House of Commons Energy and Climate Change Committee
Energy Prices, Profits and Poverty
Fifth Report of Session 2013–14
Volume I Volume I: Report, together with formal minutes, oral and written evidence
Additional written evidence is contained in Volume II, available on the Committee website at www.parliament.uk/ecc
Ordered by the House of Commons to be printed 16 July 2013
HC 108 [Incorporating HC 1060, Session 2012–13] Published on 29 July 2013 by authority of the House of Commons London: The Stationery Office Limited £27.30
The Energy and Climate Change Committee
The Energy and Climate Change Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department of Energy and Climate Change and associated public bodies.
Current membership Mr Tim Yeo MP (Conservative, South Suffolk) (Chair) Dan Byles MP (Conservative, North Warwickshire) Barry Gardiner MP (Labour, Brent North) Ian Lavery MP (Labour, Wansbeck) Dr Phillip Lee MP (Conservative, Bracknell) Rt Hon Peter Lilley MP (Conservative, Hitchin & Harpenden) Albert Owen MP (Labour, Ynys Môn) Christopher Pincher MP (Conservative, Tamworth) John Robertson MP (Labour, Glasgow North West) Sir Robert Smith MP (Liberal Democrat, West Aberdeenshire and Kincardine) Dr Alan Whitehead MP (Labour, Southampton Test)
The following members were also members of the committee during the Parliament:
Gemma Doyle MP (Labour/Co-operative, West Dunbartonshire) Tom Greatrex MP (Labour, Rutherglen and Hamilton West) Laura Sandys MP (Conservative, South Thanet)
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 via www.parliament.uk.
Publication The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the internet at www.parliament.uk/ecc. A list of Reports of the Committee in the present Parliament is at the back of this volume.
The Report of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in a printed volume. Additional written evidence may be published on the internet only.
Committee staff The current staff of the Committee are Sarah Hartwell-Naguib (Clerk), Liz Bolton (Second Clerk), Dr Alfred Gathorne-Hardy (Committee Specialist), Tom Leveridge (Committee Specialist), Luanne Middleton (Inquiry Manager), Shane Pathmanathan (Senior Committee Assistant), Jonathan Olivier Wright (Committee Assistant), Joe Strawson (Committee Support Assistant), Nick Davies (Media Officer) and Constantinos Regas (Scrutiny Unit).
Contacts All correspondence should be addressed to the Clerk of the Energy and Climate Change Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 2569; the Committee’s email address is [email protected]
Energy Prices, Profits and Poverty 1
Contents
Report Page
Summary 3
Glossary 5
1 Introduction 7
2 Energy prices 8 Rising energy prices 8 Driving factors behind price rises 9 Wholesale cost of fuel 11 Costs of supply – transmission and distribution 12 Costs of energy and climate change policies 13 Supplier operating costs and profit margins 15 Communicating reasons for price rises 16 Government and regulatory action 16 Energy company action 18 A failure to communicate 20 Ensuring a competitive retail market 22 Market competitiveness 23 Measuring competitiveness 24
3 Profits 26 Energy company profits 26 Company structure 27 Increasing transparency of energy company profits 29 Consolidated Segmental statements 29 Supply Market Indicators 38 REMIT 41
4 Fuel Poverty 45 Measuring fuel poverty 45 Current and new definition of fuel poverty 45 A better definition? 47 The role of data-sharing 50 Need for urgent action 51 Fuel poverty policies 53 Efficacy of fuel poverty policies 54 Closure of Warm Front (WF) 55 The Energy Company Obligation (ECO) 56 Rural fuel poverty 57 Use of levies on bills 58 Ways to protect the fuel-poor from impact of levies 61 Reinvesting revenues in energy efficiency programmes 62 Government spend on fuel poverty 63
2 Energy Prices, Profits and Poverty
Delivery of fuel poverty policies 65
5 Conclusion 69
Recommendations 71
Annex 77
Formal Minutes 97
Witnesses 98
List of printed written evidence 99
List of additional written evidence 99
List of Reports from the Committee during the current Parliament 100
Energy Prices, Profits and Poverty 3
Summary
Rising energy prices are a worry for households across the UK. Since 2007 average prices of gas and electricity have risen by 41% and 20% in the UK in real terms, according to DECC. This has had an adverse impact on fuel poor households and thrown Government targets to eliminate the problem by 2016 off-course.
The main driver behind energy price rises has been wholesale gas and electricity costs, but network charges, energy and climate change policies, and company costs and profits also contribute. In future, DECC estimates that its energy and climate change policies will add 33% to the average electricity price paid by UK households in 2020, in addition to any potential wholesale price rises. The Department maintains, however, that household bills will be lower than they would otherwise be in the absence of policies.
The six largest energy companies argue that the majority of these costs behind price rises are outside their control. However, these energy companies are complex with several different arms performing different roles – generating, trading and supplying energy. The complex vertically-integrated structure of these firms makes it difficult to determine where profits and losses are being made within them and how they might relate to recent energy price rises.
Despite huge turnovers, and in some cases large profits, the six largest energy companies have made significantly different levels of profit and loss between the supply and generation parts of their business. The actual level of profit in, for example, the energy supply arm is therefore difficult to establish. Greater transparency is urgently needed to reassure consumers that high energy prices are not fuelling excessive profits.
One thing is clear; energy companies have been poor at communicating with their customers. Confusing bills, complex tariffs and a lack of transparency around profit margins have fuelled deep mistrust among consumers. Some energy companies deserve praise for the recent improvements they have made to simplify bills, but we remain concerned that efforts are falling far short of what is required to improve transparency, increase competition and enhance consumer trust. It is disappointing, for instance, that the big energy companies have not gone to greater lengths to explain the reasons behind price rises. Regulatory intervention is now needed to deliver meaningful change.
Ofgem is failing consumers by not taking all possible steps to improve transparency and openness in the energy market. That the regulator has not taken up accountancy firm BDO's recommendations to improve energy company reporting or listened to criticism over Supply Market Indicators is astonishing and lays it open to criticism that it is unwilling to use the teeth it has. Considering consumers’ lack of confidence in energy companies, Ofgem should consider whether the transparency to be gained by implementing BDO’s recommendations outweighs the costs involved.
Increasing transparency and simplifying bills would help to improve the currently low level of competition. Increased competition is one of the best ways to ensure customers were paying a fair price for their energy. Ofgem has the power to make the changes necessary to improve competition through the licensing conditions it sets for companies. If it fails to
4 Energy Prices, Profits and Poverty
act, the Government must stand ready to use any new statutory powers it has under the forthcoming Energy Act to compel greater transparency from energy companies.
The Government must not forget that rising prices are exacerbating fuel poverty.
Energy is becoming increasingly unaffordable for low-income families living in poorly insulated and inefficient homes. Yet just as the situation for the most vulnerable is worsening, it appears that fuel poverty policy has effectively been frozen. Spending on the problem has been cut in England and some of the Government’s fuel poverty programmes appear to be in hiatus. The use of levies on bills to fund social and environmental programmes will add to the burden faced by energy bill payers, particularly in low-income households. Public spending is less regressive than levies in this respect. If Government is to continue raising levies in this way, it must ensure that the public understands the different components of an energy bill and how these relate to policy costs.
Ministers have been unacceptably slow to respond to the Hills Review and take action to stem the problem. It is imperative that the Government’s new fuel poverty strategy, expected at the end of this year, is not delayed any further. It should be published and implemented as an urgent priority.
Energy Prices, Profits and Poverty 5
Glossary
Arbitrage: The practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices.
Distribution charges: The cost of building, maintaining and operating the local gas pipes and electricity wires, which deliver energy directly to your home. Suppliers are charged for this, and usually pass on these costs in the price they charge retail customers for energy.
Exchange: Bring together brokers and dealers who buy and sell products in an organized market.
Liquidity: In the case of a market, a stock or a commodity, the extent to which there are sufficient buyers and sellers to ensure that a few buy or sell orders would not move prices very much. Some markets are highly liquid; some are relatively illiquid.
Margin: Proportion of profit relative to total revenue.
Merit order: A way of ranking available sources of energy, especially electrical generation, in ascending order of their short-run marginal costs of production, so that those with the lowest marginal costs are the first ones to be brought online to meet demand, and the plants with the highest marginal costs are the last to be brought on line. The merit order was the method used in the electricity market of Great Britain when electrical power generation was the responsibility of a single integrated utility (the CEGB). After privatisation of the sector this was replaced by a more complex bidding system, the electricity pool, in 1990.
Natural monopoly: A condition on the cost-technology of an industry whereby it is most efficient (involving the lowest long-run average cost) for production to be concentrated in a single company. In some cases, this gives the largest supplier in an industry, often the first supplier in a market, an overwhelming cost advantage over other actual and potential competitors. This tends to be the case in industries where capital costs predominate, creating economies of scale that are large in relation to the size of the market, and hence high barriers to entry; examples include public utilities such as water services and electricity transmission.
Over-the-counter (OTC) trading: Trading which occurs between dealers through private bilateral contracts, as opposed to through an exchange or market. There is often little publicly available data about OTC trades.
Supply costs: The costs associated with running a retail sales business, including sales, billing etc.
6 Energy Prices, Profits and Poverty
System operator: A transmission or distribution system operator is an entity entrusted with transporting energy in the form of natural gas or electrical power on a national or regional level, using fixed infrastructure.
Transfer price: The price paid by the supply arm of a vertically-integrated energy company to purchase energy from a generation arm of the business
Transmission charges: The cost of building, maintaining and operating the high pressure gas and high voltage transmission networks. Transmission companies charge users of these networks and these costs are often passed on to retail customers.
Value Added Tax (VAT): Paid directly to HM Revenue and Customs by energy companies.
Vertical integration: A business structure whereby different elements of a supply chain are united under common ownership. In the case of energy companies, this can refer to the same company owning generation, supply and distribution assets.
Wholesale energy: The cost of the gas or electricity. Your energy supplier may buy this on the wholesale market, or have a contract with a generator. Some suppliers are also part of companies that generate their own energy.
Energy Prices, Profits and Poverty 7
1 Introduction
1. The UK’s energy system will be subject to significant changes in the next few years in order to deliver the form of capacity required in future. Our recent report, Consumer Engagement with Energy Markets found that public trust in energy companies was low and there was a clear sense of a lack of transparency around energy company prices and profits.1 If changes in the energy system are to be successful, the Government and energy companies will need to strengthen public confidence and trust in their ability to deliver a fair deal to consumers and protect the most vulnerable, fuel-poor households. DECC’s latest fuel poverty statistics showed that in 2011, 4.5 million households were in fuel poverty in the UK. Energy price rises in 2012 and 2013 will have exacerbated the situation for low-income households.2
2. We launched our inquiry on the Floor of the House on 20 December 2012.3 We received 37 pieces of written evidence.4 We held four oral evidence sessions during our inquiry. A full list of witnesses can be found at the end of this report.5 We would like to express our thanks to all those who contributed to our evidence-gathering. As part of our work on this inquiry we visited Centrica’s trading floor and head office in Slough and also held a Parliament Talks outreach event in Glasgow where we heard local people’s concerns about energy price rises and fuel costs (see transcript at Annex 1). We are grateful to those who took the time to meet us and provide us with this first-hand experience of the concerns people have about energy prices. We were also supported by two specialist advisers, Marc Ozawa and Dr Anthony White. We are very grateful for their time and for helping to explain what is a very complicated topic.
3. In this report, we consider, through an analysis of energy prices, energy company profits and fuel poverty, what is being done to ensure consumer protection and fairness in the energy market. Chapter two looks at the energy price rises since the middle of the last decade, the factors other than profits (which we consider in chapter three) which are contributing to this trend and how energy companies and the Government communicate this to customers. It also discusses how the retail market could be made more competitive. Chapter three evaluates whether rising energy company profits are linked to rising energy prices. It explores the difficulties in determining this link and assesses current mechanisms which try to increase transparency. It also discusses how the wholesale market could be made more competitive. Chapter four assesses how rising energy prices could exacerbate fuel poverty, the implications of the proposed new definition of fuel poverty, and the delivery of fuel poverty policy.
1 Energy and Climate Change Committee, Fifth Report of Session 2012-13, Consumer Engagement with Energy Markets, HC 554-I 2 DECC, Annual report on fuel poverty statistics 2013, May 2013 3 HC Deb, 20 December 2012, col 1015 4 List of written evidence, p 73 5 Witnesses, p 73
8 Energy Prices, Profits and Poverty
2 Energy prices
Rising energy prices
4. The price of domestic gas and electricity has generally increased over the past eight years after around a decade of falling prices (see figure 1). The big six energy suppliers have all recently increased their gas and electricity prices by between 6% and 11% (see table 1). DECC recently estimated that a UK household dual fuel (electricity and gas) energy bills in 2013 would be around £1,267 (before the Warm Home Discount (WHD) rebate) based on average levels of energy consumption. DECC reported that the average prices of gas and electricity paid by UK households had risen by around 18% and 9% (in real terms), respectively between 2010 and 2013, and by around 41% and 20% (in real terms), respectively, between 2007 and 2013. Taking into account declining levels of energy consumption, average household dual fuel bills were estimated to have increased by around 13% in real terms between 2010 and 2012.6
Figure 1: Index prices of selected fuel components of the RPI (indices relative to the all items RPI, January 1987=100) Gas Electricity 150
125
100
75
50
25
0 1987 1990 1993 1996 1999 2002 2005 2008 2011 Source: ONS series DOBY, DOBX, and CHAW
5. Consumers are increasingly concerned about the price of gas and electricity. Mr Lloyd, Executive Director of Which? reported polling results into consumers’ top financial concerns. Domestic energy prices were consistently either the highest or second highest concern. He described results from their most recent survey which showed that up to 40% of consumers had used savings or credit to pay for their domestic energy.7 This was echoed by Ms Pardoe, Energy and Policy Liaison Officer of Citizens Advice, who stressed that
6 DECC, Estimated impacts of energy and climate change policies on energy prices and bills, March 2013 7 Q 41 [Mr Lloyd]
Energy Prices, Profits and Poverty 9
energy prices were one of the biggest issues for their bureaux. Last year, for example, they had a total of 97,000 inquires relating to fuel debt.8
6. A key message from Ofgem’s Project Discovery – which looked at what challenges in Britain’s energy market could lead to an increased risk to consumers’ energy supplies – found that consumers bills would rise under all the future scenarios considered. As a result, Ofgem cautioned that increasing numbers of consumers would find it difficult to afford adequate levels of energy to meet their requirements.9
Table 1: Big six price rise announcements in 2012–13
E.ON* Price rise effective from 18 January 2013 Average dual fuel price increase of 8.7% Average electricity only price increase of 7.7% Average gas only price increase of 9.4% British Gas** Average increase of 6% on domestic gas and electricity prices from 16 November 2012. (Equivalent to approximately £80 a year or £1.50 a week for a dual fuel customer with average consumption.) EDF*** Increase of standard variable prices for domestic gas and electricity consumers of 10.8% from 7 December 2012. (Equivalent to an increase of approximately £2.35 per week for a dual fuel customer with average consumption.) ScottishPower**** Average increase of 7% for domestic gas and electricity prices from 3 December 2012. (Equivalent to an increase of approximately £2 per week for an average standard dual fuel bill paid for by direct debit.) SSE***** Increase for an average standard dual fuel bill paid for by monthly direct debit from £1,172 to £1,274 per year. (An increase of £102 per year, or 8.7%). From 15 October 2012. RWE****** Average increase of 8.8% for gas and 9.1% for electricity from 26 November 2012. (Equivalent to an average increase of £109 per year or £2.08 per week) Source:
* E.ON UK, Press Release, E.ON writes to customers to confirm price rise, effective from 18th January 2013 10 December 2012
** British Gas, British Gas pricing announcement, 12 October 2012
*** EDF Energy, Press Release, EDF Energy announces price change for residential customers, 26 October 2012
**** BBC, Scottish Power to raise gas and electricity prices, 15 October 2012
***** SSE, Household energy prices from 15 October 2012, 22 August 2012
****** RWE, Npower announces changes to gas and electricity prices, 12 October 2012
Driving factors behind price rises
7. There are several factors which make up a customer’s energy bill. DECC recently estimated that the wholesale cost of fuel made up around 47% of an average household energy bill, the costs of supply – transmission, distribution and metering – around 20%, other supplier operating costs and profit margins around 19%, the costs of energy and climate change policies around 9%, and VAT 5% (see table 3).10 Most of the six largest
8 Q 41 [Ms Pardoe] 9 Ev 123 10 DECC, Estimated impacts of energy and climate change policies on energy prices and bills, March 2013
10 Energy Prices, Profits and Poverty
energy suppliers provided a breakdown of their bills in their evidence to our inquiry (see table 2). The numbers were broadly in line with DECC’s estimate.
8. DECC suggested that the main drivers of recent increases are: wholesale energy costs, estimated to have contributed at least 60% of the increase in household energy bills between 2010-2012; network costs, supplier operating costs and profit margins, estimated to have contributed around 25% of the increase; and the costs of energy and climate change policies, estimated to have contributed around 15% of the increase.11 Energy supply companies argued that the majority of the costs which had contributed to energy price rises are outside their control.12
11 As above 12 Ev 4; Ev 13; Ev 30; Ev 81; Ev 101; Ev 113
Energy Prices, Profits and Poverty 11
Table 2: Big six energy suppliers breakdown of domestic energy bills
Centrica E.ON SSE Scottish Power EDF RWE npower Dual Dual Dual fuel fuel fuel Elec Gas Elec Gas Elec Gas Wholesale 46% 52% 50% 39% 58% 48% 51% not not energy costs supplied supplied Delivery (network 24% 21% 24% 24% 19% 22% 25% not not and transmission supplied supplied on costs) Environmental 9% 5% 10% 15% 6% 8% 4% 14% 7% and social policies Operating costs 10% 15% 6% 13% 9% 17% 15% not not supplied supplied
Profit 5% 2% 5% 4% 3% not not not not supplied supplied supplied supplied
VAT 5% 5% 5% 5% 5% 5% 5% not not supplied supplied
Year not not not not 2011 2011 stated stated stated 2011 2011 stated not stated
Source: Ev 4, Ev 13, Ev 30, Ev 81, Ev 101, Ev 113
Wholesale cost of fuel
9. The wholesale cost of gas and electricity was the largest contributor to customer’s bills.13 RWE described how for gas, wholesale costs were determined by global gas prices and for electricity, the wholesale price was determined by the underlying fuel costs and the ‘merit order’ of plant.14 British Gas highlighted that because gas-fired power generation currently makes up roughly a third of UK installed capacity and typically generates around 40% of UK power. Therefore, rising wholesale gas prices would also have a significant impact on UK electricity prices because they set the marginal price for much of the year.15
10. There was widespread agreement that wholesale gas and electricity costs were the main reason behind price rises in recent years.16 The Committee on Climate Change had calculated in their report, Household energy bills, that increases in the wholesale cost of gas was the most significant factor behind energy bill rises from 2004 to 2010, adding around £290 to the average annual bill.17 DECC suggested wholesale costs can be volatile, driven by international demand and supply which can vary significantly over time.18 The Institute of Public Policy Research (IPPR) similarly asserted that predicting how wholesale energy
13 Ev w11, Ev 4, Ev 13, Ev 30, Ev w23, Ev w38, Ev 73, Ev 81, Ev 101, Ev 123
14 Ev 13 15 Ev 81 16 Ev w11, Ev w38, Ev 73, Ev 81 17 Committee on Climate Change, Household energy bills – impacts of meeting carbon budgets, December 2011 18 Ev 73
12 Energy Prices, Profits and Poverty
costs will change in coming years was an exercise fraught with uncertainty.19 DECC, however, believed that wholesale costs were likely to rise in the short- to medium- term.20
11. Ofgem’s 2008 Energy Supply Probe – which sought to understand whether the supply market was working in the interests of customers – examined how changes in wholesale gas and electricity prices were passed through to consumers by the large energy suppliers. It showed there was a lag between changes in wholesale and retail prices, and explained that this was the result of suppliers' hedging of their wholesale market exposures.21 British Gas explained how it tried to mitigate wholesale energy price volatility through hedging which benefited consumers:
Energy retailers provide a valuable service for their customers by forward hedging much of their wholesale energy purchases, smoothing the impact of wholesale price volatility for customers and reducing price shocks.22
12. Citizens Advice suggested, however, that there is a common perception amongst consumers and many commentators that energy prices, ‘rise like a rocket when wholesale prices rise but sink like a feather when the wholesale prices fall.’23 In 2011, Ofgem reported that it had found, ‘some evidence that consumer energy bills respond more rapidly to rising supplier costs compared with falling costs.’24 While Citizens Advice said they recognised that suppliers strongly refute that claim, they noted that there was insufficient transparency in the way in which energy prices are set, which factors have an impact on the final bill a consumer receives, and what proportion of the bill is accounted for by each of these factors.25
Costs of supply – transmission and distribution
13. SSE described how suppliers had to pay the companies (system operator) which own the UK’s electricity and gas network for transporting energy along wires, cables and pipes to customers homes.26 These network companies had a natural monopoly.27 The amount they charged users of their network was controlled through a long-term regulatory formula determined by Ofgem. Cornwall Energy argued that the methodology used by network companies to determine charges to users was overly complex and the timeframe by which users were notified of price changes, too short. As a result, suppliers were unable to confidently assess future costs in retail offerings to their customers. Cornwall Energy went on to suggest that this uncertainty probably produced unnecessary costs to the customer.28
19 Ev w11 20 DECC, Estimated impacts of energy and climate change policies on energy prices and bills, March 2013 21 Ev 123 22 Ev 81 23 Ev 1 24 Ofgem, Do energy bills respond faster to rising costs than falling costs?, 21 March 2011 25 Ev 1 26 Ev 4 27 In England and Wales the system operator is National Grid. In Scotland the system operator is Scottish Power and SSE 28 Ev w23
Energy Prices, Profits and Poverty 13
Scottish Power stressed, however, that the large cost associated with this element of bills was a result of significant and necessary investment undertaken to modernise the network and accommodate increases in renewables.29 E.ON warned that these costs were expected to rise over the coming years.30
Costs of energy and climate change policies
14. Table 3 shows the breakdown of energy and climate change policy costs in average household bills. Figure 2 shows DECC estimates for the costs of these polices in 2020 and 2030.
Table 3: Breakdown of average household gas, electricity and energy bill in 2013
Gas Electricity Energy Real 2012 prices bill bill bill Wholesale energy cost £383 (55%) £215 (37%) £597 (47%) Network costs £124 (18%) £133 (23%) £257 (20%) Other supplier costs and margin £119 (17%) £121 (21%) £240 (19%) Energy and climate change policies £33 (5%) £80 (14%) £112 (9%) ECO117 £25 (4%) £22 (4%) £47 (4%) RO - £30 (5%) £30 (2%) EU ETS - £8 (1%) £8 (1%) CPF - £5 (1%) £5 (0%) Warm Home Discount £6 (1%) £6 (1%) £11 (1%) FITs - £7 (1%) £7 (1%) Smart Meters & Better Billing £2 (0%) £1 (0%) £3 (0%) VAT (5%) £33 (5%) £27 (5%) £60 (5%) Total (no warm Home discount rebate) £691 £576 £1,267 Average rebate (inc VAT) - -£13 -£13 Total (with rebate) £691 £563 £1,255 Source: DECC 2013. Figures may not add due to rounding
Source: DECC, Estimated impacts of energy and climate policies on energy prices and bills, March 2013
29 Ev 113 30 Ev 30
14 Energy Prices, Profits and Poverty
Figure 2: Estimated impact of energy and climate change policies on average retail gas and electricity prices paid by UK households (including VAT) 225 Small-scale FITs support cost
200 EMR support cost
175 RO support cost
150 EU ETS and CPF carbon price impact
125 Warm Home Discount support cost
100 ECO support cost and Green Deal admin cost
75 Smart Meters and Better Billing net supplier cost (Real 2012 £/MWh) 50 Wholesale price effects
25 Baseline gas price
Average household gas and electricity prices Average 0 Baseline electricity price
-25 Final gas price Gas Electricity Gas Electricity Gas Electricity 2013 2020 2030 Final electricity price
Source: DECC, Estimated impacts of energy and climate policies on energy prices and bills, March 2013
15. In its recent report, Estimated impacts of energy and climate change policies on energy prices and bills, DECC reported that the average gas prices paid by UK households in 2012/13 were 5% higher due to Government energy efficiency policies such as the Energy Company Obligation (ECO) (see table 10). They claimed that the estimated impact of policies on household gas prices was expected to remain broadly unchanged to 2020. The average electricity price paid by UK households in 2012/13 were 17% higher due to Government energy efficiency policies and the added cost of supporting renewable energy. In the future, DECC estimated that the impact of these policies on the electricity price could increase to 33% in 2020 (in addition to any potential wholesale price rises).31 The Renewable Energy Association agreed with DECC’s analysis that support for renewable energy would comprise a larger proportion of energy bills in 2020. They were keen to point out, however, that current support for renewable energy which, it believed, was frequently blamed in the media for escalating energy bills, had contributed only 2% of the amount by which bills had increased over the past two years. It also highlighted that the impact of these polices on energy prices was predicted to fall in the longer-term to 2030.32
16. DECC emphasised that despite electricity price rises, the combined effect of policies on energy prices in 2020 was, on average, expected to be offset by the impact of policies which improved energy efficiency by helping households reduce energy consumption.33 The Secretary of State emphasised:
We look at our impact of our measures on current bills and we believe that without our policies, bills would now be higher. Our policies on things like product efficiency, energy efficiency, have helped drive overall bills down compared with
31 DECC, Estimated impacts of energy and climate change policies on energy prices and bills, March 2013 32 Ev w38 33 As above
Energy Prices, Profits and Poverty 15
what they otherwise would have been. When you then project forward to 2020, that saving is greater.34
Nevertheless, there was significant concern about the impact these policies could have on customers including the fuel poor (see paragraph 124).
Supplier operating costs and profit margins
17. Supplier operating costs and profit margin is the part of a bill that energy companies control. It can be broken down into two: supplier operating costs and profit margin (see chapter three for discussion of energy supplier profits). Some energy companies were keen to emphasise that they had worked hard to reduce their operating costs. British Gas said, for example:
We have been working hard to reduce our operating costs over recent years in order to protect customers from the full impact of rising prices. We are on track with our publicly announced programme to remove a further £300m of operating costs from our business over 2012 and 2013.35
Similarly, RWE pointed out that despite inflationary pressures, they have been extremely successful in reducing their operating costs in recent years through significant investment in systems and services.36 They drew attention to consolidated segmental statements (see paragraph 48) which they argued showed that cost cutting initiatives by large suppliers had resulted in operating costs falling by c£100m or 3% between 2010 and 2011, with further falls likely in 2012.37
18. In their report, The true cost of energy, the IPPR showed that Ofgem’s estimates of suppliers’ operational costs increased in real terms over time, by £9 per customer per year from 2007 to 2011. The IPPR suggested that if Ofgem’s estimates were accurate the suppliers would not have delivered the efficiency savings in the operational costs that should be expected if competition was working effectively.38 Furthermore, it showed that the difference between the most and least efficient supplier, in terms of operational costs per account, increased from a 90% differential in 2007 to a 113% differential in 2010. It concluded that in a competitive market the operational efficiency of the suppliers should converge over time. It took this as further evidence that competition was not fully effective in the market.39 Which? said:
While the cost of retailing energy should be a small component of consumers’ bills, ineffective competition reduces pressure on suppliers to ensure that their costs are as
34 Q 439 35 Ev 81 36 Ev 13 37 Ev 13 38 Ev w11 39 Ev w11
16 Energy Prices, Profits and Poverty
efficient as possible [...]. This will remain a source of inefficient costs unless competition in the retail market becomes more effective.40
19. DECC suggested that supply company operating costs and profit margins may change overtime as direct and indirect costs change and as market share changes. Government and Ofgem are taking action to bring about greater competition in the energy market to put downward pressure on this element of the bill.41
20. Energy bills are rising and are likely to continue to rise in the future. The wholesale price of fuel has been the largest contributing factor, driven by rising global gas prices. Several other factors are also contributing to price rises including the need to invest and finance UK’s electricity and gas network and energy and climate change policies. The extent to which energy supply companies are actively working to reduce their operating costs remains unclear.
Communicating reasons for price rises
Government and regulatory action
21. Ofgem stated that its commitment to tackle poor transparency of consumer prices and bills was at the heart of its Retail Market Review (RMR). The RMR is central to its efforts to protect consumer interests. By reforming the energy market to make it simpler, clearer and fairer for consumers, it aimed to encourage and equip consumers to get the best deal for themselves.42 Ofgem proposed three key reforms as part of its review:
Reducing tariff complexity by limiting each supplier to offering no more than four core tariffs at any point in time.
Providing customers with better and more relevant information including tools to help them navigate the market, and relevant prompts on what engaging in the market might be.
Providing greater confidence that an energy supplier will treat their customers fairly by requiring each supplier to develop management and business systems and processes to embed the Standards of Conduct in all aspects of their engagement with their consumers.43
22. Ms Harrison, Senior Partner of Ofgem said of the reforms;
The reform package will reduce the number of tariffs, so that if companies are making profits and putting up their prices, that will not be done on the basis of bamboozling and confusing customers.44
40 Ev 26 41 Ev 73 42 Ev 123 43 Ofgem, The retail market review – Final domestic proposals: Consultation on policy effect and draft licence conditions, 27 March 2013 44 Q 399 [Ms Harrison]
Energy Prices, Profits and Poverty 17
In its recent report, Ensuring a better deal for consumers, DECC built on Ofgem’s retail market review work. The Secretary of State told us that while Ofgem would take forward the detailed reforms, the Energy Bill will give statutory backing to those proposals.45 Indeed in our Consumer Engagement report we noted the Government’s assertion that licence modifications did not carry the same weight as legislation. The Rt Hon Gregory Barker, Minister of State for Energy, suggested that legislation was required to avoid delay caused by disagreements between suppliers and the regulator.46 “Frustration” at the slowness of Ofgem’s progress on RMR was also noted by the Minister.47 The Government amended the Energy Bill to enable Government to:
Cap the number of tariffs that suppliers may offer;
Require suppliers to move customers on poor value dead tariffs to better value tariffs;
Require suppliers to inform their customers of the savings they can make by moving to the cheapest tariff; and
Introduce a tariff comparison tool.48
23. Consumer Focus49 stated that Ofgem had been slow to respond to the need to improve transparency in the market. They suggested that the Government could set a deadline to use its powers to concentrate Ofgem and the industry on the need for progress – and provide reassurance to consumers that something would change if they did not.50 Furthermore, Which? said that it thought the Government and Ofgem’s intervention via their tariff proposals contained a serious risk of allowing competition to remain weak. They argued that prices still could not be compared at a glance and that this would constrain competitive pressure on energy bills.51 Ofgem, however, suggested that they had been quick to tackle poor transparency where they have found problems. They went on to say that their past actions and future planned actions, which have yet to be implemented, will take time for customers to realise the full benefits.52
24. Professor Littlechild, Fellow at the Judge Business School, University of Cambridge was concerned that some of the proposals put forward by Ofgem and DECC, while well- meaning, ‘fail to look at the implications for energy prices.’ He argued that:
[...] those elements of Ofgem’s key proposals that sought to make the market simpler would restrict energy tariffs and would thereby remove attractive offers that
45 Q 423 46 Oral evidence taken before the Energy and Climate Change Committee on 30 October 2012, HC (2012–13) 554-ii, Q 288 47 Oral evidence taken before the Energy and Climate Change Committee on 30 October 2012, HC (2012–13) 554-ii, Q 286 48 Ev 73 49 Consumer Focus has changed its name to Consumer Futures 50 Ev 54 51 Ev 26 52 Ev 123
18 Energy Prices, Profits and Poverty
customers valued, reduce competition, increase prices and work to the disadvantage of customers without encouraging them to engage effectively.53
Professor Littlechild went on to say that it might be possible to provide more appropriate information. He suggested, “critics might [...] argue that the required measures represent undesirable further steps towards regulatory micro-management that will be burdensome and costly to suppliers, Ofgem and customers alike.’ He suggested that the proposals raise questions which are a matter for debate and discussion with customers, suppliers, consumer bodies and others.54
25. We welcome Ofgem’s and the Government’s proposals to ensure energy companies to improve the way they communicate with their customers. In addition to their proposals we recommend that the regulator compel energy companies to: a) Standardise the presentation of their bills to make it easier to understand bills and compare prices (for example on a price comparison website); b) Identify the various components which make up the costs of the bill (i.e. wholesale price of fuel, costs of supply (i.e. transmission, distribution and metering), the costs of UK/EU policy (including support for low-carbon/renewables and energy efficiency schemes) and company margins (i.e. operating costs and profit); c) Express price changes in pounds and pence as well as percentages.
26. We are disappointed at the regulator’s slow progress on requiring energy companies to improve their transparency and communication with their customers. We hope that Ofgem will use its existing powers to ensure that its RMR reforms are implemented. If the requirements proposed under Ofgem’s RMR are not in place by the August 2013 as promised, we recommend that the Government stand ready to use any statutory powers to compel greater transparency from energy companies, early in 2014. We believe that this intervention should deliver the desirable long-term aim of incentivising companies to provide more competitive products for consumers. It should not be considered a one-off intervention to reduce energy company profits.
27. We also repeat the recommendation made in our Consumer Engagement report that DECC should lead a full and frank conversation about the contribution that consumers are being expected to make towards ensuring we have safe, secure and affordable energy supplies in future. DECC should set out a detailed strategy and programme for action over the next two years. This should include how it will engage with the public on these issues in a meaningful way.
Energy company action
28. Mr Lloyd of Which? suggested that energy companies needed to have an ‘honest conversation [...] about what is genuinely driving the increase in [customers] bills, what they can do to manage that, and where the investment that we are all paying for through
53 Ev w67 54 Ev w67
Energy Prices, Profits and Poverty 19
our bills is taking us.’55 In a speech, the CBI Director for Business Environment, Ms Kelly, argued that:
[...] industry and government had a more honest conversation about solutions to make the market work better for consumers. Energy bills are going up. Neither side should try and hide the facts. But we should be clear on the reasons why. It's because global prices are increasing. It's because we need to invest to keep the lights on. And it's because policy costs are rising to facilitate investment in a balanced energy mix [...].56
Energy companies emphasised that they were doing a number of things to try and improve their communication and trust with their customers:
E.ON had developed a ‘Reset programme’ which had led it to simplify the presentation of its tariffs using a new online tool. It also encouraged customers to check that they were on the best deal for their circumstances. E.ON reported that since launching its customer communication and advertising campaign towards the end of last year, over 300,000 customers had switched to one of its new products.57
SSE had reduced the number of tariffs from over 60 to three core products. It had also published a breakdown of costs on consumer bills. It also reported that it had introduced a Sales Guarantee offering all customers and an Annual Energy Review to ensure they were on the right products.58
British Gas had introduced a single unit rate and fixed standing charge tariff structure to improve customer understanding and helped compare British Gas tariffs with other suppliers. It had developed an online tool, showing the costs, benefits and fees associated with each tariff. It was introducing on its bills a personalised, proactive six-monthly comparison of what a customer was paying and what they would save by switching to other tariffs. It had also written to all its customers checking they were on the most appropriate tariff and it has reviewed customers’ bills and annual statements to make them easier to understand. This included using a light bulb to show graphically a breakdown of costs on the energy bill (see figure 3).59
55 Q 55 56 CBI, Don’t fall into ‘the blame game’ on energy costs – CBI, 4 July 2013 57 Ev 30 58 Ev 4 59 Ev 81
20 Energy Prices, Profits and Poverty
Figure 3: British Gas light bulb showing average British Gas dual fuel bill in 2011
British Gas 2011 Average Gas &Electricity bill (Total £1,031)* £48 Our profit £474 £249 £93 £65 £102 Wholesale energy Delivery to Environmental Taxes Operating you home and Social costs policies costs Our External costs costs
* Based on actual 2011 results, is and average of all payment types/tariffs/regions and is based on consumption levels of 443 therms for gas and 3,805kWh for electricity
Source: Ev 81
EDF Energy had simplified its tariff structure. (It was keen to point out it did this before Ofgem’s announcement to reform the retail market). It also offered a Blue+ Promise product which informed customers if they would save more than £1 a week with any competitor’s product. It also published in graphic format a breakdown of a typical consumer’s bill on its website.60
Scottish Power had its own ‘trust and transparency agenda’, underpinned by its ‘World of Difference’ commitments, in which it had focused on providing customers with choice, clarity and control over its energy purchases, including through improved tariff information and tariff choices.61
RWE’s CEO, Mr Massara explained in oral evidence that it was launching an Energy Explained series which would aim to explain to the public how their bill is made up and how those different segments are likely to be impacted.62
29. Despite serious shortfalls in the way energy companies communicate with their customers, we are pleased to see that they have started to make some progress on improving how they communicate with their customers. It is clear that some are doing better than others. We commend those companies, including British Gas and EDF Energy, who are developing innovative new ways of communicating complex information to their customers. We are concerned, however, that their efforts are still falling far short of what is required to increase transparency and improve consumer trust. It is clear that meaningful improvements are unlikely to be achieved without regulatory intervention.
A failure to communicate
30. DECC reported that Ofgem’s research had found that the public’s view of the energy market was ‘overwhelmingly negative’.63 Citizens Advice suggested there was insufficient
60 Ev 101 61 Ev w6 62 Q 229
Energy Prices, Profits and Poverty 21
transparency in the way energy prices were set, which factors had an impact on the final bill a consumer received and what proportion of the bill was accounted for by each of these factors. Consumer Focus suggested that while suppliers were improving their communication of underlying cost drivers affecting their businesses, there was still room for improvement.64 They outlined three key issues:
The use of percentage figures without appropriate context. Because consumer familiarity with the components making up their bill is low, attributing a percentage figure to changing components within it, without reference to their overall cost could create, rather than remove, confusion. Juliet Davenport, CEO of Good Energy said that she did not see any problem with explaining in pounds and pence and percentages because, ‘some people appreciate one way, some people appreciate another.’65
Simultaneously blaming and taking credit for Government schemes. When Consumer Focus looked at the recent round of price rises, they noted two common themes: suppliers attributing much of the blame for price rises on the cost of Government schemes; and pointing out that the supplier was making great strides to help consumers by offering them free or subsidised insulation. It is not always made clear, it suggested, that the latter is paid for by the former. Citizens Advice argued that this leaves consumers angry and confused and that uncertainty around these issues further erodes consumer trust.66
Inclusion or exclusion of VAT from figures used for international comparison. Suppliers frequently point to the prices paid by consumers in the UK compared with those paid elsewhere in the EU to suggest that these strongly indicate that the UK had a competitive market. Consumer Focus observed that the UK applies an unusually low VAT rate to energy. This means that the UK’s position in international league tables can vary considerably depending on whether you choose to use tax-inclusive or tax-exclusive figures.67
31. Poor communication on the part of energy companies had resulted in what Mr Lloyd of Which? described as a deep mistrust of the energy suppliers.68 Citizens Advice recommended that, ‘in order for suppliers to regain the trust of consumers, transparency and clarity around pricing was essential.’ There was a key role for Government, the regulator and suppliers in ensuring a more open, reasoned public debate around price rises. This should move beyond political point scoring in the media between suppliers, Government and Ofgem which it believed had characterised price rises in the past.69
32. To some extent the failings highlighted by consumer groups were acknowledged by energy companies. Mr Massara, CEO of RWE admitted:
63 Ev 73 64 Ev 54 65 Q 205 [Ms Davenport] 66 Ev 1 67 Ev 54 68 Q 41 [Mr Lloyd] 69 Ev 1
22 Energy Prices, Profits and Poverty
I do not think the [energy] suppliers have necessarily got it right in explaining to customers what is happening to their bills, how their bills are made up, and indeed how their bills are likely to be made up.70
33. Similarly, British Gas accepted that, ‘the energy industry has not always done as much as it could to improve consumer trust, and that tariffs in particular have been both complicated, and delivered in a framework that has not always been transparent or easy to navigate.71 They went on to declare that, ‘more needs to be done to [...] better explain the components of their energy bills and the upward pressures on prices.’72 Alistair Philips- Davies, CEO of SSE also recognised that, ‘bills are a little complex and confusing for people generally [...] and we should seek to simplify the bills for people.’73 RWE agreed that customers would benefit from enhanced information including some communication standardization (e.g. common terms and the annual statement).74
34. Ofgem emphasised the importance of transparency in driving effective competition. It suggested that transparency facilitated market functioning in a number of ways. Transparent and simple consumer prices and bills, it argued, enabled consumers to engage with the market. This would drive companies to compete more vigorously to retain customers and win new ones.75
35. We are disappointed that energy supply companies have not gone to greater lengths to explain to their customers the reasons behind energy price rises. It should come as no surprise to energy companies that poor communication on their part has resulted in deep mistrust from their customers. We welcome the industry’s acknowledgement that it has failed to act and needs to simplify and improve bills including explaining the individual components of a bill and the reasons for the upward pressure on prices.
