House of Commons Business and Enterprise Committee
Energy policy: future challenges
First Report of Session 2008–09
Report, together with formal minutes, oral and written evidence
Ordered by The House of Commons to be printed 10 December 2008
HC 32 [Incorporating HC 1207 i–ii from Session 2007–08] Published on 12 December 2008 by authority of the House of Commons London: The Stationery Office Limited £13.50
The Business & Enterprise Committee
The Business & Enterprise Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department for Business, Enterprise & Regulatory Reform.
Current membership Peter Luff MP (Conservative, Mid Worcestershire) (Chairman) Mr Adrian Bailey MP (Labour, West Bromwich West) Roger Berry MP (Labour, Kingswood) Mr Brian Binley MP (Conservative, Northampton South) Mr Michael Clapham MP (Labour, Barnsley West and Penistone) Mr Lindsay Hoyle MP (Labour, Chorley) Miss Julie Kirkbride MP (Conservative, Bromsgrove) Anne Moffat MP (Labour, East Lothian) Mr Mark Oaten MP (Liberal Democrat, Winchester) Mr Mike Weir MP (Scottish National Party, Angus) Mr Anthony Wright MP (Labour, Great Yarmouth)
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 http://www.parliament.uk/parliamentary_committees/parliamentary_committees
Publications 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 http://www.parliament.uk/parliamentary_committees/berr.cfm
Committee staff The current staff of the Committee are: Eve Samson (Clerk), Emma Berry (Second Clerk), Robert Cope (Committee Specialist), Louise Whitley (Inquiry Manager), Anita Fuki (Senior Committee Assistant), Anne Woolhouse (Committee Assistant) and Jim Hudson (Senior Office Clerk).
Contacts All correspondence should be addressed to the Clerks of the Business and Enterprise Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 5777; the Committee’s email address is [email protected]
Energy policy: future challenges 1
Contents
Report Page
Summary 3
1 Introduction 5
2 Future challenges 7 Energy prices 7 Gas storage 8 New electricity generating capacity 9 Wholesale market liquidity 11 The Energy Act 2008 12 Electricity network infrastructure 13 Funding the Nuclear Decommissioning Authority 13 Treating domestic and small business customers fairly 14 Cost-reflective energy pricing 14 Direct debit charges 15 Direct selling 15 Supply for small businesses 16 Fuel poverty 17 The role of Ofgem 18
Conclusions and recommendations 20
Formal Minutes 25
Witnesses 26
List of written evidence 26
List of Reports from the Committee during the last Parliamentary Session 27
Energy policy: future challenges 3
Summary
In July 2008 the Business and Enterprise Committee completed a major inquiry into energy prices and fuel poverty. Since then, there have been a number of developments within the energy sector, including the publication of Ofgem’s energy supply probe, the Government’s launch of a £1 billion package to tackle fuel poverty, and the creation of the new Department of Energy and Climate Change, among others. These events have taken place against the back-drop of a global financial and economic crisis. This short Report considers the implications of these developments for the future of the UK’s energy policy. Matters we consider to be of most importance include:
• The need for intervention to ensure rapid investment in gas storage;
• The likelihood of timely investment in new electricity generating capacity and network infrastructure;
• Interventions to improve liquidity in the wholesale gas and electricity markets;
• The development of new initiatives to promote small and large-scale renewables;
• The Government’s framework for managing its current nuclear liabilities and those arising from new nuclear build;
• Implementation of Ofgem’s supply probe recommendations to ensure domestic and small business customers are treated fairly;
• The Government’s future strategy on fuel poverty; and
• The effectiveness of the current energy market regulatory framework.
This is the Committee’s last Report on energy-related matters, as from January 2009 responsibility for the scrutiny of energy policy will pass to the new Energy and Climate Change Committee.
Energy policy: future challenges 5
1 Introduction
1. On 28 July 2008 the Business and Enterprise Committee published its Eleventh Report of Session 2007-08, Energy prices, fuel poverty and Ofgem, the output of a major inquiry conducted during the first half of the year.1 In the cabinet reshuffle announced on 3 October the Prime Minister created a new Department of Energy and Climate Change, combining the Climate Change Group from the Department for Environment, Food and Rural Affairs (DEFRA) and the Energy Group from the Department for Business, Enterprise and Regulatory Reform (BERR). The House has restructured the departmental committee system in response to the creation of the new department, and from January 2009 responsibility for scrutinising energy policy will move from our Committee, to the new Energy and Climate Change Committee.
2. We timed our original Report to ensure that Ofgem could take account of it in its own energy supply probe, the initial findings for which were published on 6 October 2008.2 The aim of this short Report is to draw on our experience to highlight some of the areas to which we believe our successors will need to pay particular attention.
3. In addition to Ofgem’s work, there have been a number of other important developments within the energy sector in the last five months:
• During July and August the ‘Big 6’ energy retailers raised their gas and electricity prices by double-digit percentages for the second time in 2008;
• On 11 September the Government announced a £1 billion package of additional support for those in fuel poverty. Much of this will be funded by the ‘Big 6’ energy companies and, for the first time, the independent generators. Subsequent figures have shown a one million increase in the number of fuel-poor households, to 3.5 million in 2006;
• On 24 September EDF agreed a £12.5 billion takeover of British Energy. Centrica has also announced that it is in talks to take a 25% stake in the subsidiary formed by the merger;
• On 25 October Electricity4Business, one the few small suppliers to the SME market, went into administration. They were followed on 3 November by another significant small supplier, BizzEnergy;
• On 26 November the Energy Bill was enacted. It includes provisions to allow banding of the Renewables Obligation by technology and establishment of a framework for funding the decommissioning of future nuclear power stations. Late amendments to the Bill also paved the way for the introduction of feed-in tariffs for small-scale renewables, further incentives for renewable heat, and a national roll-out of smart meters for households; and
1 House of Commons Business and Enterprise Committee, Eleventh Report of Session 2007-08, Energy prices, fuel poverty and Ofgem, 28 July 2008, HC 293 2 Ofgem, Energy Supply Probe—Initial Findings Report, 6 October 2008
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• Since reaching a peak of $147 per barrel in early July, the price of oil has collapsed to around $40-45 as expectations of demand have plummeted.
4. These events have taken place within the wider context of a global financial and economic crisis in which most advanced economies have now entered recession with little likelihood of an upturn before 2010. Accordingly, we have taken oral evidence from Ofgem and the Minister of State at the new Department of Energy and Climate Change (DECC) to gauge the wider implications of these developments for the UK’s energy sector in the coming years. We are grateful to those who have contributed to the evidence gathering for this inquiry. We also wish to thank all those who have participated in the various energy- related inquiries conducted by the Committee during the current Parliament.
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2 Future challenges
5. The inquiries we have conducted in the course of the current Parliament suggest there will be a number of major energy policy challenges in the coming years, made worse by current economic conditions. We highlight the most significant of these below.
Energy prices 6. All the ‘Big 6’ energy companies raised their retail prices during the summer, beginning with EDF Energy on 5 July 2008 and ending with Scottish Power and Npower on 29 August. This was the second time they had done so in 2008. The scale of the latest increases was even greater this time round. The price of gas for households jumped by between 22% and 35%, while that for electricity rose by between 9% and 19%. These increases had been widely anticipated as they followed months during which the wholesale price of gas and hence that for electricity had continued an upward trend which had begun in spring 2007.
7. However, July 2008 marked a turning point: the price of oil peaked at around $147 per barrel. Since then prices have fallen sharply to around $40-45—a level last seen in 2004. This has reflected rapidly diminishing expectations of the performance of the world’s major oil-consuming economies in the short to medium term in the wake of the global financial crisis. Accordingly, UK wholesale gas and electricity prices have also started to decline, though not by the same extent. Ofgem told us that on the gas side this was partly a consequence of the sharp drop in the value of Sterling, hence making imports more expensive.3 On the electricity side, concerns over when the Hartlepool and Heysham nuclear power stations would come back on line, having been out of service, have also helped keep prices higher than they might otherwise have been. During the autumn, the Government called on the energy companies to cut retail gas and electricity prices as soon as possible.4 In response, Scottish and Southern Energy, for example, has recently indicated that if wholesale prices continue to fall it will reduce its retail prices in early 2009.5 However, no company has yet announced a price cut for its customers.
8. In the 2008 Pre-Budget Report the Chancellor announced that he had requested Ofgem to publish quarterly reports over the coming year “showing the relationship between wholesale prices, estimated hedged wholesale costs and average retail prices for gas and electricity”.6 The aim of this is to help ensure greater transparency over future price movements, which should improve consumer understanding of why their bills are changing, and may discourage companies from delaying passing on lower wholesale prices to their retail customers.
3 Q 77 (Ofgem) 4 See for example, BBC News, Brown warning over energy bills, 28 October 2008 5 BBC News, Energy prices “could fall soon”, 12 November 2008 6 HM Treasury, Pre-Budget Report 2008: Facing global challenges: supporting people through difficult times, 24 November 2008
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9. Given the expectation of recession amongst most advanced economies in 2009, and the absence of a co-ordinated response from OPEC, the price of oil is likely to remain well below its July 2008 peak in the short term. Accordingly, despite the problems with the structure of the wholesale markets identified in our previous Report, we would expect to see a fall in wholesale gas and electricity prices. While recognising that the hedging strategies of the companies means there will always be a lag of weeks or months between falls in wholesale prices and matching reductions in retail prices, we support the Government in calling on the ‘Big 6’ energy companies to cut prices for their retail customers as soon as possible in 2009, and in pressing for greater transparency on the relationship between wholesale and retail prices. However, we continue to believe that, once the global economy begins to recover, in the long term “the era of cheap energy is surely over”.7
Gas storage 10. Our July Report highlighted the slow progress on increasing the UK’s available gas storage capacity. We said that: “Significant additional storage, beyond that currently planned, is needed to reduce volatility in the wholesale gas price, which otherwise is likely to increase as the UK becomes increasingly dependent on gas imports”.8 Since 2000, the UK’s storage capacity has risen from around 3.5 billion cubic metres (bcm) to approximately 4.3 bcm. Ofgem contrasted this figure with the expectation four or five years ago that total capacity would have reached 10 bcm by 2009.9 The Minister told us that roughly 1 bcm of new storage is currently under construction, with a further 13.8 bcm proposed by 2015.10 Yet National Grid’s most recent Ten Year Statement notes that even if all projects which are at present under construction or have the required consents are developed total storage capacity will rise only to 6 bcm by 2013/14.
11. Only if all proposed projects were to proceed would total capacity approach 18 bcm, which would place the UK in a comparable position to many other European countries.11 Experience, however, suggests that the likelihood of the UK reaching Continental levels of gas storage in the next decade will be slim without government intervention. Two significant constraints inhibit the rapid development of new storage. The first of these is the planning regime. For example, two projects—at Saltfleetby and Fleetwood—that would have provided around 1.7 bcm of additional capacity have recently been refused planning permission. In its response to our July Report, the Government noted that changes to the planning system brought about by the recent Planning Act should in the future help bring forward new projects. Yet we are not likely to see its effect for some time. The Minister told us he expected DECC to consult on a national policy statement for gas storage in mid to late 2009, with final publication likely in 2010. This would then inform the work of the new Infrastructure Planning Commission.12 Even then, it is not necessarily the case that projects
7 Op. cit. para 1 8 Op. cit. para 29 9 Q 109 (Ofgem) 10 Q 6 (Minster of State for Energy) 11 National Grid, Gas Transportation Ten Year Statement 2007, December 2007 12 Q 5 (Minister of State for Energy)
Energy policy: future challenges 9
will receive planning approval that would have been rejected otherwise. Sometimes constraints are local, and may be overridden if national interests take precedence. But even when projects have been referred to central government they may, like the Fleetwood development, be turned down if their impact is too great. The Infrastructure Planning Commission may improve the speediness and consistency of decision-making—it does not, quite rightly, guarantee that every proposal will get permission.
12. Moreover, the economic rationale for companies investing in gas storage is now also a major concern. In our July Report we noted that existing gas storage sites had only recently become profitable enough to demonstrate a commercial incentive to justify major new investment.13 However, the expectation of recession during the latter half of 2008 and into 2009 is likely to delay some projects as firms struggle to raise financing. Portland Gas has, for example, recently put back its 1 bcm project in Dorset by six months. The Minister told us he had “had no further indication from anyone that [credit] crunch problems are likely to cause significant difficulties”.14 However, we find it difficult to believe the gas storage industry can be immune to the economic downturn, which is prompting most companies to re-evaluate their investment plans.
13. If the UK is to avoid falling victim to even higher levels of wholesale gas price volatility in the coming years, it requires a level of growth in storage capacity that is an order of magnitude greater than that which the market has achieved on its own to date. The Government’s national policy statement (NPS) must set out in detail what level of storage it wishes to achieve in the next decade and the criteria that sites for development should meet. Given that NPSs were announced some time ago, we are very disappointed that the NPS for gas storage will not be available for consultation until mid to late 2009, with final publication in 2010. We call on the Government to bring this date forward. Moreover, given the current economic climate, it must now re- consider the likelihood that investment will take place without some form of regulatory intervention. Given the amount of time that has been lost, and the lack of progress that has been made, we think it likely that the market will fail to deliver. There are many possible solutions. To give two possible examples, some form of storage obligation could be placed on gas shippers or suppliers, or the regulated monopoly role of National Grid could be extended.
New electricity generating capacity 14. The Government expects that by 2015, 12 gigawatts of coal and oil-fired electricity generating capacity will close as a result of the European Union’s Large Combustion Plant Directive (LCPD).15 In addition, some 7.4 gigawatts of nuclear power stations will have closed by 2020. It will be a challenge to close the resulting energy gap. BERR’s Energy Markets Outlook report estimated last year that around 14 gigawatts of new conventional (i.e. fossil fuel based) capacity was currently in development, of which around 4.5 gigawatts was under or close to construction. With the exception of a proposed coal-fired plant at Kingsnorth, all of this will be gas-fired. The Minister had even greater expectations of the
13 Op. cit. para 28, and Financial Times, Britain lags behind in gas storage boom, 10 September 2008 14 Q 10 (Minister of State for Energy) 15 Department for Business, Enterprise and Regulatory Reform, Energy Markets Outlook, October 2007
10 Energy policy: future challenges
level of new gas-fired capacity anticipated in the coming years, stating that 10 gigawatts currently had consents, while a further 7.5 gigawatts was in planning.16 Because of this, he gave us the qualified conclusion that: “I think we can be relatively sure that we will get a sufficient replacement for some of the capacity that we will lose …”.17
15. Ofgem gave a more pessimistic summary of the current situation, highlighting the fact that the current financial crisis and the economic downturn are likely to weigh heavily on companies’ investment decisions.18 For example, its Chief Executive, Alistair Buchanan, told us the required return on equity for new power stations has jumped from 10% to 15%. This potentially reduces the commercial viability of a number of proposed projects, and increases the likelihood of their delay. He also noted that a number of British utilities needed to achieve a significant level of refinancing in the next 18 months.19 This too could affect their investment plans. However, the Minister told us “we are getting reassurances from the large energy companies […] and they are saying that they are still looking to go ahead with the projects that they have in the pipelines”.20
16. The outlook appears still more uncertain in the medium to longer term. Whilst the Minister told us there might be up to 13 gigawatts of new coal-fired generation in the future, this is dependent on a number of issues, not least of which will be progress in developing carbon capture and storage.21 There are also some questions about new nuclear build. Companies such as EDF and E.ON have stated an intention to construct new power stations in the UK. However, the commissioning of the new reactor at Olkiluoto in Finland is already running two years behind schedule and significantly over budget.22 The Finnish project was widely seen as providing a potential blueprint for the UK’s own nuclear programme.
17. Generating capacity equivalent to nearly a third of current electricity demand will be made redundant by 2020. It will need to be replaced. We believe that in the current economic climate there is a high risk that the energy companies will not be able to raise the finance necessary to build this. It is the Government’s job to ensure security of supply. Just as the Government has been quick to respond to the crisis in the banking sector, it must now take action to ensure investment in new capacity takes place as planned. A reasonable level of profit by the big energy suppliers will be a precondition of this investment taking place. The situation is now very serious and we believe that a simple trust in the market’s ability to deliver without any intervention will see us facing an ‘energy crunch’ in the medium term. The social and economic consequences of such a ‘crunch’ would be disastrous.
18. The Government needs to take action to ensure the credibility of its claims that climate change forms as important a part of the UK’s energy policy as security of
16 Q 33 (Minister of State for Energy) 17 Q 30 (Minister of State for Energy) 18 Q 135 (Ofgem) 19 Ibid. 20 Q 30 (Minister of State for Energy) 21 Q 28 (Minister of State for Energy) 22 BBC News website, ‘Entente nucleaire’: What, why? 27 March 2008
Energy policy: future challenges 11
supply. Further action is required if both nuclear power and coal-fired generation are to form part of the electricity mix in the medium to longer term. The Government will need to learn from the recent Finnish experience of new nuclear build to ensure a UK programme is not subject to the same delays and cost over-runs. The national policy statement on nuclear power should be brought forward at the earliest possible date. In addition, much greater levels of investment in carbon capture and storage (CCS) are required than the current single competition for a demonstration plant if the Government wishes to see environmentally acceptable new coal-fired capacity.
Wholesale market liquidity 19. In our July Report we raised concern over the level of liquidity in the wholesale gas and electricity forward markets.23 The problem is particularly acute for electricity, which contributes to price volatility and poor price transparency, as we discuss below. But there are problems in other markets as well. While there is a high level of churn on the spot market for gas, Ofgem found the percentage of over-the-counter (OTC) gas contracts traded one or more years’ forward is relatively small, and has declined in the last couple of years.24 Ofgem also noted that the forward market for oil showed a similar lack of liquidity for forward contracts further out. However, the regulator has not, at this stage, proposed further work. For electricity, the regulator found that churn on the OTC market is low in comparison to the gas market and again focused on prompt delivery. Exchange-based trading of electricity has also collapsed to near negligible levels in the last year as a result of the credit crunch. In response, for electricity, Ofgem has stated that it will “begin, urgently, a programme of work to identify the underlying causes of low wholesale market liquidity, and explore with the ‘Big 6’ suppliers how best to achieve a significant increase in liquidity”.25
20. We welcome Ofgem’s decision to take action to improve liquidity in the wholesale electricity market. This is now more important than ever, as the credit crunch has seen a decline in liquidity from the very low levels that existed in the first place. We look to the regulator to move quickly by proposing reforms in the first half of 2009. These will be crucial for encouraging future new entrants, both in the wholesale and retail markets. Furthermore, we continue to believe the Government and regulator should give greater attention to liquidity in the forward market for wholesale gas, about which a number of witnesses raised concern in our previous inquiry. The Government’s response to that Report showed that the last piece of substantive work on the topic was conducted in 2005. It is time for the Department of Energy and Climate Change (DECC) to consider the issue again and without delay. Unless wholesale markets work well there is no chance of achieving a fair deal for retail customers.
23 Op. cit. paras 17 and 63 24 Ofgem, Energy Supply Probe—Initial Findings Report, 6 October 2008 25 Ibid.
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The Energy Act 2008 21. The Energy Act 2008 received Royal Assent on 26 November 2008. It implements the legislative aspects of the 2007 Energy White Paper, including the introduction of technology banding for the Renewables Obligation, and provision of a framework for financing the waste disposal and decommissioning costs required for a new generation of nuclear power stations. The Act also contains provisions implementing past Committee recommendations. For example, a 2007 Report of ours stated that “a feed-in tariff could be used to encourage the development of local energy”.26 The new Act will enable the Government to introduce a scheme of feed-in tariffs to support low-carbon generation of electricity projects up to 5 megawatts.
22. This Committee has also been consistently critical of the lack of attention paid by government to the potential for low-carbon heating.27 Space heating accounts for 47% of the UK’s carbon emissions. Yet the 2007 Energy White Paper dedicated only 5 pages to the issue in a document of more than 300 pages. We are therefore pleased to see that the Energy Act contains provisions that will allow the Secretary of State to establish a financial support mechanism for renewable heat from large industrial sites down to household level. We stated two years ago that: “Renewable low-carbon heat production is the Cinderella of energy policy and this attitude must change”.28 This policy area has finally received its invitation to the ball.
23. Smart meters will play a crucial part in encouraging energy efficiency and enabling retail markets to function more efficiently. Our most recent Report called for the Government to set “a clear and urgent timetable for implementation”.29 DECC has since announced a national roll-out of smart meters for domestic customers and the Energy Act contains the powers it needs to achieve this. The Department intends to spend the next two years resolving technical issues and establishing the detail of the roll-out, which will then take place over a ten-year period.
24. The creation of the Department of Energy and Climate Change has brought about new policy initiatives on feed-in tariffs, incentives for renewable heat and smart metering, which this Committee has advocated for some time. We welcome these developments. It will now fall to the new Energy and Climate Change Committee to scrutinise the finer detail of how the Department puts these policies into practice. In particular, we hope that DECC will treat the twelve year programme for the introduction of smart meters (two years consultation and ten-year roll-out) as an absolute maximum, and aim to complete it much more quickly. The new committee will also need to pay close attention to other aspects of the Energy Act 2008, such as the implementation of technology banding for the Renewables Obligation and the
26 House of Commons Trade and Industry Committee, First Report of Session 2006-07, Local energy—turning consumers into producers, January 2007, HC 257 27 Ibid. and House of Commons Trade and Industry Committee, Fourth Report of Session 2005-06, New nuclear? Examining the issues, July 2006, HC 1122 28 House of Commons Trade and Industry Committee, First Report of Session 2006-07, Local energy—turning consumers into producers, January 2007, HC 257 29 Op. cit. para 90
Energy policy: future challenges 13
establishment of a framework for financing waste disposal and decommissioning costs arising from future new nuclear power stations.
Electricity network infrastructure 25. In our 2007 Report on local energy we considered the implications of a changing energy mix for the UK’s electricity networks. We noted that much of our existing infrastructure is coming to the end of its design life, and that about two-thirds of the network will need to be replaced in the near future. The current system is optimised for centralised electricity generation, with power flowing in one direction from generating plants through the transmission network to lower voltage distribution networks, from which it is delivered to homes, offices and factories. Ofgem manages the framework for investment in the electricity networks through a rolling cycle of five-year distribution and transmission price control reviews.
26. The UK’s future energy mix will come from a more diverse range of sources, including local energy and larger-scale onshore and offshore renewables, as well as new nuclear power stations. More decentralised generation will need technologies that allow more ‘active’ management of the electricity networks. The scale of investment required to install them is likely to be huge, but could yield substantial benefits both in terms of security of supply and in reducing carbon emissions. In conjunction with new incentives for decentralised generation, DECC, Ofgem and the new committee will need to consider whether the existing regulatory regime governing network investment is sufficient to meet the demands posed by a more complex energy mix.
Funding the Nuclear Decommissioning Authority 27. As a consequence of the machinery of government changes in October 2008, responsibility for the Nuclear Decommissioning Authority (NDA) has now passed to DECC. In a Report on the NDA’s funding earlier this year we noted that its then sponsoring department, BERR, spent over 40% of its annual departmental expenditure limit (DEL) on the Authority.30 The proportion of DECC’s DEL that will constitute NDA expenditure is likely to be even greater. The Authority’s budget was ring-fenced within BERR’s budget. This meant that, in the first instance, BERR had to look to its non-ring- fenced budgets to make good any short fall for the NDA—a situation we concluded was unacceptable. As a smaller department than BERR, this poses an even greater risk to the newly formed DECC’s non-NDA budgets.
28. Moreover, our Report highlighted that the NDA’s funding model is unsustainable in the longer term as a result of uncertain and declining commercial revenues. However, BERR’s Permanent Secretary told us that: “the saving grace is I do not think there is a car crash in the next two or three years and therefore we have time to plan the avoidance strategy”.31 It will now fall to DECC to avoid a potential “car crash” by re-designing the Nuclear Decommissioning Authority’s funding model before the end of the current
30 House of Commons Business and Enterprise Committee, Fourth Report of Session 2007-08, Funding the Nuclear Decommissioning Authority, April 2008, HC 394 31 Ibid.
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spending review period. Agreement with HM Treasury on an appropriate framework should provide full protection of DECC’s non-NDA related departmental expenditure limit. This issue should be a high priority for both the new department and the new select committee which will scrutinise it.
Treating domestic and small business customers fairly 29. In our July Report we noted our concern over various aspects of the retail markets for electricity and gas for both households and small businesses. In this section we follow up on some of these areas as well as raising new issues that have come to light since the summer.
