called a DCC from the detail. But think we’ll get the technology solution. that’s where we have significant concerns, I’d say; around interoperability and getting systems to work Q38 Albert Owen: Why start in the centre? Why not properly. start on the periphery? Why not go to some of these One final point, in Italy at least they had a monopoly hard-to-work areas and have a pilot scheme in business. I think in this country, because you have six northwest Wales? We get poor broadband; we get poor major competitors and a number of others, you have telecommunications. So why not start there and join a slightly more difficult situation, in terms of central the whole thing up? systems, to enable everybody to roll out smart meters Phil Bentley: We would be happy to look at a trial and get all the communications working when you’ve when we’ve got clarity from DECC on how to deal in still got a lot of competition going on. That’s not what that particular area. they had in Italy. So it made their job a little easier but it means that we must plan— Q39 Albert Owen: Otherwise you’re going to have a second-class operation. Q36 Christopher Pincher: But as long as you’ve got Alistair Phillips-Davies: I think if we do that, it a data clearing house that shouldn’t present you with unfortunately doesn’t deal with Anglesea in north a technological issue. Wales. At the moment we’ve got a project on the Alistair Phillips-Davies: Yes, but at the moment the Shetland Islands to put in smart grids, which will proposal is that we all get on with it and do something include smart metering as well. That’s a project we to start with and then we’ll have a new data clearing put forward to Ofgem that we’d still like to try and house at the end of 2013, early 2014. I think that get running with them. But I think there are other presents a significant risk. I don’t know what other areas, too. We will have hard-to-deal-with areas and, people feel. clearly, trying to get a bid for a particular area to get Paul Spence: If I can, just pick up on that point. I a trial running to show that there’s a particular think that’s why we absolutely welcome DECC technology that will work outside of some of those grabbing hold of this and the focus on getting the big areas is very worthwhile. I suspect all the DCC established as quickly as possible. If they can get on with that piece of it and give us all the clarity companies here would support doing that at some on the rules and the policy then, as Phil says, we can stage. get on with doing what we do best, which is competing and offering our customers what they want. Q40 Dr Lee: It’s not just about coverage though is it? It’s about capacity. Again, this is interesting Q37 Christopher Pincher: If I can just ask two more because I’m with Vodafone and it was suggested to quick questions. What about overall national reach? me by a competitor that a lot of the information is Because when we had our Committee meeting and sent in the middle of the night, because that’s the only looked at smart meters, one of the concerns raised, I time the network can carry the information. By think by Albert, was some companies are talking definition that means it’s not real time; which means about using mobile phone networks to interact with that, unless everybody’s up in the night anticipating smart meters. There are parts of the country that are usage of their washing machine, they don’t get any not covered by mobile signal. Are you confident that benefit from it if you start introducing tariffs that all consumers will be able to benefit from smart change on an hourly basis during the day. Do you meters because they’ll all be able to connect to them? have any concerns that maybe going with a mobile Alistair Phillips-Davies: I think there are going to be phone operator in the medium to long term won’t have some challenges in certain areas and clearly our a return for the customer, because you won’t get a distribution area in the north of Scotland will present real-time exchange of information? one of those challenges. People will have to look at Phil Bentley: There’s a huge amount of investment things like power-line carrier technology in order to going into capacity and there is a ramp-up scale. We get the signals back because you don’t have a were hoping to put 2 million smart meters by 2012 on communication network perhaps that covers all that the wall. At that level, that won’t be an issue and we’ll equally. If you went to things like long-wave radio continue to see investment in coverage; also in the across certain frequencies you may get better new mast system as well, that BT are looking at, that coverage. There is clearly an issue around delivering will also potentially be able to carry messages as well. cobber Pack: U PL: COE1 [O] Processed: [24-11-2011 17:00] Job: 009792 Unit: PG01 Source: /MILES/PKU/INPUT/009792/009792_o001_michelle_Corrected EnCC 7.12.10.xml

Energy and Climate Change Committee: Evidence Ev 11

7 December 2010 Phil Bentley, Paul Spence, Paul Golby, Guy Johnson and Alistair Phillips-Davies

So we don’t see the data capacity being an inhibitor Paul Golby: There’s absolutely no reason why you of roll out. couldn’t achieve that. Alistair Phillips-Davies: I’m more sceptical than that, Q41 Dr Lee: We’re talking about quite a lot of personally. You’ve got a lot of work to do on industry information transfer, aren’t we? Daily I have problems systems and things of that nature. So, okay, if the sending emails by mobile text, BBM messages in this DCC comes in and I think if you put that into the first area, and I’ve complained about it. The capacity is spec of the DCC, you’ll delay the DCC and you’ll completely overloaded. Sometimes it takes four or have even more problems. If you want to get smart five hours to receive a text. Now, if that’s happening metering in, put smart metering in. If you then want here, and that’s with just communication between to change settlement systems and industry transfer individuals, I just worry about the idea of all of these processes, no problem with that. But the more smart meters—you are talking about 40 million or complex you make that large IT project, the more whatever it is—suddenly coming on the market and difficulty you’ll have in delivering it anything like to the increase in the use of Wi-Fi, which is another time and budget. suggestion. With all the data transfer that’s going on, Paul Golby: Alistair, I think you’re right in are we not concerned that the capacity issue is actually prioritisation but we ought to use this as an going to prevent what we all want, which is a proper opportunity of tidying up all of these bureaucratic use of smart metering? industry systems that were put in place with all good Alistair Phillips-Davies: I think in your house you can idea at the time of privatisation, but technology has have a display that communicates with your meter that moved on an awful long way from those times. shows you exactly what’s going on. You only Alistair Phillips-Davies: Well, it has, but people have necessarily want real-time data every single household to weigh up the cost benefits of that because we’re if you’re looking at extracting smart grid benefits. The spending an awful lot of money on doing these things. fact that we pick up periodically, like overnight, what And if you put major IT system delivery at risk and the data is, you can see in your house what’s going other things at risk and if people said, “Okay, rather on. You may be able tell whether your immersion than changing in 17 days, you can change in two days heater has been knocked on by accident or whether but it’s going to cost £1 billion”, is that what people you have got certain appliances that are using a lot of want to do? power, real time, there and then. We can pick up, for billing purposes, that exact same data overnight. So Q44 Christopher Pincher: As long as you’ve got the it’s not necessarily critical for all aspects of smart data and as long as the settlement systems—ELEXON metering to be able to have real-time data going for 40 and what have you that provide the payment between million households into some central system. Clearly themselves—have the technology to make that that’s more relevant if you’re looking at smart grid payment, then as far as the customer is concerned they benefit, but I think you can still generate an awful lot can switch very quickly and you can deal with the of benefits without having that. So I think some of transfer of funds, back office. your concerns aren’t perhaps quite as strong as you Alistair Phillips-Davies: I have no problem with it think. in principle. But people keep layering extra levels of complexity on to something, which is going back to Q42 Dr Lee: And one final small point: the manner the point that was made earlier by my colleagues. in which data is transferred depends on the Let’s make some simple decisions and deliver the technology. So BlackBerrys use different data transfer things that we think are right and then you can come to other mobile handsets. There’s a difference in back and layer extra complexity on later. But I think if you build systems that are far too complicated— energy usage in the transfer of data. Has there been we’ve all had our issues over the years with doing any investigation into that in terms of the most energy things like that, some of them pretty painful—you will efficient way of collecting and transferring data? end up with issues like they had in the NHS and Alistair Phillips-Davies: I’m not sure. I don’t know. elsewhere, in terms of delivery systems. And I don’t Phil Bentley: I’ve not heard that as an issue and we’ve think that’s what we as an industry or you as a put 200,000 on the wall. Certainly we’re working very Government would want. closely across the industry but also with the mobile Phil Bentley: I think that sort of illustrates my point companies and the meter manufacturers and DECC though, which is that the different individual and Ofgem and I’ve never heard that issue raised companies are in different places. If I take British Gas, before. we’ve invested a huge amount in systems and billing Alistair Phillips-Davies: It’s an interesting one though capability in anticipation of smart meters. Not every company is in the same place in terms of billing Q43 Christopher Pincher: One last quick point, and capability to handle the huge volume of data. So I the caveats that we’ve heard notwithstanding. I think that’s back to the point about DECC and policy. assumed that smart metering, which will provide real- If DECC says we need these rules in place by this time data to you, will enable customers to switch time, then it will force other energy suppliers to between suppliers much more quickly than they are modernise their systems. The other point to remember currently able to do. So you’ll reduce the three-week as well though: to transfer one electricity customer turnaround to something like what? today, there are 47 different pieces of data that have Phil Bentley: Could be within a day. You could switch to move around electronically—47. Paul is right. We four times in a day. can simplify a lot of those processes, almost designing cobber Pack: U PL: COE1 [E] Processed: [24-11-2011 17:00] Job: 009792 Unit: PG01 Source: /MILES/PKU/INPUT/009792/009792_o001_michelle_Corrected EnCC 7.12.10.xml

Ev 12 Energy and Climate Change Committee: Evidence

7 December 2010 Phil Bentley, Paul Spence, Paul Golby, Guy Johnson and Alistair Phillips-Davies in the ability to switch quickly, and that’s something what’s needed. It’s the same point about building trust, that we should, as an industry support, and not get because customers switch and then they find they hamstrung on worrying about our own individual haven’t received the savings they were anticipating. billing systems. Q46 Albert Owen: So, just on the check, do they Q45 Chair: We’ll have to move on now to the actually—forgive me, I’ve never changed and you’ve question of tariffs. Are you all confident now that, not yet convinced me on that one. Two of you will be after the Ofgem intervention, your doorstep and phone very happy to hear that. So you have this handheld selling practices are as good as they can be and Ofgem equipment. How soon does the potential customer get will not be visiting you again with another discussion a printout so that they can read it in their own time on this? and— Guy Johnson: If I could start the response to that. We Phil Bentley: For us, if they then confirm they want made massive changes to the way in which we control to go ahead we would send the printout confirming our door-to-door and event sales. Perhaps the one their— that’s easiest to visualise is that, if we were selling to Albert Owen: And there’s a cooling off period? a customer during that door-to-door sale, we would Phil Bentley: During the cooling off period, before give a phone to the customer and ask them to call our the final transfer takes place. centre in Glasgow. There would then be a conversation between the customer and that validation Q47 Albert Owen: So they receive that pretty centre. They would go through, by script, a number quickly? of questions in order to seek to ensure that the Paul Golby: Exactly the same situation. customer was very clear that it was the right product Guy Johnson: In our instance, there is an estimate or for them; the estimate that we had given as to what an estimate and comparison form completed and left the charges would be over the next 12 months from with the customer at the time of sale. us; if we’d made a comparison, the basis of that Alistair Phillips-Davies: It’s the same for our comparison with their incumbent supplier. company as well; we leave it there and then. So we have a very clear third party control now in trying to ensure that the risk of any mis-selling Q48 Chair: Isn’t there a wider issue: that, in addition through our door-to-door or event sales is minimised. to the question of whether doorstep and phone mis- We’ve put in a number of other measures and perhaps selling may have been taking place in the past— one that would particularly ring home is that we you’ve taken steps, we’ve heard about that—you are ensure not only that action is taken against any sales collectively addicted to completely impenetrable and agent who mis-sells, but also it affects the bonus of over-extensive tariffs, which mystify the customer and the manager of that team. So, as you all know, there remove some of the gains from reasonable selling, and is an ongoing investigation by Ofgem at the moment reasonable phone selling. Is that a fair comment? but we believe that the controls we have put in place, Paul Golby: I think, from my point of view, that’s one and particularly that independence of that control, that of the myths that’s grown up around the industry. In telephone control, should eliminate so far as possible my case we have 11 tariffs and it doesn’t seem to be any risk of mis-selling. too many. One is a social product, seven enduring Paul Golby: Could I just add to that because my tariffs and three promotional tariffs. It doesn’t seem to company was the first company to move to pentablets be excessive to me for a competitive market, because or handheld computers for controlling our people on customers do want to make their own decisions about the doorstep, so they have real live data. They have the nature of the tariff and certainly 11 doesn’t seem the information on the computer. The customer has complicated to me. that information directly in front of them. We can Guy Johnson: I think, in terms of clarity, what we clearly see that the customer has agreed or not agreed now have on our bills is details of average daily to the transaction. Maybe that’s why we’re one of the consumption, that’s the previous year. We have a companies not being investigated by Ofgem for projection of charges over the next 12 months based doorstop selling. on that consumption. We have a jargon buster within Phil Bentley: And we’re the other one. We’ve also our bills. We have an information page that, in our invested in handheld terminals. So that if you get on instance, received the Crystal Mark under the Plain the doorstep, you put in the postcode and the English Campaign. So I think we have sought to address—because every tariff in the different areas has substantially reduce the complexity through the different distribution charges, it’s quite complicated— changes that we’ve made to the bills. In addition, we and you press the button and you say how much now send an annual statement. That annual statement volume are you selling and it will calculate there and has all that information on. The other thing that the then what you will save. Sometimes it might only be annual statement has is a comparison of the cost that £2.50 but you can’t fake it. It’s absolutely what the the customer is paying compared to the monthly direct savings are and it gives absolute transparency. Four debit charges. So I think there is now an awful lot of of the industry are being investigated because we are information in order to enable the customer to better concerned that there isn’t that transparency standard understand the details of that bill. You could argue applied across the whole of the industry. And I think that perhaps the very fact we have a jargon buster is we will find, coming out of the probe, some a little bit of an indictment of itself, but we do have recommendations to invest in the type of systems that that jargon buster that explains some of the terms used British Gas and E.ON have invested in because it’s on the bill. cobber Pack: U PL: COE1 [O] Processed: [24-11-2011 17:00] Job: 009792 Unit: PG01 Source: /MILES/PKU/INPUT/009792/009792_o001_michelle_Corrected EnCC 7.12.10.xml