Ensuring a competitive retail market
36. Which? argued that competition driven by engaged and informed consumers was often the most effective mechanism to drive efficient prices.76 Professor Littlechild of the University of Cambridge suggested that the benefits of reducing complexity and increasing information may be overstated. He argued that customers are more likely to switch the greater the gains to be made.77 Mr Lloyd of Which? expressed his view that there was a growing distrust from consumers about whether they were paying a fair price:
I think what we have seen over the years, where we have relied on a liberalised competitive retail market, is growing distrust on the part of consumers about
70 Q 228 71 Ev 81 72 As above 73 Q 206 74 Ev 13 75 Ev 123 76 Ev 26 77 Ev w67
Energy Prices, Profits and Poverty 23
whether the price they are paying is fair, a great difficulty in navigating their way around the market and identifying the best deals, and nowhere to look to, to compare authoritatively whether the price they are paying for gas and electricity is a decent one.78
The Secretary of State advocated increasing competition asserting, “we absolutely have to make sure that the energy companies feel the heat of competition.”79 A concern remains, however, as to whether the retail energy market is truly competitive.80
Market competitiveness
37. We examined competition in the domestic market in some detail in our report on Consumer Engagement.81 In evidence to this inquiry Which? argued that with only 5-10% of customers actively engaged in the retail market there was little incentive for suppliers or generators to be efficient and offer the lowest prices and, therefore, offer consumers the best deal.82 The IPPR believed that competition was not fully functioning in the supply market: its report, The true cost of energy, said that this was demonstrated by energy supply companies slowness to reduce their operational costs (see paragraph 18) and to over- charge their ‘sticky’ customers.83 Others suggested that the fact that no new entrant into the retail market had secured significant market share demonstrated that there were significant barriers for new entrants.84
38. RWE reported that ‘there was no evidence (as opposed to rhetoric) of problems on the supply side.’85 British Gas also argued that, ‘effective competition is the best way of ensuring that customers get a “fair deal”, and we believe the UK fundamentally delivers for customers.’86 Mr Cocker, CEO of E.ON said:
We are in a competitive market and in terms of the price that we offer to our customers we have to be competitive. What we try to do is to make sure we offer fair, competitive prices to our customers and simple products.87
The Secretary of State also suggested that the UK was seeing more competition, not less. This was based on smaller companies entering the supply market and the development of collective switching of which he was an advocate.88 Professor Littlechild of the University of Cambridge said he thought this, ‘deserves further consideration.’ He suggested that one of
78 Q 42 79 Q 444 80 Ev w11, Ev 26, Ev 123 81 Energy and Climate Change Committee, Fifth Report of Session 2012–13, Consumer Engagement with Energy Markets, HC 554-I 82 Ev 26 83 Ev w11 84 Ev w46 85 Ev 13 86 Ev 81 87 Q 140 [Mr Cocker] 88 Q 436
24 Energy Prices, Profits and Poverty
the most promising avenue of inquiry is DECC’s related question whether, ‘there is benefit in seeking to establish a co-ordinated network of voluntary organisations and community groups that work proactively with trained energy advisers to support vulnerable consumers to engage in the energy market’. This, Professor Littlechild argued, ‘would focus directly on the core concern [to encourage and equip consumers to engage effectively in the market], and would address it by extending the benefits of the market to a wider range of consumers.’89
Measuring competitiveness
39. E.ON commented that as part of the retail market reform, Ofgem needed to have a ‘vision of the market’ in the latter part of this decade. According to E.ON this vision should reflect Ofgem’s view of what competition and customer choice should look like, the potential for innovation, and Ofgem’s role in the market. It argued that Ofgem should be confident in its ability to manage principles-based regulation, whilst avoiding the restriction and risk of detailed regulation, to ensure customers got a fair deal in the market.90
40. In our Consumer Engagement with Energy Markets report we examined what metrics would help determine whether the supply market was competitive and concluded that there were several different ways of measuring whether the supply market was competitive including:
The percentage of consumers who had never switched;
The quality and outcome of switches;
The number of suppliers in the market;
The market share held by the largest energy companies;
Supplier operating costs;
The level of efficiency savings made by large suppliers; and
The level of self-selling of electricity by vertically integrated companies.91
We recommend that Ofgem also include ‘profit margin’ and ‘rate of return on capital’ (because excessive profit margins are a symptom of poorly functioning markets) in the above list of metrics which would help determine whether the supply market was competitive.
41. We had previously recommended that:
When Ofgem implements its final RMR measures, it should publish its targets for improvements in the market as a result of these measures and the criteria it will use
89 Ev w67 90 Ev 30 91 Energy and Climate Change Committee, Fifth Report of Session 2012–13, Consumer Engagement with Energy Markets, HC 554-I
Energy Prices, Profits and Poverty 25
to judge the success of the measures. Going forward, Ofgem should also publish an annual assessment of the effect those measures are having on competition and consumer engagement.
The Government responded stating;
The government agrees that it is important that Ofgem sets out the indicators it will use to measure the effectiveness of its RMR proposals. We agree that indicators should seek to measure whether the market is working better for consumers and whether competition and liquidity are increasing.92
We were unsatisfied with Ofgem’s original response and asked them to write to us again clarifying their response. They said: With respect to recommendation 2, the Committee asked that Ofgem consider publishing its targets for improvement in the market as a result of the RMR reforms. We have given this area consideration and, in the RMR October 2012 consultation, we published a range of market indicators which could potentially be used for monitoring of the domestic RMR package, if it was implemented. Following the publication of our final RMR proposals, we are conducting further analysis in order to understand how we may measure the direct impact of the proposals on the market. This work will continue to be considered in more detail over the next few months. We are also committed to undertaking a comprehensive review of our proposed package of retail measures no later than 2017 if they come into effect before the end of 2013. Ofgem may carry out a review earlier if there is evidence to suggest it is necessary.
42. We conclude that the small level of switching by customers between energy suppliers suggests the retail market is not as competitive as it could be. There is, however, insufficient data to determine accurately the actual level of competition in the retail market. We repeat our recommendation that when Ofgem implements its final Retail Market Review measures, it should publish its targets for improvements in the market as a result of these measures and the criteria it will use to judge the success of the measures. Going forward, Ofgem should also publish an annual assessment of the effect those measures are having on competition and consumer engagement.
92 Energy and Climate Change Committee, Fifth Report of Session 2012–13, Consumer Engagement with Energy Markets: Government and Ofgem Responses to the Committee’s Fifth Report of Session 2012–13, HC 1036
26 Energy Prices, Profits and Poverty
3 Profits
Energy company profits
43. Mr Lloyd of Which? suggested that the six largest vertically integrated energy companies (big six) had been making regular and substantial profit announcements whilst at the same time raising energy prices:
I think there is a justified lack of trust. [...] I think there are a number of causes. One is a lack of transparency about how the price and, in particular, the price increases that people have been paying have been arrived at, with very regular, very substantial profit announcements by particularly the vertically integrated suppliers [...]. That fuels the perception among consumers that there is something going on in the industry.93
Ms Gallacher, Director of Energy of Consumer Focus supported this view, suggesting that from 2008 to 2011 there had been a 36% increase in (pre-tax) profits across the big six.94 In its written evidence Consumer Focus reported the big six’s profits increased from £6.67 billion to £9.09 billion.95 Table 4, however, doesn’t appear to support this. It is also worth noting that the figures referred to by Consumer Focus are absolute profits rather than profit margins. Absolute profits will inevitably rise if energy company activity and investment rise.
44. Table 4 shows the reported turnover for the six largest energy companies. whether profits are 'excessive' is a matter of opinion. we accept that energy companies need to be profitable and profits will increase if the investment in infrastructure that the UK needs comes forward. Nevertheless, there remains a perception that profits are excessive. In this chapter we focus on how transparency can be increased in order to facilitate a better understanding of energy company profits.
45. Calculating energy company profits is, however, complicated. Despite very large turnover, and in some cases large pre-tax profits, the big six made significantly different levels of profit and loss in different parts of their business (see table 4). Furthermore, understanding how much profit an energy company was making requires an understanding of company structure (including whether they are based offshore), how they operate in the wholesale market and whether it is easy to trade in the wholesale markets (i.e. are they sufficiently “liquid”, and how they use their trading arm - if they have one).
93 Q 44 94 Q 56 95 Ev 54
Energy Prices, Profits and Poverty 27
Table 4: Turnover and profit for the big six (£ million)
Turnover Pre-tax profit Profit margin
2007-11 2007-11 2007-11 Company average 2011 average 2011 average 2011 EDF EDF Energy Holdings Limited 2,457 7,371 386 627 15.7% 8.5% EDF Energy PLC n/a 3,849 n/a 41 n/a 1.1% EDF Energy Customers PLC 5,301 4,951 -127 -211 -2.4% -4.3% British Energy Direct Limited 1,009 676 15 22 1.5% 3.2% SSE SSE PLC 24,458 31,724 1,031 269 4.2% 0.8% SSE Energy Supply Limited 22,812 32,008 375 -7 1.6% 0.0% British Gas Centrica PLC 20,979 22,824 1,527 1,268 7.3% 5.6% British GAS Trading Limited 12,316 12,786 713 1,898 5.8% 14.8% Scottish Power Scottish Power UK Holdings Limited 6,261 7,450 690 327 11.0% 4.4% Scottish Power UK PLC 5,098 6,441 625 295 12.3% 4.6% Scottishpower Energy Retail Limited 3,192 3,378 76 -14 2.4% -0.4% E.On E.On UK PLC 9,071 9,240 621 -199 6.8% -2.2% E.On Energy Solutions Limited 6,529 7,028 24 157 0.4% 2.2% Npower RWE Npower PLC 785 687 96 -38 12.2% -5.5% Npower Limited 3,224 3,293 -12 55 -0.4% 1.7% Npower Northern Limited 1,449 1,686 -102 -117 -7.1% -7.0% Npower GAS Limited 606 386 -36 -11 -5.9% -2.9% Npower Direct Limited 412 355 46 55 11.2% 15.4% Npower Yorkshire Limited 309 236 -57 -27 -18.4% -11.5% Note: The subsidiaries listed include energy supply among their activities, some but not all include other activities both inside and outside the energy sector. The table showed relevant subsidiaries for each of the big six. This excluded some of the much smaller subsidiaries. The range of operations of each company varies considerably. There is no direct read across from one company to another from such figures.
Source: FAME database
Company structure
46. SSE and British Gas are owned by UK companies. E.ON and RWE are owned by German companies, EDF Energy is owned by a French company, and Scottish Power a Spanish company. Some companies have upstream oil and gas exploration and production arms while others have gas storage arms. Common to all the big six is an (upstream) generation arm, a (downstream) supply/retail arm and a trading arm which provide trading services for both the generation and supply arms (see table 5). In oral evidence, each of the big six outlined the different parts of their business:
28 Energy Prices, Profits and Poverty
Mr Cocker of E.ON said it had a, “retail business, which supplies electricity and gas to residential customers and business customers. We have a generation business, which generates electricity. We have a renewable business. We also have an upstream gas business and a gas storage business.”96
Mr Poole, Director of Business-to-Consumers of EDF energy said it had an, “upstream business, which is largely generating energy, on one hand and we have a downstream supply business supplying electricity and gas to our residential and business customers.”97
Mr Phillips-Davies of SSE said it had three business streams. “We have a network stream that is completely regulated and separated. We also have a wholesale or generation stream, and then we have a retail stream that deals with customers.”98
Mr Peters, Managing Director, Energy of British Gas said, “We have a very clear separation between downstream supply and our upstream business. We do also have a smaller storage business that is held out to one side through undertakings we made to Ofgem relating to the Rough transaction. Our trading operations are a route to market for both downstream and upstream and are embedded in our upstream business.”99
Mr Clitheroe of Scottish Power said it had three businesses. “The generation business, the energy management business and the retail business. The energy management business manages the buying and selling of energy on behalf of the generation and retail business.”100
Mr Massara of RWE said, “as of 1 January [...] the generation business is now a European generation business and therefore that is a separate P&L (profit and loss) completely. The trading division will have their P&L and, effectively, the downstream supply business will have theirs.”101
47. The big six argued that their businesses were simple, but the structures and relationships between the component elements are varied and complex. Some of the big six had a parent company which owned, or partly owned, multiple companies in different countries around the world. When these companies reported their overall profits they included all these multiple different companies. This complexity made it difficult to determine where profits and losses were being made within the company and how they might relate to recent energy price rises (see paragraph 4). Indeed, SSE explicitly pointed out that:
96 Q 115 [Mr Cocker] 97 Q 115 [Mr Poole] 98 Q 115 [Mr Phillips-Davies] 99 Q 224 [Mr Peters] 100 Q 224 [Mr Clitheroe] 101 Q 224 [Mr Massara]
Energy Prices, Profits and Poverty 29
With energy retail just one part of SSE’s business, and given the many factors that determine energy prices, attempting to draw correlations between energy prices rises and company-wide profits is misleading.102
Mr Lloyd of Which? said:
[...] consumer perception is one of distrust in the energy market. A part of that is the lack of transparency about what is driving retail prices, but then if you look at the results that companies are reporting, they are reporting much healthier margins on the generation businesses than the retail businesses. That is part of why there is a perception, on the part of consumers, that there is something perhaps untoward going on between the different arms of vertically integrated companies.103
Energy Action Scotland stated its belief that, ‘in order to obtain a true competitive market for all suppliers big and small there must be a more transparent wholesale market with strong regulation from Ofgem.’104
Table 5: Different arms which make up each of the six largest vertically integrated energy companies Exploration/ Net‐ Gas Company production Generation Trading Retail work storage Renewables E.ON* x x x x x x EDF x x x x x SSE x x x x x x x Centrica/ x x x x x x British Gas ScottishP x x x x x x ower RWE x x x x *E.ON operates each of the businesses listed (Exploration and Production, Generation, Trading, Retail, Gas Storage and Renewables) as an independent standalone business within the overall E.ON group, which must optimise its own position separately, and not on a vertically integrated basis.
Source: Q 115, Q 224
Increasing transparency of energy company profits
Consolidated Segmental statements
48. In an effort to increase transparency of the big six’s profits, Ofgem has, since 2009, required them to publish Consolidated Segmental Statements (the statements) annually. The statements are intended to provide greater transparency about the profitability of the different parts of vertically integrated companies. Ofgem highlighted that as a result, for the first time, data was available on the companies’ revenues, costs and profits, disaggregated for their generation and supply arms.105 The Secretary of State said, “[the statements are] a
102 Ev 4 103 Q 52 [Mr Lloyd] 104 Ev w17 105 Ev 123
30 Energy Prices, Profits and Poverty
unique regime, to my understanding, and therefore I think it is something that should be celebrated and supported.”106
49. Ofgem has summarised the average profit margin of all big six energy companies (see table 6 below) over the last three years using the statements from them.107 Its figures are aggregated across the big six and show that the supply margin fell to 3.1% in 2011 after increasing from 1.8% in 2009 to 3.8% in 2010, and that the generation margin rose from 21.9% in 2010 to 24.4% in 2011. Ofgem reported how in its 2008 Energy Supply Probe it found that suppliers’ margin targets were between 4 and 10%. We would expect generation margins to be larger because it requires larger capital investment and carries greater financial risk. The Probe also explained more about the structure of energy supply businesses, which have low levels of invested capital and a high level of pass-through costs. Both these factors, Ofgem reported, would suggest significantly lower levels of profitability on the supply side than the capital intensive generation parts of these companies.108
Table 6: Average profit margin by segment
2011 2010 2009 Profit margins aggregate aggregate aggregate margin margin margin All segments 7.6% 7.2% 5.8% Generation 24.4% 21.9% 22.5% Supply 3.1% 3.8% 1.8% Electricity - Domestic 1.5% 0.3% 2.1% Electricity - non-Domestic 3.3% 4.7% 4.0% Gas - Domestic 4.3% 5.7% -0.4% Gas - non-domestic 6.5% 6.2% -0.5%
Source: OFGEM: Consolidated Segmental Statements
50. Most of the big six believed that the statements helped to improve transparency. E.ON described them as a, ‘valuable tool’.109 EDF Energy similarly suggested that they, ‘provide robust information’.110 Scottish Power proposed that media and political commentary should focus more on the statements and that they should be made more visible to consumers.111 Ms Gallacher of Consumer Focus said they had stimulated discussion around energy company profits which she thought was positive:
[...] it does generate quite a lot of debate now. Maybe if we had not had them, the level of consumer interest in energy prices might not be as great as it is, so I think they have definitely prompted a degree of debate. [...] If that is something that brings focus on this market and encourages Ofgem, Government, consumer bodies, and
106 Q 448 107 Ofgem uses EBIT (Earnings before Interest and Tax deductions) as our measure of profit. In the 2009 and 2010 summarydocuments it used EBITDA for the supply margins, where EBITDA adds back depreciation and amortisation to the profit figure. It has now chosen to present all the results on a consistent EBIT basis. 108 Ev 123 109 Ev 30 110 Ev 101 111 Ev 113
Energy Prices, Profits and Poverty 31
industry to try to sort it out, rebuild consumer trust and try to give greater confidence on price fairness and transparency, then that is a good thing.112
51. There were, however, limitations to the effectiveness of the statements in increasing the transparency and comparability of the big six’s profits. Ofgem put this down to how companies operate and structure themselves:
This is mainly because of the various differences among the companies in how they operate and structure their businesses and therefore how they report their results. In particular, differences in the way the trading arm remunerates the generation and supply arms will create differences in how the information contained in the Statements is calculated.113
Mr Lloyd of Which? also thought that the Statements had failed to demonstrate that consumers were paying a fair price:
What it [CSS] has not done, if I may, is [...] translate what we think is an accurate picture of what is going on in the market to consumers. [...] if part of what is intended through the publication of segmented accounts is to give customers some assurance that the businesses are operating competitively and the retail end in their interest, as well as to show shareholders what is going on, then they are failing in that objective. There is not sufficient data there for us to be able to say with confidence that consumers are in a competitive market that is giving them keen prices.114
52. Ofgem emphasised that, since introduction of the statements, it had worked to improve their transparency and cross-comparability. In 2011, it commissioned a detailed review of the statements by the accountancy firm BDO. The review concluded that the methods the big six used to complete the statements were ‘broadly fair and appropriate’. However, it also identified a number of inconsistencies in the business models used, limiting cross- comparability. BDO made a number of recommendations to improve the statements. Ofgem consulted on a range of proposals based on the recommendations and enacted them in 2012 (see table 7). They did not take forward any of the proposals in their original form. Ms Gallacher of Consumer Focus said she did not understand why Ofgem did not implement all BDO’s recommendations:
I do not understand [...] why Ofgem did not choose to implement all the recommendations from BDO. It would be quite helpful to understand whether it was cost drivers or technical or physical ability to do that but you would really have to question why you would pursue this if it is not really helping the situation.115
53. Mr MacGregor, Head of Advisory Services of BDO told us that if its recommendations had been implemented it would have led, over a period of time, to more transparency over the performance of the big six.116 When asked why they didn’t take the recommendations
112 Q 76 [Ms Gallacher] 113 Ev 123 114 Q 75 [Mr Lloyd] 115 Q 75 [Ms Gallacher] 116 Q 345
32 Energy Prices, Profits and Poverty
forward Mr Wright, Senior Partner of Ofgem said Ofgem had taken forward five modified recommendations and rejected three:
[...] because they did not meet our criterion of meeting our cost benefit analysis, so we did not think that the cost associated with the usefulness of the information released would be in the interests of consumers.117
54. In written evidence Ofgem did, however, state that there is, ‘still more that the companies can do to make the statements clearer to consumers in a way that substantially increases their understanding and trust’. Ofgem asserted that companies, ‘have a key role in delivering this and we would hope to see them taking this responsibility seriously’.118
Table 7: Ofgem revised proposals following BDO’s report
Recommendation January 2012 May 2012
1. Require the companies We do not intend to take As in January to publish their Statements forward this recommendation to the same year-end
2. An independent auditor We propose obtaining an As in January to provide an opinion on independent opinion, at least the Statements for the first year, but not necessarily from an auditor 3. Instruct reconciliation of We propose to take forward We propose to take forward a the Statements to an this recommendation variation of this recommendation audited IFRS income and require companies to reconcile statement to the UK result in their published Group Accounts
4. Require the reporting of We do not propose to take As in January trading function results, forward this recommendation, including disclosure of the although we do propose risk each trading function companies produce a checklist assumes to identify where functions are undertaken 5. Perform further work to We do not intend to take As in January assess current transfer forward this recommendation pricing policy
6. Introduce uniform We propose to take forward We propose to take forward a reporting treatments for this recommendation variation of this recommendation generation fuel costs and and allow companies that operate free EU ETS allowances toll processing arrangements to provide the fuel costs as a supplementary note to the main results template 7. Guidance on scope and We propose to take forward As a result of our amended proposal definition of exceptional this recommendation on recommendation 3, items recommendations 7 and 8 are no 8. Specify consistent profit We propose to take forward longer required in their original base for reconciliation this recommendation form.
Source: Ofgem, Improving the Reporting Transparency of Large Energy Suppliers consultation, 1 May 2012
117 Q 376 118 Ev 123
Energy Prices, Profits and Poverty 33
Trading
55. Trading provides a route to market for energy companies.119 The trading arms of the largest vertically integrated energy companies provide a service buying and selling energy on behalf of the generation and supply arms.120 There are two key markets which energy companies use: the day ahead market (usually done through an exchange) and the forward market (usually done through a trading platform using bilateral over-the-counter (OTC) transactions). The big six described how they buy and sell (or “churn”) energy products from these markets several times before delivery.121 The big six emphasised that they traded as part of a risk management strategy to manage (or hedge) any peaks in market prices (see paragraph 11). Mr MacGregor of BDO agreed with this assertion:
What we are talking about is the companies themselves trying to work out what the future is going to look like as far as demand is concerned and then coming up with pricing modelling to manage that risk over the period of time. That is what they are doing as far as the trading is concerned. They are basically trying to work out what future demand is and keep their costs of purchase to a minimum, because of course the closer you get to needing power, if you do not have a contract which will give you that power, the more money it will cost you.122
Mr MacGregor went on to say that, ‘there is nothing suspicious about trading and hedging itself. It is a perfectly rational business activity, especially for these businesses.’123
56. Trades in both gas and electricity were overwhelmingly transacted in OTC trades with comparatively only a very small amount traded through exchanges (see table 8). EDF Energy said that since the advent of the New Electricity Trading Arrangements in March 2001,124 the OTC electricity market has been the main route to the wholesale market for energy companies who wish to forward hedge their electricity market risks.125 This market is also the most liquid for both gas and electricity which means that prices are more competitive which is important for companies looking for the most economic route to market.126 In addition, British Gas and Scottish Power reported that trading forward contracts on exchanges could be more costly than the OTC market.127
57. Which? was concerned that the wholesale market was dominated by OTC trades. They argued that these trades were not transparent because they were not disclosed and were, therefore, vulnerable to manipulation. They also argued that it raised questions about
119 Q 224 [Mr Peters] 120 Q 118 121 Q 133 [Mr Cocker] 122 Q 361 123 Q 366 124 New Electricity Trading Arrangements (NETA) is the name of the system under which electricity is traded in the United Kingdom's electricity market. NETA came into force on 27 March 2001. As of April 2005, NETA changed its name to the British Electricity Trading Transmission Arrangements (BETTA), and expanding to become the single Great Britain electricity market of England, Wales and Scotland 125 Ev 110 126 Ev 9, Ev 18, Ev 35, Ev 94, Ev 110, Ev 119 127 Ev 94, Ev 119
34 Energy Prices, Profits and Poverty
whether contracts linked to OTC indexes were value for money.128 Richard Lloyd of Which? described BDO’s conclusions and its implications;
it was impossible to see whether the transfer pricing had been done in the best interests of consumers. It was impossible to determine the prices offered to the supply businesses within the vertically integrated companies. I think much more transparency about transfer pricing and the methodologies that are being used is a start, but in the end, without more structural changes the segmented accounts, to be honest, at times just raise more questions than they answer.129
58. All of the big six stated, however, that there was either no or minimal price difference between the OTC and exchange market.130 In particular, British Gas and RWE suggested that any price difference which did emerge was quickly reduced by arbitrage.131 RWE stated that, ‘traders buy the cheaper product (wherever it is traded) and sell the more expensive product (on the other platform) to ensure that prices return to an equivalent basis.’132 In written evidence, the big six also consistently specified that price bids were available to everyone on the trading platform and that is it is not the case that preference for OTC trades were necessarily secretive thereby advantaging the company.133
Table 8: Percentage of volume of gas and electricity traded in either over the counter trades or through an exchange
Electricity Gas Company OTC Exchange OTC Exchange Period EDF 71% 21% 95% 5% 2012 E.ON 80% 20% 70% 30% N/A SSE 100% 0% 99% 1% Current (forward) (forward) RWE 96% 4% 99% 1% 2011 Centrica (British gas) 96% 4% 77% 23% First four months of 2013 Scottish Power 85% 15% 90% 11% 2012 Source: Ev 9, Ev 18, Ev 35, Ev 94, Ev 110, Ev 119
59. The original consolidated segmental statements did not require the big six to explicitly disclose their trading activities. Ms Gallacher of Consumer Focus told the Committee that not including trading in the statements was a fundamental omission.134 MacGregor of BDO said that trading was an important part of their overall business model.135 Mr Wright of Ofgem said that:
128 Ev 26 129 Q 74 [Mr Lloyd] 130 Ev 9, Ev 18, Ev 35, Ev 94, Ev 110, Ev 119 131 Ev 18, Ev 94 132 Ev 18 133 Ev 35, Ev 18, Ev 94, Ev 110, Ev 119 134 Q 74 [Ms Gallacher] 135 Q 349
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[...] because we do not necessarily have the full picture of all the relationships between the license businesses and the trading businesses, we accept that there is a possibility there are some missing pieces of information.136
60. In the interests of promoting increased transparency, BDO recommended that trading function results be reported, including disclosure of the risk each trading function assumes. Instead Ofgem proposed that the statements include a checklist table where trading activity can be allocated to segments. Mr Wright said he thought that, “the independent checklist adds value.”137 Mr MacGregor, however, asserted that the checklist was not at all satisfactory:
My recommendation was including the trading in the segmental accounts, not a checklist. The checklist is possibly open to interpretation. I don’t know the value of it. Including the trading gives you a much better idea of the total picture of the financial performance of the companies, if that is what you are trying to get to. The review was—my instruction was—to look at improving the way these CSSs are prepared. Quite frankly, I would much prefer to see numbers, rather than a checklist with some ticks on it.138
61. Mr Wright emphasised that this there might be difficulties in obtaining full information because the regulator did not necessarily have the power to make companies disclose profits they were making overseas.139 Mr MacGregor, however, said that he thought the big six would have detailed trading information.140 He doubted that the cost of producing trading information is significant.141 He agreed that the perceived reluctance of energy companies to include their trading information in the statements reinforces the suspicion that is an activity which can be used to confuse and obscure.142 He underlined his opinion that trading could be used to move profits from one part of the business to another:
Yes, in trading and the transfer pricing aspects of trading, as between generation and supply, of course there is an opportunity for profits to be moved around, within certain parameters. There is no doubt about it.143
He concluded that including trading activities in the Statements would give a much better idea of the total financial performance of the companies.144
62. We understand that there may be difficulties in getting large vertically integrated energy companies to report their trading activities especially if they are foreign owned or based overseas. However, we believe that the increase in transparency and associated
136 Q 377 137 Q 380 138 Q 356 139 Q 377 140 Q 357 141 Q 357 142 Q 358 143 Q 359 144 Q 356
36 Energy Prices, Profits and Poverty
consumer trust clearly justifies including trading activities in the statements. We recommend that Ofgem require the big six to include trading activities in the statements. There is an opportunity for energy companies to make reputational gains by setting an example of best practice. In the context of low consumer confidence, we hope that energy companies will see the benefits of increased transparency.
Auditing
63. Unlike the statutory accounts, there is no requirement for the segmental accounts to be certified as true and fair by an independent auditor. Auditors are subject to a regulation and supervision regime governed by the Financial Reporting Council. Audits must follow International Standards on Auditing, whereas accountants’ reports can follow any format agreed in terms of reference. Auditors are also subject to ethical standards that are designed to limit conflicts of interest and maximise quality assurance. Non-audit engagements are not subject to these limitations. BDO recommended that an independent auditor provide an opinion on the statements. Ofgem, however, instead proposed obtaining an independent opinion, at least for the first year, but not necessarily from an auditor.
64. Mr Wright of Ofgem said he thought that an audit, “would be quite an extensive and intrusive thing to do to companies that are already audited.”145 Mr MacGragor of BDO said he thought a review did not provide the same level of assurance:
An audit will look at the information in the CSSs and how that relates back to the underlying financial information. It will give some level of assurance—that is the point of audit—that that segmental information has been correctly prepared and stated. The review does not do anything like that. As I understand it, it is a desktop review with no enquiries made of the companies or their auditors. [...]. It does not give an assurance.146
65. We believe that obtaining an independent opinion as opposed to requiring an audit of the statements is unsatisfactory because it does not provide a sufficient level of assurance to bolster trust in energy companies. The potential cost and inconvenience to the large vertically integrated businesses would be eclipsed by the gains in confidence an audit would bring. We recommend that Ofgem require the statements to be audited.
Publishing statements to the same year end
66. The financial reporting period is not mandated. All of the big six have a 31 December year end, except for SSE, which has a 31 March year end. This reduces comparability because the cost of generation fuels varies with time and because the later year end for SSE means that Ofgem takes much longer to produce its analysis of the statements for the big six. BDO recommended that companies be required to publish their statements to the same year end. Mr Macgregor of BDO suggested that he didn’t think it would cost very much considering the size of the big six.147 Mr Wright, however, disagreed suggesting it
145 Q 380 146 Q 353 147 Q 352
Energy Prices, Profits and Poverty 37
was of limited value because the numbers were still comparable: the difference over the three months would not be huge. He suggested that significant costs would be incurred by SSE. He suggested, “all of that needs to be borne in mind against the limited improvement in transparency that would provide. I do not think there is a great deal been lost by SSE having a different year-end when you look at the statements that have been published so far.”148
67. We note that Scottish Power recently changed its financial reporting period to align with the majority of companies.149 We believe that the costs and inconvenience to SSE to change its year end would be outweighed by the gains in comparability across the different statements. We recommend that Ofgem require SSE to change its financial reporting period to align with the other large vertically integrated energy companies.
Uniform treatments for EU Energy Trading System (EU ETS) allowances150
68. Trading activities related to environmental measures, such as sale of Renewable Obligation Certificates or Carbon Trading may not be adequately disclosed in the statements. Similarly, supplier spending in support of other schemes (e.g. domestic energy saving) may not be included in the statements. Carbon permits in the EU Emissions Trading Scheme have an intrinsic value that varies, depending on market conditions. BDO recommended that Ofgem introduce uniform reporting treatments for generation fuel costs and free EU ETS allowances. Mr Macgregor said this should be done in the interests of improving comparability of the Statements:
They just treat things differently. One of my recommendations—again, I take you to my overall contextual point at the beginning—was that if you are going to do things and look at comparability, you need the information compared on a consistent basis. The carbon credits and things like that are just one of a number of areas where I was recommending that you need to start from the same base point. You need to have a consistent approach to exceptional items, for example. You need to reconcile back to the same starting points—EBIT or EBITDA.151 Otherwise, as I said before, you end up with six statements that mean something on their own but do not really mean anything as a group.152
Treatment of exceptional items
69. Areas of accounting estimate, such as depreciation and impairment on asset values, can distort the presentation of figures. Significant one-off items, such as provisions for restructuring, or profits or losses on the disposal of an asset, can distort the financial statements and reduce year-on-year comparability. BDO recommended that Ofgem
148 Q 381 149 Q352
150 EU emissions trading system (EU ETS): a ‘cap and trade’ policy tool for reducing industrial greenhouse gas emissions cost-effectively. It is the first and largest international system for trading greenhouse gas emission allowances. The EU ETS covers more than 11,000 power stations and industrial plants in 31 countries, as well as airlines 151 Earnings before interest and taxes (EBIT) and Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) 152 Q 370
38 Energy Prices, Profits and Poverty
introduce guidance on scope and definition of exceptional items. Mr Macgregor credited Ofgem with pursuing this. He suggested that one-off items were to be expected. He highlighted however, that, “you do need the ability to strip [exceptional items] out of the ongoing activities so you can understanding what the underlying financial performance has been.”153
70. We reject Ofgem’s assertion that most of BDOs recommendations would put unnecessary burdens on the big six. The impact of BDO’s recommendations should be considered as a package We believe that taken as a whole, the benefits of BDOs recommendations – in terms of improvements to transparency and comparability of the statements and associated improvements in consumer trust – significantly outweigh any burdens on the six largest vertically integrated energy companies. We acknowledge that there will be additional costs involved with implementation of BDO’s recommendations, but we believe that the benefits in terms of increased transparency and competition, and the potential downward pressure on prices that may result, justifies the expense.
71. We recommend that Ofgem should require the six largest vertically integrated companies to implement BDO’ recommendations 1 (publishing statements to the same year-end), 2 (independent auditor opinion on statements), and 4(reporting of trading function results). We also encourage Ofgem to consider requiring implementation of BDO’s recommendations in full and to publish, in its response to this report, its analysis of the cost to energy companies of full implementation. We also recommend that Ofgem undertake further work to assess current transfer pricing policies.
Supply Market Indicators
72. The SMI is Ofgem’s key indicator to improve transparency in the retail market. Its role is to help interested parties gain a greater understanding of the relationship between retail prices and supplier costs. It is a rolling average net profit margin which an energy supply company could expect to make on supplying a typical customer on a standard tariff for both gas and electricity. Ofgem also produce a snapshot estimate of the net margin on supplying a typical, standard tariff dual fuel customer for the next 12 months (see table 9). In order to calculate this average net profit margin Ofgem uses:
Data: including an average of the estimated net margin data for the previous six months, the current month, and the next six months.
A methodology: based on a number of assumptions such as the typical household energy consumption. It also uses its own hedging strategy (similar to actual energy companies) to estimate supplier wholesale costs.
153 Q 372
Energy Prices, Profits and Poverty 39
Table 9: Changes in retail bills, costs and total indicative net margin for the next 12 months – June 2013
Year Dual Fuel Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Customer bill £1,150 £1,105 £1,170 £1,310 £1,420 Wholesale costs £655 £485 £570 £635 £640 VAT and other costs £400 £435 £480 £525 £560 Gross margin £95 £185 £125 £150 £220 Operating costs £130 £130 £130 £130 £130
Total indicative net margin for the next 12 months -£30 £55 -£10 £20 £90 Rolling net margin -£5 £55 £45 £45 £100 Source: Ofgem, Electricity and Gas Market Indicators, www.ofgem.gov.uk
73. SMIs have in the past caused heated public debate between Ofgem and the energy companies.154 Consumer Focus describe the SMI as ‘very useful’ with ‘significant use as a diagnostic tool in order to understand what’s driving bills’.155 Mr Wright of Ofgem highlighted the benefits of SMI:
The supply market indicator, once again, is an initiative from us to improve transparency in this market. Had we not taken this initiative there would be no ongoing view of the forward looking profitability of these companies. It enables consumers, politicians and the media to have a dialogue about whether or not price increases were justified, whether price increases are in the offing. It is used by other agencies, for example, the Bank of England, to look at inflation forecasts. So it is a useful addition to the transparency in the market. You cannot expect us, in the position we are in, to be able to make accurate forecasts of the company’s profitability looking 12 months ahead.156
74. Several organisations argued that methodological deficiencies reduced the accuracy of SMIs. In oral evidence, some energy companies suggested that energy consumption figures under the SMI were overstated, leading to exaggerated profit margins. SSE stated that Ofgem’s methodology “appears to have a consistent bias towards overstating profit margins”. Alistair Phillips-Davies of SSE explained:
Unfortunately there are errors in those figures. They consistently overstate the consumption that people make. It is the most fundamental part of the errors they make. We could give you a list of the errors they make, but they fundamentally and consistently overstate the levels of consumption that people make and therefore that causes a fundamental overstatement of the profitability of those businesses.157
154 Ev 1 155 Ev 54 156 Q 382 157 Q 209
40 Energy Prices, Profits and Poverty
Mr Wright said he accepted the accusation on consumption. He agreed that consumption levels had changed. Ofgem had initiated a review both for use in the supply market indicator and the average consumption levels that Ofgem would use in the media when quoting the size of a typical bill. They will update the assumptions following this review.158
75. But Mr Wright also defended the methodology overall:
[...] because we want to make what we are doing transparent, we have a published methodology which we allow other people to replicate. We rely on public domain information and as a result, there are some simplifying assumptions in that. I think that makes it practical to update the supply market indicator regularly. As a result of that, we look at the profitability of a typical customer, with typical consumption, on standard dual fuel tariffs. Now, that is not the same as giving a forecast of the profitability of the companies. The companies point out the differences; typical consumption is not necessarily the same as average consumption. They have discounted tariffs that we don’t take into account. We use a simplified hedging strategy, an 18-month hedging strategy because we do not know the companies’ hedging strategies. They do not disclose it and we have no way of knowing. So inevitably there are going to be differences, but does that mean this is not useful? I don’t think it does. I think this is a useful indicator that provides a useful indication.159
76. Some organisations have identified disparities between the SMI and the CSS which call into question their accuracy. Consumer Focus explains:
It should also be noted that it is hard to reconcile the statements with Ofgem’s separate monitoring of supply market indicators. For example, the statements suggest that in 2010 three of the big 6 made profits on their electricity supply business while three made losses, with an aggregate margin of the six businesses of 0.3 per cent – roughly breakeven. However, its supply market indicators reports suggest that electricity supply was consistently profitable throughout 2010 at about a £30 margin on an approximately £500 average annual bill, inferring a supply margin around 6 per cent. Although the supply market indicators are based on a ‘typical’ standard tariff bill at average consumption levels rather than all bills, the majority of consumers remain on standard tariffs. To get from a ~6 per cent margin across the majority of consumers to a 0.3 per cent margin across all consumers might imply predatory pricing; that market leading deals are being sold at a very heavy loss. Alternately, it might imply that either the statements and/or the supply market indicators provide a false perspective of supplier profitability.160
77. We believe that the Supply Market Indicator is a useful tool, for assessing the supply margin of the big six’s retail business. The disagreements between Ofgem and the energy companies over the figures, played out in the media, are deeply unhelpful and only work to erode public trust in the companies and confidence in the regulator.
158 Q 232 159 Q 382 160 Ev 54
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Companies should engage constructively in improving the SMI. We recognise the methodological concerns and recommend that Ofgem actively review the methodology and improve it so that the SMI more accurately reflects the actual activities of energy companies.
REMIT
78. The EU regulation No 1227/2011 on wholesale energy market integrity and transparency (REMIT) came into force in December 2011. It is aimed at preventing market abuse including market manipulation and insider trading in wholesale energy markets. It will do this by introducing explicit prohibitions of market manipulation and insider trading. It requires public disclosure of insider information by market participants and introduced an obligation to report suspicious transactions. Importantly it provides Ofgem with enforcement and investigatory powers. Consumer Focus hoped that the regulations would provide Ofgem with greater powers to disclose energy companies’ actual traded cost of energy and therefore allow it to verify suppliers’ wholesale costs.161 With regards to REMIT the Secretary of State said that he was implementing REMIT and that he wanted to be one of the first EU countries to transpose it.162
79. We recommend that the Government ensure Ofgem takes full advantage of these new REMIT powers.
Improving wholesale market competitiveness
80. In addition to improved transparency and communication, measures to encourage more competitive markets were proposed as one of the best ways to ensure customers were paying a fair price. This was especially true for the electricity wholesale market. Which? described the important role wholesale markets play in encouraging investment and influencing future energy prices. They suggested that the Government and regulator should consider what action was needed to ensure that price information was robust and that the markets were competitive.163 Mr Cocker of E.ON also emphasised that liquidity in the market was important for his company’s business model and to engender confidence in market:
[...] it is absolutely vital for us that we have a deep and liquid market in order to enable that business model to work. So we had a clear self-interest in supporting liquidity. In addition to that, I personally believe that it is very important to have liquidity in order to engender confidence in the market and competition.164
81. Consumer Focus said that there were significant problems with liquidity in the wholesale electricity market. They suggested that, ‘while spot and prompt markets are relatively heavily traded, the forward market is thinly traded and largely illiquid.’ Liquidity
161 Ev 54 162 Q 428 163 Ev 26 164 Q 141 [Mr Cocker]
42 Energy Prices, Profits and Poverty
was an essential prerequisite for a healthy market and to keep costs down, they argued.165 This was confirmed by Ofgem. As part of their proactive monitoring of the wholesale electricity market they identified, ‘poor and stagnating liquidity as a barrier to compensation, preventing entry and growth of new players and imposing costs on consumers.166 Consumer Focus described how, ‘for all stakeholders, liquid heavily traded markets would provide clear signals of the ‘real’ price of energy – and could therefore help gauge whether end user prices are fair.’167
82. Since its 2008 Energy Supply Probe, when it first identified liquidity as a problem, Ofgem has used a combination of carrot and stick techniques to improve liquidity. Mr Wright of Ofgem said that, ‘it is far better that the industry steps up and solves this problem itself rather than responding reluctantly to rules we put in place.’168 Its Liquidity Project which sits alongside Ofgem’s retail market review (see paragraph 21) is, ‘central to [its] efforts to ensure that consumers get the best possible deals from competitive energy markets.’169 The Liquidity Project challenged the industry to deliver three key objectives:
Availability of products which support hedging;
Robust reference prices along the curve; and
An effective near-term market.