Cost-reflective energy pricing 30. Both our own inquiry and Ofgem’s subsequent probe highlighted several ways in which the ‘Big 6’ energy retailers engage in differential pricing. For instance, we both found that customers who pay by standard credit are charged disproportionately more than those who use direct debits. We also expressed concern over excessive charging of pre-payment meter (PPM) users, though the regulator found this problem had diminished over the course of 2008. The regulator also found that five of the former incumbent electricity suppliers were charging their legacy customers on average 6% more than comparable ‘out- of-area’ customers. Furthermore, Ofgem discovered that the incumbent energy retailers have been consistently earning higher margins on electricity supply than on gas, hence over-charging those 4.3 million electricity customers who are not connected to the gas main.32
31. In response, Ofgem has proposed a new licence requirement on suppliers that would require charges for different payment types to be cost-reflective. This would ensure the price differentials for direct debit, standard credit and PPM users are proportionate to the different costs of each means of payment. In addition, the regulator has said it is considering a further licence condition that would impose either a “prohibition on undue price discrimination or introduce a form of relative price control”.33 This would tackle some of the other forms of price discrimination uncovered in Ofgem’s probe. Alistair Buchanan told us there were already signs that the energy companies were responding to calls for payment type price differentials to be cost-reflective.34 Following a consultation on its findings and recommendations, which has now closed, the regulator will decide how best to proceed in the New Year.
32. In the short term energy suppliers may themselves take action to ensure their charges for different payment types are cost-reflective. However, we believe that in future this requirement should be set down in companies’ licences to ensure the issue does not arise again. We also support Ofgem’s proposal for a further licence condition that would prohibit undue price discrimination. This would benefit vulnerable groups such as older people who are less likely to switch, or rural customers who are not
32 Ibid. 33 Op. cit. para 1.40 34 Q 76 (Ofgem)
Energy policy: future challenges 15
connected to the gas grid. Such a condition would, however, need to make an exception for those households who currently benefit from suppliers’ social tariffs. We also repeat that most of those in fuel poverty are on standard credit terms and that, while much is said about pre-payment meter tariffs, too little political attention is focussed on this larger and often more vulnerable group.
Direct debit charges 33. In November 2008 a new concern amongst energy consumers came to light regarding direct debit charges.35 Many customers who pay in this way believe their suppliers set their monthly direct debit at too high a level so that, in the long term, they gradually build up surplus credit with their company, and effectively provide it with an interest-free loan. The Committee has heard from hundreds of frustrated customers who have had to request either a rebate from their supplier or a reduction in their monthly payments. When we raised this issue with the Minister, he said he had had the same experience.36 In response, Ofgem told us its “corporate affairs team will take it on and have a look at it and see where we go from there, whether it triggers an enforcement case”.37 Subsequently Ofgem has indicated to complainants that it lacks quantitative evidence and has given the impression of withdrawing from its commitment to our Committee. We welcome the regulator’s initial commitment to look into whether the energy suppliers are using higher than necessary direct debit charges to boost their cash flow, and we look forward to its findings. The level of public concern is high and we urge our successor committee to maintain the pressure on Ofgem to resolve this issue.
Direct selling 34. In our earlier Report we said: “The industry must consider itself on notice” on the continued use of direct sales as a means of encouraging customers to switch suppliers.38 We reached this conclusion in response to a high level of public concern over alleged mis- selling practices, and the launch by Ofgem of an investigation into Npower for a breach of its supply licence. Ofgem’s probe found further damning evidence on the effectiveness of direct selling. 48% of gas customers and 42% for electricity who switch as a result of a direct sales approach do not achieve a price reduction. This is despite the fact that almost all consumers who switch supplier do so in an attempt to save money. Ofgem has said that it will strengthen the rules governing suppliers’ sales and marketing activities to encourage more informed decision-making and to prevent misleading activity. Its probe findings suggest this could include requiring suppliers to provide a written quotation and comparison with the customer’s current price before they make the decision to switch.39 Neither Ofgem nor the Minister was willing yet to recommend the step of banning direct selling outright.40
35 BBC News, Direct debit bills in spotlight, 25 November 2008
36 Q 37 (Minister of State for Energy) 37 Q 177 (Ofgem) 38 Op. cit. para 80 39 Op. cit. para 1.37 40 Qq 44 (Minister of State for Energy) and 181 (Ofgem)
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35. We are deeply concerned that nearly half of consumers who switch as a result of a direct sales approach fail to achieve a price reduction. We welcome Ofgem’s commitment to strengthen the rules governing direct selling. It should ensure new rules are in place within the first quarter of 2009. If they do not significantly improve the level of service to customers by this time next year, then the regulator should not hesitate to ban the practice outright.
Supply for small businesses 36. Our inquiry and Ofgem’s subsequent probe highlighted a number of abuses in the market for electricity supply to small and medium-sized enterprises (SMEs). These included alleged predatory pricing, delaying tactics to win back customers, and confusing contract cancellation requirements. We recommended that if Ofgem was unable to find a solution then it should consider referring the SME supply market to the Competition Commission. In response Ofgem has proposed a range of remedies including, among others, a code of practice to govern the objections and switching process; an extension of the accreditation scheme for switching sites to cover those dealing with SME customers; and a strengthening of the code of practice for third party intermediaries.41 Alistair Buchanan told us:
the ‘Big 6’ have simply behaved so badly to this group […] that I would be very disappointed if the range of remedies that we have put down does not have a substantial improvement […] for small users. If it does not, it means that something is going very wrong and we will have to use powers that could include going to the Competition Commission.42
We are pleased at this new attitude, but we believe that a fully effective regulator would not have allowed things to get so bad in the first place.
37. During our inquiry, it was the small independent suppliers, such as BizzEnergy and Electricity4Business that were most vocal in raising awareness of competition issues in the SME market. Both these companies have since gone into administration or receivership. It is too early to say whether this was a direct consequence of anti-competitive practices by the ‘Big 6’. Indeed British Gas recently wrote to the Committee stating, without a trace of irony, that “the exit of the weaker companies shows that competition is indeed working”.43 In reality, it is likely that a combination of factors, including the impact of the credit crunch, lie at the route of the small suppliers’ exit from the market.
38. A consequence of BizzEnergy and Electricity4Business’s recent demise is that SME customers have lost two of their most effective advocates. Households are represented by the successor to Energywatch, Consumer Focus, and large-scale energy consumers have two dedicated advocacy bodies in the Major Energy Users’ Council and the Energy Intensive Users’ Group. Yet SMEs do not benefit from such advocacy, although Consumer Focus is currently looking at its role in representing them. Lack of a
41 Op. cit. para 1.39 42 Q 156 (Ofgem) 43 Letter to the Chairman of the Business and Enterprise Committee from British Gas, 18 November 2008
Energy policy: future challenges 17
dedicated advocate may explain why anti-competitive practices by the ‘Big 6’ have been able to develop relatively unchallenged in the past. Though Ofgem told us it maintains links to SMEs through its Small User Group, we believe the regulator and DECC must ensure there are effective mechanisms for ensuring the interests of SMEs are identified and properly safeguarded.
Fuel poverty 39. On 11 September the Government announced a £1 billion Home Energy Saving Programme to help domestic consumers cut their energy bills permanently. Within this, it is expanding the Carbon Emissions Reduction Target (CERT) by 20%. This is an obligation on energy suppliers to install energy efficiency measures in households. It will mean an extra £560 million of investment in housing by energy suppliers. 40% of installed measures must be for a priority group of low income and elderly households. The Government also announced £74 million of additional funds for the Warm Front Scheme; an increase in the Cold Weather Payment for this winter from £8.50 to £25 per week; and plans to work with energy companies and the banks to increase the number of people using direct debits to pay their energy bills.44
40. In addition, the package included a new £350 million Community Energy Saving Programme. This will create partnerships between local councils, community-based organisations, voluntary organisations and energy companies going street-by-street, offering free and discounted central heating, energy efficiency measures and benefit checks. Areas where the programme will operate will be selected based on their levels of deprivation, though measures will be developed for both vulnerable households and those in the able-to-pay sector. The programme will be funded through a new and additional obligation on energy suppliers and, for the first time, electricity generators such as Drax Power and International Power.
41. On 2 October, the latest fuel poverty figures for 2006 showed a one million increase to 3.5 million households—2.75 million of which are defined as vulnerable. The figures mark a return to levels last seen in 1998. In our July Report National Energy Action told us it believed actual fuel poverty had now reached 4.5 million.45 We noted too that every 10% increase in energy prices sends an additional 400,000 people into fuel poverty. This means the round of price increases by the ‘Big 6’ energy suppliers in the summer could have added another million to the total number of fuel poor.
42. After two rounds of price increases, we estimate as many as 5.5 million households may now be living in fuel poverty. We welcome the Government’s package of measures announced in the autumn, particularly their focus on improving the energy efficiency of the existing housing stock. This will prove the most cost-effective means of tackling fuel poverty in the long run. We also welcome the contribution to the package being made by non-vertically integrated electricity generators, which acknowledges the fact
44 Department for Food, Environment and Rural Affairs Press Release, Save Money: Save Energy: Government takes action on family fuel bills, 11 September 2008 45 Op. cit. para 107
18 Energy policy: future challenges
that they too have benefited from windfall gains under Phase 2 of the EU Emissions Trading Scheme.
43. The creation of DECC removes one of the fissures in responsibility for fuel poverty within government, with BERR and DEFRA previously having overlapping involvement. We hope the Department will keep its strategy under review as many of its current measures have a limited lifetime even within the existing spending review period. While there is currently a strong case for the industry’s role in alleviating fuel poverty because of the windfall gains it is receiving, these will cease to exist once full auctioning of carbon permits is introduced in 2013. Provided the regulatory framework is sufficient to ensure fairness to all consumers, in the long term the Government will need to consider whether it can continue to expect energy companies and the regulator to be responsible for the delivery of its social policy objectives. We also reiterate our frequent recommendation that much more attention must be paid to groups in fuel poverty other than pensioners, particularly disabled people under 60.
The role of Ofgem 44. In our July Report we expressed surprise that Ofgem had decided to conduct its own inquiry into the energy markets, having stated only a matter of weeks before that “Britain’s competitive market in energy is working”.46 We nevertheless welcomed Ofgem’s investigation and adjusted our own inquiry accordingly. Our inquiry revealed that many aspects of the market were not working effectively. While we are pleased the regulator agreed with our assessment in many cases, we are concerned that it appeared to require our inquiry to goad it into action. We are particularly concerned that until recently Ofgem appeared indifferent to the concerns of smaller business consumers.
45. When we asked the Minister’s view on the regulator’s recent performance, he stated:
I think it is fair to say that certainly among our many Members of the House there have been some concerns expressed about Ofgem and some issues around confidence in Ofgem […] I very much hope that Ofgem will be able to restore the level of public confidence that it needs to have. I think there is every indication in terms of the way in which it has dealt with this particular probe that it will achieve the level of confidence the public need. I would not for a moment say that, at least among MPs, it can hold its hand on its heart and say it is where it ought to be. I hope as a result of this probe it will get there.47
46. We were pleased that the regulator’s initial findings report and suggested recommendations sought to address many, though not all, of the concerns set out in our earlier Report. Indeed, its probe raised some issues that had not come to light in our inquiry. For this we give Ofgem credit. However, it is clear that in 2008 the regulator has been slow to respond to rising concern over the functioning of the energy markets. We hope that in 2009 and onwards, the new Energy and Climate Change
46 Op. cit. para 4 47 Q 70 (Minister of State for Energy)
Energy policy: future challenges 19
Committee will not have to take the lead in setting the regulator’s agenda as we have found ourselves doing on too many occasions.
47. We also express concern that the new consumer representation processes and the plethora of bodies involved—Consumer Direct, companies’ complaints procedures, the Energy Ombudsman, Consumer Focus and Ofgem itself—are opaque. Moreover, they risk reducing Ofgem’s awareness of issues of concern to consumers, such as the recent complaints about direct debits. Ofgem and Consumer Focus will need to have close and frequent contact. Otherwise, the combination of a regulator which often needs to be prompted to take action, and a lack of effective procedures for bringing shortcomings to the attention of the regulator, will be a recipe for poor representation of consumer interests.
48. However, we also believe that if Ofgem is to regulate the UK’s gas and electricity markets effectively, then it must have the means with which to do so. Alistair Buchanan told us “the Enterprise Act or the Competition Act is quite often a very clumsy tool—using a sledgehammer to crack what may be a big or a small nut”.48 Accordingly, the regulator told us it is pursuing the possibility of acquiring a “market abuse power”.49 This would place a condition in companies’ licences that prohibited conduct that amounts to an abuse of a position of substantial market power in the wholesale gas and electricity markets. Ofgem is able to adjust companies’ licence conditions as it sees fit, though they can appeal to the Competition Commission (CC). The regulator sought this power in 1999, but it was rejected by the CC.50 A recent evaluation by the Commission stated: “the CC’s decision not to support the introduction of the market abuse licence clause in 2001 seems well-justified by subsequent market developments in Great Britain. Equally, however, Ofgem’s view that such powers can be necessary in some circumstances also seems to be supported by subsequent developments overseas”.51 We recommend the Government now investigates whether Ofgem should have additional powers to guard against market abuses, particularly in the wholesale electricity markets, and how these powers might be granted.
48 Q 82 (Ofgem) 49 Q 190 (Ofgem) 50 Ibid. 51 Competition Commission, Evaluation of the Commission’s past cases, January 2008
20 Energy policy: future challenges
Conclusions and recommendations
Energy prices 1. Given the expectation of recession amongst most advanced economies in 2009, and the absence of a co-ordinated response from OPEC, the price of oil is likely to remain well below its July 2008 peak in the short term. Accordingly, despite the problems with the structure of the wholesale markets identified in our previous Report, we would expect to see a fall in wholesale gas and electricity prices. While recognising that the hedging strategies of the companies means there will always be a lag of weeks or months between falls in wholesale prices and matching reductions in retail prices, we support the Government in calling on the ‘Big 6’ energy companies to cut prices for their retail customers as soon as possible in 2009, and in pressing for greater transparency on the relationship between wholesale and retail prices. However, we continue to believe that, once the global economy begins to recover, in the long term “the era of cheap energy is surely over”. (Paragraph 9)
Gas storage 2. If the UK is to avoid falling victim to even higher levels of wholesale gas price volatility in the coming years, it requires a level of growth in storage capacity that is an order of magnitude greater than that which the market has achieved on its own to date. The Government’s national policy statement (NPS) must set out in detail what level of storage it wishes to achieve in the next decade and the criteria that sites for development should meet. Given that NPSs were announced some time ago, we are very disappointed that the NPS for gas storage will not be available for consultation until mid to late 2009, with final publication in 2010. We call on the Government to bring this date forward. Moreover, given the current economic climate, it must now re-consider the likelihood that investment will take place without some form of regulatory intervention. Given the amount of time that has been lost, and the lack of progress that has been made, we think it likely that the market will fail to deliver. There are many possible solutions. To give two possible examples, some form of storage obligation could be placed on gas shippers or suppliers, or the regulated monopoly role of National Grid could be extended. (Paragraph 13)
New electricity generating capacity 3. Generating capacity equivalent to nearly a third of current electricity demand will be made redundant by 2020. It will need to be replaced. We believe that in the current economic climate there is a high risk that the energy companies will not be able to raise the finance necessary to build this. It is the Government’s job to ensure security of supply. Just as the Government has been quick to respond to the crisis in the banking sector, it must now take action to ensure investment in new capacity takes place as planned. A reasonable level of profit by the big energy suppliers will be a precondition of this investment taking place. The situation is now very serious and we believe that a simple trust in the market’s ability to deliver without any
Energy policy: future challenges 21
intervention will see us facing an ‘energy crunch’ in the medium term. The social and economic consequences of such a ‘crunch’ would be disastrous. (Paragraph 17)
4. The Government needs to take action to ensure the credibility of its claims that climate change forms as important a part of the UK’s energy policy as security of supply. Further action is required if both nuclear power and coal-fired generation are to form part of the electricity mix in the medium to longer term. The Government will need to learn from the recent Finnish experience of new nuclear build to ensure a UK programme is not subject to the same delays and cost over-runs. The national policy statement on nuclear power should be brought forward at the earliest possible date. In addition, much greater levels of investment in carbon capture and storage (CCS) are required than the current single competition for a demonstration plant if the Government wishes to see environmentally acceptable new coal-fired capacity. (Paragraph 18)
Wholesale market liquidity 5. We welcome Ofgem’s decision to take action to improve liquidity in the wholesale electricity market. This is now more important than ever, as the credit crunch has seen a decline in liquidity from the very low levels that existed in the first place. We look to the regulator to move quickly by proposing reforms in the first half of 2009. These will be crucial for encouraging future new entrants, both in the wholesale and retail markets. Furthermore, we continue to believe the Government and regulator should give greater attention to liquidity in the forward market for wholesale gas, about which a number of witnesses raised concern in our previous inquiry. The Government’s response to that Report showed that the last piece of substantive work on the topic was conducted in 2005. It is time for the Department of Energy and Climate Change (DECC) to consider the issue again and without delay. Unless wholesale markets work well there is no chance of achieving a fair deal for retail customers. (Paragraph 20)
The Energy Act 2008 6. The creation of the Department of Energy and Climate Change has brought about new policy initiatives on feed-in tariffs, incentives for renewable heat and smart metering, which this Committee has advocated for some time. We welcome these developments. It will now fall to the new Energy and Climate Change Committee to scrutinise the finer detail of how the Department puts these policies into practice. In particular, we hope that DECC will treat the twelve year programme for the introduction of smart meters (two years consultation and ten-year roll-out) as an absolute maximum, and aim to complete it much more quickly. The new committee will also need to pay close attention to other aspects of the Energy Act 2008, such as the implementation of technology banding for the Renewables Obligation and the establishment of a framework for financing waste disposal and decommissioning costs arising from future new nuclear power stations. (Paragraph 24)
22 Energy policy: future challenges
Electricity network infrastructure 7. The UK’s future energy mix will come from a more diverse range of sources, including local energy and larger-scale onshore and offshore renewables, as well as new nuclear power stations. More decentralised generation will need technologies that allow more ‘active’ management of the electricity networks. The scale of investment required to install them is likely to be huge, but could yield substantial benefits both in terms of security of supply and in reducing carbon emissions. In conjunction with new incentives for decentralised generation, DECC, Ofgem and the new committee will need to consider whether the existing regulatory regime governing network investment is sufficient to meet the demands posed by a more complex energy mix. (Paragraph 26)
Funding the Nuclear Decommissioning Authority 8. It will now fall to DECC to avoid a potential “car crash” by re-designing the Nuclear Decommissioning Authority’s funding model before the end of the current spending review period. Agreement with HM Treasury on an appropriate framework should provide full protection of DECC’s non-NDA related departmental expenditure limit. This issue should be a high priority for both the new department and the new select committee which will scrutinise it. (Paragraph 28)
Cost-reflective energy pricing 9. In the short term energy suppliers may themselves take action to ensure their charges for different payment types are cost-reflective. However, we believe that in future this requirement should be set down in companies’ licences to ensure the issue does not arise again. We also support Ofgem’s proposal for a further licence condition that would prohibit undue price discrimination. This would benefit vulnerable groups such as older people who are less likely to switch, or rural customers who are not connected to the gas grid. Such a condition would, however, need to make an exception for those households who currently benefit from suppliers’ social tariffs. We also repeat that most of those in fuel poverty are on standard credit terms and that, while much is said about pre-payment meter tariffs, too little political attention is focussed on this larger and often more vulnerable group. (Paragraph 32)
Direct debit charges 10. We welcome the regulator’s initial commitment to look into whether the energy suppliers are using higher than necessary direct debit charges to boost their cash flow, and we look forward to its findings. The level of public concern is high and we urge our successor committee to maintain the pressure on Ofgem to resolve this issue. (Paragraph 33)
Energy policy: future challenges 23
Direct selling 11. We are deeply concerned that nearly half of consumers who switch as a result of a direct sales approach fail to achieve a price reduction. We welcome Ofgem’s commitment to strengthen the rules governing direct selling. It should ensure new rules are in place within the first quarter of 2009. If they do not significantly improve the level of service to customers by this time next year, then the regulator should not hesitate to ban the practice outright. (Paragraph 35)
Supply for small businesses 12. A consequence of BizzEnergy and Electricity4Business’s recent demise is that SME customers have lost two of their most effective advocates. Households are represented by the successor to Energywatch, Consumer Focus, and large-scale energy consumers have two dedicated advocacy bodies in the Major Energy Users’ Council and the Energy Intensive Users’ Group. Yet SMEs do not benefit from such advocacy, although Consumer Focus is currently looking at its role in representing them. Lack of a dedicated advocate may explain why anti-competitive practices by the ‘Big 6’ have been able to develop relatively unchallenged in the past. Though Ofgem told us it maintains links to SMEs through its Small User Group, we believe the regulator and DECC must ensure there are effective mechanisms for ensuring the interests of SMEs are identified and properly safeguarded. (Paragraph 38)
Fuel poverty 13. After two rounds of price increases, we estimate as many as 5.5 million households may now be living in fuel poverty. We welcome the Government’s package of measures announced in the autumn, particularly their focus on improving the energy efficiency of the existing housing stock. This will prove the most cost-effective means of tackling fuel poverty in the long run. We also welcome the contribution to the package being made by non-vertically integrated electricity generators, which acknowledges the fact that they too have benefited from windfall gains under Phase 2 of the EU Emissions Trading Scheme. (Paragraph 42)
14. The creation of DECC removes one of the fissures in responsibility for fuel poverty within government, with BERR and DEFRA previously having overlapping involvement. We hope the Department will keep its strategy under review as many of its current measures have a limited lifetime even within the existing spending review period. While there is currently a strong case for the industry’s role in alleviating fuel poverty because of the windfall gains it is receiving, these will cease to exist once full auctioning of carbon permits is introduced in 2013. Provided the regulatory framework is sufficient to ensure fairness to all consumers, in the long term the Government will need to consider whether it can continue to expect energy companies and the regulator to be responsible for the delivery of its social policy objectives. We also reiterate our frequent recommendation that much more attention must be paid to groups in fuel poverty other than pensioners, particularly disabled people under 60. (Paragraph 43)
24 Energy policy: future challenges
The role of Ofgem 15. We were pleased that the regulator’s initial findings report and suggested recommendations sought to address many, though not all, of the concerns set out in our earlier Report. Indeed, its probe raised some issues that had not come to light in our inquiry. For this we give Ofgem credit. However, it is clear that in 2008 the regulator has been slow to respond to rising concern over the functioning of the energy markets. We hope that in 2009 and onwards, the new Energy and Climate Change Committee will not have to take the lead in setting the regulator’s agenda as we have found ourselves doing on too many occasions. (Paragraph 46)
16. We also express concern that the new consumer representation processes and the plethora of bodies involved—Consumer Direct, companies’ complaints procedures, the Energy Ombudsman, Consumer Focus and Ofgem itself—are opaque. Moreover, they risk reducing Ofgem’s awareness of issues of concern to consumers, such as the recent complaints about direct debits. Ofgem and Consumer Focus will need to have close and frequent contact. Otherwise, the combination of a regulator which often needs to be prompted to take action, and a lack of effective procedures for bringing shortcomings to the attention of the regulator, will be a recipe for poor representation of consumer interests. (Paragraph 47)
17. We recommend the Government now investigates whether Ofgem should have additional powers to guard against market abuses, particularly in the wholesale electricity markets, and how these powers might be granted. (Paragraph 48)
Energy policy: future challenges 25
Formal Minutes
Wednesday 10 December 2008
Members present:
Peter Luff, in the Chair
Roger Berry Mr Mike Weir Miss Julie Kirkbride
Draft Report (Energy policy: future challenges), proposed by the Chairman, brought up and read.
Ordered, That the draft Report be read a second time, paragraph by paragraph.
Paragraphs 1 to 48 read and agreed to.
Summary agreed to.
Resolved, That the Report be the First Report of the Committee to the House.
Ordered, That the Chairman make the Report to the House.
Ordered, That embargoed copies of the Report be made available, in accordance with the provisions of Standing Order No. 134.
Written evidence was ordered to be reported to the House for printing with the Report.
[Adjourned till Monday 15 December at 2.15 pm
26 Energy policy: future challenges
Witnesses
Monday 24 November 2008 Page
Mike O’Brien MP, Minister of State, and Neil Feinson, Director, Energy Regulator Framework, Department of Energy and Climate Change Ev 1
Tuesday 25 November 2008
Alistair Buchanan, Chief Executive, Ofgem Ev 15
List of written evidence
Letter from the Department of Energy and Climate Change Letter from Ofgem
Energy policy: future challenges 27
List of Reports from the Committee during the last Parliamentary Session
Session 2007–08 First Report The work of the Committee in 2007 HC 233 Second Report Jobs for the Girls: Two Years On HC 291 Third Report Post Office Closure Programme HC 292 Fourth Report Funding the Nuclear Decommissioning Authority HC 394 Fifth Report Waking up to India: Developments in UK-India economic HC 209 relations Sixth Report After the Network Change Programme: the future of the HC 577 post office network Seventh Report Keeping the door wide open: Turkey and EU accession HC 367 Eighth Report Scrutiny of Arms Export Controls (2008): UK Strategic Export HC 254 (First Joint Report of Controls Annual Report 2006, Quarterly Reports for 2007, Committee’s on Arms licensing policy and review of export control legislation Export Controls) Ninth Report Construction matters HC 127 Tenth Report Post Office finance: matters arising from evidence taken on HC 662 10 June 2008 Eleventh Report Energy prices, fuel poverty and Ofgem HC 293 Twelfth Report Post Office Card Account: successor arrangements HC 1052 Thirteenth Report Companies House HC 456 Fourteenth Report Departmental Annual Report and Scrutiny of the Department HC 1116 for Business, Enterprise and Regulatory Reform
Business and Enterprise Committee: Evidence Ev 1 Oral evidence
Taken before the Business and Enterprise Committee
on Monday 24 November 2008
Members present:
Peter LuV, in the Chair Mr Mike Weir Mr Adrian Bailey Mr Anthony Wright Mr Lindsay Hoyle
Witnesses: Mike O’Brien MP, Minister of State, and Mr Neil Feinson, Director, Energy Regulator Framework, gave evidence.