Energy and Climate Change Committee: Evidence Ev 13

7 December 2010 Phil Bentley, Paul Spence, Paul Golby, Guy Johnson and Alistair Phillips-Davies

Phil Bentley: I think the thing to remember as well, One of the consequences of that has been that there over 70% of what is on the bill is laid down by the will always be an estimate now and that estimate, say regulators. So what we can influence is quite difficult in our instance, will be left with the customer. If the and, again, if there was a recommendation about sales agent makes a claim that we are cheaper than moving to a plainer bill, we would welcome that. We their incumbent supplier, there will be a comparison do this calorific conversion of temperature and and that comparison will also be left with the pressure that frankly I don’t understand. So I do think customer. So I think there has been, perhaps, a we can do more in that area. But the point about substantial move on in practice from the criticism choice, I think, is an important one. I’m on a green Ofgem made at the end of 2008. tariff, for example, and we have a number of different green tariffs where money is then put into investing Q53 Chair: Albert and I are together in the fact that in green technologies and carbon offsets. Those are we don’t switch very often, if at all, sorry. Conversely, choices that customers make: fixed price products, overall, those who stay loyal tend to get a much worse tracker products, a variety. So while I think we should deal than those who switch. Is that fair? There are welcome transparency and clarity of what’s in your always offers to switch and if you’re a loyal customer tariff, I don’t think we want to move to a one-size- you tend to miss out on all those super offers. fits-all tariff. I think that would be a retrograde step. Paul Golby: No, I don’t think so anymore. Certainly in our case, with the annual statement, we encourage Q49 Chair: But the fact of the matter is, though, that our customers to contact our call centres and talk to a good proportion of the customers who switch end us about the cheapest tariff available to them. Let me up paying more for their gas and electricity than they give you an example. This was a town hall meeting did before they switched and one of the arguments we held where we had a particular customer who was behind that is that you keep changing tariffs, on Economy 7. He changed the working patterns of sometimes quicker than the process by which the his house and the Economy 7, while it looked person can actually switch can take place. So that by superficially the best tariff for him, with his changed the time they land in what they think is a better tariff, usage pattern it was no longer the case and we the goalposts have been changed. switched him on to a different tariff. So I think, Phil Bentley: That’s not the case in the industry. increasingly, we are giving customers the option to That’s not the case. The reason why people say, “Well, I switched but my bill went up”, if you look in the switch. period from 2007, 2008 and early 2009, wholesale Guy Johnson: I think, again, it’s something that was prices were going up, and bills generally were going a criticism. In particular, there was a criticism for up. If you reverse that situation—we’ve been, as an those of us that had in-area electricity customers, that industry, lowering prices since 2009; British Gas was there was differential between in-area and out-of-area; the first to lower prices in 2009—anyone switching that we were charging more to our in-area customers will have saved money by definition because we’ve than we were to our out-of-area customers. That’s all been lowering prices. We’ve lowered prices by something that specifically has been amended by a over £200. So I think you have to unpick those licence condition and can’t be done. On the more statistics. general point, we offer, for example, £100 discount Chair: So you’re the good guys. There must be some after 12 months for those customers who pay by direct bad guys here then. debit and we also offer, after 12 months, an energy bonus £100 payment. So I think in our instance there Q50 Albert Owen: The logic to that: if you bought are very clear benefits from loyalty with us. at the peak and then it goes down and you have a fixed term contract for a period, then you’re going to Q54 Albert Owen: Just on that point: I accept that be worse off. people have choices but elderly people that live in Phil Bentley: If you have but, equally, conversely, if remote areas and don’t have internet and have been you’d bought when the— loyal customers for a long time, they don’t get many letters from the company saying, “Switch to this Q51 Albert Owen: So there will be somebody, when cheaper one”, do they? I’m making a serious point the prices go down, losing out? It’s not a myth. here. I do applaud all of you for the efforts you’ve Phil Bentley: No, but the point that Alan was making made into helping people in fuel poverty with their was about general switching because the vast majority bills and getting the right advice and information. I of customers in Britain are on variable tariffs that go think that’s a massive step forward. And I do agree up and go down. That’s the majority we’re dealing with you, Mr Golby, when you mentioned local with here. authorities. I’m not digressing. I do think it is Paul Spence: Just to pick up your point if I may. If a important that local authorities have advice centres to customer chooses to fix they’re saying they value the help their people to get the best deals because it’s a certainty of their forward bills and it’s their choice big one. But there are still people that are hard to about the time they choose to do that. reach and they’re hard to reach because they’re quite proud people. They may have small savings but they Q52 Albert Owen: I understand that. are struggling and they’re not on the DWP database. Guy Johnson: I think also your point about customers So whatever method that we have, they are going to switching to a more expensive tariff was certainly be difficult. They are loyal customers and they don’t something that Ofgem did raise at the end of 2008. get a loyalty bonus of any sort, do they? cobber Pack: U PL: COE1 [E] Processed: [24-11-2011 17:00] Job: 009792 Unit: PG01 Source: /MILES/PKU/INPUT/009792/009792_o001_michelle_Corrected EnCC 7.12.10.xml

Ev 14 Energy and Climate Change Committee: Evidence

7 December 2010 Phil Bentley, Paul Spence, Paul Golby, Guy Johnson and Alistair Phillips-Davies

Alistair Phillips-Davies: Some of them do; it does Paul Spence: If I can just echo those same comments. depend. Not all of our tariffs have them, but some of I think we were the first to introduce a social tariff and them do. Gary referred to a couple of his and certainly we have absolutely supported the move to a mandated if you’re with Atlantic there are loyalty bonuses there. tariff. In doing that, we are very keen not to lose the If you switch to some of our green tariffs you’ll get benefit and the success of the schemes that we’ve had: some of them. But you’re right; there are bound to be the Energy Saving Trust and the Energy Assist some customers— programme and schemes that we offer. So I think finding a way to get there, to share data with the Q55 Albert Owen: It’s not a pitch for me and Alan. people who are the experts in the ones who need help, It’s our constituency. which is the Government, and then working to make Alistair Phillips-Davies: But there are bound to be that apply effectively. some customers out there who might have benefitted Paul Golby: One other thing that I meant to say was from switching who haven’t. I’m sure there are some I do think that we also need to go back to the CERT of us who would benefit from giving up Waitrose and priority group measures. We are spending something going to Lidl instead, but we don’t always do— like £70 million this year on energy efficiency measures for the priority group. We know that is a Q56 Albert Owen: It’s not quite the same, with long-term saving. Last year we insulated 1,000 homes respect, because people need heat and electricity and every working day. We have a scheme, for example, perhaps it’s something you should take on board about at the city of Bradford that is addressing issues in a loyalty bonus for some of your long-term customers 200,000 homes. And those kinds of schemes— who are elderly. working with local authorities—can, I believe, Phil Bentley: We certainly agree with that point provide a long-term sustainable solution, or at least a because a lot of effort seems to go into winning new part solution, to the fuel poverty issue. customers and not enough into looking after elderly; Phil Bentley: It’s the right approach because you particularly elderly customers who have been with us ensure you get it to the right customers who need the for a long time. One of the things we do in British support the most. If you take an average energy bill, Gas is, if you take at the moment, we’re fixing 40,000 just over £1,000 per year: with energy efficiency you broken boilers a day around the countryside and our could probably knock £200 or £300 off that bill. If customers who are on Energy get priority. We’re you’re over 80, you get a £400 winter fuel payment joining the Nectar Scheme next year and we’ll give and then if we do go with the Warm Home Discount Nectar points for loyalty. So I think there are ways Scheme that DECC are proposing, which we would and I think we all recognise that a loyal customer is support, that could potentially take another £130 off. very valuable and we all want to hang on to as many So you’re ending up with a bill that is maybe £1 per as we can. day for all the heating and hot water that you need in your home and, at that level, I think we’ve cracked Q57 Chair: You all have social tariffs of various our social responsibility to those in low incomes. And kinds. Do you think the Government should set the that’s the way to get 5 million homes out of fuel levels at which social tariffs should be set and the poverty and in this Parliament we have the qualification criteria or do you think that should be opportunity, I think, to make a huge inroad into that left to you? number. Guy Johnson: If I could start on that. We are definitely supportive of a mandated social tariff. We Q58 Chair: One of those things that it is coming have had a voluntary scheme for the last three years, forward obviously is the Green Deal, very shortly. our Spreading Warmth scheme and we sought to How do you think that can best be arranged so that it devise that working with people like the NEA, maximises the benefits to the fuel poor? Energywatch, because we will confess not to be Phil Bentley: British Gas is the only company that experts in this area, in the right way. So we had a has decided to go early on the Green Deal and the criteria of eligibility of households with income of idea of the Green Deal is that we will invest in energy less than £13,500 with a child or somebody on a efficiency in your home; you don’t need to pay for it disability allowance or a pensioner. but you’ll pay for it through your bill and you’ll get But there’s no doubt that that eligibility criteria, for savings from having a more energy efficient home. So some reason, has been criticised and I think that if we that’s the way it works and the so-called “golden rule” can end up with a mandated social tariff, and indeed is that the amount you pay back will always be less with data sharing—because we have all participated than the amount that you save on your energy bill. So in that trial that Phil referred to of using data share to that’s the way it works. In the Green Deal, potentially, give a discount to pensioners on pension credit above if we take the 24 million homes in Britain spending— a certain age—I think that would be very beneficial. I I don’t know—about £3,000 per home to improve think it is very important that we don’t lose our legacy energy efficiency, that’s £60 billion. Now, no one operations. We believe that Spreading Warmth is very company here can raise that money alone and, good, very valuable. We give a £300 discount from therefore, we’re going to have to be looking to our receipt of bill tariff, which is among the largest in financial markets to raise the funding. So one of the the industry. But sitting alongside that, I believe, things the Committee might want to consider is what should be a mandated social tariff as is going to occur the mechanism is for financial markets to provide from April of next year. finance. cobber Pack: U PL: COE1 [O] Processed: [24-11-2011 17:00] Job: 009792 Unit: PG01 Source: /MILES/PKU/INPUT/009792/009792_o001_michelle_Corrected EnCC 7.12.10.xml