83. Mr Wright of Ofgem described the improvements Ofgem has made to market liquidity:
There have been significant increases in the volumes traded on the day-ahead market, for example. The day-ahead auction is now well established and the short- term market is a critical part of the market. It is not only useful in its own right but potentially encourages other people to come into the market to trade on longer-term products as well. On top of that the companies now treat small suppliers far better than they used to. We used to have a litany of complaints about the credit terms, the clip sizes and a whole bunch of barriers about why small suppliers were not able to get hold of the electricity and gas they needed from the Big Six.170
84. SSE in particular had supported smaller suppliers. Mr Phillips-Davies of SSE explained that they had made available to smaller suppliers’ ‘free credit’ so they could trade in the market.171 When asked why it did this, Mr Phillips-Davies said it was responding to criticism that the big six were not helping smaller suppliers and that, ‘[it was] very happy to see a deep, liquid and competitive market, and we would support actions that delivered that.’172
165 Ev 54 166 Ev 123 167 Ev 54 168 Q 390 169 Ev 123 170 Q 390 171 Q 126 172 Q 141
Energy Prices, Profits and Poverty 43
85. Ofgem reported that even though there had been improvements, overall its objectives remained unmet.173 Mr Wright said that it could no longer wait for the industry to solve the issue by itself and would plug the remaining gaps that exist.174 In written evidence Ofgem said it had a, ‘firm preference for intervention to improve liquidity.’175 This included proposals it had recently announced designed to give independent energy suppliers a more level playing field to compete against larger companies. Ofgem also hoped that it will increase competition between these larger companies. Ofgem said that under the proposals:
The big six suppliers will have to post the prices at which they buy and sell wholesale electricity on power trading platforms up to two years in advance. They will be obliged to trade at these prices, which means independent suppliers and generators will have far more opportunities to buy and sell the power they need to compete effectively. Posting prices in this way will make wholesale prices clearer for all firms in the market. The new licence conditions will be backed by Ofgem’s powers to fine companies if they are in breach.176
The Secretary of State said that he had made it clear that he wanted to see much greater liquidity in the forward markets because it was good for competition and transparency:
Just in case anyone was in any doubt, we obtained in the Energy Bill reserve powers so that if Ofgem proposals do not work, we would still have the powers to come and revisit the wholesale markets to get liquidity. I do not think we could have been clearer supporting the independent energy regulator and giving a clear steer that we want to see more competition in the wholesale markets.177
Consumer Focus outlined their view that, ‘Ofgem has made little progress despite five years of trying.” They encouraged the Government to set a firm deadline to use the powers in the Energy Bill. They believed that imposition of a deadline would focus Ofgem and the industry on the need for progress (see paragraph 23).178
86. Some organisations advocated more fundamental reform of the wholesale market. The IPPR suggested that a way to reform the wholesale market, improving transparency and liquidity, would be to consider ‘whether all wholesale trading activity should go through some kind of pooling system, similar to the Nordpool system in Europe.’179 Which? suggested that ideas for improving wholesale market liquidity included a self supply restriction and the legal separation of the supply and generation divisions of the big six.180 E.ON suggested that, ‘clear and consistent prohibition of cross-subsidy between the generation and supply activities that are within the same group’, together with ‘some form
173 Ev 123 174 Q 390 175 Ev 123 176 Ofgem, Opening up electricity market to effective competition, 12 June 2013 177 Q 437 178 Ev 54 179 Ev w11, Ev w46 180 Ev 26
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of self supply restriction’ would help create clarity in energy company profits.181 Mr Wright of Ofgem however suggested that implementing a self-supply restriction or a mandated auction presented challenges including for example how it was enforced. Instead he highlighted, ‘the important thing is that people who want to trade are able to trade at fair prices.’ Ofgems proposals outlined above represent, according to Mr Wright, Ofgem’s view on what was the best and most appropriate solution to this issue.182
87. Improving wholesale market competitiveness will be vital in ensuring customers are paying a fair price for their energy. We are astonished at how long it has taken Ofgem to act since it first identified this as an issue in 2008. The relatively light touch approach favoured by Ofgem has failed to deliver the changes required to improve competition. We recommend that urgent intervention is required to resolve this problem. Ofgem needs to implement its proposals to improve liquidity as soon as possible taking a more assertive approach than it has in the past.
181 Ev 30 182 Q 389
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4 Fuel Poverty
88. Rising energy prices will exacerbate fuel poverty. DECC’s latest statistics show the severity of the problem has increased: in 2011 fuel-poor households spent £448 more on fuel costs than the national average, an increase of £26 since 2010.183 This is largely due to the fact that fuel poor households are more likely to live in inefficient properties, be less able to take advantage of cheaper tariff options such as direct debit tariffs, and have unavoidably high fuel requirements (for example the elderly, disabled people or those with a long-term illness who need to remain at home).184 . Additionally the lack of consumer trust in energy companies, caused partly by the perception of excessive profits, could undermine efforts to identify and support fuel-poor households. This section will consider the scale of the problem and assesses Government fuel poverty programmes.
Measuring fuel poverty
Current and new definition of fuel poverty
89. Effective action cannot be taken without a clear understanding of the scale and nature of the problem to be addressed. Under the current definition of fuel poverty (“the 10 % definition”), a household is said to be fuel poor if it needs to spend more than 10 % of its income on fuel to maintain an adequate level of warmth.185 Government has a statutory obligation to ensure that by November 2016 “as far as reasonably practicable persons in England or Wales do not live in fuel poverty.”186 The 2001 Fuel Poverty Strategy set out how this would be achieved through policies on energy efficiency, fuel prices and household income.187
90. There was consensus among witnesses that Government would fail to achieve this target.188 Citizen’s Advice noted that “without a significant increase in Government spending on the energy efficiency of fuel poor homes the number households in fuel poverty is as likely to increase by 2016 as be eliminated.”189 Some organisations have questioned whether Government is doing all that is “reasonably practicable” to meet the target in light of the closure of the Warm Front (WF) scheme in January 2013. WF was a tax-funded scheme which provided grants for heating and/or insulation measures for qualifying households in England, such those on certain income-related benefits or on pension credit, in order to deliver affordable warmth. Witnesses observed that the closure of WF marked the first time since 1978 when there would be no Government-funded
183 DECC, Annual report on fuel poverty statistics 2013, May 2013 184 Professor John Hills, Fuel poverty: the problem and its measurement: Interim report of the fuel poverty review, CASE Report 96, October 2011; Professor John Hills, Getting the measure of fuel poverty: Final report of the fuel poverty review, CASE Report 72, March 2012 185 The adequate standard of warmth is usually defined as 21 degrees for the main living area, and 18 degrees for other occupied rooms 186 Warm Homes and Energy Conservation Act 2000 187 DECC, UK fuel poverty strategy 2001: Government response to the consultation on amending reference to the warm front scheme eligibility criteria, 21 March 2011 188 Ev w7, Ev 1, Ev 40, Ev w34, Ev 54, Ev w49 189 Ev 1
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domestic energy efficiency programme in England.190 NEA claimed that the closure of WF represented a “breach of the legal duties contained in the Warm Homes and Energy Conservation Act” and expressed concern that the Exchequer was “abdicating responsibility for funding fuel poverty programmes and [...] simply shifting the burden on to energy consumers.”191
91. In 2008, Friends of the Earth and Help the Aged sought Judicial Review on the grounds that Government action on fuel poverty did not represent all that was ‘reasonably practicable.’ Although the judgement was in favour of Government, the responsible department was cited as noting ‘that the Act and Strategy would not (as presently formulated) permit the Government to eliminate Winter Fuel Payments in their entirety or cut Warm Front funding to zero.’192 The Secretary of State maintained that the Government was meeting its statutory obligations in relation to fuel poverty.193
92. As part of the Spending Review in 2010, the Government announced that it would commission an independent review of the current fuel poverty target and its definition. An interim report was published in October 2011 and in March 2012 Professor Hills, Professor of Social Policy at London School of Economics, published the final report of his independent review of fuel poverty, making a number of recommendations and proposing a new indicator for fuel poverty.194 Under the proposed Low Income High Cost (LIHC) indicator, a household would be considered “fuel-poor” if its fuel costs were above the national average, and if spending this amount would leave a residual income below the official poverty line.195 Hills also recommended that Government should measure the depth of the problem through a “fuel poverty gap” indicator. This would measure “the amounts by which the assessed energy needs of fuel poor households exceed the threshold for reasonable costs.”196 The LIHC definition is intended to give an indication of the severity of the problem for fuel-poor households by showing the amount by which their costs exceed the national median. The Government published its response to the consultation on Hills’ proposals on 9 July 2013, after we had finished taking evidence in this inquiry, confirming that the LIHC indicator would be adopted.197 Alongside the Government response, DECC published a framework for action on fuel poverty to underpin its forthcoming fuel poverty strategy. This framework set out plans to introduce a new long-term fuel poverty target and strategy.198
190 Ev 40, Ev 54, Ev w49 191 Ev 40 192 Ev 40; Case No: CO/3373/2008, Royal Courts of Justice, 23/10/2008. 193 Q 455 194 Professor John Hills, Fuel poverty: the problem and its measurement: Interim report of the fuel poverty review, CASE Report 96, October 2011; Professor John Hills, Getting the measure of fuel poverty: Final report of the fuel poverty review, CASE Report 72, March 2012 195 The official poverty line is calculated if a household has an income of less than 60% of the median income. This is known as the Households Below Average Income (HBAI) and is calculated by DWP. For 2011 this resulted in an average poverty threshold of £11,553 196 Professor John Hills, Getting the measure of fuel poverty: Final report of the fuel poverty review, CASE Report 72, March 2012 197 DECC, Fuel poverty: changing the framework for measurement government response, July 2013 198 DECC, Fuel poverty: A framework for future action, July 2013. An amendment was passed in the House of Lords at Committee stage of the Energy Bill on 11 July, requiring the Secretary of State to set a fuel poverty objective, target date and strategy for meeting the objective
Energy Prices, Profits and Poverty 47
A better definition?
93. Many witnesses endorsed the following elements of the Hills’ review:
the recognition of fuel poverty as a distinct national problem;
the recommendation to focus policy efforts on energy efficiency, and
the recommendation to introduce a new fuel poverty strategy and target.
However, serious concerns were expressed regarding the effectiveness of the new LIHC indicator. The Government’s Fuel Poverty Advisory Group (FPAG) suggested that the use of median household costs to determine affordability and determine the threshold for ‘reasonable costs’ was problematic, since household energy costs could be below the median and still remain unaffordable to a low-income household.199 National Energy Action (NEA) emphasised that this was a concern shared by many respondents to the Government’s consultation:
However the [Hills] Review’s recommendation that high energy costs should be understood as costs exceeding the median for all households was subject to near universal disagreement as a failure to comprehend the concept of affordability in the context of low-income households.200
94. Consumer Focus echoed these concerns, stating that the “definition of high energy costs failed to reflect fuel affordability and in effect made ‘it almost impossible to literally eradicate fuel poverty.’”201 This is because under the LIHC indicator, half of all households will be defined as having higher than average (median) costs. DECC noted that it was “difficult to imagine that none of these households would be low income.”202 The Government’s response to the consultation on Hills’ proposals acknowledged that the energy costs threshold was a point of contention, with “two thirds of those that responded [...] disagreeing with the approach that we suggested.”203 Government cited a lack of robust income data as the reason for not introducing a link between income and bills within the proposed definition. Another concern was that the use of median figures would mean the LIHC indicator would lack sensitivity to changes in energy prices. In oral evidence, Mervyn Kohler, Special Adviser at Age UK, explained why this might be the case:
I think the key point is that John Hills observed in our current definition of fuel poverty that it was too sensitive to price changes, and the key point about his proposed alternative is that it is not sensitive enough to price changes, and that because he is taking a median of a median [...] to help define who is going to be in fuel poverty under his new definition, we will be looking at a target that scarcely ever changes. The value of a fuel poverty definition is that it gives us a picture of the scale of the problem. It also enables us to measure whether we are going forwards or
199 Ev w49 200 Ev 40 201 Ev 54 202 DECC, Fuel poverty: Changing the framework for measurement, September 2012 203 DECC, Fuel poverty: Changing the framework for measurement government response, July 2013
48 Energy Prices, Profits and Poverty
backwards dealing with it, and if we have a measure that doesn’t change very much it doesn’t seem to be awfully helpful from that point of view.204
However, Professor Hills contested this point in oral evidence, citing the importance of the “fuel poverty gap” indicator in accurately measuring the problem:
On the one hand, the number of households or individuals captured by my measure varies as energy prices vary, but the thing that really changes is how big a problem that is for the people affected by it. That is the fuel poverty gap.205
95. Professor Hills pointed out that the previous indicator could lead Government to “focus on action that tips people just across the [fuel poverty] line”, rather than those people most in need of support. Under the 10% indicator, a small rise in energy prices could tip disproportionately large numbers of households into fuel poverty due to the number of households close to fuel poverty. Examining the depth of the problem, Professor Hills argued, would “focus your energy on using your resources to make the biggest difference.”206 The new indicator, by taking account of the combined impact of a low income with high energy costs, while defining fewer households as fuel-poor, would be a more accurate measure and would help to identify those suffering the greatest hardship. The IPPR explained that the current indicator captured a broad cross-section of the population, including wealthy households, which distorted the debate about where resources should be targeted.207
96. However some witnesses were critical of the fact that the new definition effectively reduced the fuel-poor headcount without any Government action having taken place: NEA observed that “the Hills definition significantly reduce[s] the incidence of fuel poverty – without having provided affordable warmth for a single household.”208 Similarly FPAG observe that “the new definition leads to large numbers of low-income households no longer being classed as ‘fuel-poor’, yet these households clearly cannot afford their fuel costs.”209
97. In general, energy companies and service providers welcomed Hills’ proposals. Carillion agreed that the “fuel poverty gap” indicator could “enable better targeting of policy towards households most severely affected,” a point of view also shared by Scottish Power who noted that the LIHC indicator would “help the Government to better identify and design policies that focus resources on those most in need.”210 E.ON and SSE also expressed their support for the review and revised definition.211
98. There has been some concern that the proposed definition is “overly complex”, leading to a debate on “complex and abstruse technical issues rather than to policy development
204 Q 38 205 Q 302 206 Q 301 207 Ev w11 208 Ev 40 209 Ev w49 210 Ev w34, Ev 113 211 Ev3 0, Ev 4
Energy Prices, Profits and Poverty 49
and advocacy”.212 In oral evidence Professor Hills acknowledged the importance of “relatively simple-to-measure indicators on the ground” for effective implementation of fuel poverty policies.213 Hills also stressed the importance of striving for an approach that was “good, rather than perfect”:214
We want things that by and large hit the right people in the right order, but if we can find relatively simple proxies that get us to the bulk of the problem, that is where we should start.215
99. Witnesses have suggested that the fuel poverty indicator should also incorporate the energy efficiency rating of a property. Jan Rosenow of the Environmental Change Institute at the University of Oxford, described how existing indicators could be improved:
The proxies we are using to identify fuel-poor households are not that precise. [...]We are focusing on income, benefits and age, but not the actual properties and their energy efficiency ratings.216
There was considerable support for this suggestion among witnesses. Professor Hills recommended that a “priority order” be established to target “anybody on a low income who is living in a property with an energy efficiency certificate rating of E, F or G.”217 DECC’s consultation also underlined the significance of energy efficiency ratings, stating that “81% of [those households in]the fuel poverty gap, under the LIHC indicator, have an EPC energy efficiency rating of E, F or G.”218 Consumer Focus noted that an indicator based on the number of households living in EPC E, F or G-rated properties “has much merit and would enable tracking of progress, including the impact of local projects and programmes.”219 Government recently announced plans to “monitor [...] the number of fuel poor households who live in the most energy inefficient properties e.g. E, F and G rated properties.”220
100. We conclude that the focus on low-income under the proposed LIHC indicator, by reference to the official poverty line, ensures a more accurate identification of fuel-poor households. The use of a ‘fuel poverty gap’ is welcome in giving a measure of the severity of the problem faced by households as energy prices continue to increase. However, we are concerned by the use of median national spend on fuel to determine “high costs” within the indicator. It is clear that fuel costs can be below the median and yet still remain unaffordable. If the median national spend is high it may not provide a true indication of affordability. We recognise that consumers who are paying the median could also be finding their energy bills unaffordable, even if they are not classed
212 Ev w17, Ev 40 213 Q 317 214 Q 325 215 Q 317 216 Q 319 217 Q 318 218 DECC, Fuel poverty: Changing the framework for measurement, September 2012 219 Ev 54 220 DECC, Fuel poverty: A framework for future action, July 2013
50 Energy Prices, Profits and Poverty
as fuel-poor. We recommend Government modifies the proposed definition to better reflect affordability in the context of low-income households by introducing a link between the income threshold and the energy costs threshold within the new indicator.
101. We welcome Government’s commitment to monitor the number of fuel-poor households living in E, F and G-rated properties, and recommend that Government use this information to help focus policy on improving some of the UK’s most inefficient housing stock.
102. Stakeholders criticised the Hills Review and Government for a lack of engagement with the concerns of consultees. NEA stated that “we have seen no indication of any proposed revisions since Professor Hills published his Interim Report in October 2011”221 while FPAG criticised the “minimal recognition of the cogent arguments put forward by stakeholders in the final Hills proposals.”222 We are alarmed by the reported lack of Government engagement with input from consultees during the Review process, in particular with regard to recommendations from the Government’s own statutory advisory body (Fuel Poverty Advisory Group). Government has not modified the LIHC indicator, despite the fact that two thirds of respondents were opposed to the use of the national median to determine “high costs”. We seek assurances that DECC will take full account of stakeholder concerns when formulating the new fuel poverty strategy.
The role of data-sharing
103. Increased data-sharing between Government departments and energy companies could help identify fuel-poor households in a more efficient and cost-effective way. Under The Pensions Act 2008, data-sharing was permitted between the Department for Work and Pensions and energy suppliers to enable automatic payment of the Warm Home Discount (WHD) to low-income pensioners.223 Witnesses including most energy companies were almost unanimous in recommending the extension of such data-sharing to facilitate the delivery of fuel poverty programmes. EDF also emphasised the importance of cross-departmental engagement and linking programmes such as WHD and Energy Company Obligation (ECO) with benefit checks to achieve greater targeting efficiency:
To be effective the new fuel poverty strategy should be cross- Governmental to ensure full engagement and ownership by all relevant departments, and not only DECC. For example, the DWP and HMRC have full information on household income and benefit status and are therefore best placed to identify those householders who would most benefit from policy interventions.224
104. Ofgem acknowledged in written evidence that increased data sharing could help identify eligible Affordable Warmth Group households under the ECO. Sarah Harrison, Senior Partner, Sustainable Development at Ofgem, outlined how suppliers’ data on vulnerable consumers could be shared to help provide targeted support:
221 Ev 40 222 Ev w49 223 The Pensions Act 2008 224 Ev 101
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There are other ways that suppliers in particular and distribution companies can act here. Many suppliers and distribution companies maintain priority service registers, which gather information about some of their most vulnerable customers who have particular needs. One of the strands of our new consumer vulnerability strategy is going to look at ways in which we can improve the awareness of the public service registers and seeing ways in which suppliers and distribution network companies can make better use of that data, not only to target their own services and support to those customers but also potentially to share that information with other providers and organisations, particularly in the local communities, who might also be able to provide additional help.225
105. Household-level energy consumption and spend data collected by energy companies could also be useful in helping Government to identify fuel-poor households. Ofgem does not currently require energy companies to pass on such data except in the case of the Warm Home Discount scheme, where suppliers are required to provide data on mean annual energy consumption and fuel costs for discounted tariff customers until March 2014.226 The Government’s framework for action on fuel poverty states that it “will consider the scope for increasing the use of automated data matching” and “the role of data sharing in the [...] delivery landscape.”227 The Secretary of State confirmed that data- sharing could be extended if appropriate safeguards were in place:
There are obviously other data sets that could be used and we have certainly not ruled out expanding the use of data-sharing, but I think you could immediately imagine that we would have to go about that with some caution and some sensitivity. People do not necessarily want their data shared widely and we need to respect that. I think there would have to be a full, proper debate in Parliament before we decided to expand the use of data-sharing. It has to be an option, but there are reasons why people are nervous about that.228
106. We welcome Government’s recent commitment to consider extending the use of data- sharing to ensure the most efficient and cost-effective delivery of fuel poverty policies. We further recommend that Ofgem considers introducing a licence condition to ensure that energy companies share data on household energy consumption and spend with Government, in order to facilitate identification of fuel-poor households.
Need for urgent action
107. DECC’s latest statistics on fuel poverty provided data according to both the 10% definition of fuel poverty, and the proposed new LIHC indicator.229 The statistics showed that in 2011 there were 4.5 million households in fuel poverty under the 10% definition, of which 3.2 million were in England. Under the new indicator, there were 2.6 million fuel-
225 Q 409 226 The Warm Home Discount Regulations 2011 227 DECC, Fuel poverty: A framework for future action, July 2013 228 Q 456 229 DECC, Annual report on fuel poverty statistics 2013, May 2013
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poor households in England in 2011 (data is only currently available for England).230 Although under both measures the overall number of fuel-poor households was shown to have reduced, the fuel poverty gap (the difference between energy costs for the fuel-poor and average energy costs) increased between 2010 and 2011. The aggregate fuel poverty gap increased in real terms by £22 million to £1.15 billion, and the average gap increased by £26 to £448 – meaning that energy costs in a fuel-poor household were on average £448 higher than national average fuel costs. DECC attributed this rise to increases in energy prices.231 The Secretary of State acknowledged that any reduction in overall fuel poverty was likely to be “a temporary reduction” in light of significant energy prices increases since 2011, and that the LIHC indicator revealed that “the depth of fuel poverty has become worse.”232 Other estimates for fuel poverty suggested the scale of the problem is even greater: FPAG estimated that there are approximately 6 million households in fuel poverty, while Consumer Focus suggested that households in fuel poverty would reach 6.2m by 2016 based on current trends.233
108. As NEA noted, fuel poverty does not relate to a “small sub-set of the population”, but to a large and growing proportion of households in the UK. In this context, it is more urgent than ever that fuel poverty resources are deployed as quickly and as effectively as possible. Many campaigners called for more action on fuel poverty and less academic discussion. Citizen’s Advice described Government new fuel poverty strategy as “long overdue” and summed up the frustration felt by some organisations:
It is more than two years since the Spending Review in 2010 in which the Government announced its intention to commission an independent review to look at the fuel poverty definition and more than eighteen months since Professor Hills and his team were commissioned to carry out this task. Furthermore, as welcome and vital as the commitment to draw up a new strategy to combat fuel poverty is, this will take further valuable time to put together and longer still to implement. Meanwhile the fuel poor continue to suffer in cold homes [...] it is now time to stop quibbling over the precise definition of fuel poverty and take action.234
109. We conclude that while an accurate definition of fuel poverty is important, the Government has been unacceptably slow to respond to the Hills Review and take action to stem rising fuel poverty. We are concerned that fuel poverty policy has effectively been frozen at a time when significant energy price rises have made energy costs increasingly unaffordable for vulnerable and low-income households. We welcome the recent publication of the Government’s framework for action on fuel poverty which will underpin the Government’s fuel poverty strategy when it is introduced. It is imperative that the introduction and implementation of the strategy, expected at the end of this year, is not delayed any further. For Government to have done all that is
230 Data sets for the new indicator are only available for England. These showed that in 2011 there were 2.6 million households in fuel poverty in England. Source: DECC, Annual report on fuel poverty statistics 2013, May 2013 231 DECC, Annual report on fuel poverty statistics 2013, May 2013 232 Q 451 233 Ev w49, Ev 54 234 Ev 1
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reasonably practicable to tackle fuel poverty, the new fuel poverty strategy should be published and implemented as an urgent priority.
Fuel poverty policies
110. The Government has a number of schemes in place provide help with high energy costs. These include:
The Winter Fuel Payment. This is an automatic payment of between £100 and £300 to those in receipt of the state pension. It is not means-tested and is funded through the Exchequer and administered by DWP.
The Cold Weather Payment of the Regulated Social Fund, administered by DWP. This is payable when local temperature is either recorded as, or forecast to be, an average of zero degrees Celsius or below over 7 consecutive days. Low-income pensioners and other vulnerable consumers receive a payment of £25 for each 7 day period of very cold weather. It is tax-funded.
The levy-funded Warm Home Discount offers a mandatory reduction of £130 on electricity bills for low-income older households and, on a discretionary basis, for other financially disadvantaged vulnerable households.
The Energy Company Obligation (ECO) was introduced in January 2013 to reduce the UK’s energy consumption and support people living in fuel poverty. It does this by funding energy efficiency improvements worth around £1.3 billion every year. It is a continuation of previous obligations on energy companies to deliver energy efficiency measures across the housing stock, but with a much stronger emphasis on higher cost insulation measures. It will run until March 2015. There are three obligations under the ECO:
Carbon Saving Obligation (CSO) – this covers the installation of measures like solid wall and hard-to-treat cavity wall insulation, which are ordinarily too expensive to be financed solely through the Green Deal. This aspect is worth around £760m per year.
Carbon Saving Community Obligation (CSCO) – this provides insulation measures to households in specified areas of low income. It also makes sure that 15% of each supplier’s obligation is used to upgrade more hard-to-reach low-income households in rural areas.
Affordable Warmth Obligation – this provides heating and insulation measures to consumers living in private tenure properties that receive particular means-tested benefits. This obligation supports low-income consumers that are vulnerable to the impact of living in cold homes, including the elderly, disabled and families. This combined with the CSCO will provide around £540m of support per year to low- income households.
In addition, DECC supports collective switching and purchasing schemes for vulnerable customers through the £5 million “Cheaper Energy Together” fund which was launched in
54 Energy Prices, Profits and Poverty
October 2012.235 The Government’s flagship energy efficiency programme, the Green Deal, offers loans for home energy efficiency improvements which are repaid over time through energy bills. The idea is that energy savings will be equal to or exceed the costs of installing the measures. However, the Green Deal will have limited application to fuel-poor households concerned about or unable to take on debt.
Efficacy of fuel poverty policies
111. Expenditure on the Winter Fuel Payment (WFP) far exceeds spend on any other fuel poverty policy, costing an estimated £1.723 billion in 2013.236 It is significantly larger than the ECO. Witnesses have questioned whether this is an effective use of Government funds to tackle fuel poverty. According to Professor Hills, “spending more money on the winter fuel allowance is one of the least effective ways of tackling this problem”237, reflecting the conclusion of the final report that the WFP suffered from “poor targeting and limited value for money from a fuel poverty perspective.”238 British Gas suggested that better targeting of the WFP would enable Government to make a bigger contribution to tackling fuel poverty.239 The National Pensioners’ Convention however supported the continuation of the policy given “excess winter deaths amongst older people and the expected increases in fuel bills.”240
112. Collective switching could be a useful tool in enabling vulnerable customers to get a good energy deal. Ron Campbell, Chief Policy Analyst at NEA, expressed support for the community-based approach of the Government’s collective switching initiatives, although Mervyn Kohler of Age UK noted that individual preferences regarding payment method and type added “extra tiers of complication to a collective arrangement.”241
113. There was widespread agreement that focussing on long-term energy efficiency programmes was the best way to tackle fuel poverty, as opposed to short-term help with rising bills. Professor Hills’ Review identified low energy efficiency as the fundamental cause of fuel poverty, a view reflected in the oral and written evidence of both fuel poverty campaigners and energy companies. Energy efficiency measures were described as a “good national investment” offering value for money in tackling the causes of fuel poverty, while also contributing to decarbonisation objectives.242 This was particularly applicable to work carried out on existing properties:
235 DECC, Collective switching and purchasing, 22 January 2013, www.gov.uk 236 Ev 40 237 Q 309 238 Professor John Hills, Getting the measure of fuel poverty: Final report of the fuel poverty review, CASE Report 72, March 2012 239 Ev 81 240 Ev w7 241 Q 4 242 Q 308 [Professor Hills], Q 317 [Professor Hills]
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In terms of cost-benefit analysis—the benefit you get for each pound spent— renovation and retrofitting is probably much more effective than demolition and rebuilding.243
DECC’s recently published framework for action on fuel poverty highlighted the cost- effectiveness of energy efficiency measures such as low-cost loft and cavity-wall insulation (CWI), but suggested that bill rebates could prove more cost-effective than the more expensive efficiency measures such as solid wall insulation.244
114. We conclude that energy efficiency programmes should be the focus of Government’s fuel poverty policy in order to tackle the long-term root causes of the problem cost-effectively. It is disappointing that so much of current Government fuel poverty policy centres on short-term help with bills when improving the thermal efficiency of UK housing stock should be the priority. We welcome the recent announcement in the Spending Review that the Winter Fuel Payment will no longer be paid to those living in warmer European climates. We recommend that Government considers better targeting of the Winter Fuel Payment through means-testing, considering how savings made could be used to boost investment in energy efficiency programmes. We also recommend that Government reviews the allocation of funds for fuel poverty policies, prioritising energy efficiency initiatives over provision of financial assistance.
Closure of Warm Front (WF)
115. As noted earlier, the closure of Warm Front (WF) in January 2013 marked the first time since 1978 that there would be no Government-funded domestic energy efficiency programme in England.245 By contrast, in other parts of the UK similar schemes continue in operation: the Nest scheme in Wales; the Energy Assistance Package in Scotland, and the Warm Homes scheme in Northern Ireland. The Energy Company Obligation (ECO) is designed to replace WF, however overall expenditure in comparison will be reduced and will derive from levies (see next section and “Use of levies on bills”). Research by the Association for the Conservation of Energy suggested that the total budget reaching fuel- poor households in England had reduced by 26%, while overall spending on energy efficiency programmes in England fell by 44% between 2009 and 2013.246
116. England will be the only country in the UK without a tax-funded energy efficiency programme to address fuel poverty following the closure of Warm Front. We are concerned that there have been such significant reductions in the fuel poverty budget for England at a time when rising energy prices are having an increasingly adverse impact on vulnerable households.
243 Q 309 244 DECC, Fuel poverty: A framework for future action, July 2013 245 Ev 40 Ev 54, Ev w49 246 These figures compare budgets in 2009 to budgets in 2013. Association for the Conservation of Energy, The impact of fuel poverty budgets in England, November 2012
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The Energy Company Obligation (ECO)
117. ECO replaces Warm Front, the Carbon Emission Reduction Target (CERT) and the Community Energy Saving Programme (CESP). ECO therefore takes on the dual objectives of carbon reduction and fuel poverty alleviation. Under the Affordable Warmth and Carbon Savings Communities Obligation (CSCO) components of ECO, approximately £540 million per year will be directed at low-income households. In 2009- 10, CERT, CESP and WF expenditure totalled £1,035 million.247 Witnesses have expressed concern that ECO resources are not sufficient:
Looking at the potential funding that ECO is going to provide for dealing with fuel poverty, it seems to be a disappointingly small total in relation to what we have seen in public expenditure in the past through Warm Front. Indeed, the Government’s own impact assessment, looking at how many people will have been taken out of fuel poverty over the next decade is very, very disappointing—125,000 to 250,000 households. In relation to the target, which is now probably over 6 million households, that is just a drop in the bucket.248
In oral evidence Ron Campbell of NEA maintained that “the £1.3 billion ECO expenditure should be devoted in its entirety to fuel-poverty programmes.”249
118. RWE explained that low-income consumers were unlikely to benefit from the Carbon Emissions Reduction (CERO) component of ECO but that this could be incentivised:
Under the ECO, fuel poor households living in solid-wall and hard to treat properties can access ECO funding under the Carbon Emissions Reduction (CERO) and the Carbon Saving Communities Obligations (CSCO). However, suppliers are obligated to discharge their ECO obligations as cost-effectively as possible, and will seek to maximise the carbon savings from every £ of ECO subsidy provided. As CERO is not focused on fuel poor households, this will almost certainly mean that households that are able to take out a Green Deal loan or can part self-finance will be more attractive to suppliers. This could be remedied by revising the targets and scoring system to compensate for this, while ensuring the overall cost of ECO is not increased.250
119. In the case of Solid Wall Insulation (SWI), an expensive and intrusive process, a high level of subsidy will be required under ECO to encourage take-up.251 Suppliers seeking to fulfil obligations cost-effectively are therefore unlikely to target fuel-poor households, but instead target those customers who can part-finance. The Committee on Climate Change suggested that this could be avoided through greater targeting of the fuel-poor under ECO, for example by prioritising SWI measures in the 1.9 million fuel-poor households that live in solid walled properties.252 As an alternative, Consumer Focus suggested that expensive
247 Ev 40; Association for the Conservation of Energy, The impact of fuel poverty budgets in England, November 2012 248 Q 5 [Mervyn Kohler] 249 Q 7 250 Ev 13 251 Ev w11, Ev 40 252 Ev 40; Committee on Climate Change, Meeting carbon budgets – 3rd progress report to Parliament, June 2011
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measures such as SWI should be publicly funded in order to ensure take-up, while low-cost insulation measures could be funded by ECO.253 In its current form, the ECO is unlikely to provide SWI where it is most needed — in fuel-poor households.
120. We conclude that resources under ECO are insufficient considering the scale of fuel poverty. We recommend that ECO expenditure is devoted primarily to fuel-poor households, and further recommend that Government reconsider how best to incentivise take-up and funding of the most expensive energy efficiency measures such as solid wall insulation.
Rural fuel poverty
121. Age UK stated that rural fuel poverty is “under-resourced” and requires greater attention from Government.254 Rural households are particularly vulnerable to fuel poverty due to off-gas grid areas, the number of solid-walled properties, and lower than average wages. Off-gas grid consumers are subject to higher bills due to reliance on heating oil or Liquid Petroleum Gas (LPG) to heat their homes: as a result, the average off-gas grid bill in 2010 was approximately £2,100.255 One witness expressed concern about the confidential and often uncompetitive pricing of LPG and the difficulties in switching, describing the market as “effectively unregulated”.256 The Committee investigated this issue as part of its inquiry Fuel poverty in the private and off-grid sectors. In a letter in July 2012 to Minister of State Gregory Rt Hon. Barker MP, we outlined our concerns about off- gas grid consumers and questioned the effectiveness of self-regulation in the domestic heating oil market, suggesting that Ofgem could have a role to play.257 These concerns still stand, and we urge Government to review regulation of the domestic heating oil and LPG market, as well as extending support for fuel-poor households reliant on these fuels.
122. Witnesses have questioned whether ECO resources will be able to address rural fuel poverty. Ron Campbell of NEA described the 15% “rural safeguard” as part of ECO’s CSCO as a “fairly modest” ambition, equating to approximately £29 million per year.258 Consumer Focus and FPAG suggested that the lack of heating cost reduction, “hard-to- reach” and “hard-to-treat” targets in ECO could mean that rural fuel-poor households would lose out compared to previous schemes.259 Mervyn Kohler of Age UK noted that “a special focus on rural fuel poverty issues might be helpful as part of a fuel-poverty strategy”.260 Hastoe Housing drew attention to the lack of competitive energy deals for those on pre-payment meters or without internet access, and suggested that energy tariffs be reviewed to ensure that low-income, rural households had access to the best deals.261
253 Ev 54 254 Ev 24 255 Ev w49 256 Ev w5 257 Letter to Minister of State Gregory Barker MP from Tim Yeo, Chair of the Energy and Climate Change Committee, 4 July 2012 258 Q 7 259 Ev 54, Ev w49 260 Q 7 261 Ev w20
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Concerns regarding the charges faced by pre-payment consumers were also highlighted by Barnado’s, which called for improved access to direct debit facilities for families and a review of price bands for pre-payment meters. The charity also cited the introduction of keypads to pre-payment meters in Northern Ireland as an example of how costs could be brought down through innovation and regulation.262
123. We conclude that further and more specialised resources are needed to tackle fuel poverty in rural areas, in particular to address the difficulties experienced by off-gas grid customers. Ofgem and DECC should consider further measures as part of RMR and the Fuel Poverty Strategy to ensure that pre-payment customers and those without internet access are able to obtain best market deals.
Use of levies on bills
124. Environmental and fuel poverty policies may be funded from tax or through levies on bills (see table 10). In our earlier discussion of prices, we examined the cost of UK/EU policy as a component of energy bills (see paragraph 14). Here we consider in more detail the extent and impact of the use levies on consumer bills to fund policy initiative, with particular reference to fuel poverty.
Table 10: Expenditure on fuel poverty and environmental programmes Programme Who pays? Expenditure
Warm Front (England) Taxpayers £370 million (2009/10) CERT Consumers263 £564 million (2009/10) CESP Consumers £101 million (2009/10) ECO Affordable Warmth Consumers £466 million (2013) + Carbon Saving Communities Obligation Winter Fuel Payments Taxpayers £1.723 billion (2013) Cold Weather Payments Taxpayers £228 million (estimated) (2013) Warm Home Discount Consumers £237 million (2013) EU Emissions Trading Consumers £700 million264 System Carbon Floor Price Consumers £900 million (2013-14)265 Renewables Obligation Consumers £2,156 million (2012/13) (budget available under the levy control framework) Feed-in Tariffs for Consumers £196 million (2012/13) small-scale renewables (budget available under the levy control framework) Contracts for Difference Consumers Not yet introduced Capacity payments Consumers Not yet introduced
262 Ev w64 263 Consumers may be domestic or non-domestic 264 Note that firms outside the UK may participate in UK auctions 265 Figures on a national accounts accrual basis
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Renewable Heat Taxpayers £133 million (2012/13) Incentive CCS competition Taxpayers £1 billion Sources: EV 40 (NEA); Control Framework for DECC levy-funded spending; HM Treasury, Budget 2013; Office for Budget Responsibility, Economic and fiscal outlook, March 2013
125. According to Ofgem, environmental charges currently account for around 11% (£59) of average annual electricity bills and 6% (£49) of average annual gas bills.266 DECC analysis suggests that energy and climate change policies make up approximately 9% (around £112) of the average annual dual fuel bill.267 However this is set to rise sharply in future years, with costs falling largely on the wholesale electricity price. DECC estimates that its policies will add to 33% to the average electricity price paid by UK households in 2020 and 41% in 2030.268 This significant increase is of particular concern to those households, often fuel-poor, that rely on electric heating systems.269 The Secretary of State explained that the Government’s assumption was that companies would “pass on these costs the way they are levied, typically on the basis of relevant units of energy supplied.” Although it was up to energy companies to decide how to recoup costs, Government expected approximately one third of policy costs to be passed on directly to household bills. Approximately two-thirds of policy costs would fall on non-domestic consumers, reflecting the share of energy consumption across these consumers. However, the majority of costs are still likely to be passed through to domestic consumers through higher prices for services and products. These extra costs could also impact on the competitiveness of UK exports. Mr Davey also explained that a policy such as ECO, which applied only to households, would be funded by domestic consumers alone.270 A breakdown of the costs of each levy funded programme can be seen in table 3 (paragraph 14).
266 Ofgem, Updated household bills explained, Factsheet 98, 16 January 2013 267 DECC, Estimated impacts of energy and climate change policies on energy prices and bills, March 2013 268 As above 269 Ev 26 270 Letter from Secretary of State Edward Davey to the Committee, 27 June 2013
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126. Many witnesses were concerned about the impact of levies on the fuel-poor and expressed a preference for taxpayer-funded environmental and social programmes.271 Consumer Focus explained:
The choice of whether to use bills or taxes to fund the decarbonisation of our energy infrastructure matters because it greatly affects the distributional impact of where these costs fall. In simple terms, the poorest households pay proportionately more when measures are added to their utility bills. In the UK, the proportion of income spent on energy decreases as income increases, while the proportion of income spent on direct taxation increases as income increases. Public finances are extremely difficult, but we think that greater consideration must be paid to the least regressive ways of paying for low carbon infrastructure.272
Ron Campbell (NEA) asserted that “the levy is regressive in its function [...] because it does not take any account of [their] ability to pay” in contrast to tax-funded programmes.273 Jan Rosenow and Dr Nick Eyre, of the Environmental Change Institute at the University of Oxford, stated that while revenue-raising from levies could be considered “regressive”, the provision of levy-funded measures such as CERT and CESP could have a positive impact in addressing fuel poverty. Dr Eyre stated that it was possible “for revenues that are raised in a regressive way to be used in a progressive way and for the overall balance to be positive” but noted that this was not the case with environmental levies which implied “all the regressive effects and none of the progressive ones.”.274 Professor Hills of London School of Economics stated that the impact of levies was dependent on how the funds were used. Careful targeting of revenues to low-income households could result in a positive impact and avoid a situation “where people on low incomes are paying higher fuel bills in order to subsidise the energy efficiency of people on high incomes”.275
127. The Secretary of State Edward Davey explained how the use of levies on bills had been decided at Government level:
I think the big debates on that happened both in the last Government and the early stages of this Government when they were doing the spending review and there was a decision that they would continue with these levies on consumer bills.276
We note that Mr Davey did not offer an explanation as to the reasons behind these decisions. The Secretary of State went on to suggest there was a case for the levy-funded approach since it could encourage more efficient and competitive delivery of programmes from energy companies.277 Gareth Baynham Hughes, DECC, explained that this reflected an “assumption built into the Hills review” regarding investment in and delivery of energy efficiency programmes. We note however that Hills’ final report stated that “funding from
271 Ev 1, Ev 24, Ev 40, Ev 54, Ev 101, Ev w49 272 Ev 54 273 Q 22 274 Q 313 275 Q 313 276 Q 440 277 Q 440
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energy consumers can increase the fuel poverty gap of those who do not benefit from them”.278 We have noted, in this report (see paragraph 17 to 20 for a discussion of energy company cost-efficiency) and in out report on Consumer Engagement with Energy Markets that the ability of energy companies to deliver cost-effectively is far from proven: and that supplier operating costs were increasing annually, with little evidence of efficiency and operational savings. This leads us to question whether “competitive pressures” on energy companies will indeed lead to a more cost-effective delivery of ECO.279
Ways to protect the fuel-poor from impact of levies
128. Witnesses have suggested a number of policy initiatives that could help protect the fuel-poor from the impact of levies on energy bills.