Q1 Chairman: Minister, thank you very much for action on the Ofgem report if aspects of that report coming before us and thank you for being flexible in are not responded to positively by the various energy timing. When we heard that it was going to be a very companies. We have highlighted issues around significant Pre-Budget Report we thought it prepayment meters, for example. appropriate to delay the start slightly. I am grateful to you for your flexibility and I think it proved to be Q3 Chairman: We will come to those later. The the right decision, particularly as the Pre-Budget particular issue that I am focused on now is the Report contained matters relevant to today’s relationship between wholesale prices and retail evidence session. We know who you are, but for the prices, which I understood to be the thrust of the record we would ask your colleague to introduce Chancellor’s remarks. himself. Mr O’Brien: What we have said is that if it is clear Mr Feinson: I am Neil Feinson. I am responsible for that there are problems there we will take some the Energy Regulator Framework in DECC, and in action, but what the Chancellor also announced was BERR previously. the publication on a quarterly basis of a report which showed what prices there were in the wholesale Q2 Chairman: Minister, we are having Ofgem in market and also in the retail market, so that it was tomorrow to talk about similar questions, although possible to follow the degree to which the retail we will be asking them about slightly diVerent issues, market was not responding to changes in the more relevant to their regulatory responsibilities, wholesale market and the lag which we have all been but there is a lot of overlap between the two sessions. aware of that happens in terms of, particularly gas Our intention is to produce a report which is this prices, but also electricity prices. What we have also Committee’s tombstone report as we hand over indicated is that we will not just show the basic responsibility to the new committee in the New Year wholesale prices because, in terms of gauging the with what we view our sense of priorities ought to be responsiveness of energy companies, that of itself for the new committee and for your department. I will not be enough. What you really need to do is think I speak for all of us in saying that we are sad have some ability to look at how those energy as a committee to be losing responsibility for energy companies are hedging their purchases. As you policy, which we have greatly enjoyed, but at the know—but perhaps some of those listening to these same time we recognise the importance of its role, proceedings will not—the energy companies buy particularly in the context of climate change, also their gas or electricity in many cases quite security of supply issues and aVordability issues, but substantially ahead. Some of those gas and we understand the need for that new department to electricity purchases are a year ahead, some of them be established and we congratulate you on your are much closer and almost on the spot market, and position within it and thank you for coming so early they hedge it over a period of time. When you are on in your occupancy of that new position. Can I looking at the wholesale prices that are on the spot start by asking you about the Pre-Budget Report market, you are not able to gauge exactly what the which we have just heard. Tony Wright will ask you energy companies are doing, so we are going to try about some of the insulation and energy eYciency to show and get agreement with the energy measures later on in questioning, but the Chancellor companies on what the hedged prices are likely to be, did say that he would be asking Ofgem to monitor so that we can better gauge what is really happening aspects of the way the market is working and he will in that market. possibly be taking statutory powers to influence prices if necessary. Could you explain in a little more Q4 Chairman: There is a lot of simplistic observation detail what that actually meant and what is the role at present that oil prices have fallen very sharply so for your department and Ofgem in this matter? energy prices should, but wholesale gas and Mr O’Brien: It is obviously for the Chancellor to electricity future prices have not shown similar falls explain the detail of his policies rather than me and and have been at roughly the same sort of level as in due course the Treasury will be doing that. We they were in July of this year when we published have indicated already that we are prepared to take our report. Ev 2 Business and Enterprise Committee: Evidence
24 November 2008 Mike O’Brien MP and Neil Feinson
Mr O’Brien: There has been some volatility in both already. This will make it easier for the planning the electricity and gas forward prices. What this process in the future but we do not have to wait for Committee actually called for, and given that you that in order to get some of that storage capacity in are talking here about your tombstone report, I place now. found your earlier report this year to be exceptionally professional and well-drafted and I Q7 Mr Hoyle: Where do you think the capacity congratulate you on that. It was an education to will be? read it and certainly all the oYcials in DECC (and Mr O’Brien: Where is it going to be located, whether BERR before) regarded it as a very professional oVshore or onshore? report indeed, and very helpful in terms of looking at some of these issues. What we need to do is to Q8 Mr Hoyle: Or regionally? make sure, as your report suggested, that we have a Mr O’Brien: That is a matter for the market, but in greater degree of transparency in some of what is terms of oVshore we would want to see some more happening in the wholesale market. As you know, oVshore storage capacity generated. You asked Ofgem looked at this wholesale market back in 2006 whether we had a particular amount in mind and to and they concluded that it was operating reasonably some extent that is a matter for the market. I have well at that stage. Whether it still is, Ofgem still want indicated the sort of amounts that are currently in to look at that, and they have indicated in their planning but we would be looking, by 2020, to be report that they do have some concerns and they able to cover about a fifth of our energy usage for a want to look at this more fully. I hope that what the year from storage. Chancellor was able to announce will help everyone to have a better view about what is happening in the comparative wholesale and retail markets. Q9 Mr Hoyle: How many days’ storage is that? Chairman: We look forward to exploring these issues Mr O’Brien: I cannot give you the exact storage. I at greater length tomorrow with Alistair Buchanan could certainly write to you with that precise figure. from Ofgem. We should also say thank you for the In terms of the amount, we would look to have Government’s response to our report which took round about a fifth, but again what I would say is our report very seriously. There are some issues that that of course in terms of storage we do not just rely we will want to explore at greater length today, and on storage in order to deal with the way in which we with Ofgem tomorrow, but we are grateful for that have pressures on the market. We also have other ways of dealing with that. We still have gas in the as well. We think that Ofgem’s response might have V been rather more robust, at least in part because of North Sea. There is a tendency to write that o , but our report, but we would say that, would we not? Let I will be doing a speech tomorrow morning when I us turn to one of the most pressing issues we basically say we have a couple more decades of highlight in that report, specifically gas storage. exploitation there, before people start pretending that there is nothing there when actually there is quite a lot there still to protect us for a period of Q5 Mr Hoyle: How long will it be from the passing time. of the Planning Bill before the Government publishes a national policy statement on gas storage? Q10 Mr Hoyle: Obviously the credit crunch is Within that, will it give the detail on the level of new beginning to have a major impact. It has certainly storage capacity the Government is looking for, over helped decline the price of oil and gas, even if the what timescale is that envisaged, and where should customers have not seen the benefits. They have that capacity be based? certainly seen it within oil, but not in gas prices. Will Mr O’Brien: There are three questions there. In this have an eVect on UK gas storage and the actual terms of the new Planning Bill, it will come into law investment? hopefully very shortly, within the next few days, and, Mr O’Brien: So far we have only had one project in due course, we will need to consult on a national where we have had any indication that there might policy statement on storage and indeed on a whole be some delay; probably about two quarters has range of areas to do with energy policy, but also been suggested. That is in the Dorset project called some other areas of infrastructure. We hope to be the Portland Gas Storage Project where they have doing that probably towards the mid to latter part of said that there is probably about two quarters’ delay next year with a view to getting something published but no more is currently indicated. We have had no in 2010 and then use that as the basis for decisions to further indication from anyone that crunch be able to be made by the new Infrastructure problems are likely to cause significant diYculties. Planning Commission which will then be in a When monitoring this, about a month ago when we position hopefully to be hearing its first applications. were set up as a department one of the things that the You look slightly puzzled by that. Secretary of State and I discussed was holding regular meetings where every week we meet with Q6 Mr Hoyle: I am worried. I think it is jam not senior oYcials to talk through what impact the tomorrow but whenever. crunch is having on areas of the energy industry. We Mr O’Brien: Your assumption behind that is that we are not just looking at storage, which is obviously a have to wait. Of course we do not because it is the key area, but at a whole range of diYculties that case that there is approximately one billion cubic might potentially arise. So far what we are finding is metres of new gas storage under construction and that, although there are some pressures on some of another 13.8 billion cubic metres proposed by 2015 the smaller companies, with regard to the bigger Business and Enterprise Committee: Evidence Ev 3
24 November 2008 Mike O’Brien MP and Neil Feinson companies we are, by and large, seeing that they market is responding to that by bringing forward have got long-term plans, they are reasonably well plans for a further 13.8 billion cubic meters of capitalised and they are able to carry those through. storage capacity. It is a fairly large amount and we So far we are fairly reassured, not just in terms of are looking for about a fifth by 2020. When you say storage, but across the broader energy market. the market has failed, I do not accept that. When you say that we do need to have more storage capacity, Q11 Mr Hoyle: You keep quoting this “leave it to the I buy that entirely—you and I are at one on that— market, leave it to the market”. The big problem is but to simply say it has all failed, I do not think is we have left it to the market and, of course, virtually right. nothing has happened. They are happy to sit on their hands, rake in immoral profits, paying huge wages at Q14 Mr Hoyle: I am not here to be an apologist for the expense of domestic and business customers the energy companies; you may feel you have to. The alike. Everybody knew that we should have been bottom line is that they have failed and people in this investing in storage capacity and yet they have country know that they have failed. When people are failed. What are you going to do if they do not do having their bank accounts pillaged by energy it now? companies because they are artificially allowing Mr O’Brien: I am not sure that you could possibly prices to increase because there is no real argue that they have failed in the sense that we have competition in the market, the more storage a billion cubic meters of storage capacity under capacity you have here the better it will be. The construction at the moment. I am not sure what reason we cannot take a lot of LNG in is because we failure you are talking about. do not have the capacity to store it longer term. That is where the market has failed. If we are going to Q12 Mr Hoyle: Let me help you with “failure” bring on oil and gas fields in the Falklands you need because if you cannot recognise it, I can recognise it. to have a big storage capacity in this country. It is Your mailbag must be diVerent from mine, although not there. When we knew it was declining this should I cannot believe that is the case. I will tell you what have been investigated. It is the fact that they did I call “failure”: that we have 13 days’ capacity; the not. Do not apologise for them. Let us cane them. If Germans have 99 days’ capacity and the French they are not going to do the investment, take the have over 100 days’ capacity. To me if we are not money oV them and you do the investment for them. matching those numbers that is what I call failure. It That is what we need to hear. is a big concern for people and I would class that as Mr O’Brien: If you think that I have been an failure. If we were on 100 days plus, I would say yes, apologist for energy companies then you have not the market has done well, the companies have obviously been aware of the discussions that we have invested when we asked them to. The fact is that is been having recently with the energy companies who why I do not believe we have seen anything other do not regard us as that. They do regard us as than real failure. The other question is how many are pushing them very hard, not only to put in billions stuck in planning permissions at the moment do we of pounds of investment in new energy know that could alleviate the problem? infrastructure, but also to ensure that this storage Mr O’Brien: Let me tell you why that is not failure, capacity is put in too. Forget the rhetorical because it is not at the moment. flourishes, they are all very well. In select committees we all do them and I have sat in your position too, but let us look at the reality. The real world is a little Q13 Mr Hoyle: Is it success? V Mr O’Brien: What we have had quite clearly is access di erent from rhetorical flourishes. The real world is for a long period to oil and gas supplies from the that we do have storage capacity, we are going to get North Sea and, therefore, the amount of storage that more storage capacity and we are not only going to other countries have needed, we have not. We do get more storage capacity, but other levels of have some capacity and we are increasing that infrastructure as well, other levels of power capacity because the amount of gas that we are provision, more power stations to make sure that we getting from the North Sea is now being depleted, deal with some of the issues in relation to long-term but we will still get gas from the North Sea for a power in this country. We require those companies to do that and it is all very easy saying we will just considerable period of time, although not in the V amounts we previously did. We also have LNG take all the money o them, but what we need is to capacity; we have new pipelines, when I was last get some of that money. It is not all money based in energy minister I signed up to get the Langeled the UK—some of it is foreign investment—and we pipelines come in, we have the interconnectors with need to get that money in to keep the lights on, to make sure our energy is secure, to make sure prices the Netherlands and with Belgium. We have a V number of sources and the idea that we are somehow are a ordable and to make sure we hit our climate utterly dependent on gas storage is frankly wrong. change targets. That is why we have got to do that The market knows quite well that there is now a and that is why we cannot just indulge in rhetorical change in the energy market because of the changes flourishes. in the North Sea and UK Continental Shelf and, as a result of that, we need to build up in response to Q15 Mr Hoyle: Come on! Smell the coVee and get those changes a level of storage which we did not into the real world. Let us face up to the truth. This is previously have as high a need for. We needed some an energy market which pays its shareholders £1.64 and we had some. What is now happening is that the billion so there is not much investment going in Ev 4 Business and Enterprise Committee: Evidence
24 November 2008 Mike O’Brien MP and Neil Feinson when you are paying shareholders so much. These could be a diYculty with the amount of gas that was are companies that are paying some of their chief going to be available and we could have a shortage executives one way or another £4.4 million a year; at that particular time. Is it not the case it is more to come on, this is about greed. I will tell you why there do with the industry missing a trick eight or nine is failure: if the French have got ten times more years ago and we should have been establishing that storage capacity than we have, that is where they storage capacity then rather than what we are trying have failed. It suits them to keep the capacity in to do at the present time? Europe because what they do is take cheap gas from Mr O’Brien: I am not sure that I would go quite that us in the summer, store it in continental Europe to far. We decided to create an energy market and we export it back at a more expensive rate so they make have, and it has paid us great benefits in terms of for more profit. That is why we have got to do half a decade it got down our energy prices and it has something about it. It is time that we put some teeth worked enormously well for Britain and we have into the energy companies. I think we can agree on been able to get great advantages from it. Part of most of it. The diVerence is I want decisions and that is that you have to create a market which builds hard decisions to be taken now and not leave it to up the capacity to respond more quickly. I would not them. say nine or ten years ago, but certainly four or five Mr O’Brien: Mr Hoyle, as you and I both know, the years ago when I was last Energy Minister back in reason the French have had to create the storage is 2004–05 I was looking then at some of the issues they did not have the North Sea in the same way in around this storage capacity and I was certainly which we have had and that we are now responding concerned by then that we needed to build up a to the change in that market. We are putting greater level of storage capacity. Work has been pressure on the energy companies to do it and, underway since then to do that. We are now seeing indeed, to be fair, they are responding. I want to see dividends in terms of we are getting the billion cubic pretty much the same as you do, despite the meters being created, so we are responding to that. I rhetorical flourishes. I want to see that storage am not sure that I would go quite as far as you, but capacity there. However, I do not want to do it on it is always a matter of judgment. It is a perfectly the basis of somehow imagining that foreign legitimate judgment for you to have that maybe we investment is going to fly here if we nationalise the should have all done it earlier. It would have been 250 monopolies. nice to do it earlier but there would have been questions raised by the industry that, if we build it Q16 Mr Hoyle: That is the cheapest shot you will now, when are we going to make some money out of ever make because we both know nobody even this? By and large, when you create a market you mentioned nationalisation. You do not want to have got to be able to show the private sector that it make cheap shots, it does not do you any good. The is going to make a return on its investment. fact is that if the companies are failing to do the investment, what I am saying is that we should do it V Q19 Mr Wright: Surely at the time when they were for them and take the money o them through a talking about the interconnector, which is just north windfall tax. Nobody has mentioned of my constituency, it was indicated quite clearly nationalisation. If they fail to do it, I want you to that the whole idea of this was a flow to and from take action. mainland Europe and the UK. That in itself was the Mr O’Brien: I was not sure how you were planning industry saying we need to have this extra flow of to do it. What I am saying is that we, as a capacity from one way to the other. government, are making sure that the storage Mr O’Brien: You are right to some extent, but capacity that you and I want is going to be there. It remember the flow is two ways, and the industry also may not be as quickly as you want it. wanted to sell some of its gains from the North Sea, so that was not just a one-way flow. One of the things Q17 Mr Hoyle: Tomorrow not next year. that you brought out in your report, for example, Mike O’Brien: I know you want it all tomorrow. I were some concerns about the direction of some of think we have to live in the real world and we both that flow, particularly during the summer, which I know what the real world is like and we have to get have taken great account of and want to look into these companies to produce it, we have to bring in that. We have talked to the EU Commission about the investment and make sure it happens and we some of those concerns. If you are saying that that have to have the storage capacity to keep the lights of itself indicated that there were problems, you may on to make sure we have security. be partly right, but in terms of creating storage Mr Hoyle: The best way to keep the lights on is to capacity, I remember looking at this back in 2004–05 build the storage capacity. and thinking that this is really where we have to put some eVort in. To be enormously fair to my Q18 Mr Wright: On the question of storage, is it not successor, Malcolm did put a lot of eVort into more the case that we missed the trick, that indeed bringing this storage capacity forward and we are responding to the need now rather than encouraging the energy companies to put that responding to a need that we probably had eight or investment in. One of the things that we have had, as nine years ago when we knew that we were going to you know, is some diYculty with some of the run out of gas and we did not have that storage planning processes. Not all of the applications for capacity? Your predecessor came to this Committee storage capacity have been approved and that is a some two years ago to suggest that perhaps there diYculty. There has been a sense of urgency from the Business and Enterprise Committee: Evidence Ev 5
24 November 2008 Mike O’Brien MP and Neil Feinson
Government for some years. The industry has that we would rather have auctioned but the decision responded but the planning system has not always of the EU was diVerent and we accepted that. We worked in the way in which perhaps it ought. I am now want to press for more auctioning. I do not have not second-guessing some of those decisions but one a detailed answer. We tried to look at this insofar as of the reasons we need to change the planning system we are able, but the level of transparency in terms of in the new Planning Bill is that we need to make sure the detail of how a company will manage its finances that there is a sense of the need for a national is not always readily discernible if you are just trying infrastructure here for a national reservoir of to follow what happened to the money from EU storage. I am not convinced that the planning ETS. It has sort of gone into their account. Some will procedures which have resulted in some decisions have spent it in one way, some in another, so I am have recognised the important national need that we afraid there is not a direct straight answer to that. get more of this gas storage into place. Chairman: We will change subject now and go to the Q22 Mr Bailey: I will pick up the auctioning issue in EU Emissions Trading Scheme windfall. a moment. My concern is that, unless there is a mechanism for measuring just how these allowances Q20 Mr Bailey: One of the enduring mysteries is the have been used at the moment when there is way in which this operates and the way in which auctioning, and presumably the costs to the energy generators can put up prices, make big profits electricity generators will go up as a result, those will and still receive what are eVectively windfall then be passed on to industry in a way which may be allowances estimated by the Government worth escalated. I know from manufacturers in my around £2 billion a year. What assessment has the constituency that they are very concerned about the Government made of just how they are using this £2 potential impact of auctioning on these allowances billion windfall per annum? for electricity generators because of the potential Mr O’Brien: It is £910 million to be exact that they impact on them and it would just be passed on. We have agreed is going to be spent. Whether it is all have a situation where they have had free windfall money from ETS is diYcult to see, but certainly they allowances and yet prices have gone up. We do not have agreed to put £910 million into the package know how they have used that money. We are that was announced in September, so that is a major moving potentially, under Phase 3, into another step. They say to us that some of that will have gone period when in fact they will have to pay for these into helping people through the recent diYculties allowances which could then just be passed on to with price hikes and will have fed in to helping industry with huge potential impact on our consumers, but it is undoubtedly the case that some industrial base. It does seem to me that there is a case of it will have gone into the profits of shareholders for having a mechanism for a far more detailed and the business. We have been quite clear that we examination of the benefits, costs and how they use wanted to see 100% of the allowances auctioned. We the funds from the windfall that they have at the had a recent auction on 19 November which went moment to ensure that there is not excessive extremely well and we were able to raise ƒ64 million exploitation in the future. from that auction, but we are only allowed to Mr O’Brien: I think most people have accepted that auction 7% of the allowances. Those are under EU we need an EU ETS; that this is a mechanism by directives and of course in the first phase none of it which we will be able to help deal with some of the was auctioned; it was all given away. In the third issues around climate change. That means that these phase, which will be 2013, we want to see that 100% allowances will have to be either given away free or, is auctioned and that money is not just going to the alternatively, they will have to be bought. We know companies but that it is money which is, we hope, that some of these costs have been passed on already better used to ensure that we deliver on some of our and that it has aVected the prices that are charged by climate change and other targets that the the energy companies to consumers. It is Government has more broadly. undoubtedly the case that, in the future, energy companies who have to buy allowances will pass Q21 Mr Bailey: You have quite rightly pointed to some of those costs on and how much will depend on the £910 million to tackle fuel poverty, but there the energy companies. We all know, and I do not does seem to be a huge vagueness over what half of think there is any point pretending, that the costs of this benefit is actually being used for. climate change in the end which are paid by energy Mr O’Brien: They will have used it in diVerent ways, companies are going to be paid either in terms of depending on diVerent companies. We estimate that their profits or in terms of consumers being charged they have made £2 billion1 out of this. Each of more. That is just the way in which we will need to them will have that money in their accounts. deal with climate change. It is not going to be cheap. Remember that some of these are foreign-based Unless you are suggesting that somehow we auction companies—EDF and others—so it is not always them we can prevent them passing the price of that very clear as to where and how that money was auction on, then I am not entirely sure where that spent. Certainly they have had significant benefits would lead us. We would be going entirely back to from that, there is no doubt about it. I have indicated some sort of price controls presumably.