Energy and Climate Change Committee: Evidence Ev 15

7 December 2010 Phil Bentley, Paul Spence, Paul Golby, Guy Johnson and Alistair Phillips-Davies

But to your point about low income: we could do the UK became a net importer of fuel. Obviously, as same situation, do the makeover, but not recover it; North Sea reserves dwindle we are going to continue because for the low income we simply do the work, to rely more heavily on imports. I’m concerned at the they enjoy the lower bill and they don’t have to pay. impact that has on energy security and on price As long as we’ve got the right balance and we know volatility. Do you think the UK is developing a what the rules are, there should be sufficient interest sufficiently diverse range of gas and electricity from capital providers that will allow a huge home imports to guard against both price volatility and to energy makeover in Britain’s homes in the next five maintain a secure energy industry? years. But, again, DECC need to say what the rules Paul Golby: May I kick off on that? I think you are are about not paying anything back and what the rules right to the extent that we are now competing in a are about financing and getting returns because, global energy market. There is no question about that. without the right incentives, the capital markets will I think the gas market is a very interesting aspect of never deliver the scale of funding that is needed for that. We’ve seen, as you know, the advent of shale the Green Deal. gas, or unconventional gas as it sometimes called, and Paul Golby: I agree substantially with what Phil just that’s causing some interesting dynamics. I think we said. I think this can work but we need the rules. We touched on this a little earlier on, that we have this need to understand the financing mechanisms. If, as market. The USA is a very interesting market. Their companies, we are sharing the burden of a £200 gas prices are currently about 50% below ours and I billion investment in upstream, we just don’t have the think last week we saw a first cargo returned to the capacity to take these sorts of additional costs onto United Kingdom from the US. It was imported into our balance sheet. So we have to engage the financial the United States and then it was re-liquefied and markets. I think the Green Investment Bank is a shipped back in this direction. vehicle. It doesn’t look as though it is going to be What are the dynamics there? I think we are seeing funded sufficiently to do this, unfortunately, but the emerging markets in the Far East, Japan, being maybe leveraging that may be a way forward. But very gas-hungry and that is creating demand there. I clarity of rules, because these are relatively small think we have seen, in the short term, some producer amounts of money for households—so it’s multiple difficulties in Qatar and also the Norwegians have had transactions—and it’s the clarity of that framework problems in recent times. I think we are just seeing a that is going to make this successful or not. And I completely different dynamic now. We are competing desperately want it to be successful and we need to in this international market. From my point of view, I make sure that we don’t over-promise and under- think we are doing the right things. We have key deliver because we haven’t thought through that import terminals now. We’re getting cargoes from the financing mechanism. Middle East shipped back from North America. I Guy Johnson: I think the pay-as-you-save elements think we are as well prepared as any country, quite of the Green Deal are different from the fuel poverty frankly, to meet that requirement. elements of the Green Deal. Clearly, the pay-as-you- Phil Bentley: It is worth separating energy security save is something that will hopefully encourage a from self-sufficiency, because I think sometimes client rating where there is greater householder people use them synonymously and it isn’t. So energy demand for energy efficiency measures, which is security doesn’t mean self-sufficiency because, as you something that is difficult for CERT, which is more of say, this year the UK will import 50% of its gas. I a push mechanism. I think we should wait to see what think it was in 1910 or something, when Churchill the energy company obligation part of the Green Deal was First Sea Lord and he converted all the coal-fired is going to be, which will come into effect from the Royal Navy vessels to oil and everyone said, “What beginning of 2013. I think all that I would urge is that about security of supply?” So it was a problem 100 I do believe that the work we do with the priority years ago and what Churchill said was, “Diversity, group is good and important. I think the fact that we and diversity alone, will deliver security of supply”. spend 70% of our commitment on insulation is I think that’s what we’ve done in the UK because in something that should be maintained. There were the last five years we’ve added pipeline capacity and still—and I think these are last year’s numbers—5.5 liquefied importation that is one and a half times million homes in the UK without cavity wall bigger than North Sea production. So we’ve got the insulation and 1.7 million without adequate loft capacity there now and we’ve got the diversity. We’re insulation. So that element of the Green Deal, which shipping from Qatar, the Middle East, Trinidad; we’ve is the same as the priority group in that it isn’t charged got pipe from Norway, pipe from Holland and, of to customers, should, I think, still focus on those course, we’ve still got our indigenous supplies. So we relatively low cost but high benefit—in terms of would argue that the UK market functions well and reduction and energy bills—measures. the only times when it hasn’t functioned well is when Chair: We have to move on now. Dan, you have we’ve had severe disruptions—if you take the Ukraine returned from de-beaking hens and perhaps you would situation—or we’ve had, as we’ve often had in like to take us through some questions on energy Europe, lack of transparency and open markets. security. And what do I mean by that? There was a time when prices were high in the UK and we weren’t able to Q59 Dan Byles: Absolutely. I apologise for having buy gas in store in Europe because it was held by to leave. I had a Delegated Legislation Committee I monopoly players without open transparent markets. had to attend. I also apologise if I ask something that In the UK the reverse is the case. Because our markets you have already covered in my absence. In 2004, the are so transparent and competitive, anybody in Europe cobber Pack: U PL: COE1 [E] Processed: [24-11-2011 17:00] Job: 009792 Unit: PG01 Source: /MILES/PKU/INPUT/009792/009792_o001_michelle_Corrected EnCC 7.12.10.xml

Ev 16 Energy and Climate Change Committee: Evidence

7 December 2010 Phil Bentley, Paul Spence, Paul Golby, Guy Johnson and Alistair Phillips-Davies can book our storage in the UK and ship it out through Paul Golby: That is likely to increase, but we also winter into continental Europe. So one of the things have the Norwegians. You’ve identified Qatar and we’ve argued for is reciprocity in open markets and Trinidad. The positive nature of the gas market for free access to data and storage booking in the rest of me, in the medium term, is that we are seeing more Europe, as we have in the UK. and more sources of gas. The United States is going to become an exporting country in the not-too-distant Q60 Dr Lee: Are you getting anywhere with that? future with their shale gas. So a lot of these countries Phil Bentley: It’s a question, I think, more for are places that we would find inherently safe from a Government and the EU. I think we are making some supply point of view. progress. But in our view we still don’t have that reciprocity, no. Q66 Dan Byles: Do you see any future for coal-fired power production in the UK? Will we see another Q61 Dr Lee: Churchill said that when we had Iran coal-fired power station built, do we think? and the reality is that we knew Anglo Iranian was Alistair Phillips-Davies: I think there’s a chance you going to be pumping oil and we controlled vast areas may well not see one, unless somebody gets carbon of the world. That was our security. You’ve just said capture technology clearly off the ground. All the that our security is dependent upon our European legislation is moving away from that: increasing neighbours who are not playing ball. carbon prices and carbon floors, talk of EPSs and Alistair Phillips-Davies: Some of it. things of that nature. It’s not beyond the realms of possibility, but I think it will be a difficult one. Q62 Dr Lee: So, with that and the fact that we have Clearly, one or two members around here will Russia, which has already turned it off once to the probably struggle to try to look at building things; Ukraine—I know it has honoured every contract, I probably converting existing machinery, if that can be gather, with us—I don’t know about you, but I am not done. But a carbon capture plant is very expensive. that trusting. On the subject of self-sufficiency, do you Whether that is one that ultimately proves the right think we ever can be self-sufficient? way to go, I am not sure. Phil Bentley: No. Q67 Dan Byles: This Committee has asked a number Q63 Dr Lee: Why? of people at DECC what plan B is, if CCS turns not Phil Bentley: Self-sufficiency means do we make it to be commercially viable. Do you think that we have ourselves in the UK. If we move to the decarbonised got problems if CCS does not turn out to be a viable world—and I think it depends over what period. Can option? we get to self-sufficiency today? No. If we go forward Phil Bentley: No. No, I don’t. I think you’ve got wind to 2020, we should have 35% of our electricity and I think you’ve got nuclear, which, in terms of generation from renewable sources. So that’s starting price per unit generated, is far cheaper than CCS. The to build toward that element of self-sufficiency. We’ve economics of CCS do not look attractive, which is got wind farms and when we get clarity from DECC why even the money that was available for the pilot— on nuclear and how we can make nuclear investment, I think there is only one company, and they are not then I think we’ll get closer to your indigenous represented here, that has actually availed themselves production argument. But in the next 10 years we are of that money. So that tells you something about how still going to be dependent upon imported gas for we see the economics today. Get nuclear up and some of our generation. running and I think we will be in a much stronger place. Q64 Dr Lee: Do you distinguish between where you Paul Golby: Could I maybe just disagree with Phil for get your gas from, with that in mind? Because, a moment? I think if we take a parochial point of view without wanting to cast aspersions, I think we can then he probably is quite right. But, quite frankly, we trust the Norwegians probably more than most. Do have no chance of solving climate change without you buy our gas from them because we know we can carbon capture and storage, because whatever we do trust them or do you just strictly follow the in the UK, frankly, is an irrelevance to climate change. commercial line? That is because India and China are sitting on 200 Phil Bentley: At British Gas, we buy very little gas years’ supply of coal and they are going to burn it from Russia; very little indeed. I know, Paul, in irrespective of what we might have to say. So, to me, Germany you buy a lot more. carbon capture and storage is absolutely critical. We Paul Golby: Yes. We buy from a diverse range of were not able to build a new coal-fired power station sources and I think diversity is the key. In respect to in the UK because we couldn’t make the economics Russia, which is where I suppose the question is work but, as a group, we are testing carbon capture coming from, we have never had a contract that hasn’t and storage in our Maasvlakte project in Holland. I been fulfilled. So it is difficult for me to point the think, globally, carbon capture and storage is one of finger and say, “The Russians are not reliable the most critical issues that we have to solve. suppliers”, when we have decades of proof to the Guy Johnson: I think the only thing that I would add opposite nature. But Russia is a very small part—from to that is if you look at the latest DECC quarterly memory, it is about 8%—of gas coming into the UK. report—when I looked at the 2009 capacity margin— So strength is in diversity. it was something of the order of 29% in electricity generation. So there is clearly not a short-term issue Q65 Dr Lee: But that is likely to increase, isn’t it? in terms of electricity generation. We have been cobber Pack: U PL: COE1 [O] Processed: [24-11-2011 17:00] Job: 009792 Unit: PG01 Source: /MILES/PKU/INPUT/009792/009792_o001_michelle_Corrected EnCC 7.12.10.xml

Energy and Climate Change Committee: Evidence Ev 17

7 December 2010 Phil Bentley, Paul Spence, Paul Golby, Guy Johnson and Alistair Phillips-Davies

investing hugely in new CCGTs. We have a new one CO2 emissions comparable to wind. So I think it is at Staythorpe commencing operation this year, and a vital. 2,000-megawatt station at Pembroke, about £1 billion investment planned to commence operation next year. Q69 Dr Lee: But in terms of that life cycle or I think that is, in the short term, the replacement, to a financial cycle of it, I get somewhat frustrated with large extent, for some of the oil plant that is closing the fact that you can’t actually get a real price about under LCPD. I think it is important that that kind of how much it costs to generate electricity via nuclear. gas plant—and we are talking now about super- I mean a real price, not just the build. What about the efficiency gas plants, something like 59% thermal decommissioning and getting rid of the waste? efficiency, with CO2 emissions of about 350 grams per Because you alluded to the cost comparison with CCS KWh—should form a part, particularly with increased but that doesn’t include the cost of getting rid of the intermittency coming onto the system through wind, waste. of our security supply equation over the next decade Paul Spence: Yes, it does. It does. or so. I would have some concern if there was an intention to extend the EPS, for example, to CCGTs Q70 Dr Lee: The waste cost keeps going up. The for that security of supply reason and because, liability for the Government, at the moment, is bigger perhaps, it is not a recognition of the extent to which than the DECC budget. On the stuff that we are these kind of super-efficient CCGTs can be consistent getting rid of now, on my— with the decarbonisation agenda. Paul Spence: If I may, the cost estimates you see for the delivered cost of a megawatt hour from a nuclear Q68 Dr Lee: Talking about nuclear: are you satisfied station do include the allowance for the cost of the with the progress that the Government is making with decommissioning and the waste. regards to new build nuclear power stations? Paul Spence: I think we have seen very positive Q71 Dr Lee: Based on which figures? Because the progress over the course of the last two years plus in figures keep going up on the previous. terms of the progress on defining a national policy Paul Spence: That’s based on the operator of that statement; in terms of setting the rules on waste and station paying the full cost of the decommissioning of decommissioning; the decision on justification and the the station and their share of the cost of dealing with vote in the House on that. They are all important steps the waste. It’s true that in this country we have an forward. We are seeing positive progress on the issue to deal with: the waste that we’ve created as a regulatory review of the two possible designs to be result of our military programme and of the early built; in our case, the European pressurised reactor. Magnox stations and the estimate of that cost has been All of those are very positive steps. The really going up. But, in terms of the newer stations and in important step that we need to see is what the rules terms of the new build stations, the money set aside are going to be in terms of the market, the introduction will pay the cost. of the carbon price floor and the electricity market reform. Q72 Dr Lee: And are you confident about that? We are very hopeful that when we see that it will be Paul Spence: Absolutely. another step in the right direction. But we need to see Chair: We may well be in danger of getting into a it and then we need to get it in place pretty quickly. substantially different area of discussion and I am There is, I think, consensus in the industry, political anxious to try to make sure we do cover the material consensus and public consensus. The latest polls show we want to this morning. Albert, you have some brief that more and more of the public see nuclear as part questions, I think, on energy capacity. of the balanced mix that they want to see into future; so all of those things are moving in the right direction. Q73 Albert Owen: Yes, on the energy capacity and There is some momentum we need to accelerate and a number of you have touched on this as we have we need to get it there quickly. gone along this morning. A very simple, Paul Golby: I would concur with that. I think it was straightforward question: do you have the a slow start. I think we now have the momentum. We organisational capacity and, importantly, the capital to have to increase that momentum going forward. So it invest in substantial new generation over the next is really critical over the next six months that we get decade? the electricity market reforms pretty much thrashed Paul Golby: This is going to be a real challenge. Let out so that we can go forward and invest in some me try to paint a picture for you. £200 billion: that is confidence, because these are big investments. We are equivalent to 20 Channel Tunnels. So, effectively, already investing very heavily in anticipation that we over the next decade, we have got to build two can get this right. We have a short period of time now Channel Tunnel equivalents every single year. That is in which to complete that work. going to be a major challenge financially to raise the Guy Johnson: Just very briefly, I think it is very capital for that and that is why energy market reform important that nuclear be given an equal chance to is so important. It’s going to be a real challenge for contribute alongside renewables and, hopefully, in due our engineering and skills base in this country, course, alongside CCS. I think it is the only proven because we don’t have the number of skilled engineers technology capable of delivering large capacities of to do that at the moment. So we need to make sure low carbon energy with very high levels of that we are getting those people through our schools availability. And, of course, it has a full life cycle, and educational establishments. Is it doable? Yes, I cobber Pack: U PL: COE1 [E] Processed: [24-11-2011 17:00] Job: 009792 Unit: PG01 Source: /MILES/PKU/INPUT/009792/009792_o001_michelle_Corrected EnCC 7.12.10.xml