Charging per unit of consumption
129. Consumer Focus and Age UK recommended that environmental and social levies were applied on a per-unit of consumption basis (per KWh) rather than a per-household basis through the standing charge. They suggested that this would be in line with the “polluter pays” principle280 and help to protect fuel-poor households which, on average, consume less energy.281 Consumer Focus stated that its discussions with energy companies suggested that CERT and CESP levies were applied on a per-household basis, and this was likely to be the case with ECO also.282 The Secretary of State noted that the Government assumption was that these costs were passed on “typically on the basis of relevant units of energy supplied.” (see paragraph 125).283 However, witnesses have pointed out that it is difficult to establish precisely how levies are distributed across standing or other fixed charges and unit costs:
Some of the cost will be passed on a per unit basis and some of that will be passed on in the standing charge, but we have no insight into what the proportions of that will be and how much is on the unit and how much is on the standing charge.284
130. Witnesses also pointed out that a per-unit approach would be detrimental for some of the most vulnerable households in fuel poverty with unavoidably high levels of energy consumption — such as older people and those who needed to spend most of their time at home due to a medical condition or disability. Professor Hills suggested that a “dual strategy” was needed involving emphasis on per-unit charging combined with extra measures for fuel-poor households in low-efficiency properties.285
278 Professor John Hills, Getting the measure of fuel poverty: Final report of the fuel poverty review, CASE Report 72, March 2012 279 Q 440 280 The notion that those with higher carbon footprints should pay more towards decarbonisation 281 Ev 54, Ev 24 282 Ev 54 283 Letter from Secretary of State Edward Davey to the Committee, 27 June 2013 284 Q 313 [Jan Rosenow] 285 Q 313
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131. The current tariff structure allows suppliers to reduce energy rates once consumption exceeds a certain threshold.286 Hastoe Housing Association described how some of the residents living in its most energy efficient homes were paying higher than average per KWh rates due to low consumption. It called for “a reform of the current system where heavy users pay a reduced charge per kWh and low users pay a higher than average charge per kWh.”287 A number of commentators also supported a move toward a single unit price with no standing charge in order to provide greater price transparency and comparability.288 We recommended Ofgem consider regulating or abolishing standing charges in our Consumer Engagement report. In its response, the regulator stated it was not “ruling out proposing further measures to improve the functioning of the retail energy markets” following robust analysis and assessment.289
Alternative tariff structures
132. Alternative tariff structures, such as rising block tariffs or tariffs partly exempt from levies, could help to address fuel poverty. 290 FPAG and Consumer Focus recommended the introduction of a “protected block of consumption” on energy bills on which no levies were raised, with costs recovered above a certain level of consumption. This protected block would be available to all consumers and would provide an incentive for consumers to use less energy as well as protecting the fuel-poor.291
133. Others were concerned about the possible use of rising block tariffs as a mechanism to alleviate fuel poverty. DECC highlighted that such tariffs are likely to have an adverse impact on high-consuming fuel-poor households, and are also in conflict with Ofgem’s RMR proposals to eliminate multi-tier tariffs.292 EAS suggested that rising block tariffs would leave elderly and vulnerable consumers “frightened to exceed their agreed allowance”.293 A simpler approach was proposed by the NEA through introduction of a “universal social tariff to households meeting the pre-defined eligibility criteria.”294
Reinvesting revenues in energy efficiency programmes
134. Some witnesses expressed support for the Energy Bill Revolution campaign to reinvest carbon tax receipts from the EU Energy Trading System (EU ETS) and Carbon Price Floor
286 Ev w67 287 Ev w20 288 Ev 26, Ev 52 289 Energy and Climate Change Committee, Fifth Report of Session 2012–13, Consumer Engagement with Energy Markets: Government and Ofgem Responses to the Committee’s Fifth Report of Session 2012–13, HC 1036 290 Rising block tariffs employ variable rates depending on consumption. A reduced price is payable for consumption below a defined threshold 291 Ev w49 292 Energy and Climate Change Committee, Fifth Report of Session 2012–13, Consumer Engagement with Energy Markets: Government and Ofgem Responses to the Committee’s Fifth Report of Session 2012–13, HC 1036; Q 441 [Secretary of State Edward Davey MP] 293 Ev w17 294 Ev 40
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(CPF)295 into energy efficiency and fuel poverty programmes.296 Audrey Gallacher, Director of Energy at Consumer Focus, argued that reinvesting revenue generated by the CPF into energy efficiency measures could “take nine out of 10 homes out of fuel poverty” as well as reducing carbon emissions.297 Fuel poverty groups expressed dismay that while energy intensive industries would receive compensation for the impact of EU ETS, carbon price floor and CfD policies,298 no support would be available for domestic fuel-poor consumers.299 When questioned as to the viability of using carbon tax receipts in this way, the Secretary of State responded that it was an unlikely prospect:
If it is a theoretical question, [...] “Is it possible”, I think it is probably possible. Whether it is likely I think is really the question. I do not think it is very likely. Successive Governments and successive Chancellors have taken the Treasury view in these types of things that hypothecation is not the right way to go. There are some fights one has in Government because you think you can win them and there are the fights that you think, “Maybe that is quite a tough call”. While I have great sympathy with the way the Energy Bill Revolution make their arguments and one can understand the power of their argument, they are up against decades, if not centuries, of Treasury orthodoxy on hypothecation.300
We note however that the Australian and French Governments have used carbon tax revenues in this way to provide support measures for households.301
Government spend on fuel poverty
135. A number of witnesses cited research by the Association for the Conservation of Energy, which suggested that overall spend on energy efficiency programmes in England had fallen by 44%. The same research showed that the budget targeted at fuel poverty in England would fall from £1.19m in 2009 to £879 million in 2013.302 This underlines our concern regarding energy efficiency resources in England (see paragraph 115). In oral evidence, we questioned the Secretary of State regarding the cut in fuel poverty spend shown in the Department’s Annual Report and Accounts: £319m was spent in 2010-11, while £97m was spent in 2011-12.303 The Secretary of State maintained that “if you add both taxpayer-funded and levy payer-funded, the overall spending on fuel poverty programmes has increased during the spending review period.”304 A recent parliamentary written answer confirmed that estimated spend in 2014-15 would be greater than spend in
295 The Carbon Price Floor (CPF) came into effect on 1 April 2013. The CPF is designed to provide an incentive to invest in low-carbon power generation by providing greatersupport and certainty to the carbon price in the UK’s electricity generation sector 296 Ev w34, Ev 54, Ev w49, See www.energybillrevolution.org 297 Q 43 298 DECC, Estimated impacts of energy and climate change policies on energy prices and bills, March 2013 299 Ev w49, Ev 54 300 Q 467
301 Ev 54 302 These figures compare budgets in 2009 to budgets in 2013. Association for the Conservation of Energy, The impact of fuel poverty budgets in England, November 2012 303 DECC, Annual report and accounts 2011-12, 11 July 2012, p122 304 Q 449
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2010-11 when levy-funded programmes are included.305 However, we note that tax-funded expenditure has decreased significantly following the closure of Warm Front and that focus has shifted to levy-funded schemes paid for by consumers, namely ECO and WHD. Witnesses concerned by reduced tax-funded Government spending in this area also pointed out that the impact of welfare reform and the Levy Control Framework on fuel poverty had yet to be assessed by Government.306
136. We conclude that the increasing use of levies on bills to fund energy and climate policies is problematic since it is likely to hit hardest those least able to pay. We note that public funding is less regressive than levies in this respect.
137. We are particularly concerned by the significant projected increase in the wholesale electricity price and how this will impact on households reliant on electric heating. It is clear that vulnerable and fuel-poor consumers require protection from the impact of rising bills and extra support to ensure affordable warmth in their homes. We therefore recommend that Government consider introducing a “protected block of consumption” on bills exempt from levies, as proposed by FPAG and Consumer Focus.
138. We note that under the current tariff structure, energy users are effectively penalised for low consumption, with reduced rates for high energy consumption. This is at odds with both energy conservation and fuel poverty aims. We therefore recommend that the Government and Ofgem consider how tariffs could be restructured to ensure that energy conservation is incentivised, while ensuring that high consuming vulnerable consumers are protected.
305 HC Written Answers, 18 June 2013, Column 623W. Estimates expressed in 2012 constant prices. 306 Ev w31, Ev w49, Ev 54
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Delivery of fuel poverty policies
Use of targets
139. Government is subject to a fuel poverty target to ensure that by November 2016 “as far as reasonably practicable persons in England or Wales do not live in fuel poverty.”307 There was consensus among many witnesses that Government would not achieve this target.308 The IPPR noted that ECO, as the main policy instrument for addressing fuel poverty, looked set to “fall woefully short of addressing the government’s legally binding target to eliminate fuel poverty by 2016.”309 Citizen’s Advice stated that “without a significant increase in Government spending on the energy efficiency of fuel poor homes the number households in fuel poverty is as likely to increase by 2016 as be eliminated.”310 Given reduced spending on energy efficiency programmes, some organisations have questioned whether Government is indeed doing all that is “reasonably practicable” to meet the target (see paragraphs 90 and 91).
140. The usefulness of such an elimination target can therefore be questioned. The interim target to eliminate fuel poverty by 2010, introduced under the Fuel Poverty Strategy, was also missed.311 Professor Hills expressed a preference for short-term, adaptable targets:
My advice would be that there probably should be a system of rolling targets, taking account of changing situations, that keeps officials’ and Government’s nose to the grindstone in delivering the greatest possible action to deal with a problem of this kind. Where I would probably part company from the original specification in the Act would be the use of the word “elimination.” [...] I would much rather see meaningful targets that lead to a more rapid pace of change, directed at what can be done over the next 10 years, than to focus on something in 16 years’ time [...].312
Mervyn Kohler of Age UK noted that targets would only be useful if they could ensure that the “trajectory [for fuel poverty] is downwards instead of remorselessly upwards, as it has been for the last seven or eight years.”313
141. Government has acknowledged that an elimination target may not represent the best approach for tackling fuel poverty and has set out plans to establish a new target based on the number of households living in inefficient properties.314 This target will be set through secondary legislation, although there will be a statutory requirement in primary legislation for the Secretary of State to adopt a strategy to meet the target. DECC stated that “detailed
307 Warm Homes and Energy Conservation Act 2000 308 Ev w7, Ev 1, Ev 40, Ev w34, Ev 54, Ev w49 309 Ev w11 310 Ev 1 311 Ev 40 312 Q 298 313 Q 40 314 DECC, Fuel poverty: A framework for future action, July 2013
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proposals for consultation...on the form, date and level of target” will follow in due course.315
142. We agree with Government that an elimination target is not the best approach for tackling fuel poverty. The importance of a target lies in its ability to create political momentum and measure the effectiveness of policy. The current target has failed to achieve these objectives. We therefore support Government proposals to introduce a new target which focuses on improving the energy efficiency of fuel-poor households. We look forward to hearing further details on the form, date and level of the proposed target. Government should also consider whether further short-term, fuel poverty targets which can adapt to changing policy contexts could also be introduced as part of its forthcoming fuel poverty strategy.
Role of energy companies
143. Some have questioned whether energy companies are the best delivery agent for fuel poverty policies such as ECO. It was suggested that large energy companies may not know a great deal about local housing stock.316 In addition, a lack of consumer trust toward energy companies could hinder effective delivery.317 The National Pensioners’ Convention also suggested a potential conflict of interest or “underlying disinterest” for energy companies in encouraging customers to reduce energy usage.318 SSE expressed concern that suppliers were required to “seek information about their customers that are beyond the normal customer/commercial company relationship, such as benefits data and health conditions.”319 The company therefore proposed that a “central agency” be set up to match consumers with support. In the longer term, an energy company obligation may not be the best way to address fuel poverty.320
Community-based approach
144. A community-based approach to tackling fuel poverty could overcome some of these barriers. NEA suggested this could involve the following elements:
Practical heating and insulation improvements
Energy, money and fuel debt advice
Assistance in claiming full benefit entitlement
Community-based collective switching.321
315 DECC, Fuel poverty: A framework for future action, July 2013. An amendment was passed in the House of Lords at Committee stage of the Energy Bill on 11 July, requiring the Secretary of State to set a fuel poverty objective, target date and strategy for meeting the objective. 316 Q 321 [Dr Nick Eyre] 317 Ev 40 318 Ev w7 319 Ev 4 320 Q 332 [Dr Nick Eyre] 321 Ev 40
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Mervyn Kohler of Age UK stressed the benefits of a community approach involving local authorities in terms of efficient delivery and greater community engagement and confidence.322 Consumer Focus also endorsed an area-approach:
Area approaches that use door knocking and extensive community outreach, coupled with scaled up installation programmes, have many benefits. They ensure that the hardest to reach are reached, they encourage take-up through ‘word of mouth’ communication of the benefits, they facilitate involvement from local third sector bodies and they realise considerable cost efficiencies through concentrated delivery of measures. Consumer Focus Scotland commissioned research that highlighted the benefits of area approaches which helped influence the Scottish Government to shift resources towards this approach.323
145. DECC’s framework for action on fuel poverty recognised the effectiveness of area- based approaches, but suggested that “the clustering of fuel poverty in a specific area is uncommon.” A street-by-street approach could therefore result in many non fuel-poor households receiving support. Given the limited resources available, Government suggested that using “benefit proxies” could be a more efficient means of targeting support.324
146. In oral evidence, Jan Rosenow and Dr Nick Eyre of the University of Oxford agreed that an area-based approach which sought out low-income, low-efficiency areas was likely to achieve a higher targeting efficiency.325 According to the Local Government Association (LGA), over half of all energy efficiency programmes were delivered by councils. It maintained that locally-designed schemes were more effective than national definitions and suggested that local councils were “best-placed to broker relationships and facilitate data-sharing across a range of partners.”326 The LGA recommended that local councils were granted access to the ECO brokerage scheme without having to acquire Green Deal provider status, in order to support fuel poverty schemes at a local level.327 Ofgem agreed there was a “key role for face to face advice provision by trusted intermediaries” in supporting vulnerable consumers, citing the Energy Best Deal campaign delivered in conjunction with Citizen’s Advice.328 Ron Campbell of NEA noted that this was a positive development but suggested that it should be extended in scope to provide a more comprehensive service offering advice on debt and energy efficiency grants as well as switching.329
147. The Energy Savings Advice Service and Big Energy Saving Network, as highlighted by the Secretary of State in oral evidence, are a step in the right direction but further resources
322 Q 6 323 Ev 54 324 DECC, Fuel poverty: A framework for future action, July 2013 325 Q 320 326 Ev w31 327 Ev w31 328 Ev 123 329 Q 3
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will be needed to reach the most vulnerable fuel-poor households.330 We conclude that energy companies are not the best delivery agent for fuel poverty policies due to low levels of consumer trust and lack of local knowledge. In the longer term, policy instruments such as the Energy Company Obligation may not therefore be the most effective means of addressing fuel poverty. Local councils and voluntary organisations may have greater knowledge of property and occupant characteristics, leading to a more effective targeting of resources. We therefore recommend that Government considers how to maximise the involvement of councils, voluntary sector organisations and other trusted intermediaries as part of its new fuel poverty strategy. We also recommend that Government considers extending access to the ECO brokerage scheme to local councils, in order to ensure finance for locally-led energy efficiency projects.
330 Q 459
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5 Conclusion
148. In chapter two we concluded that wholesale costs can be expected to continue to rise in the short to medium term driven by the rising price of gas. We identified that customers’ bills are made up of a variety of different components. Most of these constitute costs (the wholesale price of energy and operating costs), including the cost of implementing energy and climate change policies, which energy companies pass through to customers. Profits also form part of energy bills but, as we discussed in chapter three, the six largest energy companies in the UK are very complex with several different arms to their business. When reporting their overall profits they include all these different business arms. This makes it difficult to determine the profits of the energy supply companies and see how this impacts upon energy prices. It has not been possible for us to determine with certainty the level of energy company profit margins. We therefore call for more transparency and more robust data to enable an accurate assessment of profitability to be made.
149. Attempts to improve clarity over energy company profits have proved challenging. Both Ofgem’s Consolidated Segmental Statements and Supply Market Indicators have worked to muddy the waters. That a forensic accountant was required to help Ofgem understand the statements is illustrative of the complexity in determining profits. The average consumer has little hope. That Ofgem has not taken up BDO’s recommendations or listened to criticism over SMIs is astonishing and lays it open to criticism that is unwilling to use the teeth it has. It is time for Ofgem to take decisive action to improve transparency and competitiveness in the retail and wholesale markets taking full advantage of both EU and UK legislative powers.
150. The trend of rising prices that we have noted will exacerbate fuel poverty. It is disappointing that Government has not been quicker to respond to the Hills review to set out the full implications for policy of a new definition of fuel poverty. In the meantime the situation for the most vulnerable worsens while some fuel poverty policy programmes are in a state of hiatus. At the same time there is a reduction in the money available for fuel poverty, and a shift, in England at least, away from public spending towards levies – adding further burdens on consumer bills.
151. We have noted that tax-funded public spending is a less regressive mechanism than levies, and that the impact of levies on the bills of the fuel poor is perverse when they will derive no direct benefit. Shifting the emphasis from levies to taxation would help protect vulnerable households. There is no widespread understanding by consumers of how much of their bills are made up of levies. As we noted in our Consumer Engagement report inconsistent and, in some case, inaccurate media reporting serves to further undermine public trust in energy suppliers. We have called for an honest conversation about the fact that energy bills are highly likely to continue to rise. Government also needs to be in the lead in ensuring that consumers understand its decision to fund policy in this way, and of what the breakdown of these costs within bills are. This can only enhance transparency.
152. We strongly believe that the gains in transparency and associated public confidence and trust far outweigh the cost of reform. It is clearly in everyone’s interest including the energy companies to improve understanding of energy companies profits. It will be difficult to deliver the reform our energy system, increasing efficiency, reducing demand,
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investing in infrastructure, whilst meeting our statutory obligations to carbon and fuel poverty reduction, without the support of consumers. The affordability of energy is a matter of great concern to most consumers, not just those that are technically fuel poor. Governments, the regulator and energy companies need to do more to promote accurate understanding of energy prices.
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Conclusions and Recommendations
Energy prices
1. Energy bills are rising and are likely to continue to rise in the future. The wholesale price of fuel has been the largest contributing factor, driven by rising global gas prices. Several other factors are also contributing to price rises including the need to invest and finance UK’s electricity and gas network and energy and climate change policies. The extent to which energy supply companies are actively working to reduce their operating costs remains unclear. (Paragraph 20)
2. We welcome Ofgem’s and the Government’s proposals to ensure energy companies to improve the way they communicate with their customers. In addition to their proposals we recommend that the regulator compel energy companies to:
a) Standardise the presentation of their bills to make it easier to understand bills and compare prices (for example on a price comparison website);
b) Identify the various components which make up the costs of the bill (i.e. wholesale price of fuel, costs of supply (i.e. transmission, distribution and metering), the costs of UK/EU policy (including support for low-carbon/renewables and energy efficiency schemes) and company margins (i.e. operating costs and profit);
c) Express price changes in pounds and pence as well as percentages. (Paragraph 25)
3. We are disappointed at the regulator’s slow progress on requiring energy companies to improve their transparency and communication with their customers. We hope that Ofgem will use its existing powers to ensure that its RMR reforms are implemented. If the requirements proposed under Ofgem’s RMR are not in place by the August 2013 as promised, we recommend that the Government stand ready to use any statutory powers to compel greater transparency from energy companies, early in 2014. We believe that this intervention should deliver the desirable long- term aim of incentivising companies to provide more competitive products for consumers. It should not be considered a one-off intervention to reduce energy company profits. (Paragraph 26)
4. We also repeat the recommendation made in our Consumer Engagement report that DECC should lead a full and frank conversation about the contribution that consumers are being expected to make towards ensuring we have safe, secure and affordable energy supplies in future. DECC should set out a detailed strategy and programme for action over the next two years. This should include how it will engage with the public on these issues in a meaningful way. (Paragraph 27)
5. Despite serious shortfalls in the way energy companies communicate with their customers, we are pleased to see that they have started to make some progress on improving how they communicate with their customers. It is clear that some are doing better than others. We commend those companies, including British Gas and EDF Energy, who are developing innovative new ways of communicating complex information to their customers. We are concerned, however, that their efforts are still
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falling far short of what is required to increase transparency and improve consumer trust. It is clear that meaningful improvements are unlikely to be achieved without regulatory intervention. (Paragraph 29)
6. We are disappointed that energy supply companies have not gone to greater lengths to explain to their customers the reasons behind energy price rises. It should come as no surprise to energy companies that poor communication on their part has resulted in deep mistrust from their customers. We welcome the industry’s acknowledgement that it has failed to act and needs to simplify and improve bills including explaining the individual components of a bill and the reasons for the upward pressure on prices. (Paragraph 35)
7. We recommend that Ofgem also include ‘profit margin’ and ‘rate of return on capital’ (because excessive profit margins are a symptom of poorly functioning markets) in the above list of metrics which would help determine whether the supply market was competitive. (Paragraph 40)
8. We conclude that the small level of switching by customers between energy suppliers suggests the retail market is not as competitive as it could be. There is, however, insufficient data to determine accurately the actual level of competition in the retail market. We repeat our recommendation that when Ofgem implements its final Retail Market Review measures, it should publish its targets for improvements in the market as a result of these measures and the criteria it will use to judge the success of the measures. Going forward, Ofgem should also publish an annual assessment of the effect those measures are having on competition and consumer engagement. (Paragraph 42)
Profits
9. We understand that there may be difficulties in getting large vertically integrated energy companies to report their trading activities especially if they are foreign owned or based overseas. However, we believe that the increase in transparency and associated consumer trust clearly justifies including trading activities in the statements. We recommend that Ofgem require the big six to include trading activities in the statements. There is an opportunity for energy companies to make reputational gains by setting an example of best practice. In the context of low consumer confidence, we hope that energy companies will see the benefits of increased transparency. (Paragraph 62)
10. We believe that obtaining an independent opinion as opposed to requiring an audit of the statements is unsatisfactory because it does not provide a sufficient level of assurance to bolster trust in energy companies. The potential cost and inconvenience to the large vertically integrated businesses would be eclipsed by the gains in confidence an audit would bring. We recommend that Ofgem require the statements to be audited. (Paragraph 65)
11. We note that Scottish Power recently changed its financial reporting period to align with the majority of companies. We believe that the costs and inconvenience to SSE to change its year end would be outweighed by the gains in comparability across the different statements. We recommend that Ofgem require SSE to change its financial
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reporting period to align with the other large vertically integrated energy companies. (Paragraph 67)
12. We reject Ofgem’s assertion that most of BDOs recommendations would put unnecessary burdens on the big six. The impact of BDO’s recommendations should be considered as a package We believe that taken as a whole, the benefits of BDOs recommendations – in terms of improvements to transparency and comparability of the statements and associated improvements in consumer trust – significantly outweigh any burdens on the six largest vertically integrated energy companies. We acknowledge that there will be additional costs involved with implementation of BDO’s recommendations, but we believe that the benefits in terms of increased transparency and competition, and the potential downward pressure on prices that may result, justifies the expense. (Paragraph 70)
13. We recommend that Ofgem should require the six largest vertically integrated companies to implement BDO’ recommendations 1 (publishing statements to the same year-end), 2 (independent auditor opinion on statements), and 4(reporting of trading function results). We also encourage Ofgem to consider requiring implementation of BDO’s recommendations in full and to publish, in its response to this report, its analysis of the cost to energy companies of full implementation. We also recommend that Ofgem undertake further work to assess current transfer pricing policies. (Paragraph 71)
14. We believe that the Supply Market Indicator is a useful tool, for assessing the supply margin of the big six’s retail business. The disagreements between Ofgem and the energy companies over the figures, played out in the media, are deeply unhelpful and only work to erode public trust in the companies and confidence in the regulator. Companies should engage constructively in improving the SMI. We recognise the methodological concerns and recommend that Ofgem actively review the methodology and improve it so that the SMI more accurately reflects the actual activities of energy companies. (Paragraph 77)
15. We recommend that the Government ensure Ofgem takes full advantage of these new REMIT powers. (Paragraph 79)
16. Improving wholesale market competitiveness will be vital in ensuring customers are paying a fair price for their energy. We are astonished at how long it has taken Ofgem to act since it first identified this as an issue in 2008. The relatively light touch approach favoured by Ofgem has failed to deliver the changes required to improve competition. We recommend that urgent intervention is required to resolve this problem. Ofgem needs to implement its proposals to improve liquidity as soon as possible taking a more assertive approach than it has in the past. (Paragraph 87)
Fuel Poverty
17. We conclude that the focus on low-income under the proposed LIHC indicator, by reference to the official poverty line, ensures a more accurate identification of fuel- poor households. The use of a ‘fuel poverty gap’ is welcome in giving a measure of the severity of the problem faced by households as energy prices continue to
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increase. However, we are concerned by the use of median national spend on fuel to determine “high costs” within the indicator. It is clear that fuel costs can be below the median and yet still remain unaffordable. If the median national spend is high it may not provide a true indication of affordability. We recognise that consumers who are paying the median could also be finding their energy bills unaffordable, even if they are not classed as fuel-poor. We recommend Government modifies the proposed definition to better reflect affordability in the context of low-income households by introducing a link between the income threshold and the energy costs threshold within the new indicator. (Paragraph 100)
18. We welcome Government’s commitment to monitor the number of fuel-poor households living in E, F and G-rated properties, and recommend that Government use this information to help focus policy on improving some of the UK’s most inefficient housing stock. (Paragraph 101)
19. We are alarmed by the reported lack of Government engagement with input from consultees during the Review process, in particular with regard to recommendations from the Government’s own statutory advisory body (Fuel Poverty Advisory Group). Government has not modified the LIHC indicator, despite the fact that two thirds of respondents were opposed to the use of the national median to determine “high costs”. We seek assurances that DECC will take full account of stakeholder concerns when formulating the new fuel poverty strategy. (Paragraph 102)
20. We welcome Government’s recent commitment to consider extending the use of data- sharing to ensure the most efficient and cost-effective delivery of fuel poverty policies. We further recommend that Ofgem considers introducing a licence condition to ensure that energy companies share data on household energy consumption and spend with Government, in order to facilitate identification of fuel-poor households. (Paragraph 106)
21. We conclude that while an accurate definition of fuel poverty is important, the Government has been unacceptably slow to respond to the Hills Review and take action to stem rising fuel poverty. We are concerned that fuel poverty policy has effectively been frozen at a time when significant energy price rises have made energy costs increasingly unaffordable for vulnerable and low-income households. We welcome the recent publication of the Government’s framework for action on fuel poverty which will underpin the Government’s fuel poverty strategy when it is introduced. It is imperative that the introduction and implementation of the strategy, expected at the end of this year, is not delayed any further. For Government to have done all that is reasonably practicable to tackle fuel poverty, the new fuel poverty strategy should be published and implemented as an urgent priority. (Paragraph 109)
22. We conclude that energy efficiency programmes should be the focus of Government’s fuel poverty policy in order to tackle the long-term root causes of the problem cost-effectively. It is disappointing that so much of current Government fuel poverty policy centres on short-term help with bills when improving the thermal efficiency of UK housing stock should be the priority. We welcome the recent announcement in the Spending Review that the Winter Fuel Payment will no longer be
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paid to those living in warmer European climates. We recommend that Government considers better targeting of the Winter Fuel Payment through means-testing, considering how savings made could be used to boost investment in energy efficiency programmes. We also recommend that Government reviews the allocation of funds for fuel poverty policies, prioritising energy efficiency initiatives over provision of financial assistance. (Paragraph 114)
23. England will be the only country in the UK without a tax-funded energy efficiency programme to address fuel poverty following the closure of Warm Front. We are concerned that there have been such significant reductions in the fuel poverty budget for England at a time when rising energy prices are having an increasingly adverse impact on vulnerable households. (Paragraph 116)
24. We conclude that resources under ECO are insufficient considering the scale of fuel poverty. We recommend that ECO expenditure is devoted primarily to fuel-poor households, and further recommend that Government reconsider how best to incentivise take-up and funding of the most expensive energy efficiency measures such as solid wall insulation. (Paragraph 120)
25. In a letter in July 2012 to Minister of State Gregory Rt Hon. Barker MP, we outlined our concerns about off-gas grid consumers and questioned the effectiveness of self- regulation in the domestic heating oil market, suggesting that Ofgem could have a role to play. These concerns still stand, and we urge Government to review regulation of the domestic heating oil and LPG market, as well as extending support for fuel-poor households reliant on these fuels. (Paragraph 121)
26. We conclude that further and more specialised resources are needed to tackle fuel poverty in rural areas, in particular to address the difficulties experienced by off-gas grid customers. Ofgem and DECC should consider further measures as part of RMR and the Fuel Poverty Strategy to ensure that pre-payment customers and those without internet access are able to obtain best market deals. (Paragraph 123)
27. We conclude that the increasing use of levies on bills to fund energy and climate change policies is problematic since it is likely to hit hardest those least able to pay. We note that public funding is less regressive than levies in this respect. (Paragraph 136)
28. We are particularly concerned by the significant projected increase in the wholesale electricity price and how this will impact on households reliant on electric heating. It is clear that vulnerable and fuel-poor consumers require protection from the impact of rising bills and extra support to ensure affordable warmth in their homes. We therefore recommend that Government consider introducing a “protected block of consumption” on bills exempt from levies, as proposed by FPAG and Consumer Focus. (Paragraph 137)
29. We note that under the current tariff structure, energy users are effectively penalised for low consumption, with reduced rates for high energy consumption. This is at odds with both energy conservation and fuel poverty aims. We therefore recommend that the Government and Ofgem consider how tariffs could be restructured to ensure
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that energy conservation is incentivised, while ensuring that high consuming vulnerable consumers are protected. (Paragraph 138)
30. We agree with Government that an elimination target is not the best approach for tackling fuel poverty. The importance of a target lies in its ability to create political momentum and measure the effectiveness of policy. The current target has failed to achieve these objectives. We therefore support Government proposals to introduce a new target which focuses on improving the energy efficiency of fuel-poor households. We look forward to hearing further details on the form, date and level of the proposed target. Government should also consider whether further short-term, fuel poverty targets which can adapt to changing policy contexts could also be introduced as part of its forthcoming fuel poverty strategy. (Paragraph 142)
31. We conclude that energy companies are not the best delivery agent for fuel poverty policies due to low levels of consumer trust and lack of local knowledge. In the longer term, policy instruments such as the Energy Company Obligation may not therefore be the most effective means of addressing fuel poverty. Local councils and voluntary organisations may have greater knowledge of property and occupant characteristics, leading to a more effective targeting of resources. We therefore recommend that Government considers how to maximise the involvement of councils, voluntary sector organisations and other trusted intermediaries as part of its new fuel poverty strategy. We also recommend that Government considers extending access to the ECO brokerage scheme to local councils, in order to ensure finance for locally-led energy efficiency projects. (Paragraph 147)
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Annex: Transcript of public meeting
Public meeting with the Energy and Climate Change Committee
on Thursday 7 February 2013
Members present:
Mr Tim Yeo (Chair) Mr Peter Lilley John Robertson ______
Guest speakers
Sarah Beattie-Smith, Citizens Advice Scotland, Graeme Mullin, G-Heat, and Norman Kerr, Energy Action Scotland, were in attendance.
Q1 Chair: Good afternoon, and a warm welcome to this very open meeting. I am Tim Yeo. I chair the Energy and Climate Change Select Committee in the House of Commons, and I have also been a Member of Parliament since 1983. Thank you for coming along. These meetings depend entirely on attracting a decent audience and I am delighted we have done that today. I am joined by my colleagues John Robertson—who is very well known to you and I hope his chances at future elections will not be permanently damaged if I say he is a good friend of mine, even though I am a Conservative; we have worked happily on the Energy Select Committee for the last two and a half years—and Peter Lilley, on my left, who has just joined the Committee last year and who has been a colleague of mine in the House for the last 30 years. Mr Lilley: Elected the same day. Chair: The same day, exactly. Mr Lilley: With Tony Blair. Chair: As well as Gordon Brown, all on the same day. What a quartet. Pity two of them did not turn out quite so well, but I will not say what two I am referring to. Anyway, what I want this to be is Parliament listens: that the purpose of this is to hear from you. But before we get to that part of the meeting, I will just say a word or two about how the Select Committee process works in Parliament and then John will also say a few words, and Peter, and then we have some participants from a number of organisations who will introduce themselves presently. The Select Committees are appointed by the House. Their membership reflects the party balance, so our Committee has 11 members, which means five Conservatives, five Labour and one Liberal Democrat, so the minority parties—they are not all Liberal Democrats, but the minority parties are always represented on the Committee. The Chair is now directly elected by the whole House, for the first time in 2010. The work of the Committees normally focuses on an individual Government Department. Nearly all the Select Committees have a specific focus on a Department, and obviously in our case it is on the Department of Energy and Climate Change. I would have had more of my colleagues here this afternoon, but we have a clash with the Bill Committee. The Energy Bill is currently before the House of Commons. There is a Committee looking at it clause by clause; it was sitting today, and several of the members of my Committee are also members of that Committee and so they could
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not be here. That Bill is very relevant to some of the things that we are going to talk about this afternoon. The way the Select Committee operates is that we choose the subjects that we want to look at. Our agenda is entirely under our own control. Obviously it has to relate in some way to the work of the Department of Energy, but it is a pretty broad agenda, and we have more topics that we would like to investigate than we have time for. We have a small staff, an excellent staff of seven people who help us, but time is a big constraint. The process is that we choose a subject, which we think is relevant or important or perhaps where the Government is about to make a decision, we receive evidence—written evidence—and we call some people to give oral evidence at public meetings, which take place once a week. We produce a report that will contain the recommendations, and the Government is required to respond to that report and those recommendations normally within 60 days of its publication. Our recent reports have included shale gas and nuclear. We did a report on the draft Energy Bill when it was published last summer, and a number of our recommendations on that draft were incorporated when the Bill finally appeared in final form in November. We are about to start doing some work on smart-meters, but we have a particular concern with consumers. Before Christmas we published a report called Consumer Engagement with Energy Markets. After the work we did on that we did have some quite serious concerns about how the energy markets are working and how the companies are operating. There does appear to be a lack of trust among the public in the energy companies. There is not much engagement with the public about the issues. I do not think there is a good understanding of what drives prices up, and they have certainly been going up in the last five years. I think many consumers do not know where to turn to for advice. A particular concern for us is that the most vulnerable consumers tend to be the ones who are least likely to switch their energy supplier; they have the least understanding of the advantages they can gain. Energy efficiency is absolutely at the heart of all this. The Green Deal was launched in the last two weeks, and energy efficiency measures can help, but even there there is not as much take-up of some of the energy efficiency measures as we would like even though they are financially often directly very beneficial. The purpose of today is to try to promote a debate. We would like to explore how we can get more engagement from consumers, how we can tackle fuel poverty, how we can improve competition and a variety of other things. That is enough from me. I will pass firstly now to John and then to Peter. John Robertson: Thanks very much. Can everybody hear me? I do not particularly want to hold a mic, but it is all right. First of all, can I thank you for coming to Anniesland College, which opened in 1964, and this new building came in just after Christmas in 2008. It is a pleasure to have you all here; this is obviously the heart of my constituency, and I know many of you are constituents. One of the reasons that we came here was mainly because I shout the loudest on the Committee sometimes, and I believe that part of the problem was we did not really listen to real people and it was important, therefore, maybe to get real people along to get real questions that we will take back when we have the Big Six, in particular, up to give evidence in a short time and then followed by the Minister, who will have to answer the questions that I hope you are going to ask us today. Basically what I am saying here is we are here not because we want to give you a message but we want to take your message back to make sure that these people, who run our country, who make the policies, will listen to what real people have a problem with.
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Part of the problem has been, as Tim has said, is trying to get people to be more efficient. We hear that a lot of the people are switching from company to company, and we hear a lot about, “There’s too many carrots”, and nobody really understands what the process is. I honestly believe the energy companies do that deliberately so they can rip us off, and it is our job to make sure they will not do that in the future. The tariffs are going to come down. We are not quite sure where that goes, but we will make sure we keep on top of them. One thing is for sure the prices will not come down because they seem to go up every other month, and then when they start getting cheap gas the prices do not come down quick enough. So, our job is to keep on top of them to make sure they do and deal with real people. I think it is important that people see what is coming and the like. I am pleased that we have so many people from companies who do know how to help you, and hopefully the questions you are going to give us will put us further down the road. Certainly as your constituency MP once we get the report I will get you a copy, and you can read it yourself and find out did he do anything; and that is my job. At the end of the day when you go to the ballot box will determine whether I have done what I said I would do and what you wanted me to do. It is great to see you here, and I look forward to your questions. Thanks very much. Mr Lilley: Can I add my thanks to you all for coming and for Anniesland College for hosting this evening. I think it is very important for us, as a Select Committee, to get out and hear people’s views. When I was the Secretary for Social Security, and before that Trade and Industry, I found that every time I went out and visited a benefit office and talked to claimants or talked to people in the office I never failed to learn something that I had not been told by my officials. I am pretty sure that we will learn things tonight that we would not otherwise have known or would only have found out belatedly. I know there is great concern and even anger in my constituency, among my constituents, about the rise in heating bills, and they want us to hear their concerns to try to establish the causes of those increases and to examine the measures that can be taken by Government to mitigate them, particularly for those in fuel poverty. As Tim said, I am new the boy on the Committee. I have only been on a couple of months. I still cannot understand all the acronyms that are used in this area, and I have a very simple-minded view, which is that it should be the job of the Department of Energy and Climate Change to give us the cheapest possible energy. Both because we want our heating bills to be as low as possible, particularly for those on low incomes and in fuel poverty, and because also we want to rebalance the economy towards manufacturing and cheap energy will help do that and create jobs in that sector. I also have a confession to make. I am among a small minority, a very small minority, of Members of Parliament who have been highly critical both of the last Government and of this Government for the over-emphasis, in our view, they give to the objective of combating climate change. I was one of five who voted against the Climate Change Act not because I do not believe in global warning—I studied physics at university; I know it is a reality—but I have also looked at the economics. To my amazement I discovered that the likely benefits of that Bill—in the Government’s own estimate, the maximum benefits were half the likely costs, so it seemed to be self- evident one should vote against it and find some better way of doing things. Then I looked further and found, again from the Government’s own guru on these matters, Lord Stern, all the increased costs we are bearing now, from switching from fossil fuels to more expensive types of making energy—those costs are going to exceed any
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benefits for more than a century. So, what we are doing is designed to make people better off more than a century ahead, and I would like your views as to whether you think that is sensible, especially as Lord Stern thinks that by 200 years’ time, on his worst possible scenario, the worst possible implications of global warming if we do nothing at all—people will still be seven times better off than we are now. Should we be making ourselves worse off so that they can instead be 10 times better off? Again, that is something we ought to ask about. We need to look at where costs come from in our heating bills. We know part of it is imported fuel. We cannot do much about that in the short term. It is about half of it and has been a big source of the increase. Another part is the cost of generating transmission and distribution, which is a fixed cost for the short term. There is not much we can do about that. Then there is profit, and we know very little about how much profit the gas and energy companies are making. Ofgem, the regulator, puts the figure at about 6% of the bill, but I am as sceptical of them as I am of the Government and we, in the course of our inquiry, want to see whether that is true or whether it is more or less. Also, the element that we never look at—and that is the cost that the Government is imposing on fuel bills. At the moment it is quite small, but on the Government’s own figures by 2020 the average household energy bill will increase by £280 as the result of moving to high-cost energy but will be reduced by the measures they hope will have the effect of reducing the amount of energy we use, more insulation and so on, by £370. It will be up to you to give your views as to whether you think they will deliver on the promise of higher costs and whether they will also deliver on the promise of lower consumption. I have to say I am rather sceptical about the latter. We look forward to your views. I am told that I must give you a sort of health warning like they do on phone things that this meeting will be recorded for training purposes, or at least we have a Hansard official with us from the House of Commons Transcription Service, which will ensure that a full record is kept of what passes. If you have any further points you want to make after the discussion is over, please can I encourage you to submit them to us in written evidence to our inquiry so that we can take that on board as well as what we hear today. Thank you very much. Chair: Peter, thank you; now, from Energy Action Scotland, Norman. Norman Kerr: I will move away from the speaker. The batting order tonight, folks, I am going to do the high-level policy stuff, and then we are going to hear about a bit of the forward-facing things that are happening and then from G-Heat very much on the local side of where we are. Energy Action Scotland, I am sure many of you have never heard of us, and that is because we are not a public-facing campaigning organisation. A lot of what we do is working with fuel utilities, with housing providers, housing associations, local authorities, manufacturers of insulation materials, and we do a lot of work to lobby, if that is still a word that we can use, Government both here in Scotland and at Westminster on energy and fuel poverty policy. Energy Action Scotland celebrates—no, it does not; it marks—its 30 years in business; we were formed in 1983, and sadly we are still here because we still have fuel poverty. In a Scotland-wide context fuel poverty in Scotland runs around about 40% of the population, and a lot of that is caused by the fact that we have many rural communities, communities that are off the gas grid and houses, very much in the area here, are very difficult to treat, and certainly we have already heard, this evening, about reducing the demand for energy and for a lot of houses in this particular area that is quite a tall order when you look at the construction of the house. Fuel poverty, now at 40%, almost 900,000 households in Scotland, has fallen. It fell to somewhere in the region of 220,000 households in 2004, and that was caused
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mainly by the deregulation of the energy market when we saw prices go down, but unfortunately since 2004 prices have gone back up and we are now seeing the adverse effect of that in terms of more fuel per households. The cost of energy is something that, although Members of the Committee are looking at it, we are also asking to be looked at, because we have a fairly simplistic view and unfortunately it is a very complicated area, because the companies tell us they make between £25 and £65 profit per organisation. The biggest single factor in your bill is the wholesale cost. The cost of buying and selling the electricity before it gets to you amounts for something like 42% of your total bill, and to be honest that is a bit of a black hole that we do not really understand. Ofgem have just launched a market liquidity review; in other words, they are looking at that cost. We believe that a lot of savings can be made if we get the wholesale market right. Just recently, last week, we had a situation where it was recorded that the UK was selling gas to Europe at a very low price while buying liquefied natural gas from Asia at a much higher price. So, we are selling it at a loss but buying it in from elsewhere at a cost that then impacts on each of our bills. We certainly welcome the Committee’s look at fuel poverty and energy price but also the energy bill, because I do believe that we have an opportunity. If I can just stay with bills—and certainly Mr Lilley talked about bills rising—currently for your bill, your electricity bill, whether you know it or not, you contribute around about £100 to the energy companies who then do a variety of work with that money, but that money is not theirs; it is yours, as we have said, but they collect it because Government have placed levies upon them to do so. Those levies will continue to rise, and you will continue to pay more. One of the things that we are very keen to look at is how that is done, because an OAP in a one-bedroom flat will pay exactly the same as a family of five living in a five- bedroom home using much more energy. So, we have a very regressive and blunt nature of collecting of taxes, and we need to review that because that is contributing to the cost of your bills and contributing to fuel poverty. I am conscious of time, so I think there is a lot on the policy side that really requires a lot of stones to be turned over and delved in much deeper, but I think in terms of the human impact and the cost I will now hand over to Sarah Beattie-Smith from Citizens Advice. Sarah Beattie-Smith: Thanks. Like Norman says, I am Sarah. I work for Citizens Advice Scotland. We are the umbrella body for all the CABs in Scotland, and there is 61 of them across the country and you can get advice from 250 different places. You can get it online and on the phone as well, and there is some information about us over there. We recently published a report about the kind of issues that people come into CAB with around energy, and there are an awful lot of people coming in for fuel debts because they simply cannot pay. It is no surprise that the big message from that report is energy costs too much and people cannot afford it. I am not telling you anything you don’t know there. I think it is interesting that we are talking about fuel poverty. To me sometimes I think fuel poverty is really just a subset of poverty, pure and simple. I think it is something that we are all pretty familiar with, but it also helps to think about fuel poverty; it has a particular price of it, because it means that you can treat that element of poverty, and there are certain things that can be done. There are three things that tend to cause fuel poverty. There are three elements of it. One is your energy efficiency of your home; so, if your heat is leaking out through the roof, that is no good. It is going to push the cost of your energy up, and that is going to mean that you are spending more on it.