1 Footnote by witness: Estimated on the basis that UK electricity companies will be given approximately 100 Q23 Mr Bailey: I think there is a big debate to be had million free allowances per year in the period 2008–12 on them. I think that everybody would agree that the valued at ƒ25 each and using an exchange rate of £1%ƒ1.2. whole purpose of having an auction for carbon Ev 6 Business and Enterprise Committee: Evidence
24 November 2008 Mike O’Brien MP and Neil Feinson allowances is to incentivise companies to change Q25 Mr Bailey: You mentioned the amount that was their manufacturing process to reduce the amount of raised by the Government through auctioning. carbon they use. If you have a situation where you What is the Government going to use it for? have companies such as these generators who are Mr O’Brien: It goes to the Treasury. You will have just able to pass that on so that somebody else has to to ask the Chancellor. As you know, we do not pick up the tab, then it is not fulfilling the hypothecate, by and large, in the UK. Probably the incentivising process that the whole thing is designed most interesting question—I do not have a ready to do. answer for you—is not so much what are we going Mr O’Brien: I am not sure that that is the case. What to do with the ƒ64 million but what are we going to we aim to do with this, you are entirely right, is to do with the amount we get when 100% is auctioned send the signal that you have got to change the way in 2013? That might be a very interesting question in which you do things, you have to do it more and I would not have the answer for you just yet but cheaply and you have to make sure that you produce we may need to talk to the Chancellor at that time the energy in a less climate-damaging way. That is about it. the key element there. What we believe will happen is that the EU ETS—there is strong evidence that it Q26 Mr Weir: When we had the energy companies is happening already—will have that eVect. in, first of all they denied there was a windfall from However, on the year in which they have to pay for the ETS, but then said that any money that came in, these various allowances will we be able to prevent part of it was used to oVset price rises, which seems them from passing that on? Some of it may well be; unlikely given the size of the price rises. Do you other parts of it will aVect their profit and other parts accept their argument and, if it is correct, does that will hopefully be because they have already brought mean there is likely to be another round of large on some of the capacity that they will need in order price rises for the auction of the ETS credits? to generate their energy from less carbon-damaging Mr O’Brien: I do not think that should be necessary sources. It will probably be a range of it in that first for the reasons we have just discussed. The aim of year, but in the long term the whole objective is ETS is to see if we can get the energy companies to exactly the one you outlined, which is that we need change some of their behaviour, but can I promise to make sure that they change the way in which they that in terms of the broader changes that we are do things. That is the objective of the whole system. undertaking—the renewables obligation and the I am not really sure what the alternative is that you other changes—that there will never be anything are suggesting. passed on? I cannot promise it will not. Am I expecting large rises? No. The Committee suspended from 5:28 pm to 5:40 pm Q24 Mr Bailey: I feel that there has to be for a division in the House mechanisms for examining exactly how they spend it. We have a situation here where they appear to Q27 Chairman: Minister, welcome back. We will try have raised prices and made extra profit, having and finish in just over half an hour. received free allowances. Goodness knows what Mr O’Brien: Can I just say one sentence in response they are going to do under Phase 3 when they have to to Mike? There is no reason to assume that the pay for them. It will mean that other manufacturing amounts which might be passed on would be any companies will have to pick up the tab. greater than they were last time. Mr O’Brien: The whole idea is that the market will oblige them to move to less damaging sources of Q28 Chairman: There is a real argument about the energy and, if they do not, their competitors will and nuclear generators are making excess profit rather they will be undercut and they will lose out. The than passing it onto prices, but we will move on to whole aim of the EU ETS is trying to create an new generating capacity. Can I say how much we V artificial market, in e ect, that forces them to make appreciated some of the responses we got to our the changes that we want to see. The evidence is there report, particularly the action of John Hutton when that they are investing in alternative sources of he was Secretary of State, to require greater V energy so that we will get the e ect that we want to transparency in the accounts of the vertically see. The question you were asking was slightly integrated companies, which is a really important diVerent which was can I guarantee that none of this step and if I highlighted one response to our report will find its way ever into a bill; I cannot, because that really matters, that was it, and we really some of it may. We have to be totally realistic that appreciate that. There is an issue here about keeping the whole aim of this is to drive the carbon emissions the lights on, as you yourself have said in response down; it is to make sure that we have a response to to Mr Hoyle’s rather probing questions. There is a the issues around climate change and that is not lot of new capacity theoretically there—50 going to be cheap for the companies, who will have gigawatts—with network access dates actually to put in massive investment to do this, and it is also allocated by National Grid. How much of that 50 not going to be cheap for the consumer. If they get gigawatts do you think is going to get built? the market right it need not be massively expensive Mr O’Brien: We know that at the moment there is for the consumer. They should not just be passing it likely to be about 18 gigawatts of gas. Who knows on without seeking to do what the whole EU ETS whether it is going to happen? I think we can come scheme aims to do, which is precisely what you said, back to that suggestion that there might be 13 which is to change their behaviour. gigawatts of coal depends on a number of issues, Business and Enterprise Committee: Evidence Ev 7
24 November 2008 Mike O’Brien MP and Neil Feinson including carbon capture and storage. In terms of deter new investment. We are going to ask you nuclear, we are looking to have a substantial questions about consumers and current prices in a increase in that area. little while, but the single most important question is keeping the lights on and you do face a challenge in Q29 Chairman: There is one grid connection agreed doing that. How real is that challenge? Do you think for nuclear so far, is there not? I think E.ON has a we face an “energy crunch” that will make the credit grid connection agreed for a plant at Oldbury. The crunch look perhaps rather tame in the next seven point I am trying to make is that there is always stuV years or so, as many experts are saying? that is around but does not actually materialise—50 Mr O’Brien: No. I think there are always people who gigawatts actually out there theoretically at a very will seek to grab a headline by suggesting the lights V advanced stage—but you answered some of the will go o . I do not believe for a moment that they V questions of Lindsay Hoyle on the credit crunch, will not go o in the sense that we have the odd V with E.ON talking about their doubts about power cut where I live in Bedworth when they go o V Kingsnorth, for example. They are saying perhaps temporarily, but not in terms of a major switch o you should delay this for a couple of years. It does because we do not have the capacity. There was a not look so good suddenly. How much of that suggestion the other week that, in 2015, everything apparently committed capacity is actually going to will go wrong. I see that Capgemini are making be built, do you think, never mind about potential predictions; Logica made some predictions a few new stuV from EDF and others? months ago. They are all based on the premise that, Mr O’Brien: I am not sure I quite understand if the Government or the industry does nothing, then V whether you are asking a particular question around the lights will go o . They probably would if nobody the crunch. was going to do anything, but we would not be daft enough not to do anything. Q30 Chairman: I am sort of asking that. I am saying there is apparently committed capacity which the Q32 Chairman: Perhaps you were daft enough in National Grid has access arrangements in place for. 2003 not to start the nuclear initiative then. I do not In addition there is other stuV that you hope to get see any new nuclear power stations being built and I hope you get too from EDF and others to build before the current generation are being new capacity, but there is actually 50 gigawatts that decommissioned. There is an imbalance there is theoretically very firm, but there are now question between the outgoing nuclear power stations and the marks about some of the planning issues and also, new ones that you rightly want to see built. more importantly, new question marks about the Mr O’Brien: We can rehearse the arguments around aVordability of that investment. How much of that nuclear and there are still a few people to be 50 gigawatts which theoretically you can count on convinced that we needed to move towards nuclear. do you think is going to get built? Mr O’Brien: In terms of the amount that we are Q33 Chairman: The Committee has its likely to get, our view is we will get the new gas disagreements on that. capacity. That is pretty well certain. We are looking Mr O’Brien: I am sure they do. Mike raises his at two issues: one is, is it all likely to happen as disagreement and I certainly voiced my concerns planned and is there likely to be some delays? I about Alex Salmond in the Scottish newspapers at cannot guarantee there will not be some delays in the weekend and, as an energy economist, he should terms of some of the development of the new know better, but let’s not go there. We need to make capacity. That happens inevitably. It happens sure that we have suYcient capacity being brought whether we have a crunch or whether we do not. on. We believe at the moment that the energy Companies make decisions about whether they are companies are giving us reassurances that they will going to go ahead with a project, they do a lot of be bringing on 18 gigawatts of gas; 10 gigawatts is planning and then sometimes they decide for other currently consented; 7.5 gigawatts is planned. In reasons they are going to refocus their investment terms of coal, there is a question mark over that for elsewhere. I cannot guarantee that all of that will reasons we can explore later, but about 13 gigawatts, come on, but what we do know is that we are getting and again with the nukes, we believe that although reassurances from the large energy companies. We that is looking towards 2017–18 before some of that have met now twice with the “Big 6” and they are comes on stream, that we are now able to say that saying that they are still looking to go ahead with the EDF are bringing forward this £12.3 billion projects that they have in the pipelines. I think we investment which will see four nuclear power can be relatively sure that we will get a suYcient stations they believe each generating about 1.6 replacement for some of the capacity that we will gigawatts in place over the coming couple of lose because of the LCPD and also because of some decades. of the nukes are going oV. Q34 Chairman: You are very optimistic that we will Q31 Chairman: The Committee was very careful in not face a serious shortfall in electricity supplies in drafting its report not to deter investment. We did the foreseeable future? not call for a windfall tax, which was one of the terms Mr O’Brien: We have to be realistic about this. the Committee might have wanted us to, but we did There is always an issue around risk. When I did this not, despite the report in the Financial Times which job before and when I started doing it again, just said we did, because we were very anxious not to looking at the way in which the market operates, it Ev 8 Business and Enterprise Committee: Evidence
24 November 2008 Mike O’Brien MP and Neil Feinson is always clear that there are risks in this. The job of charge, people on direct debit—in order to subsidise government and the Energy Minister and for the those on prepayment meters. About 20% of those on new department is to ensure that we manage that prepayment meters are fuel-poor. Some of those risk, not just to make sure that we keep the lights on, who run these things are landlords. The question is but that we have some spare capacity on top of that. the extent to which it is advocated that a non cost- There are always issues that arise in the market. We reflective, ie a subsidy, should be paid by the rest of believe that we are in a position where we can be as the people who are on direct debit or standard credit. sure as you reasonably can be not only that the lights Many of those are themselves fuel-poor but people will stay on, but that we will have the spare capacity who may not be fuel-poor, and of course four-fifths we need beyond that to ensure that we are able to of them who are on prepayment meters are not. I deal with any situation. think there is a legitimate debate around that. My instinct at this point is that I want to be sure that Q35 Mr Weir: One of the most pressing issues to people who were dealing with prepayment meters most people is that of price and the diVerent were being fairly charged but not unduly charged methods in which you can pay for your energy. Do and I am not satisfied at the moment that they are you recognise that a large number of people who are not being unduly charged. fuel-poor are on standard credit rather than prepayment meters? Do you accept that there is a Q37 Mr Weir: Is the problem not dealing with fuel- need to bring the prices between direct debit and poor, whatever method of payment they are on, standard credit closer together? because we have, for example, standard credit and Mr O’Brien: I accept that there is a level of non cost- many fuel-poor are on that. We have problems with reflectiveness in some of these figures, particularly direct debit where the Chairman has thrown a around some of the prepayment meters, some of the spanner into the works over the weekend, but many standard credit and direct debit figures. It is diYcult people are complaining about the fact that they are to justify some of the disparities. It is not just on direct debit and the companies are bumping up disparity between some of the individual figures direct debit payments, despite the fact that they are within companies, but between the diVerent in credit. There are serious issues. companies. That is why I think the Ofgem review Mr O’Brien: Me too! Thank you, Mr Chairman, for was very important in identifying that it needed to looking after my interests. get a response by 1 December from the energy companies to justify some of the disparities and Q38 Mr Weir: My advice is: do what I did and tell apparently non cost-reflective charges that they were them to get stuVed. It usually works! making. We have been very clear with the energy Mr O’Brien: You are on direct debit and they are companies that, if they respond positively to the taking more out so you end up with quite a large concerns raised and explain what they are doing and credit and you think, is this right? If it is a large credit why they are doing it to Ofgem, we are able to see then it is clearly wrong. They say that their aim is to how they have calculated these figures. After all, it is try to make sure that none of us fall into debt. To the case that Ofgem say that the diVerence between some extent we want to make sure that we pay them a standard credit and a direct debit in terms of cost properly and no more than properly and do not might be about £20 a year which is a vague general boost their profits. Their argument, and we will see estimate of the possibility of a cost and in terms of when you talk to the companies, they say it to prepayment meters around about £85 a year. There subsidise all the bills. I think they need to justify that. is some level of cost reflection in there but, at the That was not the point of me and indeed millions of same time, we also know that some of the figures other people around this country signing up to direct were quite substantially more than that. Was it your debit. We just wanted to make sure that our bills report which referred to Npower, or was it one of the were properly paid on time. We were not in the other reports I read which had as much as £450 business of giving them a subsidy for any reason. disparity. Q39 Mr Weir: If there is evidence that they are Q36 Mr Weir: Do you accept the energy companies’ misusing this, as seems to be suggested, can the argument that they should be allowed to charge Government take action to stop them doing this? more for prepayment meters due to the costs Mr O’Brien: The straight answer to that is we have associated with them? The National Housing indicated that if prepayment meters, in particular Federation, for example, raised concerns that, even the ways in which they are charging, are not dealt after Ofgem’s review, it is likely that prepayment with properly and voluntarily by Ofgem under that meter customers will still pay substantially more. review, then we are prepared to legislate to deal with They quote a figure of £51. Do you accept that that is it. We are in the position where we will be preparing justified, given that it is often many fuel-poor people now to do that to make sure that we will be ready, who use these meters, but not all? should we need to, to legislate to deal with it. Mr O’Brien: If we were to say that the cost of actually running and getting the people to go and Q40 Mr Weir: Does that just cover prepayment check it and all the rest was not to be met in terms of meters or will you look at a situation where it is prepayment meters by those who had the alleged that the companies are artificially boosting prepayment meters, we would be saying in eVect that direct debit payments to get money in to boost others would have to pay more—people on standard their coVers? Business and Enterprise Committee: Evidence Ev 9
24 November 2008 Mike O’Brien MP and Neil Feinson
Mr O’Brien: I think the Chairman is quite right to People may switch for a diVerent reason—they may say that, first of all, is a question for Ofgem. We have be unhappy with the way in which a particular bill decided as a Parliament that we will create an was dealt with, they may be very unhappy with a independent regulator and ministers do not dabble letter they have received from the company and may in day-to-day decisions— decide they want to switch anyway—but most will switch because of price. In those circumstances we Q41 Mr Weir: On prepayment meters the know that some of them are making decisions which Chancellor has said that if they do not do it we will seem, on the face of it, to be not the sort of decision take action. Does the same apply to these other you would make on price; they seem to be convinced abuses of the way that they charge, if the abuses perhaps by some salesman. I do have some concerns are proved? about that. What we also know is that the people Mr O’Brien: If you let me get the sentences out you who tend to be more likely to switch because of will get an answer, Mike. We have set up Ofgem. direct selling are people on lower incomes who we Ofgem have the immediate responsibility of making most want to switch. They are the people who seem sure that this is dealt with and that the companies are the least likely to have access to the internet and are not unfairly charging either in terms of direct debit least likely therefore to be making the easy switch by over pulling in money or, alternatively, by the that more middleclass people tend to make. I think people who are paying by cheque or directly. there is a benefit from direct selling but only if it is However they say, that they are not being charged in done properly and only if the way in which it is done a way that is not cost-reflective and also in terms of is subject to a level of quality control. I am not the prepayment meters. We have indicated that we convinced that is there yet. Ofgem clearly in their are prepared to legislate if the companies refuse to report suggested it might not be and change is deal with this in a satisfactory way, or if it were the needed to be made and I support those changes. case that we took the view that Ofgem was not dealing with it adequately. We believe at this point Q45 Mr Weir: How do you get that quality control? that Ofgem are determined to resolve this issue and The problem is that nobody is there on the doorstep we want to see them do that and do so robustly. If apart from the person doing the direct selling and the there was a failure then we stand ready to legislate person who is being sold to. There is no independent should that become necessary, yes. verification. Mr O’Brien: There are two things that you can do: Q42 Mr Weir: The Chancellor today announced one, you can have an obligation for a written quote, various things, including a reduction in VAT. Am I and two, you can say there is an obligation that at right in thinking that that is only on the standard least for the company the person is currently with rate and it does not aVect the rate of VAT on fuel? and possibly for all the other companies, although I Mr O’Brien: It is on the standard rate. I will have to will come back to that as there is a problem with defer on that to the Chancellor. I assumed it was but that. That there is an easy to understand analysis of I have not been involved in that particular whether the person would actually be better oV and discussion. that is in writing and given to the person so that can be checked upon later if they go to the CAB or Q43 Chairman: Is not VAT on fuel charged at the somebody else and they obviously have a period to lowest rate the European Union allows already? withdraw from that contract if it is wrong. Let me Mr O’Brien: I think it probably is, so I do not think say what the problem is in terms of just giving people it can be reduced. I think you are probably right, but a quote. One of the issues that did concern me and let me check on that and come back to you. It would has done so for some time and was brought out to not be able to go lower than 5%. You must be right some extent in the probe by Ofgem was that some of on that. these price systems are enormously complex and getting comparisons, even for a mathematical Y Q44 Mr Weir: We have received evidence that 48% genius, is sometimes di cult. It is the case that you of gas customers and 42% of electricity customers need to develop some kind of comparator—some who switch as a result of direct selling end up on a kind of metric as the probe calls it—whereby each of V them have an ability to enable consumers to make a worse tari than they were before. Do you think it V V is time to end this practice rather than just tinkering reasonable comparison between the di erent o ers around the edges and stop direct selling on the that the energy companies have. I hope that Ofgem doorstep? will be able to work with the energy companies to agree a metric so that the consumer can much more Mr O’Brien: Not at the moment. I think we need to V make sure that the standards by which direct selling easily compare di erent prices. The idea that you are handed pages of diVerent comparisons of diVerent is undertaken are good enough and the Ofgem probe V V identified some concerns about that and gave some prices and di erent impacts for people of di erent— indications that direct selling would need to be dealt Chairman: You have made your point, Minister. with more eVectively. For example, people should, if someone knocks on their door, know a comparison Q46 Mr Wright: In respect of smart metering, in our with other energy companies, particularly with the Report we believe that the smart meters would play one they are currently using and whether actually an important role in facilitating competition and they would be better oV because, for precisely the indeed when we interviewed the Chief Executive of reason you indicate, some people are switching. E.ON he said that we currently have Stone Age Ev 10 Business and Enterprise Committee: Evidence
24 November 2008 Mike O’Brien MP and Neil Feinson technology, yet back in July of this year the final obviously be a cost to this and we hope that that will consultation report indicated by the Government be met over a substantial period of time by the rental that their economic impact assessment had cast being paid. some doubt about whether there was a cost-eVective case for roll-out. On 28 October there was an Q48 Chairman: It benefits the companies as well. announcement which agreed with what we Their costs are down significantly. It is not just cost deliberated on as a Committee and said yes, we are but benefit as well. going to put in smart meters over the next decade. Mr O’Brien: Yes. There is a benefit to the country, a What made the Government change its mind? More benefit to the consumer and a benefit to the to the point, in the future what model is there going companies. It is a win, win and win situation, we to be for rolling out the smart meters and who is hope. actually going to fund this? What is going to be the share between Government, business and Q49 Mr Weir: Turning to the thorny question of fuel customers? poverty, one of the proposals that has come forward Mr O’Brien: Why did we change our mind? We are from the Government’s own initiatives is the a listening Government; we listen to the arguments. Community Energy Saving Obligation. How is that What sort of model will we use? We want to consult going to operate? on that. We have taken powers in the Energy Bill to Mr O’Brien: What we have said is that we put ensure that we can use a number of diVerent models. forward £350 million for the Community Energy At the moment one of the issues is that traditionally Saving Obligation. What we want to see is, in the energy companies would each have employed particularly deprived areas, visits to those areas by their own subcontractors who would have gone out the energy companies who will then give advice on a and placed new meters in, so theoretically you could community basis—it will be identified for a have six houses in a row and each of them have particular community—about how people are able subcontractors from each of the Big 6 energy to insulate their homes, the various grants that are companies going and putting a diVerent smart meter available, the help they can get, identify people on in each of the homes. I do not think that is really a low incomes who may be able to get free insulation very eVective way of doing it. I think we need to talk put in. Also if Warm Front is able to put in heating through with the energy companies a more eVective for them that they would be able to get that, give model, whether it is area roll-outs, whether they them a benefits check to check whether they are share some of the funding. I think there is a lot of receiving all the benefits that they would be entitled work to be done on this, but I would certainly hope to and give them any other advice that can that we can find a more eVective way than everyone reasonably be given about the sorts of either micro- going oV and doing their own thing. That is the generation or other sorts of ways in which they could traditional way in which the market would have possibly save on their fuel bills. We want to consult operated. I am not sure that when we are talking on exactly how this will be done and we are looking about such a big change as this over the next decade to have a broader public consultation during the or 12 years that we are going to be in a position course of the coming year. where we just want them to go and do what they have done before. Who funds it? In the end we think Q50 Mr Weir: Part of this was obviously the £1 the benefits will come to consumers and they will billion energy saving programme which was save money by the introduction of smart meters and announced. What time period is this to be spent therefore, in eVect, hopefully it will fund itself. There over? The other issue that really gets me is that in a will be a cost of rolling this out but there will also be lot of the social housing, some in my constituency, consumer benefit and the result is, we hope, that the for instance, where my mother lives, 83-years-old, in consumers will be better oV in the long term. a bungalow, the local authority cannot aVord to put in double glazing and yet her heater is blowing out. She has to put electric bars on increasing that as an Q47 Mr Wright: The cost will be shared between the issue, yet by 2012 they are talking about the consumers and the businesses? possibility of putting in double glazing. Mr O’Brien: The businesses will be paying for the Mr O’Brien: Does she not qualify for the Decent roll-out of the smart meters and then they will have Homes standard provisions? to determine how that is paid for. They will not just stick it all on a bill. It will be amortised hopefully Q51 Mr Weir: It is a local authority bungalow. over a reasonably long period of time. Most of them Could some of that money not be directed towards rent these things. There are some issues, which I will local authorities to be able to put in energy saving not go into, in relation to what is called legacy initiatives? meters. What do you do with the meters that are Mr O’Brien: Certainly we would want to work with currently in there, some of which are rented already? local authorities on this, but most of the funding is What I would say is the likely outcome is that we will coming from the energy companies. Some will come get various companies who already provide the from us but most of it will come from them, so we meters and rent them to the energy companies doing want to talk about how that money will be spent and so on a much larger scale—the energy companies ensure that the £350 million which is going into that have slightly diVerent methods of doing this—so from the energy companies is spent in a way that that we get a roll-out across the country. There will identifies the communities. Local authorities would Business and Enterprise Committee: Evidence Ev 11
24 November 2008 Mike O’Brien MP and Neil Feinson need to assist the energy companies and identify the to them that we want a lot of investment from you. communities where these projects would be We are asking you to bring forward massive undertaken. You also asked about the time period amounts of investment in new power stations, new for the £1 billion. That is a three-year programme storage as Lindsay Hoyle was indicating earlier, and but, as you probably saw earlier today, the we therefore know that if we start asking companies Chancellor has indicated that, as part of that £1 to do so with a non-predictable situation they are billion, we put in £74 million for Warm Front and less likely to do it. We have to measure that and in what we have also now decided to do is to bring terms of windfall taxes we have not closed the door forward some new funding of £100 million for Warm on this but we are also conscious of the need for Front and an additional £50 million will be brought stability as well. forward from subsequent years. To illustrate what that means in practice, it means that this year there Q55 Chairman: How was the funding for this scheme will be £400 million going into Warm Front (an distributed? One of the principal beneficiaries of the additional £50 million) and next year there will be windfall gain was Drax, an independent generator. £374 million (an additional £100 million, and in Are they contributing to the scheme? 2010/11 there will be £200 million (down £50 Mr O’Brien: They must be contributing a certain million), so it is, in eVect, bringing that £50 million amount. I also know that they have made forward. substantial gains and that we have talked to them about this. Q52 Mr Wright: Is the £100 million that was announced today from April of next year or is it Q56 Chairman: The gains were very unequally immediately? distributed across the sector. British Gas did not get Mr O’Brien: It will be £50 million this year and £50 very large gains either for this particular reason for million next year, so £100 million of new money, their generating capacity. If you are able to give us plus £50 million brought forward. The second part an indication of what the contribution was of of that £50 million will be in the next financial year. particular generators that would be extremely Mr Bailey: I have an issue arising from a question helpful. that Tony put in respect of the double glazing and Mr O’Brien: We can probably do that. We do not Decent Homes standards. I do not know if it varies have those details and we will need to approach the from local authority to local authority, but I do companies to get them. know that in my own local authority Decent Homes does not include double glazing, which seems to me Q57 Chairman: You must know how much they to be an omission. It was put to me by the local are paying? authority that, yes, we could put double glazing in Mr O’Brien: We know how much they are paying but it would just mean that we would have fewer collectively. What happened was that we met with homes done up to Decent Homes Standard. They the energy companies collectively and we said this is also questioned the eVectiveness of double glazing in the amount we want and, after a certain amount of terms of cost-eVectiveness with energy consumption. negotiation, £910 million was agreed upon that was Personally I think there needs to be some work done then to be distributed between the various energy on this and I would have thought it was an area that companies. They were going to discuss with us and should be looked at. between themselves what their various contribution levels were. In terms of how this operates, they have Q53 Mr Wright: We talked about the £1 billion all agreed that is what is going to be spent and I have package. How much of that is actually being funded no doubt they will cough up. by the industry? Mr O’Brien: £910 million.2 Q58 Chairman: They are divvying it among themselves. Q54 Mr Weir: Do you consider that that constitutes Mr O’Brien: They will be divvying it up in a sense asuYcient top-slicing of the windfall gains energy among themselves by their various negotiations.3 companies have made from the free allocation of permits under Phase 2? Q59 Mr Wright: On the issue of social tariVs, why Mr O’Brien: Remember that the energy companies has the Government not addressed the fundamental in terms of money they get out of the North Sea question of whether social tariVs are an eVective and already pay between 50%-75% tax in any event. fair means of tackling fuel poverty as we had They are also being asked to bring forward very recommended in our Report? substantial amounts of investment. As the Mr O’Brien: There are now about 600,000 people on Chairman has indicated, we want to ensure that social tariVs. We are concerned that some of those there is a reasonable amount of stability. That said, social tariVs are quite good. One of the companies we are watching closely what the situation is. has a 15% reduction on their energy bill. Some of the Nothing has been ruled out and we will continue to other ones are, in some cases, higher than someone look at the way in which the energy companies are would pay on direct debit, so they are paying more, responding. We are also conscious of the need to say even with a social tariV. I do have some concerns about the way in which the social tariVs are 2 Footnote by witness: This is not an exact figure but an estimate of the costs of an obligation on energy suppliers 3 Footnote by witness: Please see following note from the and electricity generators set out in carbon terms. Minister to the Committee for clarification of this process. Ev 12 Business and Enterprise Committee: Evidence