Ev 18 Energy and Climate Change Committee: Evidence

7 December 2010 Phil Bentley, Paul Spence, Paul Golby, Guy Johnson and Alistair Phillips-Davies think it is; but it is going to be a very significant the next seven years. No board is going to sign off challenge. that scale of investment without some understanding Alistair Phillips-Davies: I would echo that. The things of the policy frameworks that we are going to be like the supply chain, i.e. the manufacturing base for operating in. that, we are investing in the manufacturing base on the renewable side. On the nuclear side, there’s a whole Q75 Albert Owen: To push it, what action is needed generation of nuclear engineers who have probably from Government? got older and substantially retired now, so if we are Phil Bentley: Energy market reform has to lay down going to build things like that; the amount of the rules on how we transition to a low carbon transmission and distribution going to underwater technology and the sooner we have that clarity, the high-voltage DC cables, which is not really sooner we can start building. Because next year we technology that we, as a company, have used before, face a go/no-go decision as to whether the first new even though we are a transmission operator. There are nuclear plants get built in Britain. I can only speak for an awful lot of challenges there. Centrica and British Gas. If we don’t have clarity, it is So all of the three points that Paul makes are very going to make it very difficult to give the green light. valid but, funnily enough, the supply chain and the engineering base may almost be the biggest one, even Q76 Albert Owen: What is the lack of clarity at the though financing is going to be the one that’s going to moment? come up time and again. That’s probably the principal Phil Bentley: How is the carbon regime going to one that the energy market reform will try to address operate; are you going to have capacity payments for but then, behind that, we all have to be able to invest dealing with intermittency? There are a lot of in and draw in the skills that we need to try to get a structural questions. We all know what the questions build of this level going. I suspect that we have got to are. It’s only through DECC that we can get the aim relatively high but we will probably still miss, as guidance to start investing. That is the biggest thing. is usually the case when these things tend to be a little bit more expensive than you would think and they Q77 Albert Owen: Is that the consensus on— often come in a little bit later than you expect, as well. Paul Golby: I think all the companies are very close Paul Spence: If I may, to use a slightly different on this topic, that we need to understand the carbon analogy to Paul’s; when we talk about our investment pricing mechanism. My company would argue for a programme, together with Centrica in our new nuclear low carbon obligation to drive this investment. These programme, we are talking about the equivalent of an Olympics programme at Hinkley Point in Somerset are decisions that we now need taking very quickly. I and the similar-sized programme at Sizewell in think DECC have promised to release their Suffolk. We are talking about the order of £10 billion consultation prior to Christmas and I think, even in to build the twin plants at each site. We know that the political world, Christmas is a pretty immovable means 5,000 people at peak on the construction. We date. So I hope to see that consultation in the next know it means about 900 people during the ongoing week. operation of those stations. I think that the thing to give comfort is that we are building our workforce Q78 Albert Owen: So that is how you will be today knowing that we need to do that. We are already spending Christmas? investing in some of the training infrastructure to Paul Golby: That’s how I’ll be spending Christmas, make that happen. We have plans for new training reading a consultation document; yes. centres. We are already getting the supply chain Guy Johnson: I think if the market structure is right, moving in terms of letting contracts and telling people then we have the possibility of encouraging new what we expect. The UK supply chain can play its equity investors, because that is a key issue in relation part in that. It has to step up. We have to address the to the pre-development stage. One of the things that productivity of UK construction workforce to make we have found of late—and perhaps it is one of the sure that we can deliver on time, on budget, to address reasons why I would share calls to you about a low Alistair’s point. carbon obligation—is that the element of confidence now in the renewable obligation has resulted in us Q74 Albert Owen: I deduce from what you are all being able to find equity partners for our offshore saying that the skills thing is moving forward and that wind farm at Gwynt y Môr, which is a 570 MW wind you are comfortable with the technology and that will farm off the North Wales coast. So I think that if the be developed, but the difficulty is to get the market structure is right—and perhaps the Green investment, the supply chain. And the potential Investment Bank can also play a part in encouraging investors need the confidence, and that is down to— investors at that pre-development stage, but the Phil Bentley: Policy. It’s down to policy. It goes to precursor to all of that is an appropriate market that point earlier on—going full circle and being structure. slightly provocative—if the output from £200 billion Phil Bentley: We’ve talked about capacity of markets, of investment is expected to be sold at a loss, then the but UKPLC is in a competitive market for investor maths doesn’t work. So that’s to the point about the funding. British Gas is a British company, but four margins in the supply business, because all of this out of the Big Six are based in France, Germany and investment results in more energy to be sold into a Spain and they have choices as to whether they invest low carbon UK marketplace. We can’t sell that at a in Spain or France or Germany or the UK. If we don’t loss. Centrica have committed over £15 billion over create a competitive investment framework in the UK cobber Pack: U PL: COE1 [O] Processed: [24-11-2011 17:00] Job: 009792 Unit: PG01 Source: /MILES/PKU/INPUT/009792/009792_o001_michelle_Corrected EnCC 7.12.10.xml

Energy and Climate Change Committee: Evidence Ev 19

7 December 2010 Phil Bentley, Paul Spence, Paul Golby, Guy Johnson and Alistair Phillips-Davies then the funding isn’t going to come to Britain and Phil Bentley: There’s a bit about getting planning that’s where Government can help. approvals to some of the connections for the renewable offshore—the grid connections. We’re Q79 Chair: We are coming to the end of our question building one at the moment offshore, The Wash, and period. I would like to ask you briefly to reflect, as far it’s taken us a huge amount of time for English Nature as renewables are concerned, on whether you consider to allow us to put a trench through for the connector the overall target of 15% of energy from renewables cable because it passes through some salt flats where by 2010 is achievable and, in particular, whether the there are some particular worms. There are a lot of target of 30% to 35% renewable electricity is worms in that area and we only wanted to build a achievable. How do you think we are doing on that narrow trench and it took a while. So I think the and do you think we can get to those targets? sooner we can get permission to get on with these Alistair Phillips-Davies: I think it is a very tall order things, the better. Today, only 3% of our generation and the points that have just been made about policy comes from renewables and to hit the total energy framework that relate to renewables are probably the target, generation has to pick up the lion’s share, same to the extent that people put things like low which means 35% by 2020. So it is going to be tight. carbon floors in there. People tinker with renewable I think that is where, though, having the new planning obligations. Even looking at the review of Ofgem, I process and the national policy statement to start to think people need to have real clarity very quickly on join up the big picture vision with what needs to get what is going to happen. I think the more change that approved to deliver against those emissions targets is we have around renewables, around Ofgem and things very helpful; because you can see that we have got to like that, is going to make people more nervous. It’s start approving some of these projects faster than we going to make it more difficult to find financing and have done in the last four or five years. potentially more expensive. And, therefore, certainty Guy Johnson: I think I’m less clear on targets but, and some of the getting on with it is what is really can I just say, we are getting on with it. We opened required and I think it is a big challenge to get there. real plants last year. We have a joint venture with SSC We potentially can on things such as a low carbon at Greater Gabbard, which is the world’s largest obligation. offshore wind farm, in construction. I talked about We, as a company, are probably more sceptical of that Gwynt y Môr, which, as we announced in June of this because I think, whatever happens, nobody here is year, for the joint venture as a whole is a £2 billion asking for us to write a blank cheque for developers investment. So it is happening. on putting some of these things forward. Therefore, Chair: I think perhaps straying into national policy looking at the regimes that have been talked about and statements again is a further interesting debate but I which most people have accepted—like carbon floors, think we need to conclude our discussion this capacity mechanisms and the renewable obligation— morning. Gentlemen, thank you very much for your we’ve seen more than enough to be getting on with evidence this morning. We are very grateful to you for now. Probably, what industry needs to do when your attendance, which I know has been under some Government are going through with their piece of difficulty, and we look forward to further work is make sure that we are doing all we can to developments in this. reduce the cost of building this sort of stuff and ensuring that the supply chain is there. So we have our part to play.

Q80 Chair: Do you think there are any issues relating to transmission charges, particularly in hard- to-reach areas, or do you think that is an issue that has been addressed? cobber Pack: U PL: CWE1 [SE] Processed: [24-11-2011 17:05] Job: 009792 Unit: PG02

Ev 20 Energy and Climate Change Committee: Evidence

Written evidence

Memorandum submitted by Centrica Summary — We support Ofgem in calling for greater transparency in the energy sector and believe that being clear about pricing with customers will help build their trust. We pride ourselves on being the most transparent of the suppliers and British Gas and its parent Centrica, have provided full disclosure of profits and costs, both upstream and downstream, in its audited accounts since privatisation. — However, we think Ofgem’s calling for an investigation was somewhat premature as most suppliers’ price increases have yet to come into effect and the wholesale market has risen by 5% since the Ofgem analysis was carried out. — There have been 17 different inquiries into the UK market since 2001. In the latest inquiry in October 2008, Ofgem found that the British retail energy market was amongst the most competitive in the world. — UK customers also benefit from some of the lowest energy prices in Europe. In the six months to June 2010, UK households enjoyed the 4th lowest electricity prices of the EU15. Domestic gas prices in the UK have been the lowest in the EU for ten years — The last two years have seen British Gas domestic energy bills drop by an average of £188 per annum. However, wholesale gas prices are on average 35% higher for 2011 than 2010. Other costs such as network charges and environmental obligations have also increased. In its September market report, Ofgem calculated that these other costs had risen 6% on the average dual fuel bill between February and September this year.1 — Whilst Centrica has tried to absorb some of the increases, this is unsustainable and we have had to announce that we will increase gas and electricity tariffs by 7% from 10 December 2010. Our 300,000 most vulnerable customers on our Essentials social tariff will not face an increase until after the winter period. Even after this price change, average annual dual fuel bills for British Gas customers will be £108 lower than in January 2009. — British Gas needs to make a fair rate of return in order to ensure we deliver our planned investment of £15 billion by 2020 in new energy infrastructure. This includes £3 billion–£4 billion in offshore wind, £5 billion in gas production, £1.5 billion on gas storage and £4 billion–£5 billion in new nuclear. Our investment programme is already underway. Over five years, we have invested 161% of our profits—that is for every £1 profit we’ve made, we’ve invested £1.60 in new energy infrastructure. — We support the Government’s Green Deal but believe more needs to be done to incentivise customers to take up the offer by including microgeneration and also financial incentives such as stamp duty reductions. The option of using the Green Investment Bank to help kick-start the Green Deal should be seriously considered. — On the programme to bring smart meters to all UK homes and businesses, we would welcome the Select Committee support for the British Gas’ “go- early” approach to ensure that the benefits of smart metering can be brought to UK consumers well before the 2020 Government deadline. — Changes are needed to the current energy market arrangements through underpinning the carbon price and broader energy market reform. We believe it is vital that the Government’s consultation on Energy Market Reform considers a small number of credible options that provide support over and above the wholesale market price and look forward to contributing to the Committee’s future EMR inquiry.