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There are things like your income. How much you have coming in is obviously going to have a bearing on how much is going out on your energy, but there is also the cost of energy itself from your company. The cost of energy is something that we have perhaps the least control over. Like Norman says, there are a lot of questions about how those bills are made up and how wholesale prices are set. What we see is people on low incomes essentially and most of my experience with the CAB is looking at people who really just can’t afford to pay. We are seeing increasing numbers of people coming through the doors who have not eaten in days. They cannot afford to heat their homes—whose income has collapsed because they are relying on benefits that are no longer there, whose wages have not gone up in years, who have lost their jobs and it takes an age to get any benefit. There are some really dire things out there happening now, and you are looking at welfare reform just around the corner. Some bits of it have already hit, and there is over £2 billion going to come out of the Scottish economy because of the impact of welfare reform. Not to paint a huge doom and gloom picture, but that is the kind of context that we are operating in. If you are looking at how to tackle fuel poverty, and one of those three causes of fuel poverty is low income, we are not doing too brilliantly on that, and there is an awful lot more that needs to be done on boosting people’s income and investing in jobs, a living wage and a benefit system that works for people. Those would all be nice things. Just to run quickly through some of the points that have been put forward by the others so far, I think on the transparency issue most of us have no idea of how our bills are made up. It is just something that comes through the door, and if you want to put the kettle on or you want a hot home, you are going to have to pay that bill one way or another. People are trying to pay their loans and things as well as that, it is pretty unhelpful. I would refute the points about climate change and wanting to pay for that. I think you might expect that your Government would be where your taxes go and that those taxes then support those most in need, but instead what we have is a system where energy companies are being used as a default taxman so we all pay our energy bills and some of that money then goes back in in helping people who cannot pay for those energy bills but that increases the price for everyone else as well. Whereas you might think that if we all just paid our taxes to Government then Government could invest in fuel poverty measures. Government can be doing the things like helping people who are in fuel poverty in insulating their homes. I think there is a big question around that. Just to quickly move on, I think Ofgem—we quite like Ofgem. They seem to do a pretty good job of regulating the market. Sometimes they could do things a wee bit faster because sometimes your energy companies are doing things they are not supposed to, like doing doorstep sales that they are really not supposed to and taking advantage of vulnerable consumers, and some of those things could be tackled a wee bit faster, but generally we quite like them. I would just say finally, I think one of the things that is always said that consumers can do to help themselves in this situation as well is maximising your income, and we can do that at the CAB by seeing if you are entitled to a benefits that could help you to get out of any debt. You are often told that you should be switching but there are only so many companies out there. There are so many tariffs, and there are only so many times that you can switch before your choices run out, so there needs to be something done about bringing bills down, trying to cap them in some way. I would argue that some of the schemes that have been started recently, the energy company
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obligations, which is a new way of tacking fuel poverty from a UK level is not particularly amazing in doing what it is supposed to do. The Green Deal, which is an amazing new policy where you can get a loan to get energy efficiency measures in your home like solar panels or really fancy insulation, is only available for homeowners. There are difficulties in their long-term credit that it is basically a loan that you take on yourself and I would question whether that maybe not the role of Government once again to be a massive roll-out, creating jobs for industries to do insulation and so on. That is basically the position of our organisation, but I would really like to hear from you guys as well as to what you think can be done. I will pass over to Graeme. Graeme Mullin: Thanks very much, Sarah. For anybody that does not know me, which might be quite a few of you, my name is Graeme Mullin and I look after a project in Glasgow called G-Heat, which is the Glasgow Home Energy Advice Team. As Norman has gone over some of the policy stuff and Sarah has gone over some stuff to do with Citizens Advice—we certainly operate on the ground in Glasgow. The G-Heat service is a Glasgow City Council service, and it is open to people across the city; it does not matter whether they are renting, and it does not matter whether people own the home, rent from housing associations or private landlords. Anybody can take advantage of the service. We have eight advisors that work across Glasgow who do home visit energy advice aspects. They give advice on tariffs. They give advice on how to help people understand the heating systems to the best of their ability. They look at things like billing, and we also offer quite a strong advocacy service where you might come across people who have specific issues relating to energy companies that they need to contact on the client’s behalf. This probably takes up the largest part of the work that the G- Heat advisor will do. We find that a lot of the people that come to us, and a lot of people who are referred to us have specific problems with billing or they cannot contact the utility company just due to other poverty issues. What we generally find is the G-Heat service works best because it is in the home; they can give the advice face to face in the home. They can look at things like metering. They can look at people’s usage. They can look at people’s fuel bills and they can help people understand how their fuel bills transmit into what they paying at the end of the month. Much of the advice that is out there at the moment, in terms of energy efficiency, in terms of fuel poverty, is done over the phone or it is done online. We find, and certainly the advice workers in Glasgow find, a lot of the stuff can be lost in translation over the phone. A lot of the stuff that is put on online—maybe people do not have access to the internet and perhaps people do not understand some of the terminology that is used, so getting somebody to be able to give you that type of advice face to face in the home is certainly very important. One of the points I would like to pick up on that John mentioned about the tariff and about choice of tariff. Generally at policy level it is very big on the switching and talking about tariffs, availability, and there is a big encouragement for people out there to switch between companies. I think between the Big Six companies at the moment there are around 400 or 300 utility tariffs on the market. I agree with John about the confused marketing. I think it is partially deliberate where people take a look at it, they cannot understand and they are immediately turned off by it. I think tariffs and changing and switching is a little bit of a red herring. The advice that I get passed back to me from the home energy advisors, day-to-day, when they are in people’s home is we should really be looking at a more holistic approach where they look at people’s debt, they look at people’s usage and they help people understand how what they are using
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converts into the end of month bill, they do not always understand what they are paying for at any given time. If you go around the supermarket you see how much something costs before it goes into the basket. If you are filling up the car with fuel you can see how much has gone in or how much you are paying for but utilities are something that we use and we are not always perfectly sure how much we are using and how much it is costing. With that in mind the switching in the tariff is only a small part of it. The holistic approach that G-Heat advisors tend to take would be to look at all aspects from how people use a central heating system, do they understand how to use it, are they getting the maximum efficiency from it, right up to understanding their bills and right up to the advocacy service that they give. Sarah mentioned general poverty issues that people deal with. We find a lot of people who have to deal with the utility company about billing or about points and so on are already in debt with practically every other aspect of their life. Fuel debt is a massive part of that. The majority of the contact the utility companies have with the consumer is done over the phone. What we try to get is people who have issues accruing from a debt to contact the utility company perhaps to try to sort out problems that are not their own doing. We come across many instances of incorrect billing; people maybe have meters or on tariffs that their heating system cannot support. That is when the advocacy service kicks in, and we have to do quite a lot of work on behalf of the client direct with the utility company. I guess that is where the frustration comes in and I hear the frustrations from the team every day. The utility company’s response to people who are in debt tends to be more of a reaction to credit control first and foremost, “How quickly can we get the money back? How much can you afford to pay back?” rather than understanding how the person got into debt and how they can try to help them with the consumption and help them get back out of that debt. I believe that we probably all pay it, and that is a kind of “computer says no” culture if you remember it from the TV show, where somebody sitting in a call centre will make a decision on somebody’s usage without knowing anything about them and without maybe knowing the problems that they are suffering from at home. Again it is probably where the service from G- Heat works, and what we can offer is we can see in the home the circumstances that the people are suffering from. We can look at their heater. We can look at their metering. We can look at their billing. We generally find that when we contact the utility companies and we convey some of that information to them we can have a bit of an influence and a bit of an impact. So the service, for anybody who does not use it or know about it, is available the length and breadth of Glasgow. We have one or two of my advisors in the room tonight and some other advisors from other advice agencies in Glasgow here as well; make use of them, and ask them questions maybe at the end here. I am certainly happy to answer to any questions, but hopefully that gives you a little bit of a flavour as to maybe what is happening at a more local level and a more coalface level in Glasgow. Thanks. Chair: Thank you very much, and now is the moment for the public debate. Can I ask you for the first time you ask a question please to say who you are and if you represent an organisation what that organisation is? Who wants to go first? We have two roving microphones, one at the back and then that the lady in the third row there.
Q2 Speaker 1: Hello, my name is [...]. I am just here myself today. I would like to congratulate you for coming up to Glasgow and hope you enjoy your stay. I have a few points to make. I think it was Peter Lilley that spoke there a minute ago, and he was saying, and I agree with him, that there is no real difference between the last
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Government and this Government, because I was poor in the last Government and I am still poor in this Government, so who is responsible for it? I really don’t care, but I want a solution to it, and I have not heard many solutions as to how you are going to solve the poverty industry. In terms of the chap across here, he was speaking about a black hole in terms of fuel. The black hole is a speculation of the markets, and you say it yourself: the fuel is going out, one road, and it is coming in at a higher price on our road. Is it actually leaving the country? It could be sitting in a tanker here getting moved across on the Great Western Road there and put in an oil tank and you buy it in Asia, the underdog, at 50%. So, if you don’t understand and then you didn’t understand it, you will have to pull your socks up and hoist them up a wee bit. Secondly, just recently you have changed the tariffs in relation here on the panels on the roofs that people were getting a tariff themselves, they were getting money back. They were able to produce their own electricity effectively. That was direct competition with the monopoly of the utilities. That was a small approach but if that was spread across the country between that, micro wind and somebody’s house, anyway that you can produce fuel on your own property then that is direct competition to these utilities. If that was happening across the board the utilities would soon drop the prices so you didn’t have to do that. Currently there is no competition, and by your own admission what you are saying there is you really don’t understand the market; and it is not a criticism. It is an observation to—what you say is you really don’t understand the market. You don’t have control of the market, therefore you are really not protecting me as a person or as a citizen of the country so you really needed to get control of it. Chair: Just on the point you make about the reduction in the feed-in tariff for solar PV. it is important to remember that the cost of that tariff, which is a sort of subsidy for solar PV, that cost is borne directly by you as an electricity consumer. The subsidy that solar and other low carbon technologies receive in the form either of renewable obligation certificates or in future feed-in tariffs or contracts for difference is not free it does get paid. It gets paid by consumers so if the Government had maintained those feed-in tariffs for solar at the levels that they were two years ago, which were delivering large profits to the homes who installed them that would have been at the expense of other electricity consumers. It is important to appreciate that those costs have to be paid for. I will take the lady in the third row here.
Q3 Speaker 2: I am Ms M, Glasgow Housing Association. I do the same job as Graeme, basically front line, on the ground. Basically my problem is we had an article in a key magazine that was also issued in the Glasgow Evening Times regarding smart- meters, obviously they are compulsory and everyone is to get them. My concern is that a smart-meter supposedly is to send messages back to the supplier to let them know what readings are so we can take away estimated billing, which is very dear. Whether your meter is read or not you are still receiving estimated billing, and it is causing a lot of confusion. We had a gentleman where there was no reading taken, or should I say fed back, where the meter was working for 18 months so they continued to reduce his bills and then tried to back-bill him for a bill of £1,000 but it is faulty equipment. Where is the responsibility in that and how are the smart-meters going to work and who is going to be answerable when they are not? Chair: I am not sure who is responsible in the case of a faulty meter at present. I am an enthusiast for the potential benefits of smart-meters, which I hope will give
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people good information that will enable them to use their energy much more efficiently than they do at the moment and give them much more control over their consumption. We should not be very far away from the position where you can be on your way home and decide what room you want to heat up from your telephone. That would be a considerable advance. It would lead to much less wastage of energy. The Committee is just about to start doing some work on smart-meters, but I do not know whether one of my colleagues wants to answer the point about who can be held responsible for a company that has a faulty meter that leads to someone being backbilled by a very large amount. Anyone have an idea about that? Any volunteers? Norman Kerr: The company itself should be responsible. The company have a duty, if you said the meter was faulty, to investigate that and replace the meter. Speaker 2: Basically that should happen, whereas they consistently reduced his costs, told him to pay, told him to pay, told him to pay. We was an elderly gentleman, pensionable age, unwell, very unwell, paid immediately as they asked and as they required but basically they told him, “You used the electricity, you must pay”. They wrote it off. The article says about along the lines of me getting my teeth in it and not letting it go. Chair: Your local MP is about to come to the rescue. Speaker 2: To be honest with you this, I do obviously a lot of this— John Robertson: It does not matter. If your local MP got this, then I would expect him or her to contact the company and basically give them a short shrift. These things happen all the time and the people, unfortunately, just accept it and carry on. What should happen is the company are obliged, if nothing else, to fix it and also to give the person a good goal payment of some description so that they do not have to pay it all back. If it was one of my constituents I would go and talk to the company immediately to make sure that they were not going to pay the full amount. Having said that that does not necessarily mean they would get everything back but it certainly would— Speaker 2: I don’t think you are understanding the question. What I am really saying is basically that is what I did—I didn’t have to use an MP—I did everything myself—but my point is that why do we not have this element built in around about this smart-meter where he has still not getting the registration back to see that the meter is not responding; it is not sending a signal back. Why is this not highlighted? Because basically it would just—they send it like that. John Robertson: If I am right, and I am not 100% sure I am right, but there is new variant of smart-meter coming out, smart-meter 2. The first smart-meter that came out gave the individual in the house information. The information did not transfer on to your telephone line and go through to the other end. The new smart-meters allow you to do that where they will take a meter reading straight from the telephone line that goes to the smart-meter and they will take it away. Under those circumstances you would be right. If it is an old smart-meter, if it was one of the first group then they did not transfer the information— Speaker 2: There were not fit for purpose, basically. John Robertson: It is the old story, people wanted to know what they were doing and people thought it was a great idea. Personally I was not all that keen on the first group of smart-meters. Certainly the idea of being able to use your telephone and doing all the other things that you want to do in relation to power is important and will be useful. It also lets you know if anything is happening in your house when you are not there and you can find out these things but the first lot of smart-meters were, in my opinion, not fit for purpose.
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Q4 Chair: Another topic; the lady immediately behind that. Speaker 3: Hi there. Evelyn Milligan, Shettleston Energy Advice. Chair: Yes, we can hear you. Yes. Speaker 3: I have a couple of points. The first one is a continuation on the smart-meter. I am not sure if you are aware that that can easily be switched to a pay-as- you-go meter. At the moment some are not paying and obviously people should pay but there is quite a lot of letters and information having to be done and also a warrant has to be authorised by the Justice of the Peace to change someone from a private meter to a pay-as-you-go. Obviously there is forced entry sometimes into the property. My concern is—and it is the same with a smart-meter, which can be done at the press of a button in the supplier’s office so I am just wondering if you can feed back to the suppliers to make sure that all the systems that are in place at the moment for that being done appropriately are being carried out and to get that guarantee. Chair: That is an interesting point for the work we are about to do. If it becomes too easy for a supplier to change the basis of someone’s tariff and force them to go on to the pay-as-you-go there would need to be safeguards to prevent that from being done without proper cause. I am glad you have raised that. It is a point we can look at. We are literally just about to start work on this, so thank you for bringing that up.
Q5 Speaker 3: Can I make one other point? Chair: You can if you are quick about it, yes. There are others. Speaker 3: I will do my best. Recently I think you tried to have a go at making the supplier simplify the prices. Five of them have a daily standing charge and one doesn’t, which is British Gas. I think most energy advisors would have preferred to make them do away with the daily standing charge altogether so that the prices were transparent. What happened is I think it is possible just one company. It was easier to meet them and to address their daily standing charge. Regarding British Gas, they have a daily standing charge, and they have still got the three tier pricing system so it is quite confusing and for a lot of people it is hard for them to understand that. It would have been simpler if you had done away with the daily standing charge, okay the unit prices for gas, electricity, would have gone up, but it would have made it easier for us to explain that to people. Chair: Yes, I think that point is very well made and I think there is a lot of support for what you suggest that a charge that simply is what you have used is easier to understand. There is another debate allied to that about whether we should introduce what people have called a rising block tariff that means that if you are quite careful about your use of energy and you are only slightly above the average use, or below it, you would pay at a certain tariff. If you are very extravagant and you can measure an expectation for the size of the household and the size of the premises and so on and maybe you should pay more for the extra bit rather than less. That would be encouraging people to think carefully about their energy usage. That has not been adopted as policy and some people will criticise it, but I think it is interesting because almost every consumer can find ways of using their energy more efficiently and the more we incentivise that the better it is in all sorts of ways. It may even reduce the peak demand for electricity particularly, which would reduce the cost of the extra investment we have to make in order to meet that demand so I think there is an interesting debate. The basic point you make is a very strong one and certainly one that I would be sympathetic with.
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We cannot hear you, and even more importantly the Hansard reporter will not pick up what you are saying. Please use the microphone.
Q6 Speaker 2: Sorry about that. Basically I have wee bit of concern with that because a daily standing charge is a one-off payment per day. Obviously at this point in time you are talking about consumption and obviously people overusing consumption. If you were to put an incentive onto—it would be every unit was then higher because basically the terminology is, “If you have no standing charge the unit price is higher. If you have a standing charge the unit price is lower”. With a one-off payment of 20 pence, bearing in mind, using British Gas for example, they will start off at 24 pence for the first 40 units and then it drops down to about 15 pence. Do you know what I mean? I have a background in sales. I think we need to get the pricing of the per unit right before we take away daily standing charges. Mr Lilley: The lady before mentioned the complexity of tariffs and there is also complexity of people’s household circumstances. To some extent one reflects the other so it is unnecessary or just confusing. One thing we suggested in our report, which should at least be considered, was developing a sort of app that would be available both for advisors and individuals where you could just feed in your, like your tax code, your tariff or data from your bill and it would work out what the best tariff for you was assuming your future consumption was the same as it had been in the last year or recent quarters. That ought not to be beyond the wit of man to be able to do that and then even people like me who find these tariffs very confusing would be able to work out what is the cheapest. Chair: While we are waiting for another question, can I just do a poll of the audience? How many people here have switched their supplier? Okay; that is a bit more than half I would guess. How many people have never done so? Okay; it is just interesting. Among an audience that is quite interested in these issues by definition, which is why you are here, and smart enough to know what to do half of the audience have never done so. Another question: yes, I have one in the front row, and then a lady—can we take two or three, we will take you first and the lady at the end of that row there, and then the gentleman right at the back.
Q7 Speaker 4: Hi, my name is [...] and I work for— Chair: A bit nearer the mic please. Speaker 4: Sorry, which is a charity on the south side of Glasgow and our aim is to reduce carbon and help people to reduce their energy bills. Sorry. Chair: Yes, it is but hold it close; almost kiss it. Speaker 4: Right. In the south side of Glasgow, in Govern Hill, there is a square mile where there is over 2,900 landlords, so that is privately rented accommodation. Some of the poorest people live in privately rented accommodation not social housing. Some of the poorest people live in privately rented accommodation. They are living where the energy efficiency is very poor, with no investment and white goods use up loads of energy because they are ancient. There are pre-payment meters they cannot get rid of. I understand that there are a few measures to combat this but they just do not seem to work at all. The vast majority of people in privately rented accommodation are the least able to control their energy bills. The system has just completely failed people who are renting privately. Chair: That is a well made point. I am going to take a couple at a time so we get more people in. The lady at the end there, second row.
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Q8 Speaker 5: Thank you. My name is [...], and I just came here myself. I am just representing my building. Our problem is that we cannot switch suppliers. We cannot regulate our own heat. We cannot turn it off or on because it is a communal heating system. It is probably in excess of 60 years old, and we are unable to get funding where we are to do precise funding. Pretty much it is a building with low income and elderly vulnerable people. It is a poor area but purely because of our postcodes we were unable to get it. We are hopeful that through Green Deal that we will get this funding but, as that lady was saying there, from the Citizens Advice, it may be a loan that our building cannot really afford to have. The disappointing thing about that is that we have two buildings on either side that were built at the very same time, very similar, all the same building materials and they both got funding assessed for a new heating system. As I say just because of our postcodes it was decided years ago, we tried to contest it, but it will take about 16 years to fix. So, we are in a pretty bad position. Some of our quarterly bills have reached £790 we are pulling in a company that are pretty much charging anything they like so we are in a really bad position and we just don’t know what to do about it. Sorry, just before you start, one of the ladies on the ground floor is 80 years old and she has emphysema. The building is not fit for purpose. It has asbestos and the factor are saying, “In order to try to put you through for this new funding coming up. You will need to pay £170 each”. We have just got a quarterly bill of £460 from them. That is one of the lowest bills that we have had. It is pretty much the lack of help from the factor. Just to put that out there because I know that is not something that maybe has been touched on yet. John Robertson: Whereabouts are you? Speaker 5: Mossview Quadrant in Cardonald. John Robertson: That is not mine, he says thankfully. The new energy company’s obligation may help in that, which is taking over from this so hopefully that will make a difference to you. I cannot tell you because you are not mine so I will not be able to follow it up as they say but that could help you in that respect but I just want to keep an eye on it and find out. If you have problems then go and see your equivalent of me and your MSP on the housing. That brings me to the housing problem, which is basically England and Wales are different and I am not sure if the same thing will apply up here or not where private lets will have to be a minimum of—no, just England and Wales, is it? Okay. So that would solve a lot of your problems so go and see your MSP on this one and what they are doing is in a couple of years’ time they are bringing in a level where everybody who is a private let must have a standard of or the equivalent of a certain band, Band D, I think it is. My friend at the end— On the type of accommodation that you are renting through somebody they have to have a certain standard. If you think about it most of the lets that you are talking about are Band F and G. These would just—no private. This is private let. What you are talking about is of private people she is not talking about council lets. No, because they would have to have income. Speaker 6: What band are you talking about? Speaker 7: Energy efficiency of building. Speaker 6: (inaudible - 18:55:15) John Robertson: Unfortunately housing in Scotland, first of all, but everything that affects it. Speaker 6: (inaudible - 18:55:29)
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John Robertson: It does not necessarily mean that she will help you of course. Speaker 6: (inaudible - 18:55:34) John Robertson: The thing as a Labour Member of Parliament I would say that, would I not? Chair: It is a very serious issue, and John says there is a particular problem with the Scottish housing heritage, the stock here. Some of it is very difficult to improve but it is a problem that we are acutely conscious of, south of the border as well, which is why the regulations have been changed to compel private landlords, who often do have old and rather substandard property that are let to quite poor tenants, will not be able to continue like this under the new arrangements. We have quite a few people now there is— Speaker 6: Can I just— Chair: Very quickly. Speaker 6: It is not just a Scottish problem. If you look at Victorian stone tenement building it is mainly huge glass windows so it is really important that sash and case windows are in Green Deal or the eco package otherwise huge areas of Glasgow will not benefit from Green Deal or eco package because that is the most energy efficient measure you could do? Chair: Okay. The Committee also has a watching brief on the Green Deal. We are going to see how it goes. So the gentleman in the middle there has put his hand up there, and then one lady further back and a gentleman here too, and the lady there.
Q9 Speaker 7: I am David Kennedy. I am one of Graeme’s G-Heat advisors. My old politics lecturer used to always say that a lot of this stuff that happened in the House of Commons, to him it was like pantomime. He used to say if you want to see the Commons at its best go to a Select Committee. He has retired now but we are all present tonight and we will welcome the parliamentarians. I am very glad you have taken your time to come up. Just taking the point that Lucy made in the front row, the area of Glasgow she is talking about and the housing conditions are so poor that it has been raised specific in the Scottish Parliament with concerns. What we decided to do is in G- Heat is to do visits with interpreters. I have done visits with a Slovak interpreter, a Polish interpreter and a Somalian interpreter. Not all at the same time, but it is a good way of reaching for the hard to reach groups there and just take the holistic approach. The last time I went there, when I finished I phoned the council and said, “Can you fix the drain because I had to swim to get into the front door”, because it was that bad. There definitely are challenges but I think we can ensure that we do reach the hard to reach groups. Also I think it is important to remember that although conditions are particularly bad in the private rental sector, I have been quite shocked at the middle class areas and people struggling to pay their bills sometimes. Just because maybe someone lives in a nice-looking private estate does not mean that they are finding their bills easy to manage. Sometimes they have very high levels of debt and are almost in tears when you visit them. Chair: Okay; right at the back and then there are two on this side as well. That is you.
Q10 Speaker 8: It is just to mention about— Chair: Name please first. Speaker 8: Sorry, [...]. It is just to mention about the amount of public awareness. There was a grant of £130 for pensioners that has been awarded and I do not
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think it has been made widely aware enough for people. I know that my mum did hear about it on the telly just before Christmas and phoned up about it and she was given the run around by the energy supplier that she phoned, which was British Gas, saying it did not exist. Then when she eventually managed to get to speak to somebody they said, “Oh, I don’t know why the Chancellor was on the telly telling people about it, because they shut the books several weeks ago”, and you were not allowed to claim for it. Why are people mentioning things that exist and not properly advertising it or putting the advice in the newspaper? The other thing is that British Gas obviously had access to my mum’s personal details and when my dad died she was given a lot of pressure to take out additional maintenance contracts on different things around the home. When there was plumbing work needing done that she claimed for and they said that she would not be insured for this type of taps and different work that was required to be done around the home after putting the pressure on, saying she was a widow and she would be vulnerable. It is just that they have access to this personal information and they are not always using it wisely. Chair: Okay, I will take a couple from this side now please. Yes, the gentleman towards the back with the light grey shirt; yes, with his hand up, please, and then one rather near the front. We will try to respond to the points in a moment.
Q11 Speaker 9: My name is [...]. I am representing Haemophilia Scotland. Can I just refer to the point this gentleman here made. I am a wee bit concerned that there is a danger that the notion of fuel poverty is referring primarily to those not in employment and in socially deprived areas. Although these people obviously need the most attention and most direct action I believe there is a danger that there is a very large constituency somewhere in the middle of people who are in good jobs with good incomes who also suffer fuel poverty and who, like me, dread their quarterly bills coming in. I was interested in Norrie’s figure, 40%. Norrie, you are saying of Scottish people is just in fuel poverty, I am sure the lady at CAB Scotland is seeing more and more people, even just four or five years ago, who are middle class people who are feeling their energy bills, it would not have been a problem are now experiencing this issue. I want the assurance from the politicians on the Committee that they their understanding of the term “fuel poverty” affects not just the most vulnerable people in society. It affects everyone. Chair: On that point there is a statistical definition of “fuel poverty”, and that is an absolute measure. The kind of people who may fall into that category may well have changed over the last few years but it is a quantified measurement. A gentleman just a little bit further at the front here. John Robertson: Before you take the mic, can I just say there is nearly a million people now in Scotland who hit the fuel poverty area, and I have raised it on a number of occasions in Parliament, believe me, and it is one we will look at and are looking at. Mr Lilley: I think the Government commissioned a new definition of fuel poverty, or an analysis of how it might change from Professor Hills, who is an expert in poverty and low income households. I do not think it has yet been adopted. He has only just reported, and I certainly have not yet read his report, but there is, therefore, consideration as to whether the existing definition, which is simply households where a certain percentage of their income is consumed by their fuel bills, should be adapted in some way. I think your point is one that is being considered.
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Q12 Speaker 10: My name is [...]. I am just a concerned home owner from a local area down here. One of my concerns, why doesn’t the Government step in and do something about all the profits that we read in the paper that the gas board and the electricity board are making? Cut their costs, surely that would help this heavy billing that everybody is getting. Another point I would like to make as well, I hear you talking about smart- meters and things like that. I have all kinds of meters in my house. My gas and electricity bill just now is £400 a month. I go into all the suppliers, I say, “This is extortionate. I cannot afford to pay this”. You cannot get anybody to come out. You cannot get anybody to check your meters. They are putting in smart-meters. You can watch them. You can watch the lights coming on. What do you do? I am shouting at my three kids every day, “Get out of that shower”. We cannot afford the gas to run the shower every day, let alone twice a day. That is how bad it is getting. The Government has to step in and do something about the money they are making. I am fed up reading in the papers they make multi-million pounds every year and I am struggling to pay my bill. I have to go and work six days a week to try to meet the bills in the household to keep the household together. I would be better packing my job in and going on to the dole, let them pay for it. I think that is a shocking attitude for me to take. I have worked all my life and I am really concerned about the way it is going. I cannot think for the day I retire because I cannot afford to. It is shocking the way the general public have to try to deal with this. Chair: Two of the three MPs here are over retirement age, but that is a matter of choice, I dare say. On the question of profits, clearly profits should be at a reasonable level. We do have to see sufficient profits to attract the investment. We need over £100 million of investment in new generation and transmission capacity in this decade, and to attract that—I do not think taxpayers are keen to fund it—we have to allow companies to make profits. But there are concerns naturally, and we have touched on these and we will return to this issue, that the companies, the Big Six particularly who have a very dominant position in the market, may well be exploiting their market power. In particular, prices do seem to go up sometimes faster than they come down. If you track the relationship between the wholesale and the retail prices, there is a suspicion, I think—the expression “up like a rocket and down like a feather” has been used to describe the way in which the pricing works out. I think that is a legitimate point. It is hard to respond exactly. When you say £400 a month it sounds an awful lot of money to me, but I do not know how large your house is and how many people live there and so on. Speaker 10: It is not that big, I can assure you— Chair: I do think it is worth, therefore, getting advice. I would have thought that the scope for some energy efficiency measures if a bill is as high as that is probably quite considerable. That advice is available if sought. Mr Lilley: Sounds like an ideal candidate for the Green Deal, of which I am not normally a wholly convinced advocate but in your case it sounds sensible. Graeme Mullin: Yes, we would be quite happy to come out and get one of the G-Heat advisers to maybe go through some of the things with you. If you want to grab myself or one of the advisers before you go, certainly I am sure we can give some advice.
Q13 Speaker 10: They do not want to know your problems. You go down and they will ask, “What do you have in your house? How many fridges do you have? How many televisions do you have? Oh, you should not be using that amount of electricity”
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but still you have to pay your standing order every month or you have no gas or electricity. That is how serious it starts to get, and it really gets me down that that is the way you have to live. Graeme Mullin: Yes, and that is the problems that the G-Heat team and the advice that is given through Glasgow that they come across every day. As I say, most of the contact with the utilities is done over the phone and you do not have the face to face, so if we can send somebody in person maybe to try to push it the right way and maybe liaise on your behalf with the utility company, we will certainly try to help. If I can just come back to Catherine’s point as well just about the warm home discount of £130, it is a constant source of frustration for us that we come across people every day, every week, who should be eligible for the warm home discount and the utility company do not recognise it. It generally takes us to make a phone call on the client’s behalf to get them registered for it. It is not very well publicised on the website or by the utility companies so it is probably one of the bigger criticisms that we come across. Again, we come across people who maybe have huge debt issues that we handle advocacy cases for with utility suppliers and we go in and find out that they could have the warm home discount, so that is £130 better off they could be. Again, the default setting for utilities seems to be how quickly can they try to recover the money rather than how can they look at the person’s circumstances and how can they help. It is a view that we share and that we come across day to day. Chair: I am aware that some people who have already contributed are trying to get in again, but at the moment I am favouring people who have not yet had a chance to say anything. I will start with the gentleman right at the back and then the lady in green, second row back there.
Q14 Speaker 11: My name is [...], and I suppose I represent my children. I would like to say how much I agree with the first speaker. The way these energy companies are behaving, I think they have been taking lessons off the banks in the way that they ship gas out, ship it back in, change the price. To be quite honest, Centrica, BP, whoever is buying the gas in Malaysia, this is the same company that is exporting the same gas out of the country and bringing it back in. These people are running rings round you in the same way that the banks ran rings round you. One way of dealing with it would be perhaps renationalisation. Perhaps nationalisation was a good thing after all, this would not be happening, but we know which party decided to open up this market and it is a big free for all and we will all get the best deal. All we actually have is a cartel and it is the same cartel that we had with the oil companies and the seven sisters, only it is the Big Six now, one of the sisters is dead. Maybe one way you could deal with it is to take a golden share in each of these companies the same way that when Rolls-Royce was put out the Government held a golden share so they could basically say to Rolls-Royce, “This is what you will do”. Perhaps sometimes you tend to think that politicians are just basically in bed with these people because you mentioned about retiring coming up. Where will you retire to? A seat in the boardroom? This is exactly what happens. There is a revolving door between Parliament, big companies, seats on boards, remuneration committees. The people can be fooled some of the time but not all of the time. One more thing, when you talk about a million people here in Scotland being in fuel poverty, it is not so much a million people, it is 20% of the population. Do you have any answers to this? Twenty per cent of the population are living in fuel poverty.
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What percentage is now also going to be living in food poverty? A country that has so much resource and they contribute so much, and yet we live in a state of abject poverty. We are going back to the days of Dickens here. We either heat our homes or we starve. We should not be making the choice of can I afford to buy a pair of shoes. Chair: Okay, you have made a very powerful point there, which goes a bit wider than energy and, indeed, I think when we talk about fuel poverty many of us feel that the solution to that does not lie only in energy policy. It may lie partly in energy policy; it lies more widely in how we tackle the problem of poverty generally. I will let others respond in more detail to your points, but I would just like to let the lady in green there with her hand up.
Q15 Speaker 12: My name is [...]. I am voluntary chair of Community Central Hall in Maryhill, which is a community organisation, a very large one. We are situated in what is regarded as one of the four most deprived constituencies in Britain. I would like to draw together a couple of points that people have been making, I think it is important because we have to ask what is Government policy going to do about it. Now, first of all, Glasgow has particular problems. We are one of the most dense cities in Europe for living. The majority of our residents live in flats in Glasgow and that is our basic housing. When you talk about the energy efficiency measures and the incentives, the people who stand to benefit most are suburban areas because that is where you can benefit from solar panels, from all kinds of measures and many generation systems, and you can benefit from the feed-in tariffs. But who pays for feed- in tariffs? The consumers who live in older housing, in flats that are very dense, often poorly built and for which there are minimal measures that can be taken. These are the people who suffer also from the standing charges. It is not just the people who are in fuel poverty at present but most of Glasgow is probably marginalised because of their own situation. That is also a large percentage of the population. I think this is a policy that needs to be addressed because it is not just rented private housing, it is not just— socially registered housing accounts for about 40% of our catchment area, but the rest of the housing is either private rented or privately owned. Because a person is an owner- occupier it does not mean to say that they are wealthy either or that they can afford the situation. They are very often at the mercy of factors who have interest in maximising their income. They are very often intimidated by them. There have been factoring Bills in Parliament but they are not enough. It needs to go further. But also, the problems of many older people living in this housing need to be addressed as well because all this is related to it. When you give preference to one section of the population you may well damage others. I think policy is very insufficient in this area and it needs to be addressed. Chair: Thank you. John, do you want to talk— John Robertson: Yes. Peter I know well and Anna I also know well. What surprised me is I am probably on the side of the audience as far as I am not in their party. Having said that, I understand exactly what you are saying. It is nothing, I have to say, that I have not said in my own way. What I do know is that in fairness to my colleagues this Select Committee has been very good in not being political, and I mean that by not taking up a political stance like some other areas of Parliament, particularly I have to say in Scotland where the committees here have become more and more political. We do believe that we try to do the best we can. Yes, it is very difficult. Yes, there are a lot of people in poverty and, yes, there is a lot we want to do. The housing in Scotland is not great and we know the problems Glasgow have. Again, it is something that we have to strive to improve. What I will say is that my colleagues at the end there
Energy Prices, Profits and Poverty 95
who have worked very closely—sadly, I suppose in a way—Citizens Advice and also G-Heat, who have done a lot of work for me, and I know Energy Action is good as well and they have helped me out in a number of areas. If anybody needs any help, these are the people to talk to. They are the experts on this. All I can do is try to persuade the Government to go down a different road. We do give them a hard time. I have to say our Chairman is an excellent chairman and he gives his Secretary of State more than a hard time when he comes up and it is something that I quite enjoy doing because I think they deserve it. Let me finish on this. I do believe that the Big Six are ripping us off and I do believe that we as politicians have to bring them to account, but I also believe that this Government will not do it without us pushing and shoving them down that road. Mr Lilley: On the question of most of the benefits going to the suburbs, it is very important that we make sure that that is not the case. Indeed, earlier the Committee went and saw a community heating power scheme here in Glasgow, which is ground breaking and is basically entirely social housing, not suburban housing. That could be a model for elsewhere if it all stacks up economically. On the gentleman who said the rise in bills is all due to the Big Six energy companies, well, that is partly what we are looking into. In a sense, I hope we find he is right because if that is the case then we can deal with it. If they have been increasing their profits, they are British companies; those profits will be within our domain. We can seize that money back or if it is monopoly profit, monopoly power driving up profits above what is necessary to remunerate the investment that is being put in and to attract future investment, then the whole anti-monopoly power of the state should come down and ensure that does not happen. But I am not sure that that is the case. Obviously, we cannot nationalise the oil fields or the gas fields in Malaysia or Nigeria. The Malaysian and Nigerian Governments can if they like, but we cannot. Any profits that are being made out there are outside the control of the British Government. We can control the margins that energy companies are levying on top of the cost of imported gas and oil and coal, but we cannot really influence the world price and the world price has gone up. IPPR, which is a left of centre think tank, says that the bulk of the rise in energy prices is due to the increased cost of fuel and the wholesale cost that creates. Ofgem says the margin has gone up from about £30 on the average bill to £85. Now, I do not trust those margins and it may, of course, have gone up from a higher figure to an even higher figure. One reason I do not trust them is because it shows five years ago they were all making a loss. Although I am a capitalist, I believe in market forces, I do not think oil companies voluntarily subsidise us, oil or energy companies, so there is something funny about those figures. We have to get to the bottom of it, but I very much doubt whether we will find that the bulk of energy bills is there for taking back. Most of it is due to higher world prices, which we suffer from.