24 November 2008 Mike O’Brien MP and Neil Feinson operating. I think we need more openness and clearly an issue around the level of these social tariVs transparency about how it operates. The energy and the numbers of people on them and how the companies have said they will put an extra £225 energy companies are going to respond and whether million as part of the overall deal into social tariVs. £225 million is enough or not. The energy companies When I was Pensions Minister one of the things I say we have done a deal with you, Government, £225 introduced in the Pensions Bill was the provision million extra and we will deliver on that. I have no that the Department of Work and Pensions would doubt that they will. We are now going to move into be able to share with the energy companies a situation which is somewhat diVerent and they will information about who was on pension credit and, have to respond to that. In July, Ofgem said that the question mark, in due course other benefits in a later social tariV has to be the best tariV oVered by the bill, so that they could identify who were the poorest supplier in the customer’s region. It has to be better pensioners and then compare that with their list of than any other tariV in a particular region. people on social tariVs and say have we got all of the people who are poor on social tariVs? Back in 2004 Q61 Mr Wright: There are going to be regional they said to me we worked very hard to identify who V is on a social tariV, but we do not really know who is di erences then. really poor. That data is held by the DWP and Data Mr O’Brien: By the look of it, yes. We are now Protection says that we cannot disclose that, but obviously in a position where the probe is being there would be many more that we would put on the consulted on. It is probably worth my while telling social tariV. So I became the Pensions Minister and you that, on 1 December, the companies will have responded to Ofgem. Ofgem will then look at the I got the same advice—you cannot do it—and we V phoned up the Information Commissioner who says results of that consultation on the social tari and on actually you can do this providing it benefits a the range of other things. Then we will see Ofgem pensioner. We put it into the bill and it has now come respond to us probably towards the end of through and will shortly be law. That has a December, beginning of January, I would hope and consequence of course. It means that the energy indicate then what they expect to see from the companies will now get a list if they are able to agree various energy companies. We have then indicated that there will be a benefit for the pensioners of a that if there is a way of resolving these issues that we will be satisfied. If there is not, then we are prepared large number of people who are on pension credit V who are some of them on social tariVs and some of to legislate. On social tari s we have not promised them are not. The eVect of that is that the energy legislation yet because we want to see it resolved. companies will have to look at how they respond to that and how many of those people they put on Q62 Mr Weir: You have probably answered my social tariVs. We are going to have some discussions question but it is really about how you determine with them about how this clause in the Pensions Bill which company delivers the social tariV in which will operate but there will be quite a strong onus on area. Are the energy companies deciding amongst them now to bring more people into social tariVs. themselves how the country is divvied up, or is Your question was really are these social tariVs Ofgem going to do that, given that we have a market adequate? In some cases they are better than others where various companies are competing in each area is the straight answer. We have a market in social of the country? tariVs in the same way as we have a market in other Mr O’Brien: Each company when they were things. Ofgem’s view has been up to now that it is the privatised each had regions, except for one, and case that we are better oV letting the various therefore there was initially a monopoly situation in companies compete on social tariVs, but these things many of the regions of the UK. In Scotland it is still have become so complex that I am not sure that about 80% of people seem to be signed up to one of people on low incomes without sometimes access to the main providers, whereas in England it has the internet are going to be able to gauge very well changed and there is not that monopoly situation to which is the best social tariV, so I do have some quite the same extent. It varies across the regions but concerns about it. a lot of people have switched. What is happening in the diVerent areas is that there is an ability, Q60 Mr Wright: You mentioned the discussions you therefore, to gauge what the lowest charge that a are having with the companies. Is it going to be particular provider will be making and then you can gauge what a lower charge would be for a social looking at setting the criteria by which you would tariV. Ofgem have only just announced this in July, like to see the social tariVs set, or do you think it is so at this point the question is whether it has been something that you would want to let the industry done across all the regions. set? Mr O’Brien: We have talked to the companies about this, but Parliament has decided and it is the policy Q63 Mr Weir: Is it going to be the case that of this place that we will have an independent whichever company a pensioner is with is going to regulator and it is the job not of ministers but the have to adjust that pensioner’s tariV to the lower independent regulator to take first bite. That is why rate, or are these pensioners going to be migrated to you are going to see the independent regulator the company that is oVering the lowest tariV? tomorrow. Ofgem will have to engage with the Mr O’Brien: We would hope that pensioners would various energy companies on this issue of a social migrate, but we know that they do not by and large tariV. Their report did raise this issue. There is migrate. It is the case that they tend not to switch to Business and Enterprise Committee: Evidence Ev 13
24 November 2008 Mike O’Brien MP and Neil Feinson the same extent as some other parts of the Q70 Mr Bailey: You seem to put great store on population. That may be due to sometimes lack of Ofgem. Given the fact that everybody seemed to access to the internet and so on. think there was a problem with competition in the energy market, except Ofgem, and it was only a result of pressure put on them by the Government Q64 Mr Weir: We want all the pensioners to get the that they launched an investigation, and by us, do lowest tariV that is available in that area. That is the you not think it is time to consider whether the point of this. Mr O’Brien: No, it is not. regulator is actually fit for purpose? Chairman: It is the very poorest households. Mr O’Brien: The regulator has been managing the market for some time. We are watching carefully the way in which they are managing it. There is a need Q65 Mr Weir: I am using pensioners as an example. for long term stability in the management of this Mr O’Brien: But not necessarily the lowest possible. industry for the reasons I have gone into before. We We have got a situation at the moment where you do not wish to make a substantial adjustment to the may have six companies operating in an area, each regulatory apparatus because that may aVect some of them with a diVerent social tariV, each of them of the long term investments, but at the same time we would then be competing between each other in are watching with care to ensure that Ofgem is terms of getting pensioners and they will oVer responding in a way which ensures that it continues V V di erent permutations on that social tari . When to command or increases its level of command of you say we want all the pensioners to be on the public confidence. I think it is fair to say that V lowest social tari —I wish—but for all sorts of certainly among our many members of our House V V di erent reasons people decide to go to di erent there have been some concerns expressed about companies. They may like for their own V Ofgem and some issues around confidence in Ofgem. circumstances a particular social tari rather than However, we see this probe, which you have another one which may not be the lowest because it indicated certainly that your Committee has played is the case that that suits their circumstances. There a role in ensuring happens, that Ofgem have is a market there and it is not always as responded and I think that report is a very strong straightforward as we might wish. report. Therefore, we are seeing Ofgem respond to the concerns among the public and I very much hope Q66 Chairman: We are talking about each that Ofgem will be able to restore the level of public company’s social tariV must be the lowest price confidence that it needs to have. I think there is every oVered in that region. There is no suggestion that it indication in terms of the way in which it has dealt will move those poorest households around in the with this particular probe that it will achieve the level Big 6 companies; that is the point. of confidence the public need. I would not for a Mr O’Brien: That is correct. moment say that, at least among MPs, it can hold its hand on its heart and say it is where it ought to be. I hope as a result of this probe it will get there. Q67 Chairman: We must be very careful about placing too much reliance on social tariVs because otherwise we have the fuel-poor often, and people earning not much more than fuel-poor, cross- Q71 Mr Bailey: I note your measured response but subsidising the very poorest people, so too much I think the jury is out on that. To conclude, in the reliance on social tariVs means actually that poor Energy Bill there were some amendments made people can pay a heavy price for it. referring to Ofgem’s objective, including references Mr O’Brien: You do have a situation where you to existing and future consumers. What do you think might be able to help some of the poor but the almost the implications are for Ofgem on that? poor are penalised. Mr O’Brien: In law they should be limited. What it has done is eVectively moved up the hierarchy this issue of future consumers to the top of the second Q68 Chairman: Hence the overall Chief Executive of category of objectives. Therefore what it does is it E.ON saying recently that he thought that fuel says to Ofgem this is a group that you have now got poverty was more a question of national policy on to look to with a great deal of importance. I am not poverty rather than for the fuel companies to resolve sure there is a legal implication but I think there is a themselves. certain message that Parliament has sent to Ofgem Mr O’Brien: I think the energy companies do have a that says “consider future customers”, you need to role here. build up and ensure that there is long term security, aVordability in the market and that we deliver a Q69 Chairman: What responsibility does Tesco’s market that also responds to some of the climate have to solve the problem of food poverty? Are you change objectives. I see myself as having three key going to ask them to contribute to pensions? objectives: delivery on the climate change targets, Mr O’Brien: We do not have quite the same view ensuring that we have aVordability for energy and about food poverty as we do about fuel poverty. We also ensuring that we have security of energy supply can argue about whether we should have a national for the long term. Those are the three key objectives target for food poverty as well as a national target and we must ensure too that Ofgem delivers on those for fuel poverty. as well and this change helps to emphasise that the Ev 14 Business and Enterprise Committee: Evidence
24 November 2008 Mike O’Brien MP and Neil Feinson future is important, not just watching how the Q74 Chairman: This is quite an important issue for market is operating today, but making sure future the Committee because we were concerned about the customers are considered as well. unfair allocation of the benefits from the windfall gain on the ETS, so who is now paying what would Q72 Chairman: I would love to explore this at be very helpful. Could I conclude by saying that one greater length because I would love to explore with concern I have is do not trust the regulators to do too you the wisdom of delegating . . . would you like to much of your political and social policy for you. read out the note that you are being shown? Is it Ultimately politicians make these decisions. I am a something you wish to share with us? little nervous about the creeping agenda of some Mr O’Brien: Companies will not decide how £350 regulators. million of the energy programme is divided up. We Mr O’Brien: Can I assure you, Mr Chairman, that are consulting on the metrics of the scheme which you are quite right that we must not allow will determine the split among companies. We were independent regulators to take a political stand. It is talking about the £910 million and I said they will be the Government’s responsibility in the end and, as deciding on that. £350 million of that is for the you and I know, out there the voters in the end are Community Energy Programme and they will not not going to be voting in relation to Ofgem; they are just be deciding on that; we will be determining with going to be voting in relation to us and so the buck them how they allocate that particular part of the does stop here. We do know that. £910 million. Chairman: On that note, we will draw today’s session to a conclusion. I am sorry about the slightly Q73 Chairman: Would you please drop us a note awkward timings and the confusion caused by votes. afterwards to set this out. I think it has been helpful and constructive. We are Mr O’Brien: Here we are talking about a separate certainly very grateful to you. We will not see you part of that £910 million. again so, as a parting, hail and farewell! Business & Enterprise Committee: Evidence Ev 15
Tuesday 25 November 2008
Members present:
Peter LuV, in the Chair Miss Julie Kirkbride Mr Adrian Bailey Mr Mike Weir Mr Brian Binley Mr Anthony Wright Mr Lindsay Hoyle
Witness: Mr Alistair Buchanan, Chief Executive of Ofgem, gave evidence.
Q75 Chairman: Welcome to what will be this moving quite well but we left some people at the Committee’s last ever dedicated inquiry into energy station; some people wanted a window ticket and policy before responsibility will transfer in the New they got an aisle ticket; and some people tried the Year to the new committee. This is not necessarily food and it looked better than it tasted. We are your last appearance before us, we are bound to take absolutely determined to improve the customer an interest in the issues of energy policy, particularly experience and to resolve those problems that we as it aVects the business world, but it could well be, have found. We have demanded, as you know, so welcome and thank you for your work with the action from the companies, in particular, by 1 Committee over the years I have been in the Chair. December on two topics: the 4.3 million customers Can I just begin by asking you for clarity on one who were short-changed with regard to being oV gas point in the Chancellor’s Statement yesterday; I grid, and also prepayment meter customers. I am rather misheard it in the rush of words yesterday. As very pleased that British Gas announced this I understand it, he committed you in public to morning—I took a call from their Chief Executive— publishing quarterly reports detailing the link that they were reducing their PPM customer charges between wholesale and retail prices. He then went on by £30. We have put on, as you know, the regulatory to say that—which is why I got it wrong yesterday— hobnails; you urged us to do that, we feel the timing if suYcient progress is not made in the next few is right to do that and frankly, we will tighten those months, the Government will use statutory powers laces unless they act and the board is quite to end unjustifiable pricing diVerentials. That was a determined to do that. reference to what we will be asking about a little later on in our questioning: prepayment meters, standard Q77 Mr Hoyle: It is good to see you and we are sorry credit tariVs and, of course, we will also talk about we will miss you in the future as you are being direct debits. The only promise here is that you will transferred to the new Committee. Just to go over now publish quarterly information, formalising the some of the issues, I wonder if you can give us an name and shame business that we have talked about explanation as to what lies behind the sharp increase in the past. and decreases in the wholesale gas and electricity, Mr Buchanan: That is absolutely right. If I can say and the eVect over the summer in contrast to the for the record, we welcome the Chancellor’s collapse of the price of oil. comments, as we have the Secretary of State’s. The Mr Buchanan: As you rightly point out, we have seen amount of pressure we can put on the companies to the collapse of oil from $140 to below $50. We have deliver the appropriate outcome is very welcome. not seen that exact link come through to the United Kingdom, and part of that is currency. My markets Q76 Chairman: Good. Now, unusually, you would team told me yesterday that the currency impact is like to make a short statement about how you see the 37%, which is a problem but, nevertheless, we have world, which I do not normally allow, but in the seen gas prices in the last month fall by 14% and they circumstances today I think it is appropriate to do are 40% oV their peak. Electricity prices have been a so. bit slower than that and part of the reason they are Mr Buchanan: Yes, that is very kind; it will be very trading slower is that the nuclear power stations short and partly it was to thank you for the have not come on as expected, and there are also introduction and also to thank you for this some concerns over how the LCPD—Large Committee’s input to both Ofgem’s work and more Combustion Plant Directive—is working for the generally on the energy and environmental issues. plants. Nevertheless, with these price reductions, we Certainly, a lot of the findings that we will be talking would anticipate—and both Scottish and Southern about today, which you made in your report, have and Scottish Power have announced fairly formally had more than just an echo in our report and I am in the last few days—that they would be looking to looking forward to discussing those and marrying drop their prices in the New Year. Candidly, I have those two reports. Clearly, our report was an been public for some time on this and Ed Mayo, extremely important exercise on behalf of the when he came to see you, pursued this theme, which consumer; the most thorough and detailed review of is that at the end of 2006 you may remember we the domestic retail market and broader themes that could see prices falling quite sharply in 2007, and the organisation has done for some time. As you British Gas at that time stepped forward and know, we found good and bad, and I suppose I liken announced that it would be dropping prices and by it to a train: the competition or markets express is the level that it would be dropping them. We are Ev 16 Business & Enterprise Committee: Evidence
25 November 2008 Mr Alistair Buchanan putting as much pressure as we can onto the made very clearly in your report, and what a wide- companies to announce what they plan to do—and ranging report it was—you had found no clear I think British Gas announced this morning, evidence; nobody had brought you evidence. although I have not had confirmation of that—that Clearly, we have the benefit of working under the they are intending to drop prices in the spring. So, we Enterprise Act and we found no evidence; we had have this unfortunate situation for retail customers crate loads of information, as you can imagine— where there is a lag—typically companies have board papers, letters, all their strategy documents— bought for their domestic companies ahead of we found no evidence of cartel. I instructed my winter and we are monitoring this very carefully. lawyers to go over this extremely closely and they This comes back to the Chancellor’s request from us came back with a view that there was not enough because we have now developed quite a evidence; there was not a hurdle that we could get sophisticated model. We have been able to make it over with regard to the Competition Act to deliver a quite sophisticated because we did the probe and we view that they are acting as a cartel. But I can assure have had a lot of information and inputs into our you that I asked both our external lawyers and our model so that we are watching what the companies external QC to have a look at this particularly are doing with a degree of greater information than closely. we have had before in terms of when those prices should be coming down. Clearly, the large Q81 Mr Hoyle: So what we can say is that they are industrials have benefited from the decline in prices, better lawyers than you. Nobody is convinced by so there is a little bit of good news here. We would that answer but at least you have tried to investigate V expect those prices to come o early in the New it. The problem is that you just cannot find the Year. Clearly, for the 4.3 million consumers who evidence that must be hidden somewhere. have been short-changed, and the prepayment meter Mr Buchanan: My legal advisers tell me that the customers who have been short-changed, we expect hurdle under the Competition Act is a substantial that this side of Christmas. If they do not do that this one, so I take what I am given on this. side of Christmas, candidly, I think these companies are going to get themselves into a lot of diYculty. Q82 Mr Hoyle: Do we need stronger laws; the strengthening of competition law? Q78 Mr Hoyle: So, as a kind of an apology to those Mr Buchanan: I certainly welcome something you customers, do you think they are going to give them said to me in the summer, and it may come back later a rebate or a voucher or something? on, but one of our findings is that we sought, about Mr Buchanan: That is an interesting question. five or six years ago, a market abuse power because my concern is that the Enterprise Act or the Q79 Chairman: I do not want to get too much into Competition Act is quite often a very clumsy tool— that now because we will get into more detail later. using a sledgehammer to crack what may be a big or Mr Buchanan: Just to answer that point, the a small nut—but the mechanics of it are quite consultation ends in a week’s time and I am going to clumsy. We have raised publicly and with be interested to see what happens; a lot of people Government the idea that maybe now is the time for have written in. But the other thing I have noticed in us to have a market abuse clause so that we can act typical consultations is that a lot come in just more swiftly if we see a potential breakdown in the towards the deadline, so I will be very interested to market, so I welcome your comments. see what people are saying about that. Q83 Mr Hoyle: But it is funny that within eight days Q80 Mr Hoyle: There is deep concern that people the four major players all announced a price like yourself are very sceptical about how the energy increase. companies operated. There is a perception that they Mr Buchanan: Indeed. operate as a cartel. It was interesting that E.ON and SSE both announced their summer price hikes on the same day, while Scottish Power and Npower did Q84 Mr Hoyle: Surprise, surprise, and then they the same eight days later, all of them during the wonder why they get the accusations. Can I just take height of the holiday season. I just wonder what you you on because I think one of the big concerns is can do about that and are you not suspicious when Ofgem: great ambitions; wanting to do a lot; but the the general perception of the public—either business truth is that you are the toothless tiger. You have no or domestic customers—is that this is a cartel, they claws, no teeth and nothing really to get stuck into. work together and they just ride roughshod over all You can write reports all day long but there is their customers? nothing much coming from you without the power. Mr Buchanan: That is a very fair question. Funnily Do you feel you would benefit if you were treated enough, if there was more concern—which is one of like Ofwat that can restrict price increases? the reasons we triggered the probe—it was over the Mr Buchanan: I have to, and you would expect me almost simultaneous announcement of price to, stop you on the toothless tiger. increases back in January/February. Interestingly, if you break it down there was a bit more of a Q85 Mr Hoyle: You have got to defend your diVerential in pricing and product in the summer. As position. far as the cartel is concerned—and this is where we Mr Buchanan: Of course I have to and that is very marry with the findings that you made, and you important. Business & Enterprise Committee: Evidence Ev 17
25 November 2008 Mr Alistair Buchanan
Q86 Chairman: I will give you a hint that we will be my impression is, that shareholders’ dividends went coming back to this at the end of the evidence. up to £1.64 billion—a huge increase—so I do not Mr Buchanan: Right. It is important to do that. quite understand how the two match. The second part is, we have seen some of the biggest salary Q87 Mr Hoyle: A dragon without fire if you prefer increases in the industry where we know that one that. way and another perks over the year led to £4.4 Mr Buchanan: Well, let us stay with the tiger, million being paid to a chief executive. You feel that because we are an organisation that knows how to you have done a good job, the customers out there use both the claw and the paw. The other issue about feel that if those wages can be paid, and those a tiger is that it knows about timing. I would say, in excessive profits can be gained, you are a toothless terms of our delivery, we are an eVective policeman; tiger. I come back to the question that you did not we will use our Competition Act powers; we answer: do you feel that it would be beneficial if you delivered the highest ever utility fine to National could act like Ofwat in restricting the price increases Grid earlier this year; we used our powers under the on water for the rest of us, where you could restrict Enterprise Act to instigate two major probes—one the price of electricity and gas in the same way? That upstream, one downstream; we are conducting mis- way, to me, you would be a real regulator working selling cases at the moment, so we are quite on behalf of the customers, instead of trying to name and shame, which, I am sorry to tell you, they do not comfortable with our policing powers and we are V quite comfortable giving the industry a good seem to su er shame very easily. kicking. There is also the harassment power that we Mr Buchanan: I hear your points on dividend and have, which is name and shame. That means we can salary and maybe these are issues that the companies go and have a look at how well they are running their should come and talk to you about. No doubt the businesses—such as mystery shopping—for their credit crisis is causing its own issues there for them energy eYciency work. A very important part of our to really look at that. Let me come back to your role is to inform and to help the information for the question on Ofwat. The bit of Ofwat that is directly consumer. A good example of that recently is the comparable to Ofgem is networks, their business is introduction by Ofgem of a much higher level of equivalent to our 20-25% of the bill. That is where we standard with regard to consumer complaints. We restrict prices, that is where we control, so I would have an important education role, which is say we do very much the same as Ofwat. In fact, we have felt, because Ofwat are at a diVerent stage of something that does not get much attention but is V incredibly important for us in terms of a route to the cycle, they have di erent issues, that we could market for the regulator. Energywatch and pursue a lower cost of capital on behalf of consumers than Ofwat has. That is by no way a criticism of Consumer Focus primarily have that interface, but V we want that interface also to give confidence about Ofwat; they are on a di erent stage of their cycle. the regulatory body, and our Energy Smart and Energy Best Deal campaigns have been very Q89 Chairman: We are going to have to move on but important. My final point, and I am sorry if it sounds we might return to these questions at the end of slightly prosaic, but it is quite important, Ofgem’s the time. direct responsibility is for the 20-25% of the bill that Mr Buchanan: I think they are really useful. is the monopoly. I believe that in the four price reviews that we have delivered in the past five years, we have delivered an outstanding deal for Q90 Chairman: There is one thing I wanted to consumers: quality is up, prices have been kept clarify. I started by asking about the Chancellor’s under control and we have delivered for these Statement yesterday; you are going to publish network companies the lowest cost of capital, both quarterly figures; what I do not quite understand is by contrast to United Kingdom utilities and that if evidence emerges that there is an unjustifiable European utilities. That is incredibly important for gap between changes in wholesale prices and retail the consumer because every 1% you save oV their prices, what can you do about it, apart from name rate of return literally converts into hundreds of and shame, which really follows on from Mr millions of pounds of saving for the consumer. I am Hoyle’s point? sorry to have taken a bit longer on this, but it is very Mr Buchanan: That takes us towards the whole issue important for consumers to have confidence that we of cost reflectivity and price discrimination. are competent and capable of delivering across this Obviously we are looking at putting licence range of issues. condition clauses into Ofgem so that we have powers with regard to that. I am nervous because my board has not discussed this so I do not want to fetter Q88 Mr Hoyle: You missed the question I asked and where we are going to go, but it is something that we I will put that back in a moment. I suggest you try have put in our probe document. some smelling salts because the problem you have is that your customers out there, that we represent, do not feel that. They feel that you did not do enough; Q91 Chairman: But if your monthly quartering that you were dragged to the table to do an inquiry produces evidence that there was a tendency for when everybody else was shouting and screaming. prices to go up quickly when prices rose and to come The big question I have is: those prices have gone up down slowly when they fell, if you could produce and we understand that, my concern is that you feel evidence you could put licence conditions in to deal that you have done a lot, the public impression is and with some of those things? Ev 18 Business & Enterprise Committee: Evidence
25 November 2008 Mr Alistair Buchanan
Mr Buchanan: If it was clear that was being done so energy is something they have to have, but at with a view to ensure that there was discrimination, those prices they do not see how they can keep going. which arguably that is what it is signalling, then Are you saying that you will come back to us on action would need to be reviewed, yes. that? Mr Buchanan: I would like to. I would like to get Q92 Chairman: We can now move on to some some more information, if I may. questions about the underlying wholesale market because, as you know, one of our principal points of Q96 Mr Binley: The Chairman raises a vital point, diVerence with you was that our concern was the which is that the plight of small businesses over the underlying function, the market, was poor, although next two years adds to its importance big time. Do there were issues about retail customers as well, you have regular conversations with organisations where your probe focused, and we welcomed a lot of like the FSB and British Chamber of Commerce? what you said about your intentions in the And, do you take note of what they are saying, Mr underlying wholesale markets. So we will begin with Buchanan? You are going to need to take much a series of questions on wholesale gas and more note over the next two years if we are going to electricity markets. be left with a small business infrastructure that can Mr Buchanan: Yes. face the challenges that we need them to face with regard to global competition. Q93 Miss Kirkbride: It is quite timely that you are Mr Buchanan: I can give you some comfort there. I here today because in my constituency this weekend personally, and also as an organisation, as I there were two businesses that are now fearful of mentioned earlier, have our own regular forums going out of business because they have just received with the large users and the small users. I am a their new energy supply contracts, which have gone member of the Business Energy Forum, which up by 300% in both cases. I know we have had price brings large and small businesses together; we have rises and I see the need for some of those price rises, regular meetings with the CBI and regular meetings given what is happening internationally, but how with the MEUC, so we are in regular contact. can that possibly be justified? Have you had other examples of that? A 300% increase! Q97 Mr Binley: I asked you about two specific Mr Buchanan: That is concerning me. Obviously, it organisations, the Federation of Small Business and is a statement of the obvious, it is concerning and as British Chambers of Commerce, which mostly deal I signalled earlier, in our discussions with the Large with this sector, rather than the CBI. User Group and also I met the strangely named Mr Buchanan: And they are members of those SMUG group—Small User Group—a couple of groups that I mentioned, particularly Business weeks ago, many of them were seeing the benefits of Energy Forum, so I do get access, I do hear what falling prices. So my worry for the businesses that they are saying. you mentioned is that probably they are very small businesses and therefore are locked into contracts. Q98 Mr Binley: And you do take note of them big One of the things that we have signalled within the time? probe is that much of what I call normal business Mr Buchanan: We do, they are some of the most relationship between supplier and small business has important meetings we have. As has been raised by been very poor; the conduct of business has been your colleague, we are very interested in these very poor, and we intend to change that. Perhaps we incidents which seem so bizarre, so we will follow can take it oV line, but I am genuinely concerned by that up. the scale of increase at a time when we are seeing prices fall. Q99 Mr Bailey: May I just reinforce this particular point because certainly the rise in energy prices to Q94 Chairman: What does a small business do? Who small businesses, particularly the manufacturing does a small business complain to? Consumers are businesses in my constituency, are really very okay, they have places to complain if they know significant indeed and we have to be quite clear that where to go. Where does a small business go to it could actually drive some businesses out of complain if the company does not provide business. Should your organisation not be looking at satisfaction? a process by which those contracts could be reviewed Mr Buchanan: Consumer Focus, I am sure, has in the light of falling energy wholesale prices in order taken that on because Energywatch built quite a to take some of the pressure oV small businesses? strong platform with the small/medium user. We Because, at the end of the day, it is in nobody’s have our own links into the Small User Group, but interest, including the energy suppliers, if those small the primary customer relationship is there. I would businesses are actually driven out of business. like to come back on that if I may, Chairman, and Mr Buchanan: One of the key findings from the just check with Ed Mayo that is the case. I would like probe focused on a range of remedies including to take it oZine. fairness of contract and contract structure. One of the significant findings from this was the degree to Q95 Miss Kirkbride: As you rightly said, these which the suppliers have dismally let down the small people have contracts and they feel that they are businesses in terms of explaining to them what they completely locked into them—one is a nursing home have got; even giving them a written contract; a and the other is a farm shop that needs cold storage, degree of abuse at the end of a contract cycle; and Business & Enterprise Committee: Evidence Ev 19
25 November 2008 Mr Alistair Buchanan that is very clear and we are going to deal with that can you say it is working well when, if you want a and are dealing with that in our remedies to the longer-term contract and for big energy users that probe. might be appropriate, that is not working? Mr Buchanan: One of the concerns that I have—and Q100 Mr Bailey: I would stress urgency because this may lead to it not working so well—is that one some of these businesses are really up against it now of the outcomes from the credit crunch is that and may not survive. apparently the suppliers—if you are seeking more Mr Buchanan: I will take that away. than a one-year deal—are saying that life is so uncertain that they are going to require a degree of Q101 Chairman: I have just had a constituency premium for that supply two or three years out. experience: the collapse of E4B has meant the Now, is that a short-term phenomenon, or are the transfer of the book to another supplier and I have companies taking advantage of the credit crunch? Is had a complaint from a farm business that there has it real? Those are the things we are having to think been very sharp practice from the organisation that about at the moment. There is a whole range of is on the book in terms of what new contracts she credit crunch-related issues for the sector but this is had signed up to, unbeknowingly, with the new just one of them. I am not hearing the same kind of outfit. Again, it is this point, where does someone messages as you are about the gas wholesale market like that, who thinks they have been treated harshly, per se, but I am hearing this very worrying message go for redress? about the premium that industrial consumers are Mr Buchanan: I followed that up, too, because I had having to pay because of the credit crunch if you are a similar example raised directly. The information is looking for a two or three-year deal, and that is a provided, in that case, in fact, in both cases, E4B and concern; prices are going up. British Gas, the information is provided about their rights to move, etc., but one of the concerns—and we Q104 Miss Kirkbride: We have a chart here—it is are doing a “lessons learned” on this, as you would probably better if I come and show it to you. expect, on a whole range of issues—is how do we Mr Buchanan: Yes, do. make sure that the customers really do understand Chairman: Basically, you have a market, if I what their rights are at that moment and do they remember, of about 3% of trading in a year. With the need a particular piece of information from us—a chart from the Energy Intensive Users’ Group, flyer to them immediately from the administrator? which shows significant premiums for British How do they make sure that they know that they industrial consumers over European and United have a right to move at that moment of States consumers, at a time of economic challenge, administration? I welcome your observations; I have those price diVerentials could be very serious. had it as well, and our team is looking at that. Q105 Mr Binley: It could be 50% even next year. Q102 Miss Kirkbride: I will send you details of my Mr Buchanan: They could be. Sorry, I thought you two companies so that you can have a look and see were talking about the liquidity of the market. This what the problem is. Going on to the gas wholesale will come down to how the market dynamic works market, the particular problem seems to be—please and I would need to have a bit more information on tell us how you see it—where the supply is more than what is built into the European line, because Europe a year in advance because there is not suYcient diVers quite significantly. For example, if you are market liquidity. What are your observations on using Italy, their prices are quite high and quite that? similar to ours. If you are using Germany, which is Mr Buchanan: As far as gas is concerned, you have indexed oV adiVerent index, because they have their covered the ground and got a lot of very useful contracts with Norway and Germany, then there feedback within your own survey. As far as we can would be a diVerent price. When I look at this, what see at the moment, the churn is at quite a healthy do I say? I look at America. America, at the moment, level, there is a market that goes out to 54 months, I and for some time, has been significantly below us, was looking at the chart again this morning, in terms as it is within this chart. That may give you some of forward gas trading. It is not a huge market, but comfort. It is small and it is cold comfort that if the there is regular churn and visibility in the market. I United States came into the marketplace at the know Shell and ExxonMobil came to talk to you and moment, it does not appear that it needs to because said that the market is not stitched up in unfair or the LNG market is very high indeed. So, we do not restrictive long-term contracts, which was a real appear to be having competition there from the concern of this Committee. It seems to me that the United States for global LNG. The United gas wholesale market is working quite well. The Kingdom price is a combination of the fact that we electricity market, I am afraid, is a completely take European index to gas on the margin and we are diVerent kettle of fish and I am happy to go onto exposed to the global LNG market, which is a higher that. With the gas market, from what we can see, the price. That is why you have the higher price over the dynamics of it are working quite well. European line.