Centrica Submission to the Energy and Climate Change Select Committee — We support Ofgem in calling for greater transparency in the energy sector and believe that being clear about pricing with customers will help build their trust. We pride ourselves on being the most transparent of the suppliers and British Gas and its parent Centrica, have provided full disclosure of profits and costs, both upstream and downstream, in its audited accounts since privatisation. — However, we think Ofgem’s calling for an investigation was somewhat premature as most suppliers’ price increases have yet to come into effect and the wholesale market has risen by 5% since the Ofgem analysis was carried out. — There have been 17 different inquiries into the UK market since 2001. In the latest inquiry in October 2008, Ofgem found that the British retail energy market was amongst the most competitive in the world. — UK customers also benefit from some of the lowest energy prices in Europe. In the six months to June 2010, UK households enjoyed the 4th lowest electricity prices of the EU15. Domestic gas prices in the UK have been the lowest in the EU for 10 years. 1 Electricity and Gas Supply Market Report September 2010, Ofgem cobber Pack: U PL: CWE1 [O] Processed: [24-11-2011 17:05] Job: 009792 Unit: PG02

Energy and Climate Change Committee: Evidence Ev 21

— The last two years have seen British Gas domestic energy bills drop by an average of £188 per annum. However, wholesale gas prices are on average 35% higher for 2011 than 2010. Other costs such as network charges and environmental obligations have also increased. In its September market report, Ofgem calculated that these other costs had risen 6% on the average dual fuel bill between February and September this year.2 — Whilst Centrica has tried to absorb some of the increases, this is unsustainable and we have had to announce that we will increase gas and electricity tariffs by 7% from 10 December 2010. Our 300,000 most vulnerable customers on our Essentials social tariff will not face an increase until after the winter period. Even after this price change, average annual dual fuel bills for British Gas customers will be £108 lower than in January 2009. — British Gas needs to make a fair rate of return in order to ensure we deliver our planned investment of £15 billion by 2020 in new energy infrastructure. This includes £3 billion–£4 billion in offshore wind, £5 billion in gas production, £1.5 billion on gas storage and £4 billion–£5 billion in new nuclear. Our investment programme is already underway. Over five years, we have invested 161% of our profits—that is for every £1 profit we’ve made, we’ve invested £1.60 in new energy infrastructure. — We support the Government’s Green Deal but believe more needs to be done to incentivise customers to take up the offer by including microgeneration and also financial incentives such as stamp duty reductions. The option of using the Green Investment Bank to help kick-start the Green Deal should be seriously considered. — On the programme to bring smart meters to all UK homes and businesses, we would welcome the Select Committee support for the British Gas’ “go- early” approach to ensure that the benefits of smart metering can be brought to UK consumers well before the 2020 Government deadline. — Changes are needed to the current energy market arrangements through underpinning the carbon price and broader energy market reform. We believe it is vital that the Government’s consultation on Energy Market Reform considers a small number of credible options that provide support over and above the wholesale market price and look forward to contributing to the Committee’s future EMR inquiry.

The Energy Challenge The challenge facing the energy industry today is to deliver a low carbon future whilst meeting customers’ evolving energy needs and maintaining security of supply. Up to £200 billion of new investment is needed in UK energy infrastructure in order to achieve this while meeting our carbon and renewables targets.3 The energy sector is ready and willing to make this investment, but to do so requires a clear and stable regulatory framework in which the polluter pays and there are strong incentives for investment in low carbon generation. In parallel there needs to be a sharp reduction in carbon emissions from homes and businesses if the UK’s targets are to be met. Energy companies have a central role to play in helping customers manage their energy use, supplying them with insulation, smart meters and microgeneration technology. Centrica is committed to tackling the challenges and leading the transformation required. We source, generate, process, trade, store and supply energy. We will continue to lead in the investments required to decarbonise our power and maintain our security of supply with plans to invest £15 billion in new energy infrastructure by 2020.

Outlook for Future Energy Prices The last two years have seen British Gas domestic energy bills drop by an average of £188 per annum. However, wholesale gas prices are on average 35% higher for 2011 than 2010. Other costs such as network charges and environmental obligations have also increased. In its September market report, Ofgem calculated that these other costs had risen 6% on the average dual fuel bill between February and September this year.4 Whilst Centrica has tried to absorb some of the increases, this is unsustainable and we have had to announce that we will increase gas and electricity tariffs by 7% from 10 December 2010. Our 300,000 most vulnerable customers on our Essentials social tariff will not face an increase until after the winter period. Even after this price change, average annual dual fuel bills for British Gas customers will be £108 lower than in January 2009. The longer term outlook is one for higher energy prices. Ofgem has predicted that energy bills will increase between 14% and 25% by 2020 to fund the investment in new lower carbon forms of energy.5 2 Electricity and Gas Supply Market Report September 2010, Ofgem 3 Securing the UK’s energy future—meeting the financing challenge, Ernst and Young, February 2009; Project Discovery Scenarios Consultation Document, Ofgem, October 2009 4 Electricity and Gas Supply Market Report September 2010, Ofgem 5 Project Discovery Scenarios Consultation Document, Ofgem, October 2009 cobber Pack: U PL: CWE1 [E] Processed: [24-11-2011 17:05] Job: 009792 Unit: PG02

Ev 22 Energy and Climate Change Committee: Evidence

Ultimately energy efficiency is the only sustainable way to cut customers’ energy bills and we are seeing a significant increase in energy efficiency. British Gas customers, following our advice on energy efficiency are using 18% less gas now than they were in 2006, a trend that we expect to continue.

What is happening to wholesale prices? UK Gas Prices, p/therm

100 UK Price US Price 90 German Oil-indexed Price UK Forward Price 80 US Forward Price German Oil-indexed Forward Price 70 All prices are in p/therm

60

50

40

30

20

10

0 Jan 2002 Jan 2004 Jan 2006 Jan 2008 Jan 2010 Jan 2012

UK Electricity Prices, £/MWh

100 Month Ahead Actuals

12 Month Average* 90 Forward Curve (30 Nov 10)

80

70

60

50 £/MWh

40

? 30

20

2007=30.09 10 2013=50.96 £/mwh 2003=19.07 £/mwh 2005=34.45 £/mwh 2009=40.29 £/mwh 2011=47.18 £/mwh

2002=16.42 £/mwh 2004=23.66 £/mwh 2006=45.58 £/mwh 2008=75.42 £/mwh 2010=39.46 £/mwh 2012=48.68 £/mwh 0

06 07 - t- -10 r-11 -11 r-12 -12 t-12 ct-02 ul-09 p O Jan-03Apr-03Jul-03Oct-03Jan-04Apr-04Jul-04Oct-04Jan-05Apr-05Jul-05Oct-05Jan-06Apr-06Jul Oct-06Jan-07Apr-07Jul-07Oc Jan-08Apr-08Jul-08Oct-08Jan-09Apr-09J Oct-09Jan-10Apr-10Jul Oct-10Jan-11Ap Jul-11Oct Jan-12A Jul Oc Jan-13Apr-13Jul-13Oct-13Jan-14 * Average to end of period e.g. Jan 05 = average from Feb 04 to Jan 05.

Forward energy price curves are showing increases in gas and electricity prices. Wholesale forward gas prices for 2011 are on average 35% higher than in 2010 (53 p/therm for 2011 and 39 p/therm for 2010). With gas fired generation accounting for 40% of UK electricity supplies and typically being the price setting marginal plant, electricity prices are being affected by the increases in wholesale gas prices. Forward power prices are on average 20% higher in 2011 than 2010 (£47/MWh for 2011 and £39/MWh for 2010) and indeed recently spot electricity prices have been as high as £58 MWh. cobber Pack: U PL: CWE1 [O] Processed: [24-11-2011 17:05] Job: 009792 Unit: PG02

Energy and Climate Change Committee: Evidence Ev 23

There are a number of reasons which can explain, in part, why prices are rising. These are: — Decline of UKCS The UK energy environment is rapidly changing. After decades of being self sufficient in gas, the UK is now a significant importer of gas. In 2020, the UK will import up to 70%–80% of its gas demand.6 This is not a problem in itself—many other industrialised countries have been importing gas for years and indeed the UK has been a net gas importer since 2005. The UK is however a particularly gas dependent economy with gas making up 40% of the primary energy requirements compared to other economies (that are more dependent upon Nuclear or Coal). However, it does mean that the UK is now part of a global gas market and the National Balancing Point (NBP)—a virtual trading location for the sale, purchase and exchange of UK natural gas—is thus influenced by market pressures originating well beyond our shores. With higher oil prices affecting European gas prices and some index linked UK contracts, the era of cheap energy is over. — Uncertainty of supplies LNG will provide most of the new import growth and has already provided the UK with 10% of supply in 2009.7 However, most LNG is pre-sold on long term contracts linked to oil prices which are significantly higher than UK spot gas prices with a very limited “spot market” existing for LNG. Furthermore, the UK has no long term contracts for LNG supply. This means that supplies destined for the UK can be diverted to other higher priced markets at short notice as happened when there were nuclear outages in Japan and the hurricane in the Gulf of Mexico. Global economic recovery will also increase demand and therefore energy prices. — Weather Weather also has an impact on wholesale energy prices with prices rising during very cold periods as much of the UK’s gas requirement is for domestic and commercial heating. Variability in demand due to weather can be above or below 20% which also makes it very difficult to fully hedge demand requirements.

Competition and Profit in Retail Markets The UK has one of the most competitive energy markets in Europe which has brought significant benefits to customers in terms of prices and innovation. In October 2008, Ofgem found that the British retail energy market was amongst the most competitive in the world. In the six months to June 2010, UK households enjoyed the 4th lowest electricity prices of the EU15. Domestic gas prices in the UK have been the lowest in the EU for ten years.8 In November 2010, Ofgem announced it was to investigate the retail supply market following recent price rises, as outlined in the section above. We support Ofgem in calling for greater transparency in the energy sector and believe that being clear about pricing with customers will help build their trust. We pride ourselves on being the most transparent of the suppliers and British Gas and its parent Centrica, have provided full disclosure of profits and costs, both upstream and downstream, in its audited accounts since privatisation. Ofgem has also suggested margins may be excessive following this price rise. However, analysts are forecasting that British Gas margins in the second half of 2010 will be around 3–4% on residential energy sales, substantially less than the margin predicted by Ofgem for 2011. For the current Full Year (FY), only two weeks of which will be affected by increased revenue from the announced price rise, analysts are forecasting BGR operating margins of around 9%, which would be a little higher than the cycle target range of 6–7% over a gas price cycle. We’ve indicated that some years they will be below the range, as in 2008 at 4.9% and 2006 at just 1.3%, sometimes more (as in 7.6% for 2009). British Gas needs to make a fair rate of return in order to ensure we deliver our planned investment of £15 billion by 2020 in new energy infrastructure. This includes £3 billion–£4 billion in offshore wind, £5 billion in gas production, £1.5 billion on gas storage and £4 billion–£5 billion in new nuclear. Our investment programme is already underway. Over five years, we have invested 161% of our profits— that is for every £1 profit we’ve made, we’ve invested £1.60 in new energy infrastructure.