Q16 Chair: I think we are going to be out of time as some of us have to go back to London on the flight in a little while. I know that people are keen to get in again, but I will just ask if anyone else on the panel wants to say anything by way of winding up. Norman Kerr: Can I say something on housing? A number of people have spoken about housing tonight. John Robertson mentioned the fact that there is a different regulation in housing and housing down south will be regulated in terms of its energy efficiency from 2018. That does not apply to Scotland and I think it is incumbent upon organisations like ourselves and those who represent householders to press the Scottish Parliament to ensure that that legislation comes in here. But I will also say in terms of fuel poverty the work that John Hills has undertaken in terms of redefining fuel
96 Energy Prices, Profits and Poverty
poverty will thankfully only apply south of the border and the Scottish Parliament have said that they will maintain the definition of fuel poverty in Scotland that gives us greater scope to include a whole range of more vulnerable people, as was mentioned up there, in terms of how we support people. So there is a bit of yes, some things are good down south but some things are bad up here, and I think we have to look at what the best of those things are and push politicians both in Westminster and at Holyrood to move in the right way. Chair: Okay. I am sorry we cannot accommodate people for a second round, but we have been talking for nearly an hour and a half now and we are driven by the timetable. No, I am sorry, we took a question from you earlier on, I am really sorry. I would just like to reiterate what John has said that this Committee is absolutely determined to act in the consumer interest. Peter has made the same point that if there are abuses, whether they are by Government or by companies or regulators or any agency that is involved here, we will address those and get to the bottom of them. We do try to operate as far as possible by consensus. We think we have a much greater influence if there is a group of 11 MPs from three parties all agreeing, and I think the evidence shows in the last couple of years that our reports and recommendations are taken very seriously by the Government and, indeed, by the industry. I am very grateful to you all for coming along. I hope you regard this as a useful exercise. In one of our reports we called for an honest conversation between consumers, businesses, academics, regulators, politicians, Government and so on, and this is part of that process of trying to promote the honest conversation. It has been a very valuable session for us and we have staff from the Committee here and staff from Parliament who will take note of what has been said. Thank you all for coming along.
Energy Prices, Profits and Poverty 97
Formal Minutes
Tuesday 16 July 2013
Members present:
Sir Robert Smith, in the Chair
Dr Phillip Lee Christopher Pincher Mr Peter Lilley John Robertson Dr Alan Whitehead
The following declarations of interest relating to the inquiry were made:
Sir Robert Smith declared interests, as listed in the Register of Members' Interests, in the oil and gas industry, in particular a shareholding in Shell transport and Trading (oil integrated), and as honorary Vice-President of Energy Action Scotland.
Draft Report (Energy Prices, Profits and Poverty), proposed by the Chair, brought up and read.
Ordered, That the draft Report be read a second time, paragraph by paragraph.
Paragraphs 1 to 152 read and agreed to.
Annex and Summary agreed to.
Question put, that the Committee be the Fifth Report of the Committee to the House.
The Committee divided.
Ayes, 4 Noes, 1
Dr Phillip Lee Mr Peter Lilley
Christopher Pincher
John Robertson
Dr Alan Whitehead
Question agreed to.
Resolved, That the Report be the Fifth Report of the Committee to the House.
Ordered, That the Chair 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 (in addition to that ordered to be reported for publishing on 26 and 28 February, 16 April, 9 and 21 May, and 2 July).
[Adjourned till Tuesday 10 September at 9.30 am
98 Energy Prices, Profits and Poverty
Witnesses
Tuesday 12 March 2013 Page
Ron Campbell, Chief Policy Analyst, National Energy Action and Mervyn Kohler, Special Adviser, Age UK Ev 1
Richard Lloyd, Executive Director, Which?, Audrey Gallacher, Director of Energy, Consumer Focus and Anne Pardoe, Energy Policy and Liaison Officer, Citizens Advice Ev 8
Tuesday 16 April 2013
Tony Cocker, Chief Executive Officer, E.ON, Juliet Davenport, Chief Executive Officer and Founder, Good Energy, Jim Poole, Director of B2C, EDF Energy and Alistair Phillips-Davies, Deputy Chief Executive, SSE Ev 21
Paul Massara, CEO, RWE npower, Ian Peters, Managing Director, Energy, British Gas, Neil Clitheroe, CEO Retail and Generation, ScottishPower and Stephen Fitzpatrick, Managing Director, Ovo Energy Ev 38
Thursday 9 May 2013
Professor John Hills, London School of Economics, Dr Nick Eyre, University of Oxford and Jan Rosenow, University of Oxford Ev 52
Gervase MacGregor, Head of Advisory Services, BDO LLP Ev 62
Tuesday 21 May 2013
Andrew Wright, Interim Chief Executive, Markets, Ofgem and Sarah Harrison, Senior Partner, Sustainable Development, Ofgem Ev 68
Rt Hon Edward Davey MP, Secretary of State for Energy and Climate Change, Rachael Crisp, Head of Energy Markets and Consumers, DECC and Gareth Baynham-Hughes, Head of Fuel Poverty, DECC Ev 77
Energy Prices, Profits and Poverty 99
List of printed written evidence
1 Citizens Advice Ev 93 2 SSE Ev 96: Ev 101: Ev 104 3 RWE npower Ev 105: Ev 110 4 Age UK Ev 116 5 Which? Ev 118 6 E.ON Ev 122: Ev 127: Ev 131 7 National Energy Action Ev 132: Ev 143 8 Ovo Energy Ev 144 9 Consumer Focus Ev 146 10 DECC Ev 165 11 British Gas Ev 173: Ev 186 12 EDF Energy Ev 193: Ev 202 13 ScottishPower Ev 205: Ev 211 14 Ofgem Ev 215
List of additional written evidence
(published in Volume II on the Committee’s website www.parliament.uk/ecc)
15 Ray Cope Ev w1; Ev w5 16 Barry Rosindale Ev w5 17 Chris March Ev w6 18 National Pensioners Convention Ev w7 19 IPPR Ev w11 20 All Party Parliamentary Carbon Monoxide Group Ev w15 21 Energy Action Scotland Ev w17 22 Hastoe Housing Association Ev w20 23 Martin Allan Ev w21 24 Cornwall Energy Ev w23 25 Mr D Shah Ev w31 26 Local Government Association Ev w31 27 Carillion Ev w34 28 Brian Mongey Ev w37 29 Renewable Energy Association Ev w38 30 Caroline Flint MP Ev w46 31 UK Government's Fuel Poverty Advisory Group Ev w49; Ev w59; Ev w61 32 Barnardo's Ev w64 33 Stephen Littlechild Ev w67 34 Penelope Draffan Ev w86 35 Brian Catt Ev w86 36 Michael Dangoor Ev w96 37 George Herraghty Ev w96
100 Energy Prices, Profits and Poverty
List of Reports from the Committee during the current Parliament
The reference number of the Government’s response to each Report is printed in brackets after the HC printing number.
Session 2010–12 First Report Emissions Performance Standards HC 523 (807) Second Report UK Deepwater Drilling–Implications of the Gulf of HC 450 (882) Mexico Oil Spill Third Report The revised draft National Policy Statements on HC 648 energy Fourth Report Electricity Market Reform HC 742 (1448) Fifth Report Shale Gas HC 795 (1449) Sixth Report Ofgem’s Retail Market Review HC 1046 (1544) Seventh Report A European Supergrid HC 1040 (1684) Eighth Report The UK’s Energy Supply: Security or HC 1065 (1813) Independence? Ninth Report Solar Power Feed-In Tariffs HC 1605 (1815) Tenth Report The EU Emissions Trading System HC 1476 Eleventh Report The Future of Marine Renewables in the UK HC 1624 (93 Session 12-13) Twelfth Report Consumption-Based Emissions Reporting HC 1646 (488 Session 12-13) First Special Report Low carbon technologies in a green economy: HC 455 Government Response to the Committee’s Fourth Report of Session 2009–10 Second Special Report Fuel Poverty: Government Response to the HC 541 Committee’s Fifth Report of Session 2009–10 Third Special Report The future of Britain’s electricity networks: HC 629 Government Response to the Committee’s Second Report of Session 2009–10
Session 2012–13 First Report Draft Energy Bill: Pre-legislative Scrutiny HC 275 Second Report The road to UNFCCC COP 18 and beyond HC 88 (633) Third Report Low-Carbon Growth Links with China HC 529 (748) Fourth Report Pre-appointment hearing with the Government’s HC 555 preferred candidate for Chair of the Committee on Climate Change Fifth Report Consumer Engagement with Energy Markets HC 554
Energy Prices, Profits and Poverty 101
Sixth Report Building New Nuclear: the challenges ahead HC 117 (106 Session 13-14)
Seventh Report The Impact of Shale Gas on Energy Markets HC 785 (609 Session 13-14) First Special Report The Future of Marine Renewables in the UK: HC 93 Government Response to the Committee’s Eleventh Report of Session 2010–13 Second Special Report Consumption-Based Emissions Reporting: HC 488 Government Response to the Committee’s Twelfth Report of Session 2010–12 Third Special Report The road to UNFCCC COP 18 and beyond: HC 633 Government Response to the Committee’s Second Report of Session 2012–13 Fourth Special Report Low-Carbon Growth Links with China: HC 748 Government Response to the Committee’s Third Report of Session 2012–13
Session 2013–14 First Report The Green Deal: watching brief HC 142 (607) Second Report A Severn Barrage? HC 194 Third Report UK Oil Refining HC 340 Fourth Report Smart meter roll-out HC 161 First Special Report Building New Nuclear – the challenges ahead: HC 106 Government Response to the Committee’s Sixth Report of Session 2012–13 Second Special Report The Green Deal: watching brief: Government HC 607 Response to the Committee’s First Report of Session 2013–14 Third Special Report The Impact of Shale Gas on Energy Markets: HC 609 Government Response to the Committee’s Seventh Report of Session 2012–13
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Energy and Climate Change Committee: Evidence Ev 1
Oral evidence
Taken before the Energy and Climate Change Committee on Tuesday 12 March 2013
Members present: Mr Tim Yeo (Chair)
Barry Gardiner Christopher Pincher Ian Lavery John Robertson Mr Peter Lilley Sir Robert Smith Albert Owen ______
Examination of Witnesses
Witnesses: Ron Campbell, Chief Policy Analyst, National Energy Action and Mervyn Kohler, Special Adviser, Age UK, gave evidence.
Q1 Chair: Good morning and welcome to the is a perception that there is very little to be gained Committee. Thank you very much for coming in. You from the switching process and consequently people probably are aware that Derek Liquorish has been do not get involved to the extent that perhaps they unable to get here because of some travel difficulties. once did. So we will crack on now. We know who you are and you know who we are, so I will not go through a long Q2 Chair: Are they right or wrong? formal introductory process. Ron Campbell: As Mervyn said, there is probably still We have been told that there are barriers that prevent a meaningful benefit for a first-time switcher but, fuel-poor households from engaging in the market and again as Mervyn said, the law of diminishing returns switching supplier. Given that I find that quite difficult applies. If you look at the general offerings across all to do myself, I can well imagine that others who are six of the main energy suppliers, we seem to be seeing less expert in the field may, too. Do you think it is an increasing convergence in terms of the overall costs possible to overcome those barriers? Or do you think and I think the conclusion there is that in many it is always going to be a difficulty for fuel-poor instances the benefit of switching will be marginal. households to take advantage of the opportunities of switching? Q3 Chair: Are you familiar with the Citizens Advice Mervyn Kohler: From the point of view of the older scheme, which I think is run with Ofgem, called population, one of the major barriers, of course, is Energy Best Deal? Is that something that might be access to the internet and to the use of a computer, helpful for vulnerable consumers? because without the information available online, the Ron Campbell: whole process of switching becomes extremely Yes, I am familiar with the concept. I tedious. Sometimes in this world the task of being an have read some reporting on it and yes, our view is active consumer is a full-time job in its own right and that Energy Best Deal is a beneficial development but that may be another barrier in some senses. Switching that it has the potential to be considerably better. It is obviously worthwhile, particularly the first time you is modest in scope; it is modest in its ambition. Our switch, although it becomes subject to a law of preference certainly would be for Energy Best Deal to diminishing returns thereafter. Arguably, if we had a develop into something that could be provided on a strategy of fair pricing in the first place, would we much wider—probably national—basis, and that it need to encourage people to be switching all the time? should be concerned with much more than simply Ron Campbell: I think there is probably a more guiding people towards the best energy-price offer in general point than that, that in fact we have seen a a competitive market. For example, we would like to significant degree of disengagement from the see an advice service that, in addition to providing the competitive market across all consumers. My support and guidance in switching to the best payment understanding is that switching rates across all option, provided advice on access to grants through categories of consumer are quite low; they are in a energy efficiency schemes and/or advice on debt and degree of decline. money management, and a fairly comprehensive In the case of low-income consumers of course, as service that extended beyond simply, “This is the best Mervyn says, there is a number of barriers, not least deal you can get through the competitive market”. of which is access to the kind of technology that, in Mervyn Kohler: Ron’s point there is important. fairness, I think facilitates that kind of process. Anything that has a collective flavour attached to it However, there are other barriers—there is lack of means that people begin to discuss issues, to confidence; there is lack of knowledge; in some cases understand the issues better and to develop a greater there will be a problem because the consumer is awareness of what can be and what is possible either indebted and consequently cannot switch. Also, one in that market or in relation to their consumption of of the fundamental problems, possibly across the energy more generally. So there is room for market, is that there is a degree of scepticism. There encouragement for schemes like that. cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:56] Job: 030522 Unit: PG01 Source: /MILES/PKU/INPUT/030522/Corr EnCC 12.03.13.xml
Ev 2 Energy and Climate Change Committee: Evidence
12 March 2013 Ron Campbell and Mervyn Kohler
Q4 Chair: Mr Campbell, could you just explain housing improvements that we all recognise as the collective switching and how that works and how ultimate solution of where we want to go. people benefit from it? Ron Campbell: As Mervyn says, the most recent Ron Campbell: Thankfully, I have Mervyn here, who impact assessment suggested that between 125,000 I think may make a better fist of explaining how it and 250,000 households might be removed from fuel will work. As the Committee knows, the Government poverty over that 10-year period to 2013. That is not invested significant amounts of money in supporting necessarily a reduction in the scale of fuel poverty collective switching arrangements, primarily through because we do not know fully what the impacts of local authorities but also through voluntary-sector other developments in energy markets will be as a agencies. That money was made available in the result of Government programmes. However, given autumn of last year and, as we understand it, progress that there are currently 4 million fuel-poor households will have been limited up to now. I would say in England alone, and that of course the ECO funding however that the kind of collective switching that is distributed across Great Britain, we think that is a seems to be encouraged by the Government initiatives very modest outcome. seems to us to be more the kind of initiative that we As Mervyn says, despite constant assurances from would want to see, that is to say, it appears to be based Government during the passage of the most recent on a community, on a geographical area, and as such Energy Act that additional resources would be would not have the exclusive nature that might apply available to address fuel poverty, that the level of across some other collective switching arrangements, resources that would be available would dwarf for example, where there is a compulsion to pay by previous levels of expenditure and that therefore we direct debit in order to join whatever that community should not be overly concerned about the loss of of switchers was. Warm Front, that just has not proved to be the case. Mervyn Kohler: Nothing very much to add, Resources are considerably reduced and, in fairness, I Chairman. We, Age UK, are participating in this really think they will not be deployed in the optimal manner with the intention of finding out how useful it is and because there are two things: the level of resources how helpful it can be, remembering that a lot of the and the means by which these resources are deployed. older population in particular—but probably the The existing ECO schemes—at one point the population as a whole—will sometimes want to buy Government’s estimate was £1.3 billion; we would their energy for reasons other than simply price. This emphasise that the energy suppliers suggested the cost adds extra tiers of complication to a collective of ECO might be as much as double that amount— arrangement. If people like the idea of paying on a these resources would be much better deployed traditional quarterly bill basis or of some add-on through the kind of programme, the National Retrofit services like a safety check and things of that nature Programme, that will be introduced in Scotland, in the package they are getting from their supplier, which, rather than considering fuel poverty in that makes the whole collective principle more individual households will look at addressing fuel difficult to organise and goes back to the fact that you poverty on a community basis. You will have heard can really do it adequately only if you are using a this before. You will have heard this from us. You will computer-based system. have heard this from any number of agencies, not least the Energy Minister, who in evidence to your Committee, I think in October or November, was Q5 Sir Robert Smith: There is a lot of concern that extremely enthusiastic about the idea of a community- the ECO will not make a significant impact on fuel based, street-by-street, energy efficiency programme. poverty. Is that a concern you share? Sir Robert Smith: So more resources and Mervyn Kohler: Very much so. Looking at the community-based would be your approach? potential funding that ECO is going to provide for Ron Campbell: Much more resources and dealing with fuel poverty, it seems to be a community-based would be the approach. As Mervyn disappointingly small total in relation to what we have says, this is a problem too with the Energy Company seen in public expenditure in the past through Warm Obligation. The imposition of levies on domestic Front. Indeed, the Government’s own impact consumers, while it obviously has a beneficial impact, assessment, looking at how many people will have also has a negative impact. To some extent, we have been taken out of fuel poverty over the next decade is seen this in Government programmes before, that the very, very disappointing—125,000 to 250,000 well-intentioned schemes that impose fairly households. In relation to the target, which is now significant levies on domestic consumers result in the probably over 6 million households, that is just a drop redistribution of fuel poverty. The households who in the bucket. cannot benefit from the programmes that are introduced and implemented lose out in real terms. Q6 Sir Robert Smith: So expanding the ECO would Mervyn Kohler: Just to underscore Ron’s arguments, be a solution? I believe the approach to use a local initiative to get Mervyn Kohler: Or finding some other form of this sort of work done to be truly important because finance with which to do the essential energy that brings the community together. People live in efficiency work that we want done in houses. In areas where the housing will often share similar England now, we have no publicly funded scheme. characteristics and they can chat to each other about, We are front-loading it all on to the energy companies “What’s happening in my house; what’s happening in and that means that all consumers, including those in yours” and gain strength, reassurance and confidence fuel poverty, are contributing towards the cost of these about what is happening to them and to their home as cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:56] Job: 030522 Unit: PG01 Source: /MILES/PKU/INPUT/030522/Corr EnCC 12.03.13.xml
Energy and Climate Change Committee: Evidence Ev 3
12 March 2013 Ron Campbell and Mervyn Kohler a result of being able to work together. To make a rural households. There is the built type. That is an local initiative really work, we have to somehow draw issue that is more commonly found in rural in the local authorities, who have both information communities than in urban communities. Of course, about households in their patch and who will there is the off-the-mains-gas network issue, which is understand the nature of the housing stock in the area. a significant problem. However, the main concern in Making it more possible for more local authorities to relation to ECO support for rural households is that become engaged is a very important aspect of what energy suppliers, or whoever is tasked with delivering we hope we will find in the forthcoming fuel poverty the measures, will not be prepared to fund the level strategy. of required works. Ron Campbell: Could I just reinforce that point, very Sir Robert Smith: Except they are being focused on quickly? I am not sure about what the protocol is solid walls so that will help rural building. about quoting other witnesses. I did laboriously copy Ron Campbell: Yes, the Energy Company Obligation out what the Minister said to the Committee in the is. That is the primary rationale for that part of the autumn, but regardless of that, the point is that the Energy Company Obligation, the Carbon Reduction Minister was strongly supportive of the area-based Obligation. ECO is quite a complex issue, given that approach. it is now seemingly divided, with three different I think there is another point here that, given the components. In relation to the Carbon Reduction eligibility criteria for schemes, and the view of energy Obligation, rural households should not be any more suppliers that accessing eligible households is disadvantaged really than urban households with that prohibitively expensive and adds significantly to the built type. However, we have not seen any indication cost of these schemes, we need to reduce the that there is an enthusiastic appetite for these expenditure that goes on reaching the eligible measures and again the energy suppliers are now households. It is a very expensive process. asserting that in order to incentivise take-up of solid wall insulation, the subsidy will have to be even Q7 Sir Robert Smith: On a specific community that greater than was originally envisaged and certainly it I suppose is even more difficult, the concern is that was originally envisaged that the level of subsidy the ECO will not tackle fuel poverty in rural areas— would be that which would be sufficient to comply although it does solid walls—and that the fuel poor with the golden rule of the Green Deal. This is another will not be able to benefit in the same way as problem that the suppliers have raised. elsewhere because you would want to combine it with If I could just make another point about solid wall the Renewable Heat Incentive, where there is an insulation, if it transpires—and it looks as though this upfront capital cost or a Green Deal cost. is the case—that private sector householders Mervyn Kohler: That is absolutely right. There is a occupying a property with solid walls are not technical problem as well, that as you define an area encouraged to take up a Green Deal arrangement, as having characteristics of multiple deprivation and despite the fact that 50% of that cost might be so on, sometimes in rural areas the geography just defrayed by ECO subsidy, if that is the case and the does not allow you to identify those sorts of clusters private sector does not take this up, we said from the in the way you can do in an urban world. outset that the £1.3 billion ECO expenditure should The problems of rural fuel poverty sometimes invite be devoted in its entirety to fuel-poverty programmes. different solutions, not available in urban areas, which We think this is a particularly rational solution. If the is to do with renewable generation and so on, which idea was to kick-start development of the solid-wall could be very helpful. Going forward, a special focus insulation industry in this country and, by doing so, on rural fuel poverty issues might be helpful as part bring about a situation whereby this measure became of a fuel-poverty strategy. economically feasible, became cost effective, then you Ron Campbell: Within the Carbon Saving can do that by using the social-rented sector as, to Community Obligation there is a fairly modest 15% some extent, a testing ground. rural safeguard. I am not sure how reasonable it is, but if you were to translate that into monetary terms, Sir Robert Smith: Thank you. I think it would be equivalent to about £29 million as the rural safeguard element. It is probably advisable Q8 John Robertson: Can I ask why it is not taken that there be such a specific requirement, that a certain up by the private sector? level of work be carried out on behalf of rural Ron Campbell: I think it is simply the scale of households because otherwise energy suppliers are expenditure required. I think we would be talking going to find the measures expensive and they are about £10,000 or so for external solid-wall insulation going to find accessing eligible households expensive and despite the fact that the subsidy would be and they are going to find the whole logistics issue significant—the subsidy might be 50% or so—it expensive. That is one of the difficulties with a would be organised in such a way—in righteous programme like this that is to a large extent driven by economics it should be organised in such a way—as suppliers. It is not like Warm Front, where you would to just tip that measure over into compliance with the have a rural household that knew because it had seen golden rule in the Green Deal. So, say it would be a leaflet about the eligibility criteria and the measures £5,000, but it would not be £8,000 or it would not be that were available, that they could get a grant for £9,000. It would just be enough to make this measure £6,000 towards the cost of a new oil-fired central cost effective. I cannot honestly see the marginal heating system and/or additional insulation measures. economic benefits that would accrue to a household As Mervyn says, there are significant problems with prepared to invest £5,000 in that measure being cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:56] Job: 030522 Unit: PG01 Source: /MILES/PKU/INPUT/030522/Corr EnCC 12.03.13.xml
Ev 4 Energy and Climate Change Committee: Evidence
12 March 2013 Ron Campbell and Mervyn Kohler something that appeals to a huge section of the Sometimes it is not helped particularly by the fact that population living in solid-walled properties. the Green Deal has been crafted very much as a Mervyn Kohler: To build on that point—and you may market-led initiative and the energy companies are not want to go here yet because I’m talking about seen to be among those who will be in the van leading more generally the difficulties; the barriers to getting the charge. this sort of energy retrofit work performed—a lot of people will be looking at the construction, the Q11 Barry Gardiner: My point, Mr Kohler, was that inconvenience of the work. In the private sector, about it has been marketed and also stated that the policy one third of the housing stock is occupied by older is there to reduce carbon emissions and therefore the households, and I am afraid I hear from a lot of older recommendations that are put forward by the Climate people, “Oh, I don’t think I’ll be around for another Change Committee are related to what is necessary to five or 10 years at the most and I can’t be bothered to achieve those levels of emission reductions. For solid have the work done”. We have to get over that barrier wall, for example, they said that there should be 2.3 as well, as we craft and develop the ECO or whatever million installations of solid wall by 2015. So given we have for the future. what you have said about the marketing of the scheme and the reluctance of people to have work done in Q9 Barry Gardiner: Mr Campbell, National Energy their properties, do you see any possibility of those Action suggests that 45% of fuel-poor households will recommendations being fulfilled? be unable to benefit from cavity-wall insulation under Mervyn Kohler: Not, I fear, without considerably the ECO. Can you just explain why that might be the more effort to generate interest in this sort of subject case? from communities and so on. Ron Campbell: To be honest, I do not recognise that figure. Q12 Barry Gardiner: You said that in an ideal world Barry Gardiner: Maybe if you want to check you would tip the scales to make any subsidy conform whether you did come up with it and if so if you with the golden rule of the Green Deal. Nevertheless, want to write to us and advise us why, that would that would be ideal only if the Green Deal itself and be helpful. the golden rule itself were incentivising people to take Are you aware of the sensitivity analysis that DECC up the Green Deal programme, would it not? has done for uptake by 2022? Mervyn Kohler: Absolutely correct. Ron Campbell: No, I am not familiar with that. Barry Gardiner: It is not, is it? Mervyn Kohler: No. Q10 Barry Gardiner: What about the Committee on Climate Change’s recommendation of uptake for 2015? Q13 Barry Gardiner: So when Energy UK found Ron Campbell: Of solid-wall insulation? that the cost of ECO could not be perhaps the £1.3 Barry Gardiner: They have done an uptake on solid- billion that DECC have estimated but £2.35 billion or wall, loft and cavity-wall insulation. more, adding on average £94 to consumers’ bills, do Ron Campbell: I think these things are not terribly you think that is a more realistic estimate? scientific. I think there is a general recognition Ron Campbell: This is the kind of report that we have certainly that the kind of measures that were the basis had from the industry relating to the last few years of of previous grant schemes— what they see as very challenging targets, so the Barry Gardiner: What is it that is not particularly super-priority group element of the carbon emissions scientific? Any estimates that DECC come up with or reduction target reaching these households and any recommendations that the Climate Change offering them some kind of incentive to adopt energy Committee come up with? efficiency measures—I am not entirely sure what the Ron Campbell: Both, I think. There is a degree of figure was, I think it was something like £200 per conjecture in these things. You have to look into the household—and that I think is for fairly basic heart of households and energy consumers to see just measures. If I could go back— what it is; how they will react to various grants, Barry Gardiner: I would rather you answered the schemes and incentives. The Climate Change question. Committee did say something rather supportive about Ron Campbell: If the cost of the scheme is as the negative impact of the cost of ECO on fuel-poor expensive as the energy suppliers claim, it will work households and in relation to solid-wall insulation. It out at £94 per household. did suggest that this was a good and rational deployment of resources to fund solid-wall insulation Q14 Barry Gardiner: DECC have rejected having on behalf of fuel-poor households. benefit entitlement checks carried out as part of ECO. Mervyn Kohler: I think a lot of these projections are Would that have been a useful way of ensuring that anticipating how the public is going to respond and more people in fuel poverty engaged in this deal? here we are so recently into the Green Deal-related Mervyn Kohler: It is an absolutely essential way of programmes, it is very difficult to make a judgment making progress on several fronts all at once. Linking and that is probably where a certain amount of the benefit entitlement checks to energy efficiency work speculativeness that Ron is referring to comes in. We is a convenient link to make. The important thing at certainly do need to make sure that the public get the end of the day is that the benefit entitlement check behind the concepts that we are trying to extol here— is carried out because—certainly again I would speak the idea of making homes much more energy efficient. with knowledge only in this respect of the older cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:56] Job: 030522 Unit: PG01 Source: /MILES/PKU/INPUT/030522/Corr EnCC 12.03.13.xml
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12 March 2013 Ron Campbell and Mervyn Kohler population—the numbers of people who are under- of consumption. Do you think that would work? Is claiming on benefits, and under-claiming by very that the practical solution to the dilemma that you significant amounts is quite frightening. outlined there: that you can identify who are the fuel poor and then in their bills there is a block of Q15 Barry Gardiner: So why do think DECC consumption exempted? decided not to include it? Mervyn Kohler: The fly in that particular ointment is Mervyn Kohler: Presumably again on the grounds whether you can identify the fuel poor. We have spent simply of managing the costs of the programme. a lot of time debating the definition of who is in fuel poverty or not and wherever you make a definition of Q16 Albert Owen: Can I just move on to more a description of a household, you are going to have general environmental and social levies? We have silly cliff-edges where people are either in or out of heard that these social and environmental programmes the box and sometimes inside it and sometimes are paid for through levies on the energy bills and outside it. these costs can hit the fuel poor the hardest. Why is that? Q21 Albert Owen: Nevertheless, a lot of people on Mervyn Kohler: It is a question of proportionality. A benefits are fuel poor as well so those would be an person in fuel poverty is going to be spending, by easy target group for the DWP. definition, a larger chunk of their available income on Mervyn Kohler: They would, and undoubtedly to find energy and if a chunk of that energy cost is going up, some way of protecting those people by a strategy it bites on their broad budget in more general terms. such as having a protected block of expenditure would Also, the fact of the matter is that we charge for these be a help—and a help to people who are living on environmental and social obligations on a per such seriously narrow margins that even a small household bill basis. There would be surely a greater amount of help is going to be very welcome respite. case in terms of equity if it was charged on a per consumption-unit basis. Q22 Albert Owen: So you think it is a good idea and it is something worth looking at? Q17 Albert Owen: I understand your general theme Mervyn Kohler: It is definitely an idea worth there, but some housebound people who are fuel poor looking at. need heating all the time so they would pay more Ron Campbell: My assumption here is that all under a per-unit charge. households would benefit from a number of units that Mervyn Kohler: Absolutely right. Again, with the were not subject to any kind of levy, so it would not older population, living in their homes 24 hours a day, simply be a question of identifying fuel-poor 7 days a week, probably needing a higher ambient households. The hypothetical benefit to fuel-poor temperature because of their health conditions, people households would result from the fact that they who might be incontinent and need gallons of hot generally do consume less energy. Consequently, what water to wash their bedding and things of that nature, would be a higher charge on the second tranche of they will need to be looked at in a slightly different units would not impact so badly on these households way if we were to move to a payment-by-consumption because they consume so many fewer units of the basis. They would need to be properly safeguarded. second tranche. The main issue about raising funding for Government Q18 Albert Owen: I am not really sure what you are social welfare and environmental objectives is not so saying as an organisation. You said in your opening much to do with how the levy is structured and remarks that you supported the units. Yes? Unit cost. whether the levy is right in principle. The levy is However, that would be detrimental to some people regressive in its function, not simply because energy whom you represent. costs represent a higher proportion of low-income Mervyn Kohler: As an organisation we look at the households’ expenditure and income; it is because it figures, which give us the flavour in the big picture of does not take any account of their ability to pay. things, that people who are in fuel poverty are usually smaller consumers so let’s start with that and then deal Q23 Albert Owen: Neither do the other breakdowns with the exceptions, who we want to protect. of the bill. Transmission costs—if you are rural poor in the west of Scotland, you are still paying more for Q19 Albert Owen: However, are they the your transmission costs. So it is not just the exceptions? The people I come across or visit in their environmental and social costs that that applies to in houses in my constituency who have concerns, they the bill. are growing in number. So I am not so sure that the Ron Campbell: The fundamental issue here from our balance would be, in the way that you said, better for point of view is less to do with modifying the way them by going to unit price. levies are imposed on domestic energy bills and more Mervyn Kohler: This may be a subject worth more with developing some kind of system that better research and more discussion, but I come back to the reflects ability to pay and that, we consider, fundamental point that the most profligate users of unavoidably involves Exchequer-funded programmes energy are wealthy households, and the converse is rather than levies on consumer energy bills. true as well. Q24 Albert Owen: Just one final question, I think Q20 Albert Owen: The Fuel Poverty Advisory you have covered most of what I was going to ask. Group has advocated that there be a protected block How confident are you that these are passed on to the cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:56] Job: 030522 Unit: PG01 Source: /MILES/PKU/INPUT/030522/Corr EnCC 12.03.13.xml
Ev 6 Energy and Climate Change Committee: Evidence
12 March 2013 Ron Campbell and Mervyn Kohler consumers in a fair way because we do not really proportion of fuel-poor households would further be know from the bill. I am sure you are familiar with penalised. the figures, Ofgem suggests 11% or £59 per annum Mervyn Kohler: I think the question of whether on electricity and 6% or £49 on gas. Do you think that DECC leaves the setting of the levies to the fairly reflects what people are paying? companies is an unusual one and an odder one, but I Mervyn Kohler: I think that to have the information would feel instinctively that it is for DECC to decide about these extra charges much more clearly spelled and to apply uniformly across the companies, or else out on the bill is a good thing in principle. It makes we are inviting the companies to do even more people, if they are going to pay any attention to their obscure things with their bills in order to try to bill at all say, “Oh, what are these social and provide the argument that they are offering the best environmental levies? Oh, is that what it’s about?”, price to consumers, and we are all surely about and it would perhaps improve their overall awareness simplifying bills rather than making them more of the energy that they are using, how they are using complicated. it, why they are using it. It would help with that background noise of making energy something that Q28 Mr Lilley: Presumably we can all agree that people are prepared to talk to each other about in the cost efficient programmes to reduce the amount of convenience store or in the pub or whatever. energy you consume—particularly for poor families— Albert Owen: They are talking about it now and they is a good thing, and the Green Deal therefore in don’t like it, many people. principle, if the golden rule is met, meets that criteria Ron Campbell: Levies are simultaneously problems and that the cost will be less than the benefit. You and solutions. mention ECO costing £1.3 billion. My simple Albert Owen: My question was do you think there is arithmetic, if there are 20 million households, is that sufficient information now? that makes £65 per household, presumably over the Mervyn Kohler: There is not sufficient information on lifetime of the programme. Do you think that is a consumer bills, no. good deal? Albert Owen: That can be done quite easily by the Ron Campbell: I think if the overall expenditure can regulator suggesting that the energy companies do it? be limited to the £1.3 billion, I think that is one of the Mervyn Kohler: A very simple change, yes. main concerns at the moment. The industry is suggesting that, because of the way the programme is Q25 Albert Owen: What about DECC? How can structured, expenditure might be in the region of they control how companies decide on the levy? 100% more than the £1.3 billion. It is all to do with Mervyn Kohler: I think I was answering you, Mr the outcomes and the value for money of course, and Owen, on the basis of how we explain to consumers to go back to— what the levies are about, not how we fix the levies. Mr Lilley: Surely the ECO is designed to cope with the things that cannot be financed by the Green Deal, Q26 Albert Owen: That was my first part, yes, i.e. whether costs exceed the benefits to the which you answered. You are saying it is very simple; household? Almost by definition the costs exceed the it can be done. The second part I wanted to talk about benefits, so it is not a good deal. relates to when you were talking about unit costs and Mervyn Kohler: Yes, the cost of ECO is going to fall household costs earlier. Can DECC have a direct input on all households and only a handful will see the into this? benefits of that programme of expenditure, in terms of Ron Campbell: I think DECC can frame the structure having work done in their homes. That is the balance of levies in any way they see fit. I could not imagine that we have to try to address. That would be the what the— balance if you were the householder in question looking at the extra cost of the levy on your bill, and Q27 Albert Owen: Do you think they should be looking at the energy efficiency that you are getting more proactive or just leave it to the companies? We out of your property at the moment. will be asking them and we will be asking the companies, but we are asking you now. Q29 Mr Lilley: Are your organisations concerned Ron Campbell: Presumably they will tell you that about other costs of the Government’s climate change they are being as proactive as they can. programme, in general? The costs of moving from Albert Owen: They will give us their account. We relatively low cost coal, gas and old nuclear, to are asking for yours. renewable energy, which costs twice or more as much: Ron Campbell: Levies are very complex. As we have wind, offshore wind, new nuclear? been discussing here, certainly you can structure Mervyn Kohler: We are very conscious of the fact levies so that they benefit, for example, the majority that the energy industry is facing huge costs going of fuel-poor households. The unintended consequence forward, in terms of generating and the manner in in certain cases—depending on the individual which electricity and gas are provided to us, and household’s circumstances, say, an all-electric distribution. All these matters will add remorselessly household—is that you might end up inadvertently to our energy bills. If we are concerned about fuel penalising a fuel-poor household, but these are issues poverty, of course we will be concerned about how where there has to be a kind of utilitarian approach. these extra costs are going to be factored into bills and The vast majority of fuel-poor households would consumer costs going forward into the future, because presumably benefit from option A, but a smaller it looks as if it could plunge a lot more people into cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:56] Job: 030522 Unit: PG01 Source: /MILES/PKU/INPUT/030522/Corr EnCC 12.03.13.xml
Energy and Climate Change Committee: Evidence Ev 7
12 March 2013 Ron Campbell and Mervyn Kohler fuel poverty. So, yes, we are aware of the bigger incurred as a result. We get a kind of tentative picture. reassurance from Government. I personally do not find it remotely reassuring, but I think it is intended Q30 Mr Lilley: Are you aware that, according to to be reassuring in that, as much as energy costs may Lord Stern’s report that the Government uses as be higher, they will be less high than they would be justification for imposing all these higher costs, the if we continued with business as usual in terms of costs of these measures will not be exceeded by the generation. That simply, in relation to the fuel-poor benefits in terms of reduced damage from climate population, isn’t good enough. change until the next century, in 100 years’ time? We say this in relation to as and when you identify Mervyn Kohler: From my point of view, I do not a detrimental impact on fuel-poor households, your think I have the intellectual apparatus to challenge primary objective should be to develop a Lord Stern. proportionate response to ease or eliminate that detriment. As I say, there are two issues here. One is Q31 Mr Lilley: No, I am not seeking to challenge the macro energy generation issue. The other one is him. I am asking whether you accept his analysis, back at the individual household level—what actions which is in his report? do you propose to take to mitigate the negative impact Mervyn Kohler: I can see the argument that we have on these households? to make a difference to climate globally. The Mervyn Kohler: We have to look at this in the round contribution that we will make in the United as well. To add to Ron’s point, the Government is Kingdom, by sheer dint of our size, will be a relatively trying to steer the market by a number of different small part of that, but that is not an argument for not levers, of which Contracts for Difference is one and doing it. carbon taxes and so on are others. We have to look across the piece here and see what benefits there will Q32 Mr Lilley: Don’t you think it is a bit rich that be for consumers. I would submit that we would be your client group—the elderly, the least well off— talking about the potential costs to consumers of are being asked to subsidise future generations, which things like Contracts for Difference, and the benefits again, according to Lord Stern’s forecast, in 100 that might be accrued if we looked at the revenues years’ time will be three times as well off, even on from carbon taxes going forward as being a pot of his worst scenario for climate change, and in 200 money we could use to help people in fuel poverty. years’ time will be seven times as well off, even on the worst scenario he shows for global climate change. Q35 John Robertson: Yes. I have many elderly Should the poor today subsidise the rich tomorrow? people in my constituency, and I sometimes think that Mervyn Kohler: You make your challenge to me, Mr perhaps we should be looking after not just them but Lilley, about the older population. I would submit in people with disabilities, people who do not have the return that the older population feels a sense of the money. Should we try to introduce some kind of levy importance of leaving an inheritance to their children that helps them, as opposed to other people? and to future generations. A safer planet might seem Mervyn Kohler: It is perfectly right and proper and to me to be an important part of that inheritance. laudable, and no doubt Age UK would argue that it should be done too, that we make special provision Q33 Mr Lilley: However, if their planet is going to for people who are disabled or who have special needs be seven times as well off, it is pretty well saved, and so on. However, what we know in the long run is isn’t it? that the solution that we want to reach is housing that Mervyn Kohler: “If”, you said. is much more energy efficient, where we do not have Mr Lilley: According to him, his worst scenario. to have this discussion about, “Do you have enough money to keep yourself adequately warm?” The Q34 John Robertson: I want to ask some questions slowness of our collective effort, our willpower as a about the Energy Bill and the Retail Market Review. country over the last 30 years to improve our housing Unfortunately, your colleague who is not here—the stock is why we have an urgent problem now, with so first question was to him, really, but perhaps if I can many people in fuel poverty and so many different structure it in a way that you will be able to let me potential ways—I do not criticise your potential ways know what your thoughts are. The Government have of helping people who are poor, but they are said—I think I can even quote part of it here—that the essentially “finger in a dyke” operations, whereas we costs of the Contracts for Difference will be passed to actually want a bigger dyke. consumers in their energy bills and that there is no intention to charge the industries for it. How do you Q36 John Robertson: Yes. Mr Campbell, NEA said feel about that? that the Government had failed to undertake a Ron Campbell: Obviously, in relation to our client rigorous and convincing analysis and fully consider group, anything that impacts negatively on energy the advice consequences of the Energy Bill. What was costs is to be deplored or at least regretted. We missing from the Government’s analysis? recognise—and I suppose this is very much in line Ron Campbell: I think the fundamental thing that was with what Mervyn was saying earlier in response to missing was a credible indication of the impact that Mr Lilley’s question—that there are compelling electricity market reform would have on households arguments related to the generation mix and how we in general, and fuel-poor households in particular. As develop the generation mix in the future, and that— I say, much of the emphasis in the impact assessments unavoidably, it seems to us—additional costs will be related to the Energy Bill have concerned, not the cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:56] Job: 030522 Unit: PG01 Source: /MILES/PKU/INPUT/030522/Corr EnCC 12.03.13.xml
Ev 8 Energy and Climate Change Committee: Evidence
12 March 2013 Ron Campbell and Mervyn Kohler actual degree of detriment to households but have Mervyn Kohler: I think the key point is that John concentrated on how much worse potential detriment Hills observed in our current definition of fuel poverty would be if the proposed measures of the Energy Bill that it was too sensitive to price changes, and the key were not undertaken. We have no way of deducing point about his proposed alternative is that it is not from that kind of analysis just what the implications sensitive enough to price changes, and that because he are for fuel-poor households. We have 4 million fuel- is taking a median of a median, and things like that, poor households in England at the moment, 5.0 to help define who is going to be in fuel poverty under million-something fuel-poor households in the UK. his new definition, we will be looking at a target that We have no idea how many fuel-poor households scarcely ever changes. The value of a fuel poverty there will be in 2020 or 2025, and we would like to definition is that it gives us a picture of the scale of see some kind of analysis that demonstrated the extent the problem. It also enables us to measure whether we of that problem over the next 10/15 years or so, but are going forwards or backwards dealing with it, and more importantly, I think, increased recognition of the if we have a measure that doesn’t change very much need to undertake remedial action to address what it doesn’t seem to be awfully helpful from that point appears to be a significantly growing problem. of view. Neither measure helps us do anything very tangible Q37 John Robertson: NEA have suggested an with targeting measures to alleviate fuel poverty. So, alternative approach to that set out by the RMR would in that sense, there is a certain amount of technical be to offer a universal social tariff to households happiness about getting the right definition of fuel meeting the pre-defined eligibility criteria. Can you poverty, but it doesn’t necessarily help us with explain this proposal in a bit more detail, and what practical implementation of fuel poverty strategies. you think would be preferable to simply putting all consumers on the lowest tariff rate? Q39 Ian Lavery: Do you think that the Hills Review Ron Campbell: This would be an attempt to bring in some cases was a distraction from designing clarity, consistency and uniformity across the energy effective fuel poverty policies? industry, working on the assumption that you have Mervyn Kohler: It has certainly taken people’s eye off identified a category of the population that is what is happening on the fuel poverty front. As we particularly vulnerable, that is financially have seen, the price of energy continued to spiral disadvantaged and that is in need of specific upwards in such a widespread way. It has also brought assistance. We see this now across a whole range of into disrespect the will of Parliament, for example, in fuel poverty labelled programmes, because eligibility 2000 with the Warm Homes Energy Conservation Act, criteria are converging. Whether it is based on the getting agreement from the Government that fuel Warm Home discount, whether it is the Affordable poverty would be eliminated as far as practicable by Warmth element of the Energy Company Obligation, 2016. We are not going to get there. What is whether it is cold weather payments, the most Parliament going to do about it? vulnerable and financially disadvantaged households are being prioritised for assistance. I think in relation Q40 Ian Lavery: Finally, if the Government decides to a universal social tariff, that simply reflects the way to adopt the new definition, do you think a new target other benefits work or other sources of support work, should also be set? that there is a consistency across all entitlement to the Mervyn Kohler: There certainly needs to be a new extent that a household knows whether they qualify strategy. How far we can attach targets to that I do not for some kind of support and/or an adviser knows how know, but I certainly want to see the targets bringing they can refer people into that level of support and down the numbers of fuel-poor much faster than we what that degree of support will be. So you do not have currently forecast for the intervention of Green have individual suppliers having a non-standard offer. Deal and ECO and, above all, to make sure that the trajectory is downwards instead of remorselessly Q38 Ian Lavery: I want to focus very quickly on the upwards, as it has been for the last seven or eight Hills Fuel Poverty Review, the independent review for years. Government, which was published in March 2012. Chair: Thank you very much indeed for coming in. Some concerns have been expressed about the new It is much appreciated. fuel poverty indicators recommended by Professor Hills. Can you explain the potential pitfalls of the new low income, high costs indicator?