Q103 Miss Kirkbride: But there seems to be a Q106 Miss Kirkbride: Is that because we do not have problem when people want a supply that goes over enough energy gas storage? a year. That market does not seem to be working Mr Buchanan: I am afraid that is one of the issues, very well, if the feedback we get is correct. So, how yes. Ev 20 Business & Enterprise Committee: Evidence
25 November 2008 Mr Alistair Buchanan
Q107 Chairman: Which we examined extensively Q110 Chairman: I do not want to do gas storage, as with the Minister yesterday. we did that at length previously and we are short of Mr Buchanan: Yes. It is one of the issues, we cannot time, but I am glad you enforced this Committee’s get round that. concerns about gas storage. Mr Buchanan: Yes.
Q108 Miss Kirkbride: What were you saying earlier, Q111 Mr Weir: You have said a lot about things to then, about we cannot be sure why higher gas prices be done in the future to deal with this, but looking at this graph, it shows massive increases above for a period longer than a year is to do with the credit European prices in the tail end of next year and in the crunch, is that mirrored in what you see happening winter of 2010. The Chancellor told us yesterday in Europe; perhaps not from those figures there, they that the economy would start to recover at the tail still seem to be having an easier deal? end of next year. Is this not going to strangle any Mr Buchanan: These would be market prices. I sense of recovery and is there anything being done in would anticipate if we are seeing two, three, four- the short term to ameliorate these huge price rises year contracts having some kind of extra premium that will be hitting our businesses in the tail end of put into them by the suppliers for uncertainty. I next year? suspect you would get that if you were in mainland Mr Buchanan: I understand your observations and it Europe as much as in the United Kingdom. These is a very great concern. I probably bring you small are the underlying prices upon which a contract comfort here because what I am hearing is that the would be structured. The message this sends to me suppliers are saying—and they are running is, first of all, the point that you have raised: can we businesses as well—that the uncertainty that we now get some storage? How fast can we get the storage have in the marketplace: liquidity has dried up; available? Can we at last try and break the German/ spreads have widened; some of our largest utilities Norwegian contracts because this is really have been struggling to refinance debt and these are important. DG Competition has done very well in companies that are generating—as we have already attacking, unbundling, and the structure of the talked about—substantial cash flow. There are electricity industry; it has gone after some pipelines, tremendous pressures into this sector and that is in like the MEGAL pipeline, which is Gaz de France the short term, that is not even talking about and RWE, but what really is so important for the whether the gas is going to arrive in time at the end United Kingdom customer is that relationship and of the next decade, or whether companies will be the contract which has very rich terms in it between building power stations quick enough—that is the Norway and Ruhrgas. The concern that we have is medium-term issue. The short-term issue is really until the first Directive goes through next year, and concerning and therefore businesses—and I have got even then you are going to need to get progress at this directly from the Large Users Group—are what is called the North West European seeing additional premiums being asked by the Transparency Group, we do not know how much supply and generation companies because of that gas is going down to Sleipner in the North Sea, then degree of uncertainty that they as businesses are going into Germany, sitting in German storage or having to endure. I wish I could be more optimistic. line pack and then coming to the United Kingdom at the times we most need it. In other words, that is Q112 Mr Weir: Basically, what you are saying is that the charge that we have to take. In terms of the tick- businesses in this country will be at a considerable sheet that we need to go for, we need to have a look disadvantage coming out of a recession because of at storage and try and push that on, although it does the diVerential on prices between Europe and the not directly relate to Ofgem but we, like you, can United Kingdom. urge action. We can, part of our job as part of the Mr Buchanan: Yes. European regulators, keep the pressure on Brussels to try and open up those contracts, to try and break Q113 Mr Binley: I want to make a similar point them, to ensure that we get the Third Directive because the Chancellor is gambling big time with the passed next year under the Czech presidency and future of this country and he tells us we are going to that we then pursue that through the regulatory come out of recession in the third quarter of 2009. bodies to open up the European market to He is also telling us that much of that pressure is transparency. When we look at this chart, I do not going to be on small and medium-sized businesses. think that Ofgem should sit back and say that there That is the information we are getting. This graph is nothing we can do; I think we can and we have to. tells us something diVerent, quite frankly. This is of vital importance, particularly to those small businesses that are being kicked in the butt again and again; they are the real victims of this situation. Q109 Miss Kirkbride: Is enough gas storage being What else can we do to ensure that we relook at this planned? as a matter of extreme urgency? Mr Buchanan: Gas storage at the moment—I am not Mr Buchanan: I take your point entirely. In order to happy to talk about this—but those of you who were get that top dark line down to the middle European here four or five years ago, we were talking about 4 line, which would be a success in itself, we have got bcms in 2004 and we were hoping it would be 10 by to do at least two things. One is to push forward on 2009, and we have barely moved. storage and the other is absolutely to keep the foot Business & Enterprise Committee: Evidence Ev 21
25 November 2008 Mr Alistair Buchanan down on the floor of the European car because we Mr Buchanan: I believe it is. I believe it is price have got to get under these contracts, we have got to driven. get transparency to work out what is happening within north-west Europe. It is absolutely vital. The Q118 Mr Binley: This is what the Government’s Third Directive will help; the Commission has come response to us tells us, quite frankly. Can we look quite a way, but I still think there is a big, big win for into that and can you come back to us? us there otherwise we are going to get this compare Mr Buchanan: I am happy to look into it. and contrast. I should also say this, and I said it to the Large Users two weeks ago when I saw them, we Q119 Mr Binley: There is an important diVerence have to be very careful because in France, the large here, Chairman, that we need to be aware of because users are given a substantial subsidy, as they are in it impacts upon those two peaks that we have just Germany. Therefore we have to make sure we are been talking about. comparing apples with apples. Mr Buchanan: Indeed.
Q114 Chairman: What subsidy is that? Q120 Mr Binley: Can I go on to say whether you Mr Buchanan: There are local tax subsidies to many have conducted a comparison of the access businesses in Germany. Very interestingly, the arrangements for rival terminals, such as that at V Commission was so agitated by the French tari Zeebrugge? structure that the Commission in France very much Mr Buchanan: We are doing that currently; we have put pressure on the French Government to put up got a workshop awayday coming up in the next prices to industrial and commercial customers but, month. Jeremy Nicholson of the Large Users has arguably, they did not go up by the level that they been keen for us to do that and I think it is timely to should have done. We have to be very careful about do that. We did it last year, incidentally. Nothing has comparing and contrasting: if someone says they are changed in terms of the Zeebrugge versus Grain taking their business to the Ruhr, well, ok, but let us contract structure. One is regulated—Belgium—one just work out what it is that you are getting in the is not. One is much bigger than Grain, one is at 40 Ruhr and whether certain taxes are being waived. I mcms a day, one is at 12; one has long-term would urge some caution; it is not a straightforward contracts, the other plays into the competitive switch of moving a business to Rotterdam or market. Zeebrugge is very important to the overall Du¨sseldorf. Belgian market; Grain is a very small part of our market, so you might say they are apples and pears, Q115 Chairman: We would like to pursue that at but I still think it is worth us looking at. We had an much greater length and will rely on a written note equivalent opportunity a year ago and the Large from you. Users at that time did not feel that it was worth Mr Buchanan: I would be happy to do that. looking at, but if they want to look at it now, I think it is a good idea, I think we should. Q116 Mr Binley: Bearing in mind the rather horrifying picture that graph produces for us, you Q121 Mr Binley: The Large Users might not think would have thought that liquid natural gas was one it is worth looking at but the small businesses in this of the answers. But we know that the Isle of Grain country certainly will think it is worth looking at. import terminal has seen little use this year and there This, again, comes back to the urgency of the is a suggestion that particular under usage will autumn/winter periods 2009 and 2010. It is a vital continue, even though we are talking about issue that we have to deal with, Chairman. improving the amount of resource we have to accept Mr Buchanan: We are going to review that. My the stuV in the country. Can I ask what assessment concern at the moment is that it might be that we you have made of why the Isle of Grain LNG look at it as apples and pears, but let us do that, we terminal has continued to see relatively little third are doing the work. party use in 2008? Mr Buchanan: The issue for the current usage is Q122 Mr Hoyle: Mr Binley has absolutely touched simply one of price. Typically, I looked at these on the problems but the other part of the problem is prices a month ago for a speech I was making then. that it is no good just having an LNG terminal. At that time—and it has not changed the dynamic What you have to have is an LNG terminal with the but it is a price point that I can use—British prices back-up of storage capacity because what we want is were trading 90/95 pence a therm. The price that was for those LNG ships to come when there is a surplus being paid for global LNG was 120 pence a therm. of gas in summer when there is not a great demand, It would not arrive here because the market is not the so it is cheaply bought, stored and put into the right price, it is going to Korea and Japan. market when it is peak demand in order to keep the prices down. That is the way that companies are Q117 Mr Binley: The Government makes a slightly artificially keeping prices high, not just to businesses diVerent point. In answer to us, it made the point but to domestic customers as well. I wonder how you that there are currently a limited number of LNG feel about the new proposed terminal—well, there is tanker cargoes that are free to sail to any destination a terminal, I believe, already in existence in the Isle in response to price signals because many of them of Anglesey and there is a huge storage capacity are locked up in contracts. Is your answer the where it goes into a direct pipeline at Thornton. correct answer? What will that do and what are you doing to ensure Ev 22 Business & Enterprise Committee: Evidence
25 November 2008 Mr Alistair Buchanan that these schemes are brought on quickly in order Q125 Chairman: So there is quite a robust remedy to try to get the price of gas down, but giving us that for the whole market, should that be necessary in the extra capacity in storage so that LNG ships will early part of next year? come when there is a glut in the market and that we Mr Buchanan: Indeed. can see the benefits, rather than trying to buy at the Chairman: Well, I think that probably answers my spike in the price where, of course, we are in second question as well. competition with Japan with no other energy. Have you got a quick answer for that? Q126 Mr Bailey: Before I go on to questions Mr Buchanan: I do not know if you will like my concerning vertical integration and the wholesale answer but I will give it anyway. We will try and do market, I wanted to pick up the point that was made what we can. earlier about the perceived and, I think, actual real subsidies that seem to take place in France, in Q123 Mr Hoyle: You have no powers, I know your particular. I have constant complaints from problem. companies that their energy prices are higher than in Mr Buchanan: The comment you made which, if France, which is partly a result of the way the market true, would be very profoundly worrying, which is is operated, but would also appear to be a result of that companies are artificially not wanting to do government or local government policies taking anything. The evidence that came to your place in countries. To me, that would appear to be Committee when I read it, E.ON and Scottish and against European competition rules. What is being Southern made it very clear that they were very keen done by organisations like Ofgem to combat that to develop; Canatxx has become almost a folklore and do you have links with comparable example. I agree with you, the quicker we can get this organisations in other countries on this particular on the better. Another worry I have—I sound a bit issue? I would like some more information on that. pessimistic today—you may have noticed that the I believe you said you were going to provide some Portland storage, a big storage facility, 1 bcm—has written information so I will not labour the point been delayed by one or two years because of now and take the time of the Committee. In terms of financing. the vertically integrated generation and supply, in your own report, you said that you will require the ‘Big 6’ suppliers to publish separate regulatory Q124 Chairman: Now we move to an area where I accounts for their supply and generation businesses would have liked to have pushed a little harder but in order to improve transparency and make it easier I understand that because the European Union are for potential entrants to access market opportunities currently considering the matter, it would be at each point along the value chain. Given the inappropriate. So, these questions will be a little less demise of companies like BizzEnergy, that does not probing than I would have liked. Turning to the seem to be working. Can you tell me what sort of question of market concentration: electricity. This response you had and how much progress you are Committee, as you know, expressed serious making on it? concerns about the consequences for the takeover of Mr Buchanan: This will be part of the package that British Energy by EDF for liquidity in the market. I we will release in the early part of the New Year. We must emphasise that the Committee is not against are obviously out to consultation to hear what it is the deal, that is not the point we are making, but people want to see in terms of the information, but there are implications for liquidity and transparency we are committed that we will have a much greater in the market. We welcome what the Secretary of degree of transparency with regard to the State said about some transparency issues—and we companies. We have to discuss the level of detail and will come to that later—but the liquidity question is the timeliness of those reports to come out from the very serious. By our calculations, assuming Centrica players but rest assured this is very much one of the takes a 25% stake in the new company, EDF will clear improvements and wins that we can get out of now control 22.5% of all electricity output. That is this process. really quite significant, to say the least. There are other players, of course, independents as well, but can I ask you what role Ofgem will have in the Q127 Mr Bailey: For some, this might be too little regulatory process, or is having, for the takeover too late. proposals? What are you doing, what is your role? Mr Buchanan: I am sorry, obviously, if Bizz was Mr Buchanan: As far as our role at this stage, and relying on this kind of information in order to thank you, Chairman, for outlining how far we can maintain itself, but I am afraid that in so far as the speak on this. We have made a submission, as you company is in trouble now and this would have would have expected us to. The Commission will helped them, then, yes is the answer to your show its hand on 8 December, unless there are question. remedies being discussed, and I believe then the date is 22 December. We are party to that role. Our role Q128 Mr Bailey: You have partly answered by next in a more proactive form, which we have outlined in question about when you expect this to take place; is the probe, is that we are very keen that we open up it going to be this current financial year? If I heard the liquidity issue for detailed review and you correctly you are going to publish the examination. We have also put in our probe that if information in January, is that correct? we feel we cannot get anywhere, then we will go Mr Buchanan: It will be January/February, yes, so it down the CC route. will be the beginning of next year. Business & Enterprise Committee: Evidence Ev 23
25 November 2008 Mr Alistair Buchanan
Q129 Mr Bailey: Having received the information, you have to make sure the companies are playing when would you envisage any changes being ball with you and giving you the information you are implemented by the companies or will you be really seeking. It will not be a straightforward pressing? exercise in my opinion. Mr Buchanan: We will certainly be pressing. I am Mr Buchanan: I appreciate that comment, only showing a hesitation because we have not Chairman. To give you some comfort there, we have finished the consultation. I have not taken any upgraded internally with a new finance function papers to either my own executive or to the board, within our business and also a relatively new city but if I can leave you with the commitment, this is watch function as well, so we are going to be in a something that we are very focused on and will much better position than we were to be able to read deliver on. into accounts to see if they are trying to do that. Chairman: It is fair to say that the Committee was very grateful to the Secretary of State, John Hutton, Q133 Mr Bailey: Are you satisfied that you have the at the time, for his very speedy response to this capacity to do the detailed examination necessary to recommendation. It is rightly put on record our expose any malpractice in this area? public appreciation of what I regard as a very major Mr Buchanan: At this stage, yes I am, although I response to a very important recommendation of should say that as an accountant, creative this Committee. We are grateful for that and we do accounting can be an art form and what we need to attach great importance to it and will be saying so in be able to do is both to understand them and also to our report after this evidence session, I am sure. It is gain an intuition onto them; not only to read the a really important matter and the information that accounts but to say intuitively, is there something the marketplace provides is crucial. else going on here. I think we have got that skill at Ofgem now. It is a very good question because you Q130 Mr Weir: Could I just get clarification. One of can read accounts and not have that intuition, and I the problems with the profits and finances of a think it is very important to have it. company as many of them are now part of multinational conglomerates—Scottish Power is Q134 Mr Bailey: Can we move on to market now controlled by Iberdrola. Just for clarity, I take liquidity, which is in part—or lack of it—a V it these accounts showing the di erence between the consequence of the problems with vertical generation and supply arms will be for all companies integration. You have acknowledged that the operating within the United Kingdom, whether they electricity market is incredibly illiquid and certainly are United Kingdom based or part of international all the statistics showing the over-the-counter companies. trading and the open market trading there is a huge Mr Buchanan: Absolutely, you will have heard it disparity between them. Again, your probe finding direct from Scottish and Southern or Centrica says that you will begin urgently a programme of British Gas, they feel that they are having to provide work to identify the underlying causes of low a level of information—and they are—that an EDF wholesale market liquidity and explore with the ‘Big or an E.ON Ag is just not. So, at its very basic one 6’ suppliers how best to achieve a significant increase would anticipate that we will force the companies in liquidity. I would not disagree for one moment who are giving one or two lines in group accounts to with the point that you make. I would perhaps be open up to the level that we get from a British apprehensive about the phraseology “explore with company. But we may want to take it further than the Big 6”. Do you not think it needs a rather that, which is why I do not want to fetter the board’s heavier hand? decision on that. I want to see what the feedback is Mr Buchanan: It might well need a heavier hand if in terms of how much information players think that the ‘Big 6’ do not come up to the stump on this and they should be getting. they know that we have signalled to them that either we will push on with our own review and changes Q131 Mr Weir: But is your aim, then, to show the and/or we can use the CC to do this. Clearly, profit made in these arms of the United Kingdom competition authorities may have quite an operation so that you can get a true comparison important role to play here, going back to the between Centric and SSE and those that are part of Chairman’s previous comment with regard to the multinational companies? BE/EDF and then BE/EDF Centrica, so there will Mr Buchanan: It is interesting, if you look at British be a lot of focus on this. If anything, liquidity—you Energy, as is now, British Gas Centrica, Drax, they could say how could it be even more important—has are all showing what their sell price is, their buy become even more important through the credit price, their forward contract curve, the forward crises because what was even there has dried up purchases, and the price; all that kind of information further. I was looking at one of the markets that has is available. That is something that certainly four of been quite successful, the German OTC market has the Big 6 are not having to do. lost two-thirds of its liquidity in the past two months, which is a real worry. It was a major issue Q132 Chairman: I will just say the obvious, you and and it really is a major issue now going forward. your staV will be aware of this, the ability to hide information in accounts of this nature, the capacity Q135 Mr Bailey: You have anticipated my next for creative accounting is absolutely huge. For this question in part. I will ask you to develop that information to be genuinely valuable to the market slightly further and then come back to the other one. Ev 24 Business & Enterprise Committee: Evidence
25 November 2008 Mr Alistair Buchanan
Just how is the credit crunch aVecting the market; next 18 months. These are basically very healthy can you explain in greater detail? You have just companies, but you have to be able to refinance your mentioned the German experience; I am not debt. If we go to the longer term, what one is starting altogether clear from what you have said exactly to look medium term—and your Committee is very how it is operating or not operating. focused on this, Chairman—what are we going to do Mr Buchanan: The credit crisis could almost be put in 2015–016 when the coal and the oil-fired plant into two categories—stop me if I start to go on too comes oV and some of the nuclear power stations long because this is an area that I am concerned literally, probably, just fall down. When we look at about. If we look at the short term and then the that, what I have said to my team and they are doing medium term: as far as the short-term is concerned, it as a priority job now, is that I want to go back and there is a raft of issues. On the market side, we are refocus on 2015–25, in terms of security of supply, seeing liquidity dry up; spreads increase; collateral because what we are hearing from analysts’ reports being required in substantial terms both to trade and and newspaper reports, direct quotes from Putin even to raise debt—if you can raise debt, because the himself, is that GazProm, understandably, it is a debt markets have been closed for significant parts major business, is revisiting its investment of the past two months, as have the commercial programme. The South Stream pipeline, which is the paper markets. So, where does that take us? In the umbilical chord being built through the south of short term—and we can discuss Bizz and E4B a little Europe, has already been delayed by three years. So, bit—having the credit crisis with those parameters there is an implication on gas; there is an implication aVecting companies that were already having to deal on whether power stations will get the funding in with the energy markets, and there may have been order to be ready in time. And then there is nuclear, internal issues for them as well, various contract because one of the things we know about nuclear at structures, etc., has caused tremendous pressure on the moment is that the finished project is now the independent supply sector—what little running at least three years behind time. Why I am independent supply sector we had. By and large, the pulling all that together is that what I have asked my independent generation sector—and funnily team to do is to go back and, in the light of the credit enough, it is quite active—has very large national crunch, have a look at 2015 and beyond, because we players, so DONG of Denmark has just announced have to make absolutely sure that some of the that it is going to make a play for a large power working assumptions we had for 2015 and beyond station in Scotland; the largest power station trade are still right. It is quite a sobering exercise but one in the past two years was Gaz de France Suez buying that needs to be done. at Teesside. These are big players. The independent sector on generation are of a scale that perhaps can Q136 Mr Bailey: I was going to ask you about weather some of the storm a bit better. Even still, whether the situation was exacerbated by the when I look at the implications of what we have, takeover of British Energy. What is the British both short and medium term—and if I may, I will Energy dimension? come on to the medium term in a minute—what we Mr Buchanan: I have to be very careful here. To a are seeing from the markets at the moment is that if certain extent, the way I have approached this issue you can get a deal, in terms of your debt funding, is to say, how comfortable can we be that new primarily, either to build a new power station or as nuclear will get built on time; if they are already a network company to refinance your debt, in order running three years late in Finland, does that give us to maintain your business structure, you are comfort that all the mistakes that they are going to potentially looking at 4% or 5% above LIBOR. I was make, they are going to make in Finland, or should talking to an American who came by yesterday; my economists be building in to new nuclear an extra Illinois Power did a vital debt deal at 7% above three to five years. That is what we have to start American base last week. Why is this important? It thinking about for gas, for nuclear, for traditional is important because consumers will have to look at power. this, regulators will have to look at this, and say how much of should be pushed through on the network Q137 Mr Bailey: Can I just go back to the question side, how much should be pushed through to I was about to ask before we digressed on the credit consumers? This is very frightening. On the power crunch, but very important obviously. In terms of station side, all the messages I am getting, both from the more immediate situation in liquidity, what is the the capital markets and from the deliverers of power sort of timetable that you are looking for, for action stations and the utilities, is that the required return on this? on equity has gone up from 10% to 15%. Therefore, Mr Buchanan: This is imminent on liquidity; the a number of projects are not making the hurdle any companies have got to come up with some good more; therefore, you are starting to see a slowdown. ideas and they have basically got the best part of Again, there are implications for consumers because seven days to do it. If they do not, then we will take if power stations are potentially going to get built, it forward ourselves, and if we do not think we can are they going to require a higher return? It is a take it forward because we feel that either we do not worrying picture in the short term. Our utilities, if have enough powers or the wherewithal, we will go they are coming up for a refinancing package—I can to the CC. send you a very good report by J P Morgan, it is pretty sobering—a number of our British utilities Q138 Mr Bailey: Sorry, you said “seven days to do have got significant refinancing to achieve within the it”? Business & Enterprise Committee: Evidence Ev 25
25 November 2008 Mr Alistair Buchanan
Mr Buchanan: Yes, because the consultation ends in Q142 Chairman: The wholesale electricity market seven days’ time. I am waiting to see what they peaked very sharply last month because of fears of deliver to us by way of ideas. security of supplies this winter; I think the fears have receded now. But this is exceptionally serious stuV Q139 Mr Bailey: That is very interesting indeed. In and may call for radical public policy measures if terms of the European dimension, really the there is a serious fear of a shortfall. Commission should be very proactive on this. I Mr Buchanan: The credit crises—you will have a know there have been some strong pressures to better feel for this than I do—across every business mitigate the pressure that is coming from the sector everybody must be reeling back from it—I Commission. What is your reading of this? liken it to a punch to the stomach –and saying, what Mr Buchanan: I am pretty sure that DG Comp is does it mean? It does not mean that I am not very focused on liquidity as an issue at the moment, confident that markets will not deliver in the future; and that is not just entirely because of the BE/EDF it does not mean that our assumptions for the future deal, it is because liquidity is such an issue within the are wrong; it just means that we have to go back and credit crunch problem. shake them down.