6 Transporting Britain’s Energy (TBE) consultation process 2010—Development of Energy Scenarios, National Grid, July 2010 7 Digest of UK Energy Statistics, DECC, 2010 8 Digest of UK Energy Statistics, DECC, 2010 cobber Pack: U PL: CWE1 [E] Processed: [24-11-2011 17:05] Job: 009792 Unit: PG02

Ev 24 Energy and Climate Change Committee: Evidence

The Chart below shows our annual profits against annual investment:

Centrica Profit vs. Investment

9000 8285 8000

7000

6000 5127 5000 4,072 £m's 4000

3000

2000 1,650 1,274 1,123 750 1,113 1,025 904 1000 708 710

0 2006 2007 2008 2009 2010 5 Yr Total

Profit Investment

There have been 17 different inquiries into the UK market since 2001—but the problem has consistently been shown to be with Europe. The European Commission has found European markets to be “dysfunctional”. A recent study comparing all EU member state markets found that the UK consumer has more choice and a greater ability to make savings through competitive markets.9

Since market liberalisation, energy suppliers have innovated by producing varied ranges of products providing consumers with value and choice. We offer fixed or variable prices, green energy deals and social tariffs, energy service packages and a wide range of incentive and reward deals. Suppliers have also responded in recent years to consumer demand for greater certainty by offering a range of fixed or capped price tariffs and we have 1.6 million customers on fixed rate tariffs who are protected from the recent price increase. Prepayment meters are popular with our customers who like the fact that they help them budget better. Customers who pay for their gas and electricity by prepayment incur no extra costs on average than quarterly cash cheque customers.

We have invested significantly in improving our customer services. This includes modernising our billing systems and improved training for our call centre and customer facing staff. This has seen a dramatic improvement in customers satisfaction levels.

The 2008 Ofgem probe made a number of recommendations to improve the market functionality which we have implemented. These included new standards for bills and statements, debt blocking, field sales, financial information reporting, regulatory reporting requirements and new micro business rules. We are also committed to providing information to our customers that is simple, straightforward and easy to understand. Both Which and Consumer Focus have singled us out for the quality of information on our bills. We now send out annual energy statements and increasingly customers are choosing to bill online.

We do see a need for increased simplicity for bill; however, over time the number of regulatory information requirements has increased to such an extent that now the majority of the bill contains information which customers are not interested in or don’t understand, such as calorific value conversions. This restricts our ability to make changes to the format that would be more accessible to consumers without increasing the number of pages.

Recommendation 1: We recommend that a review of billing information should be carried out with a particular focus on removing calorific value and temperature and pressure data. 9 EC Paper: The functioning of the retail electricity markets for consumers in the European Union, EC, November 2010 cobber Pack: U PL: CWE1 [O] Processed: [24-11-2011 17:05] Job: 009792 Unit: PG02

Energy and Climate Change Committee: Evidence Ev 25

Encouraging Investment in New Generating Capacity The energy market in the UK has delivered a secure supply of power to Britain’s homes and businesses over past decades. Significant investment in new low-carbon generation is now needed to meet challenging carbon reduction targets whilst maintaining security of supply. To maximise security of supply, the UK needs a balanced technology mix including flexible back-up to wind (which generates power intermittently), and new baseload generation including nuclear and, if the technology can be proven, gas or coal with carbon capture and storage (CCS). Government has recognised that the necessary investment will not be forthcoming under the current market regime. Changes are therefore proposed in two key complementary areas: underpinning the carbon price and broader energy market reform. Low-carbon investment is typically more expensive and more capital-intensive than investment in gas or coal-fired generation. These investments must deliver reasonable returns for investors, whilst keeping costs as low as possible for consumers. Underpinning the carbon price and wider energy market reform is critical to achieving this. Underpinning the carbon price: We welcome the Government’s commitment to producing a consultation setting out ways to underpin the carbon price paid by generators through an upstream carbon price support mechanism. A carbon floor should provide a predictable trajectory for a minimum carbon price over investment timescales, giving certainty to investors in low-carbon generation. Centrica believes that carbon price support needs to start early, be clearly durable to give investor confidence, and have a clear and increasing trajectory in line with investment decisions. A carbon floor is welcome and consistent with the polluter pays principle, but is not on its own sufficient to encourage new low carbon investment. New low carbon generation would require a very high carbon price if it were to rely solely on this mechanism. Since the carbon floor cost will be factored into the marginal cost of power production across all fossil generation, the resulting wholesale price would be raised significantly for all. This would be an inefficient way of supporting new low-carbon generation. Energy market reform: We also welcome the Government’s intention to publish an energy market reform consultation later this year. We believe that this should not open up the debate on the future of the energy market but should, as far as possible, focus on a small number of options that reward qualifying generation on the basis of desirable characteristics such that: — in conjunction with a carbon floor, brings forward the necessary investment in new low-carbon generation from a wide range of technologies including renewables and nuclear, and also maintains security of supply by incentivising the right amount of flexible back-up generation to remain on the system; — is consistent with the operation of a competitive wholesale power market so that competitive pressures continue to drive down costs, promote innovation and deliver operational efficiencies; — is robust over the necessary timescales, and effective in reducing exposure to political and regulatory risk, so that investor confidence can be secured; — is capable of practical implementation to a timescale consistent with necessary investments and their associated decision points; and — recognises the existence of the renewables obligation (RO) mechanism and support for carbon capture and storage avoiding duplication. Required support is likely to change over time. Many low-carbon technologies are still evolving and the costs of construction are not well-known. There is likely to be change in the construction costs of many of these technologies, as engineering requirements are better understood, as construction moves beyond first of a kind and as supply chains develop. This uncertainty will require any mechanism to be flexible over time with periodic reviews of the levels of support for new developments on the basis of prevailing conditions—while grandfathering arrangements for developments already under construction or in operation. Recommendation 2: We believe it is vital that the Government’s consultation on Energy Market Reform considers a small number of credible options that provide support over and above the wholesale market price. Like the existing Renewables commitment these can be obligations on suppliers that feed through into energy prices or capacity payments recorded through the bill rather than requiring public subsidy.

Support for the Fuel Poor Over the last decade, considerable effort has been made to eradicate fuel poverty at both Government and non governmental level. Since 2005, £20 billion has been spent in providing benefits and energy efficiency to assist the fuel poor whilst combined Government and energy supplier funding currently amounts to £4 billion cobber Pack: U PL: CWE1 [E] Processed: [24-11-2011 17:05] Job: 009792 Unit: PG02

Ev 26 Energy and Climate Change Committee: Evidence

per annum.10 Yet 20% of homes are still in fuel poverty and energy bills are likely to continue to rise to pay for climate change policies. British Gas has spent over £150 million over the last three years on social programmes. Last year’s spend was £58 million—the biggest contribution of any supplier.11 £53 million of this was spent on social and discounted tariffs for Essentials customers who are elderly, disabled or on low incomes, saving them £122 on the average annual dual fuel bill. We have over 300,000 customers on our Essentials tariff and these customers are protected from our price increase until spring 2011. We share the view of many commentators that there needs to be a fundamental review of fuel poverty and welcome the establishment of an independent working group to look at the target and definition. Much of the currently funding towards fuel poverty is mistargeted. For example, £2.7 billion is spent on making winter fuel payments to pensioners when only 18% of the 12 million pensioners who receive the benefit are estimated to be fuel poor.12 Against the backdrop of tighter public spending it is essential that the resources that are available are targeted at those who need the support most. Energy suppliers are also seeking to better target the assistance they provide their customers. We have welcomed the Government’s data sharing pilot which saw DWP share information on 250,000 pensioners on guaranteed pension income with the six major energy suppliers. Customers matched through this data sharing were credited with an £80 rebate on their electricity bill, registered on our Priority Services Register and offered free energy efficiency measures under our CERT programme. We hope that the data sharing measures will be extended further so that other groups most at risk from fuel poverty can benefit from our programmes. Ultimately we believe that energy efficiency is the only sustainable solution to ensuring warm, well-lit homes. British Gas stands ready to deliver energy services to our customers and to radically improve the energy efficiency of Britain’s homes. The energy efficiency of social housing is a particular priority given the higher levels of households on lower incomes and the relatively inefficient housing stock. The Government’s Decent Homes programme has spent £4 billion on improving the energy efficiency of the social housing stock but the standard Government has been working to has not been high enough to ensure the household will not be in fuel poverty. Partnerships between local authorities and energy suppliers will be important to address this gap. Local authorities have “on-the-ground” trust and knowledge about the communities they operate in meaning they have the potential to play an important co ordination role in the delivery of energy efficiency, particularly by highlighting lower income areas. Programmes such as CESP are an important precedent. We believe the future Energy Company Obligation which is intended to replace CERT and CESP post 2012 must build on the CESP model of community based solutions. Recommendation 3: Government needs to implement a wide ranging review of fuel poverty that looks at not only the definition and target but also how existing resources such as the Winter Fuel Allowance can be best applied to help the most vulnerable. Energy efficiency must also play an important part in any solution. The Energy Company Obligation will be critical to this and must build on the CESP model of community based solutions. However Government must make sure ECO is introduced in a way that does not put increasing upward pressure on customers’ bills.

Progress Towards the UK’s Renewables and Emission Reduction Targets Under the 2008 Climate Change Act, the UK must cut its net greenhouse gases by 34% by 2020 and 80% by 2050. This is perhaps not as daunting a task as it first appeared as this is against a 1990 baseline and the UK has already reduced its greenhouse gas emissions by c. 22%.13 In addition to this however, under the EU’s legally binding Renewable Energy Directive, 15% of all UK energy must come from renewable sources by 2020. Renewable electricity generation will need to increase to around 31% of total power generation capacity to meet this target.14 Centrica believes that the UK’s renewable and emission reduction targets are challenging but achievable. As discussed in the earlier section, the energy market needs to be reconstructed to encourage all forms of low carbon generation, including nuclear. Uncertainty in the planning regime also presents a potential barrier to investment. It is essential that a clear and efficient planning process is in place to enable major projects to be consented. Following NPS consultation, early ratification by Parliament and swift implementation by the Government in 2011 is needed. The transition from the IPC to the Major Infrastructure Planning Unit must be smooth so that early applications are not disadvantaged. In addition to decarbonising our electricity supply, energy companies must move away from supplying power alone to supplying energy efficiency and energy services. The shape of British Gas is already changing. Within just a few years our energy services business will be at least as big as our energy supply business. 10 House of Commons Library Briefing: http://www.parliament.uk/documents/commons/lib/research/key%20issues/ Key%20Issues%20Energy%20price%20rises%20and%20fuel%20poverty.pdf 11 Monitoring suppliers’ social programmes 2009–10, Ofgem, September 2010 12 Cold Comfort Fuel Poverty and the Winter Fuel Payment, Policy Exchange, February 2010 13 Climate Change Committee, March 2010 (NB: emissions are 19.4% below on a Kyoto basis, or 22% including trading) 14 Public Affairs Committee, 30 November 2010 cobber Pack: U PL: CWE1 [O] Processed: [24-11-2011 17:05] Job: 009792 Unit: PG02

Energy and Climate Change Committee: Evidence Ev 27

We believe that generating electricity and heat on a small and micro scale will be important to achieving the Government’s targets. We share the Government’s enthusiasm for Renewable Heat and look forward to further details of the Renewable Heat Incentive (RHI), which was confirmed in the Comprehensive Spending Review. Centrica has recently been involved in a project that injected the first biomethane into the UK gas grid, which should be the first of many given a supportive RHI regime. Along with the confirmation that current Feed-in- Tariff levels will be maintained in the near-term, this should help take-up of small-scale renewables in the home. Improving energy efficiency in homes and businesses is the cheapest way to achieve carbon reductions. We believe that the “Green Deal” programme represents a major opportunity to upgrade the UK’s energy inefficient housing stock. Centrica is investing up to £30 million to trial Green Deal options ahead of legislation. Our work to date highlights some of the challenges involved in putting together a package which is attractive to customers, meets the golden rule (that is the instalment payment for the energy saving measures should not be greater than the cost savings on an average bill) and is commercially viable for us and any potential finance providers. Energy company balance sheets are not big enough to carry the full costs of the Green Deal and need to pass on collected repayments to Green Deal financiers. In order to access sufficient funding, the Green Deal will likely need to access capital markets through a securitisation process. Raising finance for long-dated unsecured loans could prove very difficult. For the first two to three years, investors may be reluctant to engage in securitisation of a novel asset with no history. While the Green Deal aims to keep default rates low, there remains uncertainty around this. We think that the option should be kept open of using the Green Investment Bank to help kick-start the Green Deal by acting as a sponsor of Green Deal bonds, facilitating and encouraging growth in the market. The operation of the golden rule and its implications for the term of the repayments is also not clear. For many products, the term will be shorter than the maximum 25 years, but others will need subsidy, eg through ECO for the golden rule to work within 25 years. In summary, we cannot be certain that securitising investment will kick in. In order to make the assets more attractive, the option should be kept open that the golden rule may not apply. In order to make the package more attractive, we believe that microgeneration technologies must be included in the Green Deal. We also believe that additional “sticks and carrots” will be necessary and welcome the Government’s plans to introduce reserve powers in the forthcoming Energy Security and Green Economy Bill to regulate for minimum standards in the private rented sector and to give the tenants the right to participate in the Green Deal. The regulation should also be applied to the social rented and business sectors. However, the Government could be bolder such as including incentives to new homeowners such a stamp duty relief and a time limited open-to-all incentive to kick start the Green Deal. We also support the introduction of an Energy Company Obligation to provide additional support for vulnerable customers and “hard to treat” homes. However, at an estimated cost of £1.7 billion consideration needs to be given to ensure that the Obligation does not put an upward pressure on customers’ bills. Recommendation 4: We support the Government’s Green Deal but believe more needs to be done to incentivise customers to take up the offer by including microgeneration and also financial incentives such as stamp duty reductions. The option of using the Green Investment Bank to help kick-start the Green Deal should be seriously considered.