Examination of Witnesses
Witnesses: Richard Lloyd, Executive Director, Which?, Audrey Gallacher, Director of Energy, Consumer Focus, and Anne Pardoe, Energy Policy and Liaison Officer, Citizens Advice, gave evidence.
Q41 Chair: Thank you very much for coming in. I Some of the Committee visited Glasgow last month, am sorry we are running slightly behind time but we and we did hear concerns from members of the public will proceed now. I will not go through a formal who said they were simply unable to afford their bill. introduction, as we know who you are, and you should One homeowner claimed their bill was more than know who we are. £400 a month. We were not able to stand that up while cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:56] Job: 030522 Unit: PG01 Source: /MILES/PKU/INPUT/030522/Corr EnCC 12.03.13.xml
Energy and Climate Change Committee: Evidence Ev 9
12 March 2013 Richard Lloyd, Audrey Gallacher and Anne Pardoe we were there, but another one was saying they had of clothing, hats and scarves, indoors. We also had a to switch off their heating for six months of the year. 35-year-old woman, with two young children, who is Do you think that is a genuine and widespread in receipt of benefits. She had arrears with her gas experience for people? company that were being collected through her pre- Richard Lloyd: I think it is, Chairman, and we have payment meter at the rate of £8 per week. She could been polling every month now for a year what are only afford to put £20 per fortnight on her meter, consumers’ top financial concerns. Domestic energy which only gave her £4 worth of gas. She and her prices are consistently either the top concern or the children were very cold and the children were getting second. The second is often the price of petrol or ill and hadn’t been going to school as a result. diesel. We found that a significant proportion of consumers are dipping into savings, using credit to Q42 Chair: Could a benchmark retail energy price pay for domestic energy costs; up to 40% of help? consumers in our most recent tracker. So all the Richard Lloyd: In our view, yes. One of the problems evidence we have seen is that this is a very widespread with the market, both retail and wholesale in our view, and longstanding problem for consumers. They are is that there isn’t a clear reference point for pricing. worried about the trajectory of prices into the future, In particular, if you look at other markets where there they are worried about what they are hearing from the is a benchmark price set by the regulator, for example, Government about where prices are likely to go before in some states in the United States, in Northern potentially the effects of decarbonisation start to Ireland, and around that, suppliers can compete. It mitigate that, and they are looking to the Government gives consumers—the vast majority, as you know, are for solutions, and all of this with a backdrop of deep very disengaged in this market—some assurance mistrust of the energy suppliers. about whether they are paying a fair price. I think Audrey Gallacher: I think probably Citizens Advice what we have seen over the years, where we have will have more specific anecdotal evidence around the relied on a liberalised competitive retail market, is clients that go to them, but we have a small growing distrust on the part of consumers about complaints handling team up in Glasgow in fact that whether the price they are paying is fair, a great deal with debt and disconnection cases. It is a difficulty in navigating their way around the market statutory responsibility that we have. They have never and identifying the best deals, and nowhere to look to, been busier. They are reporting that they are seeing to compare authoritatively whether the price they are increasing cases of consumers who have self- paying for gas and electricity is a decent one. So, in disconnected from pre-payment meters, to an extent our view, yes, it would help. that they are encouraging us to do more work to understand the drivers behind that. So I think, as Q43 Chair: Consumer Focus, you have expressed Richard said, it is a significant problem—not one that concern about the Carbon Floor Price. Could you tell is going away, but one that is only getting worse, but us how you think carbon tax receipts could be used to I am sure Anne probably has lots more examples alleviate fuel poverty? around that. Audrey Gallacher: There is a campaign running at the Anne Pardoe: Yes, I think it is one of the biggest moment called the Energy Bill Revolution, which is issues that our bureaux are dealing with at the looking at making the homes in the country more moment. Last year we had 97,000 inquiries just to our energy efficient, so making them as energy efficient bureau alone about fuel debt. In the first three-quarters and up to the standard of homes built today. of this year we have received 68,000, which is roughly Obviously, to do that would cost a significant amount the same proportion of our overall inquiries. of money. We know there is pressure on public Interestingly, every year we survey our bureau, as a spending, so it is quite difficult to see where that policy team, to see what the biggest issues they think would come from. To us, there is an obvious vehicle we should be working on for the year are, and this around the Carbon Floor Price, which is obviously a year, perhaps unsurprisingly, welfare reform came top, tax on carbon. As an organisation, we would rather and then energy prices were something that they see that scrapped. We do not think it is a very good thought we should be doing something about second. policy vehicle. We do not think it really delivers the Energy prices are rising hugely out of step with intent to reduce carbon; it just displaces it across household income, and the cost of living is rising Europe. We would do much better to try and work hugely as well. It is becoming more and more of an with other member states to sort out the EU ETS. issue, and we think that it is going to get worse, with However, on the basis that we have this, that it is the prices continuing to rise. We are particularly raising significant tax receipts every year, the Energy concerned about the impact of welfare reform on Bill Revolution suggests anything up to £4 billion a benefit claimants as well. year. I brought a couple of examples along with me of some There has been some economic modelling done and it bureau clients who we have seen quite recently, since shows that if you use that money you can make homes January this year. We had one client who was a widow more energy efficient. You can take nine out of 10 and she lived alone on a very low benefit income. She homes out of fuel poverty and, as a by-product, clearly was in poor physical health. She was working part- you are reducing carbon, which is an ongoing aim, time, but was currently signed off sick. She could not but you are improving the health of those households. afford to turn her heating on during the winter as she Potentially you are offsetting the need to build was terrified that she wouldn’t be able to pay the bill increasing amounts of generation plant, because we when it came. She had resorted to wearing extra layers won’t be using as much. It would also create quite a cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:56] Job: 030522 Unit: PG01 Source: /MILES/PKU/INPUT/030522/Corr EnCC 12.03.13.xml
Ev 10 Energy and Climate Change Committee: Evidence
12 March 2013 Richard Lloyd, Audrey Gallacher and Anne Pardoe lot of jobs, which is clearly something that we are profits because they need to invest, but we do not ever looking for in these current economic times. see what that investment is. However, we thought approximately 20% of the bill—all told, not just Q44 Mr Lilley: Mr Lloyd has referred several times suppliers, right through the value chain. That was peer to lack of trust in the energy companies by consumers. reviewed by some DECC economists, who did not Do you think this is justified? I presume you mean by find any fault with it but were not going to sign up to that that they think that the profit margins taken by it. Again, it is quite a lot of conjecture because we the energy companies account for a significant just do not know. percentage of the increase in price that they have experienced. Do you agree with that? Q48 Mr Lilley: By how much do you think that Richard Lloyd: I think there is a justified lack of trust. percentage has increased? The energy suppliers acknowledge that and they are Audrey Gallacher: One of the concerns that we have saying to us they are trying to rebuild that trust. I had on— think there are a number of causes. One is a lack of Mr Lilley: Could you just answer the question: by transparency about how the price and, in particular, how much do you think that has increased? It could the price increases that people have been paying have be, “Yes, 5%, 10%” or “don’t know” or “100%, been arrived at, with very regular, very substantial don’t know”. profit announcements by particularly the vertically Audrey Gallacher: We have some figures where we integrated suppliers, who are making significant have seen that— margins on their generation business, perhaps not so Mr Lilley: Tell me what the figures are. significant on their retail end of the business. That Audrey Gallacher: I will need to look for them in my fuels the perception among consumers that there is brief, but profitability across from 2008 to 2012 has something going on in the industry. shown that the—can I come back to you on that because I don’t want to waste a lot of time looking Q45 Mr Lilley: I am not talking about perception; I for it? am fully aware of the perceptions of consumers. I am saying, do you objectively think that increased profits Q49 Mr Lilley: Sure. Presumably, at one stage they account for a significant proportion of their increased might have been earning zero profit. It could have bills? gone up to 20%, so the maximum amount of the price Richard Lloyd: I think they do. increase it could account for is 20%, if previously they Mr Lilley: How much? were earning zero profit, which would have been an Richard Lloyd: This is part of the problem that we unsustainable position. have with the industry— Richard Lloyd: What we can say is that on the retail Mr Lilley: The simple answer is you do not know. end for the Big Six, for the largest suppliers, margins Richard Lloyd:—is that there isn’t enough have been on average about 1.3% to 3.2% over the transparency about what is going on in the market— last three to four years. both at the retail and the generation end—to be able to objectively assess whether there is some advantage Q50 Mr Lilley: That is trivial compared with the cost being taken of consumers through people being very increases my consumers have suffered. reluctant to move in this market. So my view is, yes, Richard Lloyd: For the same companies, the people are right to distrust the market. Whether they wholesale electricity businesses that they own have are right to distrust individual suppliers, I would say been showing margins of between 30% and 10%. So, depends on how transparent those suppliers are being again, this is part of the difficulty consumers have in about what they are doing about the costs that they trying to figure out—when they are presented with for are imposing on people, and in general—I will have a group, say, like Centrica—what the truth is here. to come back to this—what we are asking consumers You are hearing about very substantial margins on about is consistently finding there is a low level of their generation business, still reasonable pretty trust for those reasons. healthy margins on the retail business—
Q46 Mr Lilley: Roughly, what proportion of the cost Q51 Sir Robert Smith: What percentage of the bills to consumers is profit to shareholders? Is it all stages is the generation business? of the process do you think? Richard Lloyd: About 60% of the average bill. Audrey Gallacher: We did some research last year: Sir Robert Smith: So that is 8% on the final bill? “Who Pays?”, which is about consumer attitudes to— Mr Lilley: No, you are giving the figure as a percentage of the final bill, aren’t you? Q47 Mr Lilley: No, I am not asking about consumer Richard Lloyd: Yes. attitudes. I am asking about the reality, the facts, the Sir Robert Smith: When you were saying 17%, was money going to shareholders, not what people think it that on their wholesale operation or was that— is but what you know it is or do not know it is. Richard Lloyd: 17% on their wholesale operation is Audrey Gallacher: We have done some work looking margin. across the whole value chain, so distribution activities Sir Robert Smith: So that only makes up half the and generation. We thought about 20% of the bill was bill then? made up of profits and some investment. We really do Richard Lloyd: Your maths is better than mine, not know—and this is another issue for consumers— Robert. We can write to you with what we think in companies continually tell us that they need to make more detail the numbers look like. cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:56] Job: 030522 Unit: PG01 Source: /MILES/PKU/INPUT/030522/Corr EnCC 12.03.13.xml
Energy and Climate Change Committee: Evidence Ev 11
12 March 2013 Richard Lloyd, Audrey Gallacher and Anne Pardoe
Q52 Mr Lilley: It is becoming clear to me that you of the energy companies are asking for that, to be fair are feeding public concerns that the main reason for to them? the rise in their bills is an increase in the profit margin. Richard Lloyd: The reforms on the table at the You have little evidence for this, and the maximum, moment aren’t going to get us there. I think the from the figures you have given us now, if they opportunity is there, were the reforms on the table to previously had or could in future have zero profit— go further. The most forward- thinking suppliers which is obviously unsustainable—is it could add actively want that degree of transparency because they 15% to their bill. Bills have gone up by much more want to regain the trust of their customers, as I said than that, so it must be other factors. You should be before. Why do those reforms not go far enough, in expressing that. The main factor I would have thought my view? Well, I think if we have a much simpler is increased fuel costs. A secondary factor is increased market, we are taking some steps towards getting that Government costs imposed by all these green levies. simplicity, whereby people feel they are more likely Richard Lloyd: We have always stressed that a to be able to engage in it, to be able to spot the significant proportion of what people are paying as cheapest deal, to switch more easily, to get—if they an increase in their bills is due to decarbonisation, to are not engaged with the market—a price that they social policies. can feel confident is fair. Mr Lilley: You have not told us that. Richard Lloyd: You did not ask me about that, with Q54 Albert Owen: I understand all that, but my respect, Peter. point is—and the current Secretary of State for Energy Mr Lilley: No, we asked you—you volunteered. and Climate Change has said it as well—that in the Richard Lloyd: You asked me about the contribution short term there is going to be an increase but, when of profit to the increase in people’s bills. market reform comes in, there is going to be mid to Mr Lilley: I am talking about what you talked about. long term cheaper bills in the future, but we are going You talked about consumers’ concerns that it was to have to pay this bill. Do you accept that premise? about the companies’ dishonesty and lack of Richard Lloyd: I do accept the premise and support transparency. You never mentioned the Government’s the idea that if we get the system to work better, more position in your opening remarks. efficiently, that if we can all better manage our energy Richard Lloyd: I have said consistently publicly that consumption, we should be better off than where we there are a lot of components— otherwise would be. However, that is a very difficult Mr Lilley: Except today. message to get across to people. Richard Lloyd: With respect, you did ask me a very specific question about profit but I am very happy to Q55 Albert Owen: Final point, do you think talk about the range of policies that are also driving collectively we have a responsibility to have that open the increase in bills, and I was saying that I thought argument with the public? very clearly that the consumer perception is one of Richard Lloyd: I think we do, and part of that needs distrust in the energy market. A part of that is the lack to be a responsibility on the part of suppliers and the of transparency about what is driving retail prices, but regulator to get out into the open what is going on then if you look at the results that companies are between the different arms of their business, to get reporting, they are reporting much healthier margins some numbers out, some facts out, a reference price on the generation businesses than the retail businesses. as we were mentioning earlier. In the end, having that That is part of why there is a perception, on the part of honest conversation—as one of the suppliers has been consumers, that there is something perhaps untoward saying they have been wanting to have with the going on between the different arms of vertically public—about what is genuinely driving the increase integrated companies. On top of that—as I also said in their bills, what they can do to manage that, and in my opening remarks—people are worried about where the investment that we are all paying for what they are hearing from the Government about the through our bills is taking us. However, I fear we are costs they are going to have to pay to decarbonise the a way off that and, in particular, while there is still system. I thought I was quite clear on that. this question mark about what is going on with the Mr Lilley: You did actually say that, and I apologise. profitability of companies, there will still be that I suggested you had not said that. You did say that. suspicion that there is something not quite right in the Audrey Gallacher: I have some figures. Do you want system, and that is the hump we have to get over. me to come back? Q56 Sir Robert Smith: That leads into one of the Q53 Albert Owen: Can I just—Mr Lloyd is aspects of how the companies communicate with their absolutely right to say that there is this lack of trust consumers, and I think Consumer Focus have because of transparency, and it is the companies expressed concerns that it can be misleading with the themselves that actually admit to this now. Do you way they make their comparisons. You say ever think that we will get to a position where there particularly with European countries’ prices. What is full transparency and that people will accept that other aspects of the communication are misleading? energy costs are going to keep going up? Do you think Audrey Gallacher: What I have found quite we are ever going to get to that stage or is it always frustrating over the last few years—and it leads to this going to be this sort of cloak and dagger we are point around trust and profitability—is that around worried about, whether the price has been reflected, 2008, companies told us that they didn’t make any whether the costs are passed on to the consumer? Do money at all, and so that is why they had to increase. you think we are ever going to get there because some This is in relation to price increases, so “We don’t cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:56] Job: 030522 Unit: PG01 Source: /MILES/PKU/INPUT/030522/Corr EnCC 12.03.13.xml
Ev 12 Energy and Climate Change Committee: Evidence
12 March 2013 Richard Lloyd, Audrey Gallacher and Anne Pardoe make any money so have to increase our prices”. In houses more energy efficient, people use less. We that period, from 2008 to 2011, there has actually been shave peaks. That would deliver the same benefits in a 36% increase in profits across the Big Six, but that terms of carbon reduction, but it would probably be a is another story. bit more comfortable for consumers, so there is an Sir Robert Smith: Is that 36% across the whole issue. vertically— We have a budget. Every year the Chancellor gets up Audrey Gallacher: Yes, so, on the production and the and says what he is doing with taxes. A lot of these trading arms as well. We have taken that from levies on energy bills are, in effect, imputed tax, but financial accounts. We then heard that prices have to there doesn’t really seem to be the same level of go up because wholesale prices are increasing, and public exposure around them, and that makes it clearly we have seen that. We have evidence of that. difficult for consumers to make a judgment. The last We know that there was a spike, but since that big thing we need is industry and Government at each price spike in 2008, wholesale gas, wholesale prices other’s throats because what we need is consumers have come down and we haven’t seen a corresponding changing their behaviour, becoming more energy reduction in consumer bills. That is something we efficient, engaging with the smart metering campaigned about for ages—whether prices were programme, taking up the Green Deal, all of those passed on. Ofgem has found some potential evidence things. While there is that continued argument in the that falling prices were not passed on as quickly to background, there is a real danger that consumers will consumers as rising wholesale prices were. not take action because they are leaving it up to Now that we have a less volatile or certainly a lower everybody else to sort it out. wholesale price, companies are now using the excuse of social and environmental obligations and other non- Q58 Sir Robert Smith: So you think the commodity costs to justify price increases. So, I think, Government needs to be clearer about costs as well as as consumers we are just about sick of these the industry? continually changing messages, which adds to that Audrey Gallacher: Yes. We have done research and degree of mistrust that Richard has been speaking consumers were not aware that they paid social and about. I really don’t think it helps because we don’t environmental obligations on their bills. understand the magnitude of those issues on bills, Sir Robert Smith: Even though you have said that particularly in relation to certain costs that you the companies are exaggerating that, that had not got discussed in the previous evidence session. We have through to the consumers? no idea what those costs are. We are going on what Audrey Gallacher: I do think they are. I am quite the companies tell us. So I think there is quite a lot of worried now about what the background commentary conflicting information out there. is on profits. Potentially, we need the Government to My worry would be that we now have an industry that come out and make a statement on whether prices are points towards Government and blames Government fair or not and let us know where things are for rising costs. There is absolutely no doubt that potentially going. Government energy policy will contribute to Richard Lloyd: If I can add to that, Robert? I think consumer bills, but to continually be involved in this there is a limit, especially where consumers are at the kind of bun fight over whose fault it is isn’t really moment, to what you could expect people to do in going to take the debate forward or help consumers to engaging with these numbers. If organisations, like reduce their energy costs. Consumer Focus and Which?, are not able to translate the limited data we are being given—because it is Q57 Sir Robert Smith: Can you see any way of very limited—about what is driving costs into a way providing a clear way of communicating those that consumers would engage with, then I think the Government costs to consumers? suppliers will struggle as well. Audrey Gallacher: One of the things that is quite There are examples of companies producing graphics difficult is that there is not really an open discussion, with a radiator with different chunks of it in different so we have seen situations whereby, for example, at colours, attributing costs to different drivers, to the moment the Energy Bill is looking at introducing different sources, but in the end if you know that most measures to put consumers on the cheapest tariff people don’t look at their bills or read their annual because it was mentioned by the Prime Minister in the statements or want to engage in that level of detail, I House of Commons. However, there isn’t really as think there is a job for the Government to do to help— much prominence of how Government energy policy and for us to help in doing that—to translate what is is potentially going to contribute to consumer bills. going on into more accessible information to We have accepted that we need to break the link with consumers. There is a lack of transparency in the fossil fuels, that we need to decarbonise and that all market that allows us to do that. these measures will mean that, longer term, prices will be cheaper than they would have been had we done Q59 Sir Robert Smith: Do you think Ofgem could nothing, but we still have a good 10 years to get have more of a role in encouraging an open people there. That is going to be massively painful, understanding of what is going on? and I don’t think there has been a proper debate about Richard Lloyd: I think it should, and they need to whether consumers can afford that, the pace and the think about how they can much more clearly present scale of it. Also, potentially, Government policy is what is going on to consumers; much more much more targeted at the supply side rather than proactively do that. I think they have been far too reducing demand. So if you have done things to make quiet about this for too many years. Surely it is part cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:56] Job: 030522 Unit: PG01 Source: /MILES/PKU/INPUT/030522/Corr EnCC 12.03.13.xml
Energy and Climate Change Committee: Evidence Ev 13
12 March 2013 Richard Lloyd, Audrey Gallacher and Anne Pardoe of their job, as the regulator with a duty to protect the recent scandal where the reporting organisations, who interests of consumers, to be explaining to consumers rely on traders to tell them the price, are suggesting in much more understandable language what is going that that price may have been slightly manipulated to on in this market and what they are doing to protect improve position. people from unnecessary costs. Sir Robert Smith: Did that not actually ironically Anne Pardoe: We would agree with that as well. We improve the position to the benefit of the consumer? would like to see Ofgem take far more of a role in Audrey Gallacher: I am sorry, I don’t know enough mediating the public debate around this. When there about it. I suppose the issue is that we are looking at is a round of price rises from suppliers, they have the this market reference price to set Contracts for information there, they have the ability to say, looking Difference, for example, in the future, so it is really at the market, “This is fair” or “This is not fair.” Is important that we have a robust price to start with. the level of profits fair? Surely it is part of Ofgem’s Whether or not there is any kind of merit— job to look at that and mediate that debate. We would also like to see more of a unified, sensible public Q61 Sir Robert Smith: So greater liquidity in that debate about the costs. What are the costs imposed by market? the Government? What are energy profits? What are Audrey Gallacher: I think that is the main thing. First, the wholesale? We think Ofgem has a role to play in we don’t understand the price that is being paid, and mediating that public debate as well. We would like Ofgem has options open to it, we think, through the to see them do a lot more. European Directive to get more information on the costs companies are actually paying. However, the Q60 Sir Robert Smith: I suppose a lot of the debate long-term goal is that we need to sort out liquidity, has been about the retail market, and trying to make because we are not going to have a true reference that as competitive as possible to maximise price if we do not have a properly competitive market. efficiencies, but you have highlighted that, in a sense, This is an issue that Ofgem identified in the probe in underlying that you can have a really efficient retail 2008 and we need to get it sorted out, particularly as market but if the wholesale market is producing a we are bringing in electricity market reform and we product that isn’t so competitive then retailers cannot are going to be reliant on that reference price. The make much difference. It is only on their retail margin biggest thing—which I think Richard alluded to—is that they are going to be competitive. So you are that it is a potential barrier to new entry into the thinking that there are deficiencies in the wholesale market. Acquisition products are generally 12 month energy market. What sort of data on wholesale gas fixed rate contracts. Right now the market is and electricity prices are currently publicly available completely or more or less illiquid after six months, and what do you think needs to be done to tackle your so it is quite difficult for any new supplier to come in perception of the deficiencies? and purchase the cheaper energy that they need for Richard Lloyd: There is a very small proportion of the that contract without taking a significant risk. They trades in gas and electricity for which there is publicly will either price that risk into what they are offering available data. For example, while 70% of day ahead customers or they just will not enter the market. trading is on N2EX, an exchange for electricity, only Richard Lloyd: I think it would be helpful if we had 6% of total consumption is estimated to be traded. the same focus on what it would take to create a The vast majority of trades are done behind the scenes genuinely competitive wholesale market, as we have for a far longer curve into the distance; three years had on the retail market in recent months. So what and that kind of timeframe. It is impossible for people would it take in terms of transparency in the outside the industry to know what kind of deals that publication of data, in ensuring more wholesale far out are being done, and there is no transparency trading is done through exchanges? If there is—and about the prices that are being paid. In particular, in as I say we don’t know because we do not see the the vertically-integrated companies, there is a lot of data—an unfair competitive advantage being given to self-supplying going on, for which there is no publicly the retail arms of the wholesale companies in the available data. So our view is, at the very least, there vertically integrated suppliers’ case, should there be a needs to be much more transparency about the prices restriction on self-supplying? Should the generators be that are being paid to wholesalers, including by their required to put all their energy on to the market rather own retail businesses. than selling it to themselves in this very non- We have welcomed the moves that Ofgem have been transparent way? So I think we need Ofgem and encouraging to make more energy traded openly DECC to take as hard a look at that as they have on through exchanges. Some suppliers agree that one of generating competition in retail. the things they could do to rebuild trust in the market would be to do much more through exchanges, rather Q62 Sir Robert Smith: Is there an argument, though, than the kinds of very large volume trades that are that the vertical integration might mean a benefit for going on behind the scenes. However, in the end, there the consumer in terms of hedging and, therefore, in is very little data that suggests to third party observers what is a very big market, the companies’ ability to what is going on, what are the prices that are being see its way through the troughs and peaks? paid to the wholesalers. Richard Lloyd: That is what the suppliers would say Audrey Gallacher: Yes, I would agree. Early and that may well be true. Again, we cannot look into estimates are that about 85% of trades are made enough of the trades to say if that is right. What we do bilaterally, so there isn’t really any proper disclosure know, though, is that if you are a vertically integrated around about that price. Of course, we have seen the company and you increase your wholesale price, even cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:56] Job: 030522 Unit: PG01 Source: /MILES/PKU/INPUT/030522/Corr EnCC 12.03.13.xml
Ev 14 Energy and Climate Change Committee: Evidence
12 March 2013 Richard Lloyd, Audrey Gallacher and Anne Pardoe if that loses you some retail customers by the way you well as other businesses, I think they should have a pass that price through to the consumer, you are still role to play in deciding what a reasonable price is. a net winner as a group. So what is there in the system Audrey Gallacher: I think there is a different issue that incentivises efficiency in generation, maximum about the cost reflective price and the degree of cross- competition in generation, and therefore what is being subsidy that currently goes on. I think a fair price is passed through to the consumer being kept in check? arguably going to be one that is cost reflective, we At the moment it is a very murky world and, as we haven’t seen that—well, we have seen issues of a have seen with the allegations of gas price rigging, fairly significant cross-subsidy so we are talking about one that is reliant on a very small number of players, allegations that are being made around predatory a small number of traders who have access to very pricing where acquisition deals are significantly— sensitive market information. The vast majority of Mr Lilley: So prices may be too low? trades are not done transparently. Audrey Gallacher: There is a concern that inactive customers are providing a cross-subsidy for suppliers Q63 Chair: I think you have advocated a review of to offer attractive deals. While that might be great for competition. Do you think that needs to go beyond those individual customers, and while it might be what Ofgem have already been doing in this area? difficult for me as a consumer advocate to say I do Richard Lloyd: I think it does. As I say, we have not want people to get cheap bills, there is an issue in welcomed the moves that Ofgem have been proposing that. As Anne says, it is an essential services market. on greater liquidity and ensuring that the smaller It is a non-discretionary spend, and at the beginning suppliers can challenge the bigger in this market. of this session we heard some really quite emotive Although I think there is much more that could be stuff around the impact that an inability to afford done, both to address the consumer confidence point energy has on households. We know it has a massive that I was discussing with Peter earlier, but also to impact on health and wellbeing and all of that stuff, ensure that they can reassure the consumer that this is so there is an issue about having a fair pricing regime a market that is operating efficiently and that doesn’t allow those degrees of cross-subsidy. competitively, and the previous efforts to look at this, Although I suppose there is then another question segmented accounts and the investigation into about whether as a society we rely on a competitive vertically-integrated suppliers and what is going on, market to deliver what essentially might be some did not deal with that adequately. I think you will find social intervention that is required by Government. some suppliers would advocate, too, that there is now We could find ourselves—particularly as we see the a moment where part of the process of regaining trust levels of investment required over the next 10 years— in the energy industry needs to take a very hard look with lots of affordability issues. One of our concerns at how the generators are operating, how the is that the energy policy debate has not given enough wholesale market is operating and potentially some prominence to the affordability issue. We would like changes to ensure that people have confidence in that. to see it up there with security of supply and decarbonisation, so there is a real issue about how we cope with that, and whether we should be relying on Q64 Christopher Pincher: Can I clarify something the competitive market to deliver that for consumers that Ms Pardoe said earlier, with respect to the role of or whether we just need to recognise it will only go Ofgem and price and profit? I can understand that so far and we need some other intervention, like a Ofgem may have an interest in a role with respect to really decent energy efficiency programme or some prices that are charged, but do you think that Ofgem additional financial assistance. should have a role with respect to profit? After all, a Richard Lloyd: There is a market I am fond of company can be very efficient and that might improve quoting—and apologies if I have told you this its profit margin. Does Ofgem have a role to play there before—there is an example of regulators in the or shouldn’t that be more properly the role of the tax United States that, on behalf of consumers in their system? area, go to the market and see what the best price is Anne Pardoe: I certainly think they have a role to that they can get with their expert knowledge on play in terms of saying whether a price is fair, looking behalf of people who are on a default standard tariff. at the retail price and the wholesale price. Whether The market operates around that. It effectively they have a role to play in profit, I think that is more becomes a price for others to beat. That gives the something for them and the Government to look at, to unengaged consumer confidence that an expert on be honest. behalf of them has secured the best possible price, with all the variables in that market, the pressures that Q65 Mr Lilley: How would you define a fair price? are exactly the same as in our market, in terms of Anne Pardoe: A fair price? I think it is more of what wholesale costs and Government policy. However, it is a reasonable price, given what people can afford to effectively sets a benchmark around which the rest of pay, given that it is an essential service and based on the retail market could operate. the wholesale cost of the energy. Which? is always the last consumer advocate to advocate price controls, and we are not advocating it Q66 Mr Lilley: Those are two rather different things, in this case. I think that, particularly if we have a aren’t they? So you are saying the price should not much simpler market, people are more likely to move reflect primarily the costs? around, they are likely to be mobile. Competition Anne Pardoe: I think, given Ofgem’s role as should be the best way to keep prices fair and keen. regulating the market in the interests of consumers, as Nevertheless, given the complexities and the lack of cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:56] Job: 030522 Unit: PG01 Source: /MILES/PKU/INPUT/030522/Corr EnCC 12.03.13.xml
Energy and Climate Change Committee: Evidence Ev 15
12 March 2013 Richard Lloyd, Audrey Gallacher and Anne Pardoe transparency in this market, I think people would take world we live in, but your readers wanted to believe comfort from an expert intervening in that market and there was a magic solution and that it was all down to saying, “This is a price that is fair”. That is why large companies exploiting them, would you be up collective switching has occasionally given people front with them and say, “I am afraid there is a real that assurance because, as individuals in this market, problem and it is the fundamentals that are causing they are feeling completely overwhelmed or your bills to be this high”? disempowered relative to the size and expertise of the Richard Lloyd: We are already being that up front supplier that you have to engage with. with them because we know that there are pressures in the wholesale market. Everyone knows that. What Q67 Mr Lilley: I was excited by the suggestion that we do not know is whether those pressures are being there are under-priced, cut price deals available. I kept sufficiently in check through competition, haven’t been able to find them. If there are, why don’t through competitive forces. What we also know is that we all pile in and it will have the effect of reducing the retail market is not operating effectively for any excess profits that the company are making and consumers, so absolutely. In all our public messages, put pressure on them to be more efficient. I would just to reinforce the point I made to Peter, we are have thought the answer to my question—which I will constantly saying, “No one should be fooled by offer you—was that a fair price is one which does anyone that your energy bills are going to come down not have a monopoly price element, so it is generally in the near future”. The wholesale market is bound to competitive, where there is pressure through be driven upwards in the medium term over time competition on the suppliers to keep down their costs through pressures on commodity prices. We all know and where the Government does not impose too many that. extra costs, which I fear it is doing and that is my Sir Robert Smith: What we need to know is that it principal concern. That is the principal avoidable is not being driven higher than it needs to be. element, if we did not have all these feed-in tariffs Richard Lloyd: What we want is to be able to assure and high cost energy we are being forced to use. The people that they are not being taken for a ride through last point is contentious but the first two ought not the structure of the market, through a lack of to be. competitive forces, through unnecessary Government- Richard Lloyd: If I can come in on your third point? imposed social and environmental costs, and that this I think there is an issue, putting aside the rights and is a market within which you can be confident: wrong of decarbonisation, about whether the costs to provided you move around in it and use your the consumer of decarbonisation are being kept in consumer muscle, you can get a fair deal. At the check too. With ECO, there is the hope that moment it is only a very small minority of people that competition between suppliers will keep the price of are engaged enough to be able to do that. Yes, we ECO under control. I think that is rather naive. The are already telling the million and a half people who Smart Meter programme: again, the Government is subscribe to us that they should be in no doubt that hoping that competitive pressures between suppliers you should expect that your bills will rise. What you will keep the cost of that programme in check. should be in doubt about is whether the current system Contracts for Difference: how do we know that the is keeping that rise in check enough. price that is being negotiated between the Government and suppliers is the best possible for the consumer? Q69 Ian Lavery: Which?, Mr Lloyd, has suggested So again, there is a cloud of non-transparency hanging there is a lack of information relating to the uncleared, over a significant and growing chunk of what people over the counter (OTC) trades and you say there is a are being expected to pay, and a hope on the part of particular cause for concern with regard to these. Can Government that competitive pressures, competitive you say what is known about these types of trades forces will keep those costs in check and, therefore, and how they influence wholesale energy prices and keep the price that is passed through to the consumer ultimately value for money for the consumer? in check. If we cannot see the numbers, if we cannot Richard Lloyd: It is the dominant form of trading, see the data, certainly we cannot reassure consumers over the counter in the wholesale market. It is about that they are paying a fair price, and I think that feeds 80% of electricity and 70% of gas that is traded in the suspicion we were discussing earlier. that way. They are largely primarily commercially Anne Pardoe: There is also the point to make on confidential contracts so there is no data about the whether that should be on consumers’ bills at all in prices, the volumes, the products that are being traded the first place and whether it could be funded through in that way. If such a large proportion of wholesale general taxation, which is generally less aggressive energy is being traded in that way, it is very difficult and has less of a distributional impact which to understand how a price signal is sent to, for colleagues in the earlier session were talking about example, small suppliers, how you can be confident around if people who are paying for these energy that those trades are being done in a genuinely efficiency programmes are not benefiting from them competitive fashion and how the interests of the end personally, that can have an impact of pushing people user is being taken into account. It is significant. It is into fuel poverty, so there is a wider debate around often trades between the retail and wholesale arms of how you fund that as well. the same business and, as I think I mentioned earlier, only about 6% of total electricity consumption is Q68 Sir Robert Smith: Can I just ask if Which? traded externally, for example, through to N2EX. were confident that the market was working and that There are ways of finding out. There is data available the horrendous bills people were paying reflected the if you want to pay for it about some of the trades that cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:56] Job: 030522 Unit: PG01 Source: /MILES/PKU/INPUT/030522/Corr EnCC 12.03.13.xml
Ev 16 Energy and Climate Change Committee: Evidence
12 March 2013 Richard Lloyd, Audrey Gallacher and Anne Pardoe are done, pricing data in particular, but by and large it and clarify those figures. If that is a measure that you is very hard to get to the bottom of the prices that are are using: consumer engagement in the market and being paid and what are the dynamics in those trades. switching, we know it has reduced. What we think is That is why we think there needs to be much more that there needs to be just a whole additional raft of trading through exchanges and much more price information and more effective monitoring within the transparency, much more data transparency. market to really understand what is going on, because companies will come back and say, “Quite a lot of Q70 Ian Lavery: In the interests of competition, do switching goes on within the company”, with you think there should be some form of alternative consumers going on new products that are more model such as a pooling system? Would that be fairer attractive and that, in itself, is evidence of consumer in terms of competition? engagement, but we really do not understand that. We Richard Lloyd: We think it is worth exploring other don't know the spread of products across companies, mechanisms including the pool that has been tried in how many customers are on them. We know about the past but I think for us probably the primary focus payment methods—that about 55% of people are on should be on whether there should be a restriction on direct debit—but there is still a whole chunk of self-supply and whether in vertically-integrated consumers who are paying cash and cheque, about companies there should be a legal separation of their 15% on pre-payment meters. Frankly, there is no retail from their wholesale generation arms. That competitive offering out there for them. would help bring the transparency and, we think, the In the last 3 years, about 280-odd new tariffs have competitive forces to bear given that the six largest come out on to the market. Only 3% of those have companies are dominating the wholesale and the retail been available to pre-payment meter customers, so we markets. We think that is the first place to look. have a really segmented market, where you have a There are other issues here about the ability of smaller core of engaged consumers, you have people who are players to access the market, in particular their ability online, prepared to pay by direct debit and who can to get credit that will allow them to trade and hedge get access to good deals, but you still have in a way that allows them to compete with the large approximately 45% of the market who nobody really suppliers. I think a mix of liquidity and transparency, appears to be competing for. I am sure the companies probably some form of self-supply restriction, would will call me on that one, but there is a real issue about go a way towards reassuring us that the market at the the products that have been made available and this generation end is operating more competitively. links back to the work that Ofgem is doing on its retail Audrey Gallacher: I think we have looked at issues market review. Quite a lot of the solutions that it is around the pool and what we could do because putting in place and the remedies are really targeted at obviously there are advantages in that buyers and a group of consumers who are arguably already fairly sellers have access to each other, there is a lot more engaged. I have real concerns that there is a big chunk transparency around the price. It would also probably of the market out there, generally the people who are help market entry, as Richard has already alluded to. in fuel poverty and the people who have real There were potential concerns around gaming, so affordability issues, for whom the market is just not there would need to be some safeguards in place. I working. think for us one of the issues is that we are going through such a massive round of policy change and Q72 Ian Lavery: How could Ofgem use EU electricity market reform that to make that kind of legislation to encourage suppliers to disclose the wholesale change to the wholesale market might just actual cost of trading energy? create too much change, making it riskier, which Audrey Gallacher: Since 2011, there has been a would ultimately increase investment costs being European Directive in place. It came in on the energy passed on to consumers. I suppose our issue is how third package, which is about Ofgem being able to much we can reasonably do all at the one time, given require companies to say how much they actually the scale of the job that is in front of us and whether spent. Continually, when we talk about the it would be a prudent idea to start dismantling the relationship between wholesale and retail prices, it is whole of the wholesale and trading arrangements. I do quite difficult because Ofgem will make an not have an answer but we would need to weigh those assessment. It will come out with a report, and then things up. It may well be that looking at options to try the companies will commission an alternative report to fix what we have rather than scrapping it and that will completely refute what Ofgem says. This starting again may be a better option at this really confuses customers all the more and that is particular time. because nobody really knows the actual cost that has been paid. Companies will say, “You have used the Q71 Ian Lavery: Ms Gallacher, I know it has been wrong hedging strategy. That is not the price we paid. stated from Consumer Focus that there is evidence of That is not the average consumption for our a decline of competitive intensity in the UK energy consumers”, so lots and lots of holes are picked in the market, do you have any evidence of this? various bits of analysis. Moreover, there is an ability Audrey Gallacher: It depends on what your measure for Ofgem to go and require companies to tell them of competition is. Historically it has always been how much they paid. It would be done retrospectively around the levels of switching, so we have seen that but it might be quite a good check on the industry if levels of switching have significantly tailed off since they knew that there would be an audit coming down 2007, from 20% down to about 11%, I think, are the the line that would require them to disclose what they figures but I am going to have to come back to you had paid and therefore we could retrospectively see cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:56] Job: 030522 Unit: PG01 Source: /MILES/PKU/INPUT/030522/Corr EnCC 12.03.13.xml
Energy and Climate Change Committee: Evidence Ev 17