Q140 Chairman: Your picture of the future of Q143 Chairman: There is capacity, of course, from security of supply for electricity generation in the changing decisions about larger plants that were V particular makes a good deal more sense to me than coming o stream if they can be retro-fitted or the—and I hope this does not sound partisan— improved in some way as well so there are other rather optimistic picture we got from the Minister options. yesterday. He talked about the capitalisation, the Mr Buchanan: Indeed, that is a very good point. businesses being sound and secure, and seemed to think that there was not a problem at all. I Q144 Mr Weir: You were saying about the need for particularly remember this Committee’s report on companies to refinance and the diYculties they are nuclear power, what came out of that very clearly is facing in this, is there a contradiction between this the single determinate of the cost of nuclear is the and trying to drive down fuel prices, because the cost of capital, and that is just the political risk companies will argue that they need good prices to attaching to it. But if you are talking about the kind be able finance the development they have been of situation that we now face, those companies are asked to do, both for new generation and to meet doing serious rethinking. There was the interview climate change targets. How do we square that with the German Chief Executive of E.ON about the circle? future of Kingsnorth in the Sunday Times on the Mr Buchanan: It is a very good question. We are Sunday before last, saying they are rethinking their seeing some fairly profound falls in oil, gas and coal commitment to that project, the timescale. The prices and therefore one would expect, irrespective implications are tremendously serious. We started of a margin coming in, for possibly a medium-term oV looking at energy prices in July, but if our contract between a supplier and an industrial successor Committee in six or seven years’ time are company. That would be marginal to the overall looking at why the lights have gone oV, it will be swings that we are seeing on prices here. But you much more serious. raise a fair point and it is one that my colleagues and Mr Buchanan: The Minister may be right. My I need to watch very carefully. message to you today is that we can see, at Ofgem, significant potential shifts in the assumptions that Q145 Mr Weir: Presumably, the market we have made. We need to go back and really shake capitalisation of the companies will be the those models down to see whether they stand up to determining factor as to whether they can actually the new world that we are living in. If they do, that borrow the money required for investment. is great, but not to carry that out, we would not be Mr Buchanan: Indeed. doing our job properly. It is not for me to come and defend a Minister, but if we look at the short-term Q146 Chairman: After that slightly sobering section, news, we have plants coming on line: Marchwood, we will move on to another sobering section, Langage, Glendoe. Behind that, there is a whole straddling the issues between wholesale and retail, string of plants; just in the last couple of weeks we because I want to talk to you about new entrants to have seen Drax announce three eco-friendly power the gas and electricity markets, particularly the stations. demise of two significant businesses, one in my constituency, BizzEnergy, with 160 jobs gone, and Q141 Chairman: If they can get the biomass fuel to Electricity4Business. If this Committee had a serious support it. criticism of Ofgem, it may be—and I think you have Mr Buchanan: If they get permission to build it, we heard it in some of the questions up to now—about have the Irish company ESB buying into the perhaps lack of attention on the SME sector in Carrington; we have the Danish company, DONG, general. Here were two companies that were looking to build a big station at Hunterston. There supplying the small business sector and oVering is a whole range of conventional plant that them better deals, better prices and better service potentially is being built, so I do not want to be the than the Big 6 could oVer. They have both gone out prophet of doom, but beyond 2015, we have to think of the market, taking a small but significant share— very carefully about our assumptions. 4.6%—with them, leaving behind just one big player, Ev 26 Business & Enterprise Committee: Evidence
25 November 2008 Mr Alistair Buchanan
Opus Energy with 1.4%, and seven small suppliers, Mr Buchanan: It is a “her”. holding 1.3% between them. So there was 7.3% of the market in the independent sector and now there Q149 Chairman: We had evidence from BizzEnergy is 2.7%, which is vanishingly small and is probably as part of our inquiry in the summer. As a result of vanishing, quite literally. So, what lessons will you that, publicly, one of the ‘Big 6’—I cannot remember learn from the experience from Electricity4Business which it was now so I will not name them in case I and BizzEnergy? get it wrong—said, “Oh of course we’ll supply Mr Buchanan: There are lessons with regard to the BizzEnergy”, in public, to this Committee. So structure of the industry, and there are some micro BizzEnergy entered into negotiations with the lessons with regard to administration which you company and, of course, they just would not supply may or may not be interested in. I have confidential them. There was just a refusal to supply, which is a information, so I will try and give you a flavour as big issue. It is something to do with some burnt best I can. My observation would be that the fingers experiences earlier in the market, combinations that brought Bizz and E4B into understandably, a couple of years ago. My other administration were a combination of their contract concern was that it was quite clear that the Big 6 structure, the diYcult energy market and the credit were using the smaller companies—well, reluctantly crunch. I do not say the latter point lightly because being used by them—to reduce their own prices. I spent a very enjoyable and quite exciting day—I What would happen is: if you were with British Gas, know you feel the same way—with Bizz in Worcester BizzEnergy would come and oVer a lower price, then in the summer and the company was healthy and British Gas would say, oh, we can match that. So, successful. Therefore, the extent to which it is the you were seeing BizzEnergy not able to capture credit issues, or the energy market issues, I am not business because the incumbents were bidding back entirely sure and probably should not say. to get the price. Those who did not have the wit to strike a switch ended up on higher prices; once you tried to switch and you were on lower prices, with the Q147 Chairman: It is possible that there may have original supplier. There were huge problems with the been bad commercial judgments by the company market here. On the whole, I have quite a high as well. regard for Centrica British Gas, it may surprise you Mr Buchanan: To me, I like Bizz, I like their model. I to know, but I was a bit surprised to get a letter from spent a day with them in the summer and it appeared one of their senior executives earlier this week, their model was working well. They were even saying that the departure of BizzEnergy from the planning to enter into the domestic market at that market proves that competition is working. That is point. The macro lessons are—as we have discussed not the conclusion I draw. Would you say that the already—liquidity, financial information and trying departure of the two significant competitors to the to reduce the barriers further for small players—get Big 6 proves that competition is working? rid of regulatory red tape if it is there potentially Mr Buchanan: I think it is quite an interesting causing them trouble. Interestingly, and I am going statement. to pursue this because it is very interesting for me, we have had two players coming out of the SME market Q150 Chairman: Thank you, Minister, Sir and a company called MA Energy that has just Humphrey! You have implicitly answered the opened up into that marketplace, saying that it question I wanted to ask you next, which is that intends to open into that marketplace in the first there is a need for reforms to the way the wholesale quarter of next year. They used to be Midlands electricity market works to enable new entrants to Energy; I have tried to locate where they are based emerge. We cannot be left with six big suppliers in as it may well be in your constituency or near it. On perpetuity. the micro level, we have learnt some very interesting Mr Buchanan: I agree, and I would hope that the issues. First of all, on ROC payments and the package we are going to put in place makes that a importance of whether we need to have ROC more attractive proposition for the MA Energies of payments made, not just on an annual basis, but this world to come to the market. whether we have that on an on-going basis. The other more interesting issue, because it also links to Q151 Chairman: I understand that BizzEnergy’s how well the marketplace is working, is that when a directors are anxious to try and get back into the company gets into trouble and it is running up to marketplace themselves so we will see if they succeed administration, the cash out regime—you might be in that ambition or not. short of power and therefore you might be buying Mr Buchanan: Well, that is great. power in a cash out position, which is very expensive—can really hurt a company, just as it is Q152 Mr Binley: A spin-oV from this is that pricing going into administration. We have to look at that policy is a vital part of this whole ability to enter into to see whether there is something we can do with the the market. Yet your own probe found that rules there. switching rates among small business customers have been lower than in the domestic sector and that, furthermore, a growing number of consumers are Q148 Chairman: I am encouraged by those answers. engaging actively with the market, however, a I welcome this new entrant and wish him or her significant proportion of small businesses are not. every joy. You then went on to say that there is evidence that Business & Enterprise Committee: Evidence Ev 27
25 November 2008 Mr Alistair Buchanan suppliers may be using SME customers’ lack of prepayment meters in terms of the significant cost knowledge about their terms and conditions to that people have to pay for those prepayment behave in a way that does not facilitate the smooth meters. It is a fact that most fuel poor customers are functioning of the market. You then demanded on the standard credit and it is quite clear that there some action and I have got those actions listed. Can is a diVerential between direct debit and the standard I ask whether you have done any work to have an credit customers. Indeed, one of the investigations understanding of how those actions are working? that you carried out was that the cost diVerential Are they having the eVect you wanted and if not, should be around £37, whereas the companies would what more can you do? charge a premium of £8. One of the companies Mr Buchanan: What I would be happy to do, regarded it as an incentive to encourage greater take- because we are in this consultation phase, we have up of direct debit. It is daylight robbery to suggest outlined our remedies that will go into a package and that you are going to charge your customers an extra depending on what people bring to us, it will be a £40 or so over what your costs are. It would be like much upgraded package than we have even a traYc warden saying to every motorist, we are announced so far. I would be very happy to send a going to give you a £40 fine, just in case you decide report to your successor Committee—whatever that to park on double yellow lines. To me, it is Committee is—on this area. We probably need to something that Ofgem should have taken up quite give it three to six months into next year. strongly, because in any other sphere, nobody would be allowed to get away with charging more than the Q153 Mr Binley: But you have already told the actual costs. So, what is being done about it? people the sorts of things you wanted, you have Mr Buchanan: One of the big issues within the repeated that on a number of occasions, and you probe—again, I cannot say that this is what the must have done some work to know whether the board will do, but the board has clearly signalled sorts of things you are proposing are going to bite, that it is minded to think about this very seriously— or whether you need additional powers, or whether is that we go for a licence condition clause that stops the Government needs to take action.. that price not being reflective of cost and therefore Mr Buchanan: Indeed. SC customers, as well as PPM customers get protected by that clause. Q154 Chairman: Just help me understand the answer to your question. The actions you have outlined about information, codes of practice, accreditation, Q158 Mr Wright: How confident are you that the at what stage are they? I cannot remember exactly gap is going to close? where we are in the timetable. Mr Buchanan: If there is a clause in place, the Mr Buchanan: We are moving through the process. companies would be breaking a licence condition.
Q155 Chairman: Are they all finalised? Is the code of practice finalised? Q159 Mr Wright: Are you prepared to enforce the Mr Buchanan: No, we have to wait for the licence condition? consultation to end and then we will take it to a Mr Buchanan: The licence conditions are there to be board in early January, maybe early February, then enforced and to be obeyed and if companies do not we are oV with our new package. do that, then we go after them.
Q156 Mr Binley: The point I am making is that you Q160 Mr Wright: What is the timescale for this to demanded these sorts of actions of the industry in happen? the past—demand is perhaps too strong a word— Mr Buchanan: It comes back to the timescale for the you have suggested that they ought to act in these previous debate. The board will be signing oV the areas. What accounting have you done in respect to package early in the New Year. their ability and willingness to act, because it will have a major impact upon the way you formulate your report and the recommendations you make in Q161 Mr Wright: Can you be more specific? You say respect to whether you need, or the Government early in the New Year, these dates sometimes slip. needs, to take action. Mr Buchanan: I would be disappointed if we have Mr Buchanan: The honest answer here is that the not taken everything to the board, which is in the ‘Big 6’ have simply behaved so badly to this group— middle of February, for final sign-oV. It may be and that comes across very clearly in our report— January; it may be February, but certainly in the first that I would be very disappointed if the range of two months of next year. remedies that we have put down does not have a substantial improvement in energy life for small users. If it does not, it means that something is going Q162 Mr Wright: So, therefore, you would be in a very wrong and we will have to use powers that could position to suggest that to the new Committee when include going to the Competition Committee. they call you before them, which I am sure they will, that everything is all above board and the ‘Big 6’ Q157 Mr Wright: In regard to the price diVerentials, have conformed to what your requirements are. Is it has been publicised in the past few days and for a there any issue about giving rebates to customers period of time, quite clearly the focus has been on that have been overcharged in the past? Ev 28 Business & Enterprise Committee: Evidence
25 November 2008 Mr Alistair Buchanan
Mr Buchanan: I am waiting to see what the he is not suggesting that new legislation is required, consultation feedback is, maybe a number of the he is saying the existing power that you have are consumer groups have put in some interesting suYcient to deal with the problem. thoughts there, so I do not want to prejudge that. I Mr Buchanan: I cannot clarify that for you, I am am going to wait to see what we get next week. afraid, Chairman. It seems to me that we are either Mr Wright: I know there is a big issue about going to get there by the companies volunteering customers being overcharged with direct debit and I this, or we are going to put licence conditions in know the Chairman wants to ask questions on that place, and/or the Government will either legislate for particular issue. There are a number of issues about licence conditions or legislate itself. Therefore, I am overcharging that customers have had for many hesitating to answer that question. years, with quite significant diVerences in terms of prepayment meters, standard credit, and diVerences Q167 Chairman: I do not want to draw you into in on-line charges. criticism of the Chancellor, I just want to understand the framework: you can do this, your board in mid- Q163 Mr Weir: We all welcomed the report and the February can say, licence conditions. action on prepayment meters, which is long overdue, Mr Buchanan: If that is what we see as the but some groups have voiced concerns under the appropriate way ahead, and the companies, if they cost reflective policy that some who are fuel poor— disagree with us, can take us to a CC and challenge and we appreciate that by all means not all that. prepayment meters are used by fuel poor people— but there is a significant number and some Q168 Chairman: So, legislation might avoid a companies have used prepayment meters specifically Competition Commission challenge? for fuel poor customers who have got into arrears Mr Buchanan: That may be what the decision is, with their bills. The National Housing Federation, politically, yes. for example, gave us a report that many of these fuel poor customers will still be paying £51 a year more Q169 Chairman: That is helpful, thank you very for using a prepayment meter than under the cost much. Now, direct debits: this is one of the issues reflective model. Is there any prospect of looking at that has taken me a bit by surprise. This Committee a way of eliminating this for fuel poor customers, if has worked on the basis that direct debits are terribly not for all prepayment meter customers, to ensure good news although all of us, privately, are having that those who have found themselves in this problems with our own suppliers about our own position, because of fuel poverty, do not end up direct debit terms. The BBC breakfast television paying more than they would if they were not fuel asked me to give a clip to them for their Saturday poor? programme, since when all hell broke loose—here is Mr Buchanan: This is where we go into that my file of e-mails, which I will give to you now, interesting world between Ofgem and the because you said you had not got the evidence, well Government. One of the riders of this report is the there it is. To be fair, some of those e-mails are from importance of cost reflectivity and for us, as a people who just do not understand how much regulatory body, that obviously is very important. electricity and gas prices have gone up, they have not Whether the Government picks up your challenge had the problems that other people are facing. But and says that they will take action in this area, I do there are a number of systemic problems there also. not know. I am not going to name the companies now—they did on the television this morning—but there seem to be two companies particularly prone to Q164 Mr Wright: We did ask the Minister yesterday. complaint. That may be the small sample that we Mr Buchanan: That is where it probably rests. have there, a self-selecting sample. One of those companies may have a profile of customer that lends Q165 Chairman: Before I get on to direct debits, it to complaint on this issue; it may be the customer briefly, can I seek your clarification on one thing; I profile and nature of the customers they have. There am a bit puzzled. You have indicated to this are some underlying diYculties. The trouble is that Committee, helpfully, that this issue of diVerentials the articulate people, whose e-mails I have there, between prepayment meters, standard credit and ring up and get a reduction. Each and every one of direct debit terms can be dealt with by a licence them rings up and gets a reduction; that is the condition. Is that correct? underlying theme. Some of them get more marginal Mr Buchanan: Yes. reductions, some of get huge reductions, as you will see from there. It does look as if the complicated models that the companies use to do this process, Q166 Chairman: The Chancellor said yesterday that wherever the benefit of the doubt exists, give the if suYcient progress was not made in the next few benefit of the doubt to the company rather than the months in closing gaps in pricing between payment consumer. We are all lending some £100, £200, £300 methods, the Government would use statutory to these companies, interest free. powers to end unjustifiable pricing diVerential. My Mr Buchanan: I hear your concern, you have given understanding is that Ofgem already has those us your concerns, we have asked the Daily Mail for statutory powers and it is Ofgem that will use them. their equivalent folder and we will investigate that. There is no criticism here, I just want to clarify that One of the interesting knock-ons from it for me is Business & Enterprise Committee: Evidence Ev 29
25 November 2008 Mr Alistair Buchanan that the Financial Inclusion Taskforce is looking at or 10% of their total bill on average over a period of how to promote direct debits to society more time, paying well in advance and invariably at times broadly, and that it is a good thing. Therefore, this when people can least aVord it. Again, it is the is extremely important, I would have thought, to majority of people on standard credit who are in fuel them. I have not spoken to them since this has poverty or are fuel poor, who can least aVord these broken, but they were looking to make a report in exorbitant bills when in fact they are paying for December, I believe, and I will certainly want to get energy that they have not even used. in contact with them and say that this may aVect Mr Buchanan: Right. their report. Q175 Chairman: Obviously, what I would like to be Q170 Chairman: There are quite a lot of e-mails in able to do is to treat my fuel bill in the same way as there from people acting on behalf of elderly I treat my credit card bill and repay it in full every relatives who are on direct debit. There are one or month. The trouble is that we have a quarterly two quite dramatic ones: one from a Financial Times billing system at present and I do understand, to be journalist who talks about the experience of her own fair to the companies, that they would not really mother. It is quite clear that there is a real problem want to lend me their fuel for three months either, out there for people who are at the edges of fuel that would be working the other way around. The poverty, if not actually in fuel poverty, as well as for option of repaying in full every quarter does not people like ourselves who can take the hit of an extra exist. The answer is, of course, smart meters, is it £20 or £30 a month that is not justified, even if we not? Then we could have accurate monthly bills, resent it. There is a bit issue there for fuel poverty which we could pay in full every month, and the people. problem would just go away. Mr Buchanan: There certainly is. Something that Mr Buchanan: Yes. Ofgem has been an advocate for may come out of it is that we flush out who are good three or four years for smart meters—I am sure I and who are bad. My supplier rang me up and said, bore for Britain on this—and we are very hopeful you are over here, you are under here, what would that the Government will push on with this in the you like to do. next couple of months.
Q171 Mr Wright: I guess he knows who you are. Q176 Chairman: Smart meters have been talked Mr Buchanan: That was quick. I cannot answer about in the past as an environmental measure to that one. discourage consumption, but more and more it is apparently to help the market work better generally. Q172 Chairman: My supplier has not done that to The Government has now announced a programme, me and, sitting in an equivalent seat yesterday, the has it not, which took us all a bit by surprise— Minister for Energy admitted that he had exactly the pleasantly so, in some senses—but it is two years of same problem with his supplier. The reason that the consultation on how to do it, followed by a ten-year BBC Today programme and the BBC breakfast rolling programme. I understand that it is a complex programme were so interested in this is that their programme, like converting to natural gas from editorial teams also said that they had the same town gas, but 12 years hence is quite a long time. Is problem. A senior civil servant for the Department it your view that they need 12 years? yesterday said that he had the same problem. It Mr Buchanan: The Government has not yet shown seems to be extraordinarily widespread and its hand on the method it would like to use. They something rather concerning is going on. have a number of choices: they can use the franchise Mr Buchanan: We will certainly have a look at it. method, whereby you compete to win a franchise and you have it for a period of time; a regulated Q173 Chairman: Looking at the other complaints method; or a market method. If it is a market you get: the averaging of consumption, method, you basically use quite a lot of stick and a miraculously, many people think they are averaging bit of carrot because you say, you will do it, or you over 18 months, including two winters, which will be penalised under a licence condition. enables the average bill to be increased. It may Therefore, that decision has to be made first of all depend on when the company reassesses your bill, and then work out how quickly it will roll out. There there are issues there. Issues about estimated bills, of has been a sense that if you go down the market course, are a matter of great concern also; producing route and you have got quite a severe stick hanging new bills, the time when estimated bills are used for over the companies, the companies will go quicker the calculation, particularly when many of us— because they will want to get some form of myself included—have taken radical steps to reduce advantage with their customer base by rolling out our consumption because of rising prices, so it is all faster than that. It really does depend on where your the more diYcult. starting point is going to be, and we are still waiting Mr Buchanan: Yes. for that starting point.