Smart Meter Roll-out Smart meters have the potential to transform the relationship between energy suppliers and customers by giving more accurate real-time information that can help change the way customers use their energy. Early deployments are key to delivering more value for customers and preparing our industry for the smart grid future. Consequently, British Gas has already begun to roll out smart meters and has now installed over 200,000 smart meters across both domestic and business customers. We have spent £90 million in developing smart metering systems, smart trialling, and creating an installation business. We expect our smart metering business to create 2,600 jobs by 2012. However many of the other large energy suppliers are seeking to delay progress, and are putting up obstacles to achieving the early start necessary for nation-wide roll-out by 2020 or earlier. In particular they are refusing to engage constructively in establishing interoperability approaches in the period before all the new industry arrangements—the central “DCC”—“Data Comms Co”—goes live. Ofgem’s work with industry support has established that the DCC will not be ready before Autumn 2013 or more likely six months later. A three to four year hiatus in smart deployments would clearly be damaging for UK energy market developments, and for UK energy customers. The fundamental principles agreed with Government and industry to date are that suppliers will lead the roll out and that meters will remain in the competitive market. Government has been admirably clear in stating its objective to expedite the start of smart metering in the UK. These principles have been central to our confidence in taking a leading position at attendant cost. cobber Pack: U PL: CWE1 [E] Processed: [24-11-2011 17:05] Job: 009792 Unit: PG02

Ev 28 Energy and Climate Change Committee: Evidence

The Government is now coming to the end of the consultation period for smart (the “Smart Prospectus”), with a conclusion to the “Smart Prospectus” expected in January 2010. We believe that Government can keep Industry on track for a start to smart deployments in 2012 by restating their previous plans with more detail and certainty, and by taking three simple steps, which would both encourage industry to invest, and at the same time reduce the risk of those investments, as follows: — Requiring all suppliers to collaborate and engage on developing low cost interim arrangements to accelerate the delivery of early benefits to customers ahead of the establishment of the Data Communication Company (DCC) expected in 2013–14. — Stating now that smart meters meeting the certain criteria (technical capability, customer benefits) and deployed before a date when UK smart specification compliant meters are available to buy, should not be required to be replaced by the mandate cut-off date (of 2020 or earlier). — Stating now that the DCC will accept “commonly used telecommunications methods” in meters already deployed into the market (eg mobile). Recommendation 5: We would welcome the Select Committee support for the British Gas’ “go- early” approach to ensure that the benefits of smart metering can be brought to UK consumers in time for the 2020 Government deadline. December 2010

Memorandum submitted by EDF Energy About EDF Energy 1. EDF Energy is a part of the world’s biggest utility company, EDF, and a global leader in low carbon electricity production. In the UK, EDF Energy is one of the UK’s largest energy companies with activities throughout the supply chain. We provide 50% of the UK’s low carbon generation, making us the largest producer of low carbon energy in the UK, avoiding emissions of 30 million tonnes of carbon dioxide annually. 2. Our interests include nuclear, coal and gas-fired electricity generation, renewables, combined heat and power plants, electricity and gas supply to consumers. 3. We employ some 15,000 staff and have over five million electricity and gas customer accounts in the UK, including both residential and business users. This winter we announced a price freeze guarantee for our standard energy prices, a measure which will benefit more than 90% of our customers. 4. Our multi-billion pound investment programme in the UK includes plans to develop four new nuclear stations in the UK at two separate sites. Collectively, those power stations will meet up to 40% of the UK’s low carbon domestic electricity demand by 2025. Each of these developments will employ 5,000 people directly and across the UK supply chain during the construction phase, and 900 permanent employees upon completion. 5. We are actively preparing to deliver our investments now. We, and other investors, will be working closely with Government to maintain momentum and deliver a policy framework capable of delivering the investments in new low carbon energy infrastructure that the UK urgently needs.

Overview: A Critical Time for Historic Investment 6. The UK faces a profound energy challenge, seeking to both achieve challenging carbon reduction targets (reducing our carbon emissions by 80%, by 2050) and replace around 40% of the country’s current generation capacity, which is scheduled to be decommissioned by 2025. The challenge faced by the electricity sector is particularly great, as the need to decarbonise the UK’s heat and transportation sectors, will substantially increase electricity demand. 7. To achieve the legally binding requirement for an 80% reduction in carbon emissions established in the 2008 Climate Change Act, the UK electricity sector will need to be almost entirely decarbonised by 2050. In line with the view of the Committee on Climate Change, EDF Energy believes that significant progress towards this must be made earlier, by 2030. 8. This means significant investment in new low carbon generation and demand management tools needs to be made now, a capital investment which Ofgem has estimated is likely to total around £200 billion, by 2020. 9. As the Government’s recently published 2050 Pathways report has demonstrated, in order to achieve secure, low carbon and affordable energy supplies, investment in a diverse energy portfolio is needed, including new nuclear, renewables, and clean coal and gas. 10. At a time of fiscal retrenchment in the United Kingdom, energy companies stand to make a three fold contribution to the economy, investing in a long-term, low carbon recovery. This will be achieved through: — Investment in capital intensive infrastructure to provide the low carbon generation needed to decarbonise multiple sectors of the economy. — Investment in innovative, demand led solutions for customers, to improve energy efficiency and affordability, whilst lowering carbon emissions. cobber Pack: U PL: CWE1 [O] Processed: [24-11-2011 17:05] Job: 009792 Unit: PG02

Energy and Climate Change Committee: Evidence Ev 29

— Providing skilled jobs that will help offset reductions in public sector opportunities. 11. Delivering this will require a continuing and close working partnership between industry, Government and our customers. Fresh thinking from all parties will be required in securing timely solutions to the challenges faced in the sector and in the wider economy. 12. The remaining sections of this submission focus on what EDF Energy is doing through its investment in all three areas now, pointing to where timely action from Government is required to build momentum on the progress that has already been made.

Investing in People and New Generation Today 13. EDF Energy currently operates eight nuclear power stations with a total capacity of around 9,000 MW. A number of these stations are due to retire over the coming years, and we will be seeking plant life extensions for some where it is safe, technically feasible and financially viable to do so. 14. As well as seeking these life extensions, we are advancing plans with our co-investor, Centrica, to invest upwards of £20 billion in four new nuclear power stations in the UK, at two separate sites. Final decisions concerning that investment will be taken subject to the right investment framework, which will be determined by the Government’s expected reform of the electricity market (addressed separately below). 15. Important, initial progress is already being made. We completed stage 2 of our public consultation for our development at Hinkley Point in Somerset this Autumn, engaging some 3,000 people in the process. We aim to make a final planning application for Hinkley Point to the Infrastructure Planning Committee this Winter. Separate public consultation is also progressing independently at our second site for development, Sizewell, in Suffolk, where our work is staged behind that for Hinkley Point. 16. We have already placed 130 supplier contracts worth hundreds of millions of pounds, and we are working to engage potential suppliers early, so that they understand, and are equipped to meet, the unique safety and quality standards that a nuclear project requires. 17. Early investment is also required in developing the training facilities needed to grow a workforce and supply chain capable of supporting this investment. Both the 2009 Gibson Engineering Construction Review and annual productivity reports compiled by the OECD show that engineering and construction labour productivity in the UK lag behind much of Europe. Investing in training and development now, is therefore critical if low carbon solutions are to be delivered on time. 18. EDF Energy has already developed proposals to address this. Our plans include expanding our £3.5 million nuclear power academy in Gloucestershire, and developing two separate training campuses in the UK to help meet future needs. Further work is also being undertaken with sector skills councils to develop cross industry training initiatives, and to engage supply chain partners.

Investing in Customers and Demand Management Solutions 19. We will recruit 4,000 new people over the next five years across our retail business, in positions focused on resourcing the roll-out of smart metering over our customer base, providing front-line customer support and supporting our other low carbon solutions such as micro-generation, photo-voltaic panels and air source heat pumps. 20. As well as progressing plans to enhance our customer interface through significant investment in new customer systems, we have frozen our energy prices this Winter through to March 2011. That price freeze will benefit over 90% of our customers, which taken together with consistently high customer switching rates across the sector, reflects a market that remains highly price competitive. 21 We support the direction of Government’s initiatives to roll out smart metering and develop a “Green Deal” for domestic energy users, and we are already making preparations to deliver both policies, and are working with Government to refine important logistical issues now.

Smart Metering

22. We believe investment in smart metering is an important step in allowing customers to access the tools which will help them actively manage demand. 23. Delivering smart meters could cost upwards of £10 billion across the industry, and will require 46 million units to be installed nationally. We expect to spend over £2 billion across our customer base alone. 24. With the scale of this challenge in mind, we are already taking important, intermediate steps now to test similar technologies with our customers. Our eco-manager, available to our customers, already allows users to monitor and control home energy use across domestic appliances. cobber Pack: U PL: CWE1 [E] Processed: [24-11-2011 17:05] Job: 009792 Unit: PG02

Ev 30 Energy and Climate Change Committee: Evidence

25. We urge the Government now to work closely with industry to actively consider and manage the logistical challenges involved with such a wide-scale programme, in preparation for future roll out. At this stage that should necessarily include efforts to deliver important central infrastructure such as the Date and Communications Company (DCC) as soon as possible.

Green Deal 26. We also believe the Green Deal can play an important role in incentivising energy efficient solutions. We believe that if the balance between affordability and effectiveness is right, the Green Deal stands to be an important measure in delivering wider public participation in energy efficiency, and will become integral to our customer strategy. 27. At this stage we have flagged the following issues with Government which we believe need to be addressed as part of the development of this policy. Much remains to be done to finalise important policy details to ensure successful delivery: — We believe a much broader range of measures other than basic insulation could be included under the scheme. — Consideration needs to be given to the complex challenges faced in extending this policy to the non-domestic, commercial sector. — And finally, we do not believe that energy suppliers should be expected to manage the costs of loans and associated default risks, given the unprecedented high levels of investment energy companies are making elsewhere—ie in new generation plant.

The Right Investment Framework 28. The significant capital investment in metering, generation and energy efficiency detailed in this submission require investment frameworks fully geared to incentivising such low carbon investments. 29. Current electricity market arrangements were designed at a time when the UK had strong gas reserves, and no binding carbon reduction targets. Over the long term they will fail to incentivise sufficient investment in new low carbon activities. 30. In consideration of the levels of investment at stake, and the urgency of delivering this investment, it is critically important that steps are taken now to fundamentally reform the UK’s electricity market. 31. While various stakeholders have their own view on the exact reforms required, there is now a strong, emerging consensus that holistic, wide ranging reforms are needed. 32. EDF Energy believes that electricity market reform must create an electricity market that works for all stakeholders investing in low carbon generation. The market must appropriately reward industry for making the capital intensive, long term investment that the UK needs, whilst at the same time delivering affordable, and competitively priced, energy for consumers and users. 33. In line with that view, we believe a balanced package of reforms should include the following components: —Acarbon price floor, to ensure fossil fuel generators pay a fair price for the pollution they emit. A floor price could start at a low level, and rise over time, ensuring the true costs of carbon are reflected, as new generation comes on line. — Introduction of low carbon capacity payments, to make sure enough of the right, reliable, low carbon capacity is built. In a market which will have increasingly high levels of intermittent supply from renewable sources, security will be increasingly valued by consumers. Investors should therefore be able to gain income from providing secure, available generation, alongside earnings from wholesale prices. — Clear limits to the level and duration of any subsidies for specific technologies, to avoid distorting the energy market in the long term. In the absence of such limits, there is a risk that the electricity market will not deliver lowest cost electricity for consumers.