Q174 Mr Wright: That is another point with regard Q177 Chairman: Twelve years, for me, is the outside to meter readings, the times that the companies miss acceptable figure; it must be shortened if humanly out the meter readings and do the estimates increases possible, it makes a big diVerence. Can I just be clear substantially the cost for people on standard credit what you promised—me and the Committee—on at the time. They are giving in excess of perhaps 5% the direct debit issue. You said that you will look at Ev 30 Business & Enterprise Committee: Evidence
25 November 2008 Mr Alistair Buchanan it. What form will that “looking at it” take at this Mr Buchanan: Where we come in on issues like that stage? An initial assessment is what you are going to is that we have the enforcement powers, so if it is promise initially? clear that something is going very wrong—mis- Mr Buchanan: Indeed, our corporate aVairs team selling, say—if this is something that is eVectively an will take it on and have a look at it and see where we action by a company, then we can pursue that go from there, whether it triggers an enforcement through our powers. It is another route to market; it case. is a very powerful route to market. It is from yourselves, or from Holyrood, or wherever. Q178 Chairman: People are a bit puzzled about the market in which they operate and how they Q180 Chairman: It is quite confusing for people who complain. What many e-mails have been criticising do not understand it. It is not easy; the Energy me for saying that I will raise it with Ofgem. They say Ombudsman is a brand new idea. Energywatch was that Ofgem does not do complaints. It is a bit of a a strong brand and personally I regret its departure. muddle out there at present because you have Mr Buchanan: Yes. Consumer Direct, Consumer Focus, the energy companies themselves, the Energy Ombudsman and Ofgem. Although I am beginning, dimly—as Q181 Mr Weir: Just a quick comment more than a Chairman of a Committee that scrutinises both question on direct debits. One of the problems is that Consumer Focus and Consumer Direct for the so many of us now get estimated bills because we are OYce of Fair Trading, and, temporarily at least, working and the meter is not read very often and the Ofgem—to understand that it is very confusing for direct debit is taken on the estimated bill. The people out there as to how they can get through this. companies will say that you can phone in or go on What I am trying to establish from you is how you, line with the correct reading. I have experience of Ofgem, in future—it is a fortuitous occurrence today doing that and of being totally ignored by the that I have had the direct debit complaints and company, and there is a problem with that also, presented them to you—be made aware of systemic although that is a matter of customer service, I failures in the energy market coming through from suppose. Moving on to the question of switching, we consumer complaints, particularly consumer had evidence that 48% of gas customers and 42% of complaints from articulate middle-class people who electricity customers who switched as a result of do not resort to the Energy Ombudsman but sort it direct selling, ended up paying more for their energy. out themselves. How do you know there is a problem I know that Ofgem have taken some action in this that needs fixing? area, but I wonder if it is time to ban the practice of Mr Buchanan: If we are the market, there is a direct selling, rather than simply trying to regulate it. number of routes to our market to bring that to our Mr Buchanan: I do not think we are at that stage. attention. The first will be, and Ed Mayo was very This was a finding that was deeply disturbing from clear in saying that he really believes that the the probe, there is no question about that, Consumer Direct first port of call will work and that particularly for prepayment meter customers. Our complaints will flow through to Consumer Focus, belief is that we need a package that will provide and they have—I forget the name of it but it sounds what is a very strong competitive weapon for the like a very good idea—a kind of “zap team” that will companies—the direct sales—but we want a work on major problems—the Extra Help Unit, I substantial upgrade in terms of information; think it is called, which I think is a great idea and possibly we will move to best oVer in market, which will work on the acute problems. Obviously, whether it is yours or not; we want the concept that they will interface with the companies and the there is possibly an annual statement going to every companies then have to interface with the statutory customer once they have signed on, a bit like your body from 1 October, which is the Ombudsman. car insurance so that you know where you are; Where we will interface with that, obviously, we will clearly, a code of practice that is going to have to be have regular contact with Ed Mayo and Larry adhered to more; written contract and follow-up. Whitty but, equally, we formally monitor the So, I think a range of issues that we are keen to try Ombudsman and audit them once a year, so I hope and if that does not take, then the kind of question that we would get information from that. We are you are asking might well come back into play. also going to audit, it is currently ongoing and we will have the results early in the New Year, the new customer complaint process. One of the findings Q182 Mr Weir: When we raised this with the from that is that we need to audit that on a regular Minister yesterday, he made the point that direct basis, but I cannot prejudge what that finding will selling was a good way of perhaps getting to the low be. Our role is as an auditor regulator role, and the paid, fuel poor who were not necessarily internet other bodies are doing that interface with the literate. The diYculty with this is that if you are consumer. trying to get someone to switch, perhaps on a social tariV, that there is such a diVerence in the social Q179 Chairman: If a Member of Parliament forms a tariVs between companies. Is part of the answer to view that there is a failing in the energy market, like try and have a standardised tariV that would be this issue of direct debits, for example, what should much easier for someone in that situation to be able he or she do? Should they write to you and say, here to compare what is being oVered to what he or she is the evidence I have received? has at present? Business & Enterprise Committee: Evidence Ev 31
25 November 2008 Mr Alistair Buchanan
Mr Buchanan: Where we are on this is that, as you political pressure from Government and this know, the enforcement that we say is that the Committee before you started to address these companies have to oVer the best deal available, and issues? that the customer therefore still has the right to Mr Buchanan: I will not go back into the history of switch if they think there is a better deal. Are we why we announced the review that we did. It is worth kidding ourselves on that? I do not know, but if you stepping back behind that and asking what Ofgem are starting to move towards social mandated tariVs, was doing before that, since eVectively competition I think that is a question to the Minister and to opened onto the marketplace in 2003. From our Government. reports, and we did a significant report in the middle of 2006 on the retail market, although on that Q183 Mr Weir: What I am trying to get from you point—and I will come back to this—we were very and I appreciate what you are saying but you talk focused on wholesale issues as well, we saw a number about sending more information but the problem is of issues—and funnily enough, we have not talked information overload and it is very diYcult to about them at all today—that have continued. There extract the bit of information they really want to was a very high level of switching; that market shares know, am I better oV with this or not. How do we get of companies were dramatically changing, so British to that stage? Gas in the last six or seven years has gone from 67% Mr Buchanan: I have given you a window on some of to 47% market share; Scottish and Southern has the things we are discussing. There is an interesting gone from 4 million to 8 million customers. When we advertisement on television at the moment from were looking at the market dynamic, there was a Norwich Union, saying that they will tell you the sense that at the time—in 2007, you were looking at best deal in the market, even if it is not theirs. That 350,000 to 400,000 customers switching every is the kind of thing we are looking at. month—the competitive processes were working. We also noted that margins in that period from 2005–06, in both gas and electricity on the retail side, Q184 Mr Binley: They do not say the best deal, they V had fallen, and we were putting in place during that say the best price, there is a di erence. period attempts to make the market work better, Mr Buchanan: There is. We have to think very particularly in our supply licence review, we tried to carefully about whether we can go down that route. get further independent suppliers into the marketplace by cutting red tape. We tried to Q185 Mr Weir: Something else that we touched on improve the consumer experience by introducing the earlier: you found in your report that there is a 6% Ombudsman, getting rid of back billing, getting rid price premium for those electricity customers still of the 28-day rule, so a whole range of issues. What with their incumbent suppliers. Why are you not this report has thrown up to us and it is a powerful proposing the same tough measures as the price learning lesson for us because of the “search and get” diVerential between prepayment meters and powers of the Enterprise Act, we have been able to standard credit customers for these customers? I find things in this report that, candidly, I have not should declare an interest here as I am still with heard anybody mention; no consumer group had Scottish and Southern. been mentioning many of these issues, up until this Mr Buchanan: The two groups that we felt we report was released. Did we think the market was needed to get urgent action on were the PPM and the working well? Yes, we did. Did we think we could 4.3 million—there is a crossover there, some of those judge why prices were moving in the way that they 4.3 million are PPM also. That is why we felt a were? Yes. What we did not understand was some of degree of urgency, front running even the the guts of the report and some of the issues that we consultation package, needed to be made there. As I are very keen now to resolve. At the same time, over answered to Mr Bailey earlier, we are going to look the last couple of years, we have been very active on at licence conditions for ensuring cost reflectivity. the wholesale side of the market, be it putting in new rules on back-up power, transparency rules, Q186 Mr Weir: What sort of timescale are you working with the EU, our wholesale gas probe. I looking at? think we have got the balance right in terms of the Mr Buchanan: That would be part of the package in work that we are doing. Am I glad that we have done the early New Year. this review? Yes, I am.
Q187 Mr Weir: Again, where there are dual Q189 Mr Wright: Whilst I can accept that the work suppliers and there are higher margins on electricity that has been done in the past has highlighted than on gas, are you looking at that as part of the particular issues within the industry. It has certainly package also? taken over the past six to nine months perhaps and Mr Buchanan: Indeed, we are. maybe a little beyond that, for suddenly the political impetus to be put in place to say, look you are a Q188 Mr Wright: Turning the clock back to the consumer body, you are a consumer watchdog, we beginning when Mr Hoyle said that you are the do not just want you to tell us where the problems toothless tiger, questioning the eVectiveness of are, we want you to sort those problems out. It has Ofgem, we have discussed many of the issues about now taken the political will to say, from the PPM and standard credit customer switching and Secretary of State, from this Committee, we have competition in the SME market. Why has it taken serious problems here, what are you going to do Ev 32 Business & Enterprise Committee: Evidence
25 November 2008 Mr Alistair Buchanan about it. The question is, why has it taken until now? powers here, we can act much more quickly than Why did you not ask for more powers, if you have having to go down the formal probe route, or the not got those powers? Why did you not do that at an Competition Act route, which is a very slow route. I earlier stage? I think it is incomprehensible that any know the Competition Act case against National watchdog and consumer body would sit back and Grid has been running three or four years; it is just allow people to be overcharged, for the competition a very slow route march to sort out a problem. to be there, for them to squeeze other companies out of business, perhaps, and all the other issues we have Q193 Mr Weir: Are you serious in making been raising today. application for those extra powers now? Mr Buchanan: Much of the mechanics of a Mr Buchanan: We have made that very clear that is competitive and working market were there and something that we are keen to see. were observable in that report that we did in the middle of 2006. Particularly with regard to the gaps Q194 Mr Weir: What would be the implications for on PPM and SC, many of them grew out in 2007 and Ofgem to the changes to its remit on sustainable the price increases that they put through that development and when the Government put triggered this review extenuated those gaps that you, amendments forward in the third reading of the rightly, and many of your colleagues have been Energy Bill for consideration of existing and future focusing on and saying that does not look fair and customers? realistic. When I look at the workload, we have Mr Buchanan: It is a very good question. We have a reacted; it is very important for us to evaluate and paper coming to the December board, both focused balance and get that right. The other important on the sustainability issue, but also the slight change issue, and I take your point on this, is that it is very in the wording of our primary duty, which is to have important that you as an organisation, Consumer future customers very much flagged up there. We are Focus, us, Citizens’ Advice, work on the Energy Best asking all our directors at the moment what they Deal, that we have a commonality of the consumer think the policy changes might be by having a look purpose. at that. I cannot pre-empt what that paper will say, but we are definitely taking it very seriously and Q190 Mr Wright: The bottom line is, would you looking at that, because we will be asked some time V rather have more powers? in the New Year how these new duties a ect our Mr Buchanan: I welcome that request. It was either decision-making, what policy item got changed you or someone else made it in the summer. The one and how. power that we are serious in pursuing is the market Q195 Mr Weir: So the new Committee will get the abuse power, which comes back to the wholesale information from that early in the New Year? side—we have sought this before and it was rejected. Mr Buchanan: Yes, but we are looking at that, just The Competition Commission said let competition to give you comfort on that. work. Q196 Chairman: I have a concern sometimes that we Q191 Mr Wright: How long ago was that? politicians tend to expect too much of you regulators Mr Buchanan: That was in 2001–02; then we had a and perhaps not enough of ourselves. In other flirtation with it again in 2003. That was the run-up words, we delegate social policy decisions to you, to competition. We have no issue with the CC, I can which are policy decisions that we should be taking; see why they said, look, you have got to let things issues about social tariVs, for example; issues about run. sustainability. I am personally—I do not know what the Committee’s view will be—sympathetic to your Q192 Mr Wright: Has it changed now? request for additional power in relation to market Mr Buchanan: It has. More concerning, which abuse, but I feel sometimes that you are asked to get comes back to part of the debate we had earlier, involved in political issues that are above your pay looking forward onto the generation market, I am scale, and should be taken on by Ministers and observing the National Grid—a very strong Parliament, rather than by the regulators. organisation—having to handle a much more Mr Buchanan: I find your observation very complex grid structure. With each wind farm that interesting, Chairman. We are a creature of statute comes into the system, with new generation coming and we understand where we sit within our role. onto the system, the ability for an opportunist within Chairman: I think that was remarkably unevasive. I the marketplace is much higher than it has been will conclude there. We are very grateful to you. It is before. What I mean by that is that you have the our intention to publish a report around the turn of potential to start playing your power station in the the year, which will hope to guide our successor mechanics of a marketplace, you can create a Committee and comment on your own probe and constraint, you can hide behind a constraint. The what you and the Minister have said to us. Thank question that we are asking is, and possibly seeking you very much for your work with the Committee an aYrmative answer, if you give us additional and Happy Christmas. Business and Enterprise Committee: Evidence Ev 33 Written evidence
Memorandum submitted by the Department of Energy and Climate Change I am writing to provide the Committee with further information on certain points that were raised when I attended your meeting of 24 November. Gas Storage I was asked how much gas storage, in days, one-fifth of gas supply by 2020–21 would equate to. I should first note that measuring gas storage in days is not a very meaningful concept for the UK because, as I explained at the Committee, we do not just rely on storage to balance the gas market; in particular, we still have gas in the North Sea, as well as diverse import capacity. Constraints on withdrawal rates mean that, in practice, our current gas storage facilities could probably not sustain the British gas market by themselves for any significant period of time. On the other hand the ability of our gas storage facilities to “cycle” (ie to withdraw and replenish repeatedly during the year), together with the market incentives to do this, creates so-called “virtual storage” exceeding our physical storage. The literal answer to the question regarding 2020–21 is approximately 70 days. This assumes 20 bcm of storage capacity, and average gas consumption of 300mcm/day (corresponding to an annual consumption of 110 bcm by 2020). Meanwhile I should stress that our current gas storage capacity, as a proportion of our gas imports, is already broadly in line with that of Germany. VAT on Fuel For Great Britain, this continues to be set at 5% for the domestic market. This is the lowest allowed by the European Union common system for VAT. The Home Energy Savings Programme (HESP) The £910m figure is our best estimate of the costs of the increased obligations on energy suppliers and electricity generators, ie the increase to the Carbon Emissions Reduction Target (CERT) and the new Community Energy Saving Programme (CESP) obligation. The £560 million cost of CERT!20% was derived from investment assumptions from the original CERT obligation. The impact assessment for the original CERT suggested that it would require investment by the energy suppliers of £2.8bn in energy eYciency measures to meet the obligation. The 20% increase in the obligation is expected to require additional investment equivalent to 20% of the original investment, £560m. The target will be distributed by Ofgem between the supply companies according to their customer base. The generators are not covered by the current CERT obligation, but we believe that all companies in the energy market now have a responsibility to help those who need it. That is why we are proposing a new obligation that will require around £350 million from energy suppliers and electricity generators. This money will be used to fund the CESP, which will aim to improve the energy eYciency of hard to treat homes in low income areas, through a community partnership. We will be consulting shortly on the allocation of the obligation between energy suppliers and electricity generators In terms of the timescales to spend the £1 billion, we estimate that the CERT £560 million will be spent by March 2011. We will be consulting on the duration of the CESP shortly. The £16 million for the Cold Weather Payments is available to be spent by the end of this winter (March 2009). The £74 Warm Front funding will be spent by the end of the 2009–10 financial year. Decent Homes and Double-Glazing It is for individual landlords to decide, in consultation with their tenants, what works are required to bring a property up to the Decent Homes Standard. The works that landlords choose to do will vary from landlord to landlord and will depend on the condition of individual properties. The Government cannot direct specific works to properties. One of the criteria for meeting the Decent Homes Standard is that a property should be in a reasonable state of repair. The replacement of windows might be necessary to satisfy this criterion, but this depends on the condition of the property and the age and condition of the windows and other “building components”. Whilst the Decent Homes Standard does not specify that windows should be replaced with double glazing, many landlords have chosen to do so. Local authorities report that between 2000–01 and 2006–07 over 900,000 council houses have had new (doubled glazed) windows installed, at a cost of over £2.2 billion. However it is not possible to provide a breakdown between those replaced with direct Local Authority funds and those funded under the Decent Homes Scheme. I hope that this letter provides the information that you require. 10 December 2008 Ev 34 Business and Enterprise Committee: Evidence
Memorandum submitted by Ofgem 1. The Committee has asked Ofgem to provide further information on several issues raised in its follow- up inquiry into energy prices.
Complaints by Small Businesses 2. The Government introduced changes to consumer representation in the energy sector under the Consumers, Estate Agents and Redress (CEAR) Act 2007. The extent of the arrangements provided for under that Act, and the customer groups to which they apply, are set out in an Order made by the Secretary of State.1 3. In a consultation document in July 2007, the Government set out its views on the extent to which the new redress scheme should apply to business customers. “It is likely that many large and medium-sized business consumers will have suYcient commercial power to resolve problems directly with regulated providers and will not want to seek redress through statutory schemes. Their services may be provided under contracts, backed up by specialist staV with the skills to monitor and assess the performance of the service providers against these contracts. These business consumers are likely to be able to use their commercial position to resolve complaints, or to have the freedom and expertise to seek alternative service providers. For such consumers, it could be argued that redress schemes would not provide any significant benefit, and accordingly that they should not be included within the scope of the redress schemes…Taking as the starting point the inclusion within the scope of all domestic consumers, but excluding large businesses, there is a need to identify an appropriate threshold to separate those businesses which should be included from the “large” businesses. There is an argument that micro- enterprises have the same lack of commercial power as domestic consumers. In gas and electricity markets, micro-enterprises may have similar levels of energy consumption as larger domestic consumers, for example. And small business consumers may face very similar problems and have similar complaints to those of domestic consumers.” 2 4. Following consultation, and recognising the concerns of consumer representatives that the definition of micro businesses should not be cast too narrowly, the Government defined micro businesses as those with an annual consumption of: — electricity of not more than 55,000 kWh; or — gas of not more than 200,000 kWh; or — fewer than 10 employees (or their full time equivalent); and — an annual turnover or annual balance sheet total not exceeding Euros 2 million. 5. BERR’s impact assessment for the redress schemes in July 2007 stated that in 2005 95.2% of all enterprises in the UK had fewer than 10 employees. 6. The statutory complaints handling standards set by Ofgem, and to which all suppliers and network companies are bound, mirror this definition. If a micro business falling within the definition has a complaint, it should be treated in accordance with the complaints handling standards. We expect this to lead to a marked improvement in the way complaints are dealt with by suppliers. We are currently conducting an audit of suppliers’ performance in this area. If the complaint is not resolved to the customer’s satisfaction, they now have recourse to the Energy Ombudsman. Under the complaint handling standards the supplier is required to alert the customer to their right to go to the Ombudsman. 7. In our view the fact that small businesses are now protected by complaint handling standards and have recourse to a statutory ombudsman scheme should result in better protection for these customers overall. 8. For the small number of business customers where the issue is urgent and cannot wait for the Ombudsman to resolve there is additional protection. If the micro business is vulnerable or threatened with disconnection or has actually been disconnected then Consumer Focus has a duty to provide assistance and has established its extra help unit to do this. Consumer Direct, which is part of the OYce of Fair Trading, may also oVer advice but they are not obliged to do so. They are principally a service for domestic consumers. 9. The one concern that we have voiced about this arrangement is that it is not clear how a small business customer facing disconnection would access the support of Consumer Focus as they have made clear that they will not accept direct contacts and would expect all customers to come to them via Consumer Direct. Consumer Focus have agreed to review this arrangement in the new year to ensure that it is not preventing these customers from accessing their service. Suppliers have an obligation under the complaints handling standards to alert customers to other sources of help available, which will be of particular importance where the customer is facing disconnection. 10. In Consumer Focus’ work plan they have undertaken to determine the needs of micro-enterprises as consumers, with particular regard to their energy and postal needs and the role of Consumer Focus in representing them.
1 SI2268 2 http://www.berr.gov.uk/files/file40283.pdf Business and Enterprise Committee: Evidence Ev 35
11. Mr Binley asked about bilateral meetings between Ofgem and the Federation of Small Businesses and the British Chambers of Commerce. We met bilaterally with the FSB on 13 November 2008 and with the BCC on the same date. These meetings are in addition to our wider regular meetings with the Small and Medium Users Group and the Large Users Group.
Subsidies to Large Users in Other EU Member States 12. The European Commission is conducting formal investigations under EC Treaty state aid rules into potential aid to large and medium-sized companies in France and Spain in the form of artificially low regulated tariVs that are financed by the state directly or indirectly. The investigation into Spain was launched on 25 January 20073 and the investigation into France was launched on 13 June 2007.4 13. French electricity consumers can buy their electricity either on the liberalised market or on the regulated market. On the regulated market, they buy the electricity from distributors designated by the French State, at regulated prices. The regulated prices have been considerably lower than the electricity prices on the liberalised market. Since the beginning of 2007, clients who had left the regulated market can return to it and pay electricity prices that are above the original regulated prices, but still below the market prices. The system appears to be financed mainly by the state-owned company Electricite´ de France (EDF) and by contributions levied on all French electricity consumers and administered by the state. 14. The Commission is concerned in particular about the potential distortion of competition entailed in the “green” and “yellow” tariVs which are the lowest ones and applicable to medium and large companies, and can eVect mostly in the markets for products made by energy-intensive companies. The investigation does not cover the “blue” tariVs (applicable mainly to households and small companies) since they do not seem to grant any economic advantage to the relevant companies. 15. In 2005 Spain set artificially low regulated tariVs for energy intensive, large and medium industries. The Commission is concerned that these regulated tariVs might have provided significant amounts of operating aid to these industries and, to a certain extent, to the electricity incumbents, who could have been over-compensated by the Spanish state and could have made an abnormal profit on the arrangements. The low tariVs led to a deficit of „3.8 billion in the electricity system, which will have to be paid back over 14 years by adding a new charge to the electricity bill of all Spanish consumers. 16. The Commission is concerned about the potential distortion of competition in the product markets of the energy intensive, large and medium industries, and also has doubts about the compatibility of the potential aid, which had the eVect of providing a guaranteed profit to the electricity incumbents who oVered these industrial tariVs. Another concern is that, because only the traditional Spanish electricity incumbents were allowed to provide low regulated tariVs, potential new suppliers may have been prevented from entering the Spanish electricity market and that the scheme may have prompted some recent market entrants to discontinue their activities in Spain, thus eliminating the benefits that new entrants were bringing to consumers. Usage of the LNG Terminal at the Isle of Grain 17. There have been concerns in industry that the Liquefied Natural Gas (LNG) terminal at the Isle of Grain is being under-utilised. Since June 2005, there have been 183 berthing slots at Grain. 80 of these have been used by the capacity owners, BP/Sonatrach. None have been used by third parties. 18. If the owners of the slots at these terminals are not using them, we think that others who want to bring LNG to Britain should be able to do so. That is why we demanded ‘use it or lose it’ arrangements at Grain. If the owners are not going to use a slot, it must be oVered to the secondary market 10 days in advance. 19. We held a consultation late last year and said that any issues surrounding the usage of the terminal should be identified and addressed as a matter of urgency. We received 5 responses. Centrica and National Grid said they thought the notice period was suYcient. The Chemical Industries Association and Ineos Chlor said they though the notice period was not long enough, but they did not provide any evidence. Energywatch did not mention the notice period. 20. Members asked about the comparable arrangements at the LNG terminal at Zeebrugge in Belgium. If the capacity owners at Zeebrugge do not intend to use a slot, they must oVer it to third parties on the secondary market with a 2 month notice period. This compares with 10 days at Grain. However, gas for delivery at Zeebrugge is primarily brought in under long term contracts. According to Fluxys, the number of slots available to third parties on the secondary market for December, January and February is 0. 21. It is our assessment that a similarly long notice period would be unlikely to increase the amount of LNG delivered to the Isle of Grain. — The fact that more LNG did not come to Britain in winter 2007–08 can be explained in part by the higher prices on oVer in other LNG importing countries. For example, demand and prices in Asia were much higher than spot prices in Britain at the National Balancing Point (NBP), reflecting
3 http://europa.eu/rapid/pressReleasesAction.do?reference%IP/07/93&format%HTML&aged%1&language% EN&guiLanguage%en 4 http://europa.eu/rapid/pressReleasesAction.do?reference%IP/07/815 Ev 36 Business and Enterprise Committee: Evidence
nuclear outages in Japan and high demand from China and India. Most Asian countries have no alternative source of natural gas and will therefore pay whatever is needed to secure it. Closer to home, shortages in Spain and Turkey meant that any available cargoes in the Atlantic Basin went to these markets in preference to the UK. — In addition, the supply side has been much less forthcoming in its development than forecast between 5 and 10 years ago. Spot cargos have not come become common. As the Minister stated in his oral evidence on 24 November, most LNG is delivered around the world under long term contract. — The LNG market in Belgium is very diVerent from Britain. Zeebrugge is the only Belgian LNG terminal; no new ones are due to be completed soon; and the tariV for using it is regulated. In Britain, the terminal at Grain has just expanded; and two new terminals are on the way at Milford Haven. We therefore expect to have three terminals which can compete for spot cargoes. — At Grain 1, 2, and 3 (2 and 3 are not yet in commercial operation) there are more capacity holders. At Zeebrugge, Qatar/Exxon Mobil own 50% of the capacity for 20 years from 2007; Distrigas own 28% of the capacity for 20 years from 2007; and Suez Tractabel own 22% of the capacity for 15 years from 2007. At Grain, the Phase 1 primary capacity holder is BP/Sonatrach (100% capacity). Phase 2 capacity holders are Centrica (40%), Gaz de France (38%) and Sonatrach (22%). Phase 3 capacity holders are Centrica (35%), E.ON (25%) and Iberdrola (40%). — When we held a consultation and a seminar last winter, nobody presented any evidence that the notice period was responsible for third parties not using the slots at Grain. 22. However, we continue to keep this issue under review and we aim to hold another seminar in February for LNG terminal operators and their capacity holders to communicate with market participants. In addition, it is worth noting that two new British LNG terminals (Dragon and South Hook) are due to open at Milford Haven soon. Once the Milford Haven and Grain II facilities are in operation, if fully utilised the LNG terminals could provide up to 27% of UK annual gas demand. 7 December 2008
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