Concluding Comments: No Time to Lose 34. It is critical now that the right investment frameworks for new low carbon generation, and nation wide initiatives such as the Green Deal and Smart metering are set in place. 35. The CBI’s own report No Time to Lose: Deciding Britain’s Energy Future, published earlier this year, made clear the implications of any delays to investment in new low carbon infrastructure. It noted in particular that many investors remain “wary of making final investment decisions over key parts of our energy infrastructure” which in turn runs the risk of “pushing up likely future costs to consumers”. The report stressed the need for timely reform of the electricity market in particular. cobber Pack: U PL: CWE1 [O] Processed: [24-11-2011 17:05] Job: 009792 Unit: PG02

Energy and Climate Change Committee: Evidence Ev 31

36. As the company set to deliver the first new nuclear power station in the UK for over 15 years, EDF Energy like other major investors in clean coal and gas and other low carbon technologies, needs Government now to maintain a policy momentum equal to the scale of the unprecedented private investment being made across the energy sector. December 2010

Memorandum submitted by Scottish and Southern Energy Plc Household Gas Prices from 1 December 2010 SSE (Scottish and Southern Energy plc) has today begun notifying customers that it will increase its prices for household gas by 9.4% on 1 December 2010. The increase will affect around 3.6 million customers in the UK.15 There are two reasons for implementing this change: 1. SSE’s gas supply business, Southern Electric Gas Ltd, has traded at a loss for several years, making a loss of £58.7 million in the financial year ending 31 March 2010. 2. Forward wholesale gas prices (which are the prices energy suppliers pay for their gas) have risen 25% since March 2010. This combination of rising prices and a loss-making gas supply business, at a time when SSE’s annual capital investment exceed its annual profit levels, means that SSE is no longer able to absorb these losses as it had done previously.

What will this mean for customers? Following this price change, a typical16 annual gas bill for a customer of SSE (inc VAT at 5%) will increase by £5.60 per month. The typical annual cost for an SSE gas customer will therefore be: — £4.64 per month, to £650, based on a consumption of16,500kWh, the new typical annual domestic gas consumption proposed by Ofgem in July 2010 following a consistent decline in average domestic gas consumption levels; or — £5.60 per month, to £782, based on the current typical annual domestic gas consumption value used by Ofgem of 20,500kWh. However, there is an important distinction to be made between the rising price of units of energy and the amount customers are actually paying to heat their homes, and this is illustrated by the £132 difference between the cost of the above two typical annual domestic gas consumption values (16,500kWh of gas and 20,500kWh of gas). All gas customers not already on a fixed rate tariff will be affected by this change.

What plans are there to put electricity prices up? There are currently no plans to increase electricity prices.

What impact does the wholesale price have on this decision? We buy the majority of its gas on the forward, wholesale market. By securing energy in advance we seek to shield its customers from the volatility that occurs in the wholesale market and provide stable and predictable tariffs. This approach has meant domestic customers have not had to face the full increase in wholesale prices over the last five years—rather we have absorbed these costs and aimed to recover them over the long term. However, current forward annual wholesale gas prices for the period (from October 2010) have increased by over 25% in the last six months, further exacerbating the significant losses that our gas supply business has incurred. These losses are no longer sustainable, especially at a time when our annual investment programme is exceeding its annual profit after tax.

When and how will you be informing customers about the price changes? The independent energy industry regulator, Ofgem, is currently proposing that from the beginning of 2011 domestic customers should receive 30 days notice of a price rise in order for them to make changes to their budget and consumption. In the spirit of this proposal, we have tried to give our customers as much notice as possible by announcing our intention to increase prices more than 30 days before the effective date—1 December 2010. We have also started writing to every customer affected and the majority of these customers will receive their letters before the 1 December 2010. 15 This includes around 380,000 customers in Scotland and around 440,000 customers in Wales. 16 A typical customer is based on a quarterly standard tariff bill averaged across Great Britain and based on current industry annual typical gas and electricity consumption (20,500kWh and 3,300kWh respectively). Includes VAT at 5%. cobber Pack: U PL: CWE1 [E] Processed: [24-11-2011 17:05] Job: 009792 Unit: PG02

Ev 32 Energy and Climate Change Committee: Evidence

What advice can be given to gas customers if they are concerned about their bills? An increase in the unit cost of energy does not have to mean that the bills people actually pay have to go up by the same amount. Improving energy efficiency is the fastest and most cost effective way of reducing energy costs. One easy way to offset this price change is to get advice from our new dedicated website. www.southernwintertips.co.uk. It is designed to give customers energy saving tips and practical advice to save money, as well as explaining how customers can leave meter readings and update direct debit details. We are here to help any customer take the first step to make that change or to help them continue making changes and finding new ways of saving energy.

What are you doing to help vulnerable customers? We recognise our role in helping customers who struggle to pay for their basic energy needs, and we’re supporting more customers who need help than ever before. Over 150,000 customers are currently being given that help through an assistance package designed to reach customers who need it most. Customers who are spending 10% or more of their household income on fuel costs are eligible for extra help. How much help will depend on their individual circumstances. During the last this financial year (2010–11) SSE will spend £27 million helping vulnerable customers.

Would a customer be disconnected if they could not pay their energy bill? We offer payment plans to suit customers who need help, and at the moment, we have over 300,000 customers taking advantage of such arrangements. We also offer other payment methods. For example a prepayment meter is an option for customers who want to manage their budget carefully. Disconnection for non payment of a bill is extremely rare and is only taken as the very last resort to recover an outstanding account. For some time now it has been our policy not to knowingly disconnect vulnerable customers during the winter period. We have now decided to extend this to all customers for the period between 1 December and the end of February 2011—except for reasons of safety and security or in circumstances of criminal activity such as fraud.

How will this price change affect prepayment customers? As part of our package of price reductions in March, gas prepayment tariffs were reduced by 9% to bring them in line with quarterly payment customers. While prepayment customers will be affected by the price change announced today, effectively this means they will be paying almost the same price for their gas as they did last winter. Prepayment customers continue to pay the same price as quarterly payment customers. Whenever a prepayment customer tops up their prepayment meter after 1 December the new price will be automatically applied.

How can SSE customers be sure they are getting a competitive deal? We believe we still offer real value over the medium term, excellent customer service and fair pricing. We’ve always said that we offer consistently fair and competitive prices for customers over the medium term. Our market leading products and services aim to help transform energy consumption. Our quality of service is recognised as being “best in sector”—for example, we’ve just been voted Best Overall Energy Supplier by uSwitch for the 7th time in a row. This fair and consistent approach has meant that since January 2005 our typical “dual fuel” household customers have paid on average around £450 less for their energy than the equivalent customers of British Gas.

SSE Note on Energy Prices On 29 October 2010 SSE (Scottish and Southern Energy plc) announced that it would increase its unit prices for household gas by 9.4% on 1 December 2010. The increase affected around 3.6 million customers in the UK. Customers have been individually notified (by letter) of these changes. There were two reasons for implementing this change: 1. SSE’s gas supply business, Southern Electric Gas Ltd, has traded at a loss for several years, making a loss of £58.7 million in the financial year ending 31 March 2010. 2. Forward wholesale gas prices (which are the prices energy suppliers pay for their gas) have risen 25% since March 2010, when SSE reduced prices for the second successive time. This combination of rising input costs and a loss-making gas supply business, at a time when SSE’s annual capital investment exceeds its annual profit levels after tax means that SSE is no longer able to absorb these losses as it had done previously. In November 2010 both British Gas and Scottish Power announced that they would be increasing prices for both gas and electricity. cobber Pack: U PL: CWE1 [O] Processed: [24-11-2011 17:05] Job: 009792 Unit: PG02

Energy and Climate Change Committee: Evidence Ev 33

Ofgem Review of the Energy Retail Market

On 26 November 2010 the industry regulator, Ofgem, announced its intention to review some aspects of the energy retail supply market.

At the same time it published its latest Electricity and Gas Supply Market Report.

According to Ofgem’s indicators, which incorporate the price changes announced by three energy suppliers, it estimates that the net margins on dual fuel customers that will be earned by suppliers for the year from December 2010 will increase from £65 to £90.

SSE would make the following observations about Ofgem’s analysis: — Ofgem’s analysis is based on a relatively simple per customer measurement and as such cannot reflect the profit levels within retail supply. — Domestic electricity and gas consumption has fallen steadily over the last few years. — The typical consumption figures (4MWh of electricity and 16.9MWh for gas) on which Ofgem’s conclusions are based are higher than the latest available published statistics as reported in Ofgem and DECC sources.17 These indicate typical (median) usage of 3.1MWh and 14.3MWh for electricity and gas. — If these alternative figures are used then we estimate that net margins on dual fuel customers for December 2010 would be closer to £60. SSE believes that this figure is more representative of the current situation in the market. — Ofgem even admits that “a declining consumption trend impacts on net margin, as a substantial proportion of supplier’s costs are fixed. Holding consumption constant over time means we may have overstated margin in recent years”.

In addition: — Ofgem agrees with suppliers that forward wholesale costs have risen in the last year and anticipates that these costs will continue to rise into 2011. — As such, even on the basis of Ofgem’s inflated consumption figures, net margins will reduce from £90 in December 2010 to £55 (~5%) per customer in March 2011 because of the continuing rise in wholesale costs.18 — If the alternative consumption figures are used then net margins in March 2011 would be lower.

Margins in Previous Years

It also has to be remembered that, even according to Ofgem’s own analysis, suppliers have been making losses in their supply businesses for the majority of the last six years—in 54 of the last 74 months margins have been negative. Given that consumption has been lower than this, these losses would actually have been greater than Ofgem estimated:

Figure 1.4

DUAL FUEL SUMMARY TABLE (£/CUSTOMER/YEAR) Dec-06 Dec-07 Dec-08 Dec-09 Dec-10

Customer bill £970 £865 £1,215 £1,140 £1,150 Wholesale costs £585 £465 £715 £535 £495 VAT and other costs £320 £350 £295 £420 £440 Gross margin £65 £50 £105 £185 £215 Operating costs £105 £115 £120 £125 £125 Implied net margin −£40 −£60 −£15 −£60 −£90

Notes: Customer bill is for standard tariffs, weighted by payment method and market share. Average figures assume electricity consumption of 4MWh/yr, gas consumption of 16.9MWh/yr. Figures rounded to nearest £5 and may not sum due to rounding.

17 These are 2009 figures from Annual gas and electricity consumption: Ofgem Review of National Statistics 18 This presumes that there are no changes to domestic prices. cobber Pack: U PL: CWE1 [E] Processed: [24-11-2011 17:05] Job: 009792 Unit: PG02

Ev 34 Energy and Climate Change Committee: Evidence

It is clearly unsustainable for any business to continue to make these types of losses over the medium-long term. However it is especially challenging for the energy industry which is investing, and will continue to invest, billions of pounds in the UK each year. December 2010

Printed in the United Kingdom by The Stationery Office Limited 11/2011 009792 19585

Distributed by TSO (The Stationery Office) and available from:

Online www.tsoshop.co.uk

Mail, Telephone, Fax & E-mail TSO PO Box 29, Norwich NR3 1GN General enquiries 0870 600 5522 Order through the Parliamentary Hotline Lo-call 0845 7 023474 Fax orders: 0870 600 5533 Email: [email protected] Textphone: 0870 240 3701

The Parliamentary Bookshop 12 Bridge Street, Parliament Square London SW1A 2JX Telephone orders: 020 7219 3890 General enquiries: 020 7219 3890 Fax orders: 020 7219 3866 Email: [email protected] Internet: http://www.bookshop.parliament.uk

TSO@Blackwell and other Accredited Agents © Parliamentary Copyright House of Commons 2011 PEFC/16-33-622 This publication may be reproduced under the terms of the Open Parliament Licence, which is published at www.parliament.uk/site-information/copyright/