12 March 2013 Richard Lloyd, Audrey Gallacher and Anne Pardoe whether prices are falling as quickly as they should Richard Lloyd: We think the indicators are not or increasing too quickly and give some retrospective enough. They do not say a great deal more than we reassurance. The fact that that would be a threat to already know. They are based on estimates of companies might keep them honest in the expected wholesale and operational costs. We think, intervening period. as Audrey has just said, there is a much more robust We have put it to Ofgem that it should do this. It has set of indicators that would be much more helpful. not so far. It has not explained why not. I do not know Sir Robert Smith: Do you have an idea of what whether it is too complex, if it does not have the skills, indicators those would be? if it cannot do it, but we think that there are potentially Richard Lloyd: Yes, I think there is information about tools available there that it would appear that Ofgem wholesale energy trading that they could put out. has not yet utilised. There are volumes of trading, numbers of market Richard Lloyd: We would support that, and just to participants and so on, to allow us to build a much reiterate that what that would not do, of course, would more robust picture of what is happening in the be give market participants pricing signals, so it would market. There are probably indices they could develop be a retrospective reassurance, not a means for that would allow us to track that better too. I would ensuring that there is greater competition in the day be happy to write to you with more detail, but it would ahead, the month ahead, further ahead in the market. be a build on what they currently have. Why have Ofgem not done it yet? I do not know. In what form they would do it that would allow third Q74 Christopher Pincher: Which? and others take parties to scrutinise this has yet to be explained, but I the view that the SMI indicators are okay. Ofgem think it would help. takes the view that more substantial data needs to be reported upon hence the Consolidated Segmental Q73 Sir Robert Smith: Back to trying to understand Statements, but when you commissioned BDO to the market and improve transparency and information. analyse the CSS, they found some significant issues Ofgem have come up with a supply market indicator, about the data that was supplied. What do you think which you and Which? have some concerns over. It are the main deficiencies in the CSS in terms of the is, I suppose, a sort of averaging. Could you maybe timeliness of data, the data that is included and the outline your concerns with where it could be understandability, if there is such a word, of the data? improved? Richard Lloyd: BDO themselves concluded—and it Audrey Gallacher: Is it the segmental accounts or the was quite a thin report as you will remember—that it ongoing Ofgem weekly stuff? was impossible to see whether the transfer pricing had Sir Robert Smith: The supply market indicator. been done in the best interests of consumers. It was Audrey Gallacher: We think it is okay. It has given a impossible to determine the prices offered to the picture of potential profitability. The information supply businesses within the vertically integrated could probably be disaggregated. It would not be a companies. I think much more transparency about simple message, but you could make that information transfer pricing and the methodologies that are being available. I suppose the issue we have is that the used is a start, but in the end, without more structural industry continually picks holes in it and we also have changes the segmented accounts, to be honest, at done some kind of backward analysis where we have times just raise more questions than they answer. looked at what the segmental accounts are seeing Without that greater scrutiny about what is going on around company profitability compared to what the in the wholesale market it is impossible to tell market indicator was saying around what company whether—just by looking at the segmented profits should be, and we have put that in a written accounts—what is going on is indeed fair. It is quite submission. There are some issues around how a mixed picture that BDO reported, yet Ofgem seem accurate it is and this is why we have often put a to have parked that and moved on. challenge out to both Ofgem and industry that what might be quite helpful is if we had a set of metrics Strong supporters of segmented accounts but they do that everybody could agree on so that instead of not show enough to us of what is going on in the continually having these arguments about whether we market for us to be able to say that, in particular, with were looking at the right things and how helpful or the vertically integrated companies what is happening otherwise they might be, is that if we are all agreed is competitive and fair. what it is we are looking at, we could hopefully get a Audrey Gallacher: I would echo that. A fundamental more robust picture on what is going on in the omission is that the trading activity is not included in market—competition, profit value, whatever—but them and, as they are pretty out of date by the time also it just shuts down these circular arguments that you get them, some of the values are questionable, are not really doing anything in taking it forward or but, yes, I have no doubt that it costs Ofgem and tackling issues around consumer trust. companies a whole lot of money that will ultimately I have already said this, but the longer we continue to will be borne by consumers who produce them. So talk about consumers or if consumers feel as if they there is an issue about either sorting them out and are getting ripped off and they are not getting a good make them more robust or not doing them—we really deal and somebody is going to fix it for them, it takes question the value of them. the onus off ourselves doing something about the fact that energy is becoming increasingly unaffordable and Q75 Christopher Pincher: They are costly to we need to take measures personally to sort it out. produce. Have you seen any benefit as a result of That is my view. them? Has there been any change in behaviour or any cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:56] Job: 030522 Unit: PG01 Source: /MILES/PKU/INPUT/030522/Corr EnCC 12.03.13.xml
Ev 18 Energy and Climate Change Committee: Evidence
12 March 2013 Richard Lloyd, Audrey Gallacher and Anne Pardoe change in engagement as a result of the data that is somebody in place to try to fix them, so in that respect produced? they do not work. Audrey Gallacher: I have not observed anything like Christopher Pincher: What you seem to be saying is that. I do not understand either why Ofgem did not that although they act as a catalyst for debate and they choose to implement all the recommendations from focus concerns, they do not really encourage greater BDO. It would be quite helpful to understand whether understanding of the way in which the market works it was cost drivers or technical or physical ability to and the costs and the way pricing operates. do that but you would really have to question why Audrey Gallacher: Yes. you would pursue this if it is not really helping the situation. I might be wrong but personally I have not Q77 Christopher Pincher: What are the disparities seen any evidence that it has changed things because between the data as reported through SMI and the data of that fundamental omission on trading activities. as reported through the CSS? Are there any glaring Richard Lloyd: What it has not done, if I may, is differences? allow us—again sorry to keep going back to my Audrey Gallacher: Yes, we looked back earlier point—to translate what we think is an accurate retrospectively through to 2010, when the segmental picture of what is going on in the market to accounts were speaking about industry profitability at consumers. Again, to go back to the earlier point, if about 0.3%, but Ofgem were showing that the part of what is intended through the publication of difference was on margins of about 6% across the segmented accounts is to give customers some board on the weekly monitoring, whereas on the assurance that the businesses are operating segmental accounts it was 0.3%. There was quite a competitively and the retail end in their interest, as significant gulf between those two different reports. well as to show shareholders what is going on, then Obviously, when we were looking back at them, it was they are failing in that objective. There is not two years before we obtained the segmental accounts. sufficient data there for us to be able to say with There is an issue that Ofgem on an on-going basis is confidence that consumers are in a competitive market telling us the potential level of profitability in the that is giving them keen prices. industry, albeit that industry refutes that, but we then look at the financial statements that tell us quite a Q76 Christopher Pincher: Just in the term you used different picture. That in itself can be quite confusing there, the translation of data. when you understand where that disparity lies, Richard Lloyd: Yes. whether it is around pricing strategies or whether it is Christopher Pincher: There seems to be general the veracity of the reports themselves. agreement among you that the data provided is not really comprehendible by many people who may wish Q78 Mr Lilley: Am I right that the SMI is simply to benefit from it. Does that then mean that rather than the retail cost and profit breakdown? improve the situation, the CSS and the data in it, and Audrey Gallacher: Yes. the SMI and the data in it, simply muddy the waters? Mr Lilley: So the problem is that it does not tell you Audrey Gallacher: I think it is a difficult one because anything about the wholesale cost and profit obviously it does generate quite a lot of debate now. breakdown? Maybe if we had not had them, the level of consumer Audrey Gallacher: I think it is looking at the interest in energy prices might not be as great as it is, relationship between prices as well. so I think they have definitely prompted a degree of Richard Lloyd: They use estimates of expected debate. I think the fact that prices have doubled over wholesale costs in arriving at that figure. the last seven years is probably the bigger issue for Mr Lilley: Yes, so it is just the retail? consumer interest in energy but, nevertheless, we have Richard Lloyd: Yes. this thing that goes out there and generates a bit of a story. If that is something that brings focus on this Q79 Mr Lilley: Over time that will even out, market and encourages Ofgem, Government, whereas the Consolidated Segmental Statement does consumer bodies, and industry to try to sort it out, that give us the breakdown for the generating level, rebuild consumer trust and try to give greater for example, in electricity? confidence on price fairness and transparency, then Audrey Gallacher: It gives generation and retail but that is a good thing. it does not give trading activities. I suppose it is just the fact that we have these things Mr Lilley: All right, but it does give generating which rather than what they are themselves that potentially is what we need to know as well as the retail figure? brings the benefit because it brings more focus to this Richard Lloyd: Yes. debate. I know that sounds kind of strange because Audrey Gallacher: Yes. we are thinking they are not very good, but they do Mr Lilley: It is surprising they make such a meal of act, probably, as a bit of a catalyst and a prompt to this and do not seem to define things very clearly. It have these kind of discussions and if it leads us to says in our briefing, or rather in Consumer Focus a place where we have something that is a bit more stuff, that to get from a 6% margin across the majority meaningful that will allow us to offer consumers those of consumers to a 0.3% margin across all consumers assurances or challenge the industry when things go might imply predatory pricing. That is still at the retail wrong, I think at this point in time we have reports end, not wholesale? that do not do either of those jobs. They do not allow Audrey Gallacher: Yes, that has just picked up the us to reassure consumers. They do not allow us to find retail aspect of the segmental accounts that were out where there are problems in the market and get saying supply businesses looked as though they were cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:56] Job: 030522 Unit: PG01 Source: /MILES/PKU/INPUT/030522/Corr EnCC 12.03.13.xml
Energy and Climate Change Committee: Evidence Ev 19
12 March 2013 Richard Lloyd, Audrey Gallacher and Anne Pardoe breaking even with 0.3% profit in that 2010 year, but Mr Lilley: Yes, I do. There are all different varieties. if you looked at the SMI through that period, Ofgem You have not studied the shampoo market. is suggesting that there was a £30 margin which is a Richard Lloyd: I think perhaps the shampoo market 6% margin. There is an issue that we have two sets of may be a poor analogy but it is the simplicity. In our information that are quite significantly different and view what we have done is ask consumers, “Look at the issue is can we understand why that is? Is it about the tariffs and the pricing structures that exist now. how robust the reporting arrangements are? Clearly Can you spot the cheapest deal for you?” We wanted one of them was after the event, actual what was to test whether people could themselves navigate reported by companies. One of them is Ofgem’s around the market without an intermediary and estimates, so it will again call into question whether people—with the way pricing information is presented those estimates are so far out from what has been under the existing mechanisms—in most cases could reported. It just continues with this level of not spot the best deal on the market for them. uncertainty over what consumers are paying, and Mr Lilley: However, there are many markets which whether they are paying a fair price. I think probably would not exist. more work needs to be done to ensure that the— Richard Lloyd: We would like to see simple markets Mr Lilley: It ought not to be beyond the wit of man that consumers can operate in and operate in a far to establish what the profits and what the costs and more mobile way. That is what we were set up to what the prices are? create. It is not in our interest to promote complexity. Audrey Gallacher: It apparently is. Mr Lilley: You give consumers the information on Mr Lilley: I am baffled. the assumption that they could use it, but in this Richard Lloyd: I think if you are baffled, the average market you say, “No, we are not going to give them consumer is baffled many times over. the information. Let us reduce their choice to four tariffs and that is it”. Q80 Mr Lilley: That brings me to another point. I Richard Lloyd: No. am slightly diverging, Chairman, but in my younger Mr Lilley: This almost inevitably means that the days Which? used to tell us which was the best buy companies will cut out their cheapest tariffs, does it for things. not? Richard Lloyd: We still do that. Richard Lloyd: Again, the cheapest tariff needs to be Mr Lilley: Do you tell people which is the best buy, one that is competitive and that is exactly why we given their particular household circumstances or have been saying if the price is presented in a consumption pattern, for buying electricity and gas? complicated way that people cannot compare easily Richard Lloyd: We do. We also do customer service then competition will not be sufficient to keep that ratings so we can tell people not only—if they provide price in check. That is why we have said that Ofgem’s the right data—who the best supplier is likely to be, proposal for a comparative rate is just too but also whether they are likely to be treated well or complicated. You need to have a single unit price that, badly by them. like your shampoo, you can compare one product Mr Lilley: Most of us would put the priority on against another at a glance and spot the cheapest deal. having a low bill. Have you seen the work by Stephen I would be delighted if there was no need for Littlechild who says The Sunday Times’ best buy was comparison sites, for pages of reports about how you the SSE tariff and that is now prohibited under the can find the best deal in the gas and electricity market. Government’s widely supported proposals for limiting It is different from shampoo. You need it to live. You the number of tariffs? Do you think that is a good cannot get by without energy and that is why a move thing, that by trying to simplify the market we outlaw to more simplicity, in our view, is to the greater good the best deals? of consumers and then we can get on with advising Richard Lloyd: It depends, I am afraid, is the answer. people about which supplier to look to for other Our view is that simplifying the market is absolutely dimensions of service delivery and customer essential in enabling more people to engage in it and satisfaction. thereby we would hope for a more competitive market I think under the current reform arrangements we will to exist and for prices to be keener. not move to a market where the prices are presented in a simple way that will allow people to choose between Q81 Mr Lilley: Why do you think people are suppliers quickly, and that means we will not get those particularly incapable of shopping around in this competitive forces operating that we were talking market? I went to buy some hair shampoo the other about. day and there were 40 different varieties at all different prices. I managed to stagger through and buy Q82 Mr Lilley: Would it not be fairly easy to devise some. No one says I need to be protected from myself an app for our mobile phones that if it had our gas in this market. If I go and buy a car, there are scores and electricity bills fed in to it automatically, it would of different models at different prices and I can tell us which is the best deal? negotiate a better deal here than I can there. Nobody Richard Lloyd: We have developed a prototype for says I have to be protected from it. The competitive that with Scottish Power and we have been asking the forces seem to work. energy suppliers, all of them, to buy in to that system Richard Lloyd: You have a much simpler pricing where you could download your consumption data, arrangement. You do not need to figure out for your plug it in to a comparison site like Which? Switch and shampoo whether you are a low, medium or high user find the best deal on the market for you. They have of your shampoo. been dragging their feet on that, so I am with you on cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:56] Job: 030522 Unit: PG01 Source: /MILES/PKU/INPUT/030522/Corr EnCC 12.03.13.xml
Ev 20 Energy and Climate Change Committee: Evidence
12 March 2013 Richard Lloyd, Audrey Gallacher and Anne Pardoe that. That would certainly take some of the friction in a way that if we all were savvy consumers and out of switching but, again, you have to recognise that switched on to that, that would probably not be it is a minority sport still. There are not that many available anymore and a lot of the suppliers say, people who are that interested, despite the cost, in although they would not say on their advertising, “It going to the market and switching. is open for 200,000 consumers” or whatever, and then Mr Lilley: For most people the most important single as soon as that number of people are on that, that tariff worry is their heating bill. would then be closed and they will have to open a Richard Lloyd: It is the paradox about this market new one. that despite people being worried about the price, a Mr Lilley: It seems a very funny position for a lot of people are so disengaged in the market that they consumer advocate to say a tariff may be too good; are not shopping around and getting the best deal for too many people may be attracted to it; let us be them even with a simpler structure of tariffs there will satisfied that it has now been outlawed by the be gains for them to do that. That is why we need a Government. This whole business baffles me. mix of things to enable consumers to engage—simpler Anne Pardoe: No, it is not. It is just giving everyone pricing, easier and quicker switching with less hassle, an equal chance to be able to access a tariff which is easier means to identify the best deal on the market the best one available for them. Obviously, we would for you—and not this halfway house of some tariff love suppliers to offer the best tariffs to everyone, but simplicity but still complex presentation of pricing, it is simply not the case that that happens at the slow switching and so on. moment. With pre-payment meters, in particular, I think there is one supplier now that is moving to open Q83 Sir Robert Smith: Is there a fear of getting all their tariffs to pre-payment customers, but in the yourself trapped in an even worse deal or is it just that vast majority of cases the pre-payment customers do some people’s minds go blank and they think it is all not have access to those deals. too confusing? Audrey Gallacher: I think some of the Big Six, and Anne Pardoe: I think with the complex market, certainly smaller suppliers, have alleged predatory obviously if you simplify it then you reduce the areas pricing and we have had some positive statements where suppliers can compete and offer innovation. from some of the larger suppliers. The issue being that for some of the sharper elbowed consumers, more able consumers, then that is fine. Q84 Mr Lilley: I would love some predatory pricing. They may be able to, with some difficulty, navigate I would go and sign up for some predatory pricing. their way round the market. The issue comes for time You are against predatory pricing and you are against poor and also less able consumers who just do not high pricing. What sort of pricing are you for? have the time or the ability to sift through all those Audrey Gallacher: I think predatory pricing of and work out which is the best deal for them. In order shampoo is okay, but when it is an essential service to allow them to engage in the market more and the people subsidising that predatory pricing are effectively you need to simplify. In terms of your the people who can least afford it and who are really example, where I think you said SSE had this with suffering quite significant hardship as a result of it the tariff— then there is a question about whether that should be Mr Lilley: The Sunday Times said it was the best buy allowed. So we would move towards fair pricing, on the market. whatever fair pricing may be, but we would move Anne Pardoe: Yes, the issue around that is if everyone towards fair pricing rather than cheap pricing. did decamp and switch on to that tariff it would no Chair: I think on this note of bafflement we will have longer be viable for SSE to run that tariff because of to draw to a conclusion. Thank you very much for the way that pricing is worked out, quite often some coming in. tariffs are subsidising other tariffs. It sort of works out cobber Pack: U PL: COE1 [SO] Processed: [26-07-2013 09:58] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 21
Tuesday 16 April 2013
Members present: Mr Tim Yeo (Chair)
Dan Byles Christopher Pincher Barry Gardiner John Robertson Ian Lavery Sir Robert Smith Dr Phillip Lee Dr Alan Whitehead Mr Peter Lilley ______
Examination of Witnesses
Witnesses: Tony Cocker, Chief Executive Officer, E.ON, Juliet Davenport, Chief Executive Officer and Founder, Good Energy, Jim Poole, Director of B2C, EDF Energy, and Alistair Phillips-Davies, Deputy Chief Executive, SSE, gave evidence.
Q85 Chair: Good morning and welcome to the have continued presumably doing so indefinitely for Committee. There is, as you know, a lot of interest in the benefit of your profits had Surrey Trading this inquiry. We are televised today, so could you Standards Service not started their investigation? please identify yourself by name, starting with you, Alistair Phillips-Davies: No, I do not think that is Tony Cocker. the case. Tony Cocker: Tony Cocker, CEO of E.ON UK. Juliet Davenport: Juliet Davenport, CEO of Good Q89 Chair: What action did you take to stop this Energy. process prior to the investigation by Surrey Trading Jim Poole: Jim Poole, Director of EDF Energy’s retail Standards Service? supply business. Alistair Phillips-Davies: In respect to the matter with Alistair Phillips-Davies: Alistair Phillips-Davies, Surrey Trading Standards, there was essentially one Deputy CEO of SSE. script where there was a detailed discussion between us and them around whether that script was Q86 Chair: Mr Phillips-Davies, can I start with you? appropriate. When it was ultimately decided that there Can you tell us exactly when SSE stopped mis- were inappropriate elements within that script, we selling? changed that script. Alistair Phillips-Davies: I would like to start in terms of the mis-selling announcement that Ofgem made. Q90 Chair: Illegal elements, not “inappropriate”; Personally and on behalf of the management team, illegal and misleading. individually and collectively, I would like to apologise Alistair Phillips-Davies: We have apologised to our for the issues that we faced, the fact that the standards customers for what happened in regard of that. We that we showed during the period that Ofgem have obviously been fined in regard of that, and we investigated us were not the standards we would have have put that matter right. liked to have lived up to and were clearly not what customers would have expected. But in answer to your Q91 Chair: You will create a better impression with question specifically, we cleared all the items in this Committee and your customers if you do not use relation to the Ofgem investigation principally during weasel words like “inappropriate” for illegal and 2011, and then there were some minor clear-ups as misleading sales scripts, will you not? well that took until September 2012. Alistair Phillips-Davies: If you say so, yes.
Q87 Chair: It is the case, is it not, that your staff and Q92 Chair: It is not, if I say so, that is what the vast agents continued mis-selling up to and after the point majority of people who have been in touch with this at which the Trading Standards Authority started to Committee have already told us. We have had the investigate? benefit of a lot of contributions from the public today Alistair Phillips-Davies: The Trading Standards about the questions we should ask you, and, not Authority? surprisingly, this is one of them. Will you just be Chair: Surrey County Council. absolutely clear that SSE continued the use of illegal Alistair Phillips-Davies: Are we talking about the and misleading sales scripts up to and after the point Ofgem investigation or Surrey County Council? at which the investigation by Surrey Trading Chair: Surrey County Council. Standards Service commenced? Alistair Phillips-Davies: In respect of the Surrey Alistair Phillips-Davies: After the investigation County Council investigation, which related commenced? specifically to scripts in 2009, all of those issues Chair: Yes. related to that were dealt with immediately after the Alistair Phillips-Davies: So, prior to the judgment? judgment. Chair: Yes. Alistair Phillips-Davies: There were a number of Q88 Chair: But you were happy for your staff to changes made to the scripts at the time that the continue using dishonest selling methods and would investigation commenced, and then there were further cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:58] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
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16 April 2013 Tony Cocker, Juliet Davenport, Jim Poole and Alistair Phillips-Davies changes put in place after the judgment was issued wants to contact us, we would consider that case and and there was a clear ruling on what had happened. we would compensate them for it.
Q93 Chair: Prior to the commencement of the Surrey Q100 Chair: So the onus is on the offended party Trading Standards Service investigation, your rather than you as the guilty party? company took no action to stop the use of illegal and Alistair Phillips-Davies: We have placed adverts in misleading sales scripts, yes or no? national papers and we have written out to Alistair Phillips-Davies: Can you repeat the approximately 10% of our customer base or those question, please? people who may have been affected by these practices Chair: Yes. Prior to the commencement of the in an attempt to try to make sure that they all come investigation by Surrey Trading Standards Service, forward and we can have a proper conversation with your company took no action whatever to stop the use them about what compensation they are due. We have of illegal and misleading sales scripts by your staff? been doing that for the last 17 months. We have done Alistair Phillips-Davies: No, I have to disagree with it in conjunction with a well-known or leading that. consumer body and we estimate, in conjunction with Ofgem, that probably less than half of 1% of our Q94 Chair: What action did they take and when? customers would have been affected by this. Alistair Phillips-Davies: As a company, we have always sought to hold the highest standards in respect Q101 Chair: What date do the advertisements of dealing with our customers. suggest you will pay the compensation from? Alistair Phillips-Davies: I would have to go back and Q95 Chair: What action did you take to stop the use look at the advertisements, but if there is any customer of illegal sales scripts and when? who feels that they have been disadvantaged by the Alistair Phillips-Davies: We have a compliance mis-selling practices from October 2008, we would function within the company and that compliance happily recompense them. function would audit what was going on. We would review scripts and other materials that we used for Q102 Chair: It was suggested to us that the sales to try to ensure that that complied with all compensation offer was only going to apply to relevant legislation, whether regulatory or legal. That customers from October 2009, but I am happy to note is an ongoing process that we have had for a number your on-the-record commitment to using the earlier of years and since we have been in the business of date. energy sales. Alistair Phillips-Davies: We will seek to rectify that, and we will also talk with the consumer body we have Q96 Chair: How many of your customers were mis- been working with about how we communicate with sold tariffs? any people who have not been made aware of that. Alistair Phillips-Davies: In the Ofgem report that was issued two weeks ago, they estimated in the region of Q103 John Robertson: I was interested in your 23,000 people would have been disadvantaged by advert, of which I have a copy here. Do you not think, some of the sales practices that went on during the considering this is 7 April 2013, that that is actually an period of their investigation. insult to the people who buy their energy from you? Alistair Phillips-Davies: No. Q97 Chair: Is it the case that these mis-sold tariffs started from 30 September 2008? Q104 John Robertson: You think that is fair, and yet Alistair Phillips-Davies: The Ofgem investigation did you have already said that you were making changes not cover the period that early. It covered the period to the script earlier at that time? You must have known from 2009; I think October 2009, from memory. you were cheating and all you were doing was trying to continue cheating but to manufacture some new Q98 Chair: We have been contacted by Surrey words to try to convince people that you were not. Is Trading Standards Service to point out that this illegal that not right? and misleading sales script was used from 30 Alistair Phillips-Davies: No. September 2008. Do you dispute that fact? Alistair Phillips-Davies: No, and we have a sales Q105 John Robertson: You are a member of the guarantee in place. If there is any customer who feels board? One of our public who have tweeted us has they have been mis-sold to, we have had in place for asked if you were a member of the board during this 17 months a guarantee that offers any customer who mis-selling. thinks that they have been mis-sold to the opportunity Alistair Phillips-Davies: I was a member of the board to come to us. We were the first and remain the only during the period of the investigation that Ofgem company that has sought to recompense customers undertook, the report of which came out two weeks fully for any disadvantage that they have received as ago, yes. a result of any mis-selling. Q106 John Robertson: So why are you still a Q99 Chair: You will compensate people who were member of the board? mis-sold from the beginning of October 2008? Alistair Phillips-Davies: During the period of the mis- Alistair Phillips-Davies: Yes. If there was anybody selling when Ofgem are investigating what we did, we who was mis-sold to who could prove that to us and took extensive action in regard to retraining, cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:58] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
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16 April 2013 Tony Cocker, Juliet Davenport, Jim Poole and Alistair Phillips-Davies additional audit procedures, significant changes of or do you want to hold your hand up now and say staff. We took unprecedented action in respect of guilty? actually closing our doorstep sales activity in 2011, Jim Poole: I can speak for EDF Energy. EDF Energy, terminating a number of contracts of external in the past, has been through an investigation by agencies, and we have replaced a lot of the senior Ofgem into this area. It did not identify any mis- management within the retail business. We now have selling activities, but it did identify control the right team to deliver for our customers and I weaknesses, which Ofgem commented at the end of believe I am the right person to lead that team. the investigation, that we corrected very quickly. We are confident now that those controls are robust and Q107 John Robertson: So what you are really in place. saying is, “It was a big boy who did it and he ran away. It is not my fault, guv”? Q111 John Robertson: That is quite interesting, Alistair Phillips-Davies: I am not running away from because I complained to your company about people this. We have said we are sorry. We absolutely phoning me up that had information about my energy, acknowledge that what we did— and yet they refused to tell me where they got their information from. Does that sound like being legal? Q108 John Robertson: Words are easy. To me that Jim Poole: That does not sound right. is an insult. Alistair Phillips-Davies: Words are easy but equally, Q112 John Robertson: You are right, it does not, but Mr Robertson, we have spent the last 17 months— that happened and it was your company. What are you John Robertson: You knew before that you were going to do? cheating. You were cheating the public; you knew Jim Poole: Certainly, if you give us the details of that, that. I will look into it. As I say, there was a thorough Alistair Phillips-Davies: As soon as we became aware investigation and we have taken all of the actions that of things that may have been misconstrued or viewed Ofgem asked us to take. As Ofgem said at the end of the investigation, the speed with which we did that as mis-selling or illegal or anything else, we took was appropriate. action. We took significant action over the period of the investigation, and we have been taking action for the last 17 months to seek to recompense fully all of Q113 John Robertson: Mr Cocker, what about the customers who were affected, which again I would E.ON? reiterate is less than half a per cent of our customer Tony Cocker: Ofgem is currently investigating E.ON. base. We are working fully with Ofgem to understand their concerns. We have a very strong view that we want to provide the best products to our customers at fair Q109 Chair: How much profit did you make as a prices and to enable customers to make the right result of this mis-selling? decisions in terms of their energy tariffs, so we will Alistair Phillips-Davies: In Ofgem’s estimate there work fully with Ofgem. If there are findings, we will were 23,000 customers who may have been mis-sold implement those findings. to. What they said was that they felt that we were making £45 a year out of those customers. Of the Q114 John Robertson: As far as you are aware, you customers that we have spoken to to date and settled are squeaky-clean? with, the average compensation figure we have paid— Tony Cocker: I think it is too early to say. We are I am rounding up and adding a small amount on to working as hard as we can— cover any interest and other inconvenience—has been John Robertson: I am bound to say, Mr Cocker, I between £65 and £70. If you took £65 and £70 and would expect a company to know whether they are multiplied by 23,000, I would imagine you would end doing things right or not doing things right. You and up with a number of about £1.5 million in terms of I both know that you know whether you are squeaky- the detriment that has been suffered by customers. We clean or not. Come clean now and tell us if you are have obviously provided £5 million for that and we or you aren’t. will go through a process to make sure that we deal Tony Cocker: We are working as hard as we can to with all the customers who contact us, and then we make sure we are squeaky-clean. will go through a process that we have been John Robertson: Not good enough. discussing with a leading agency for any customers who have not approached us to try to make a fair and Q115 Chair: One of the points that I think many reasonable recompense to them by trying to identify people are concerned about is the lack of transparency what their circumstances were. On top of that, we in the operations of the big six, the fact that their have borne the not insignificant fine of £10.5 million, corporate structures are extremely complex and with which we decided to accept to try to draw the matter very large numbers of subsidiaries, with vertical to a close. integration, in fact with profits being generated partly John Robertson: Chair, can I come back? in the generation business, partly in the trading Chair: Yes. business, partly in the supply business. I want to ask all three of you this. Why do you use these very Q110 John Robertson: Just so it is not just Mr complex and somewhat obscure structures? Phillips-Davies who is getting hammered all the time, Tony Cocker: Mr Chairman, I think the way we think the other companies, are you squeaky-clean in all this about it, we have a number of businesses in the UK, cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:58] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
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16 April 2013 Tony Cocker, Juliet Davenport, Jim Poole and Alistair Phillips-Davies and each of those businesses has to stand on its own Q117 Chair: Just on that, all the transactions two feet. We have a retail business, which supplies between the generation business and the retail electricity and gas to residential customers and business are at prices that are available publicly, are business customers. We have a generation business, they? which generates electricity. We have a renewables Tony Cocker: No, the retail business buys all of its business. We also have an upstream gas business and electricity and gas through our trading business. It is a gas storage business. Each of those businesses has a service from our trading business, which is based to operate and stand on its own two feet, as I say. in Germany. The generation business sells all of its Then in terms of ensuring transparency for our electricity and procures all its fuel also through a customers, we explain as clearly as we possibly can service that is provided by the trading business. They what is the makeup of our customers’ bills and as are completely separate, completely standalone. Each clearly as we can what is the makeup of our profits, of them, as I say, has to stand on their own two feet, both in terms of the retail profits that we make in the and those transactions are at market prices. retail business, which is providing a service to those customers, and also in the other areas of the business, Q118 Chair: This transparent structure involves a the generation business or the exploration and company in Britain buying from another company in Britain via an intermediary in Germany at a price that production business. is not disclosed. That is your transparency? Jim Poole: I guess the easiest way to explain the Tony Cocker: No. The retail business does not buy structure is that we have an upstream business, which from the generation business. The generation is largely generating energy, on one hand and we have business, through the trading business, sells all of its a downstream supply business supplying electricity generation into the market and the retail business, and gas to our residential and business customers. The through the trading business, buys all of the electricity segmented accounts that are produced accurately and gas that we require for our customers through reflect the performance of those two businesses. the marketplace. Alistair Phillips-Davies: We have three business streams. We have a network stream that is completely Q119 Chair: Wouldn’t it be much simpler just to regulated and separated. We also have a wholesale or transfer it straight from the generating business to the generation stream, and then we have a retail stream retail business at a price that you could then publish? that deals with customers. Those three streams are Tony Cocker: No, because we want to be very focused reported in our financial accounts every year, and they on simple standalone businesses, each of which stands are subject to audit. Also, Ofgem have over the last on their own two feet and each of which is three or four years asked us to produce specific competitive in their own marketplaces. accounts in relation to retail and generation businesses solely in the UK, because we do have some businesses Q120 Chair: How does it work in your case in EDF? based in Ireland as well. We produce those accounts. Jim Poole: Very similar model. The upstream They are fully reconciled to the published accounts business sells its energy at market prices into the and the Ofgem auditors have given us a clean bill of market and the downstream business, the business I health on the fact that what we are doing is entirely am responsible for, effectively does the same. It buys appropriate. I think they went as far as to say, in from the wholesale market and the prices that impact response to issues around trading profits, that because the performance of both those businesses are the we reconcile those accounts fully and they are prices of the wholesale market. The view that publicly available there was no opportunity for us to vertically integrated businesses effectively self-supply disguise or hide profits within either the generation or is not the case. As I say, the upstream sell into the supply business. We do not have a central trading or market and the downstream buy from the market, and hedging business that we attribute any significant that means that we get an accurate reflection of the profits or losses to, so they are all entirely attributed downstream profitability of the business. It is to either the customer business or the generation appropriate, because clearly we are competing with businesses that are all doing the same thing in terms business. They are available every year. I have a copy of buying energy from the wholesale market. here if you want to see them. Q121 Dr Lee: How is the market price set? In each Q116 Chair: Is not the effect of these very complex case, how do you arrive at a market price for any structures to allow you to move profits at will from particular commodity? one part of the business to another? Tony Cocker: Our retail business buys the electricity Tony Cocker: No, absolutely not. You keep calling it or the gas at the market price, so at the prevailing a complex structure. Actually, Mr Chairman, it is a market price in the traded market. very simple structure. As I said, we have a generation business. There is a team that runs that. We have a Q122 Dr Lee: Is that done at that time or is it done retail business and a team that runs that, a renewables over a period? Is it a spot price? team that runs that business, an E&P team that runs Tony Cocker: The retail business for our residential that business. It is actually very simple and supply business will buy the electricity and gas straightforward and we report very transparently on gradually over the front of the coming two to three each of those businesses, including through the Ofgem years to manage the volatility in the prices, so we get segmental analysis. a smoother price than if we attempt to buy all of it cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:58] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 25
16 April 2013 Tony Cocker, Juliet Davenport, Jim Poole and Alistair Phillips-Davies on one day or all of it in one week or all of it in Anybody can bid for that power and we routinely put one month. 100% of the volume of our generation into that market on a day-ahead basis. In addition to that, in respect of Q123 Dr Lee: Do you think that market price is set I think both of the smaller energy companies here and by country conditions or is it a global price? The price four others, so therefore six in total, at our cost we of liquid natural gas is different in different parts of have made available to them free credit so they can the world, for example. You say it is based in trade in that market. We have offered them favourable Germany in your case. Clearly, the decision on terms without quoting bid-offer spreads. We do a nuclear has made a difference to the price of gas in number of contracts with those six smaller companies. the region. How do you make a calculation over two Therefore, in terms of short-term liquidity, which is to three years on how much you are going to buy and this day-ahead auction market, and/or medium-term at what price when something like that can happen? liquidity, offering to trade with the various companies, How do you do it? I do not quite understand how you we have done clearly more than anybody else in order price something in that environment. to improve that liquidity. Tony Cocker: For our residential business, for example, our risk management team here will say, Q128 Dr Whitehead: Could I be clear that you put “Okay, we are going to buy a certain amount of gas all your generation in— for summer 2014 now, and we will buy that in the Alistair Phillips-Davies: We routinely put all of our market”. By “in the market” I mean it is the UK North generation into that day-ahead market. We can come West European traded gas market and the indicator of up with figures. Do we do it absolutely every day? that price is the NBP price, which is published on a No, but we routinely put 100% of the generation into daily basis. That is a very clear and transparent price that market. If you wanted we could give some and a very clear and transparent way of doing it from statistics or if you want to send somebody to come our business perspective. and see our traders and look at it or verify that, we would be very happy for you to do that, but that is Q124 Dr Lee: Do you think that is truly subjected to what we routinely do. market forces in the way that you can trade oranges and lemons and there is a proper market, or is there a Q129 Dr Whitehead: Then you buy from that day- danger that it is not really? ahead market as if that were not your generation? Tony Cocker: The UK traded market, the North West Alistair Phillips-Davies: That auction, which is free European traded market particularly around the UK, to anybody to bid into, we end up selling in that is the most liquid, it is the most traded energy market auction, and we end up buying back from that auction in Europe. Therefore, the price that we procure our for our supply business as well. gas for through that market we believe is a fair price. There have been some issues and you will recall in Q130 Dr Whitehead: You do not trade two years September of last year there was accusations of ahead, three years ahead? traders attempting to manipulate the price. Clearly, Alistair Phillips-Davies: No, we will routinely look that is bad behaviour and absolutely should not to hedge our position further out as well. In terms of happen, and all the serious participants in the market that day-ahead market we do routinely put all of our absolutely do not condone that sort of behaviour. volume into that market, but we will actually keep contracts further out as well. Q125 Dr Lee: That was actually my next question. Is there any evidence of any of your companies being Q131 Dr Whitehead: What is the effect on the day- involved in an equivalent to a LIBOR scandal in terms ahead trading and the hedging strategy? of fixing of price at all? Alistair Phillips-Davies: Say that again. What is Tony Cocker: Absolutely not. our— Dr Lee: There is no game-playing, nothing at all? Dr Whitehead: You say you hedge against the day- Tony Cocker: We have thoroughly reviewed it and ahead trading for longer term trading. What is the absolutely not. effect of that? Alistair Phillips-Davies: What do you mean? Sorry, I Q126 Dr Whitehead: Could each of you let me don’t understand the question. know how much you trade, bearing in mind what we Dr Whitehead: Well, you have just mentioned that have just been discussing, over-the-counter and how you put everything into the day-ahead market, which much over the wholesale markets, bearing in mind you then trade as if it were not your generation, but that all of you in one way or another self-supply? you hedge presumably in order to mitigate the effect Alistair Phillips-Davies: I will answer. We routinely of the day-ahead trading in terms of the long-term trade 100% of our generation in the day-ahead market market arrangements, which is then relayed back to and our demand as well, so it is relatively routine for your own self-supply? us to put all of our power into the day-ahead market. Alistair Phillips-Davies: Yes. So, if we are trying to mitigate the issues around particular price spikes and Q127 Dr Whitehead: These are not financial things like that—so, for instance, in March we contracts? obviously saw gas prices more than double at times Alistair Phillips-Davies: Well, they go into an during March—then we would want to trade ahead for auction. There is an auction structure that Ofgem things like that in order to mitigate the risks to our support, and the support has been fully transparent. customers of not being able to supply them. Similarly, cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:58] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
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16 April 2013 Tony Cocker, Juliet Davenport, Jim Poole and Alistair Phillips-Davies we do the same within the electricity market, which exception of Good Energy, you have all said is pretty is what you are talking about. We would seek to hedge much similar between companies? some of our exposure forward and, therefore, we Alistair Phillips-Davies: I think one of the issues with would end up putting generation into the market and electricity is that you have 48 half-hourly periods in our supply business would end up buying generation every day, so despite the fact that you may have out of that market as well, that day-ahead market, to reasonable liquidity further down the curve, let us say cover its position, because it could not take it straight a year out, for a season or a quarter or a month, it is from our generation business. more difficult to get liquidity if you happen to want to buy 5.00pm until 7.00pm on a Thursday afternoon Q132 Dr Whitehead: How do you do that? in October 2014. That is a pretty difficult product to Jim Poole: The model is very similar, actually. We buy, and that is simply a function of the fact that you trade over the horizon for both the supply business can’t store electricity very easily. Essentially, you buying energy and the upstream business selling have 8,000-odd hours in every year and for each of energy. The over-the-counter market it is about 86%, those hours it is split into two, so therefore you have and the auction market is about 14%. Very similar to an awful lot of chunks of electricity to try to trade to the way that Alistair has just described, we then do completely balance yourself further out. That is why effectively the gross bidding process in the day-ahead you tend to go for either flexible supply contracts or market, so a very similar model. Buying over that have flexible generation on standby that you maybe longer period of time clearly helps to manage any own or contract with in some way, shape or form. I peaks that we see in the market prices. think there is good liquidity, but the problem is the granularity of that liquidity given how many half- Q133 Dr Whitehead: Are you also hedging? hours the day is chunked up into. I do not know Jim Poole: Yes. whether Juliet would agree, because it is probably an Juliet Davenport: We buy and sell in a very different issue for you. way from everybody else. We buy power from about Juliet Davenport: I think the issue with liquidity 500 independent generators on longer and short-term particularly for smaller suppliers is down the curve contracts. We then balance that in the day-ahead and how do you sort that. For the day-ahead liquidity marketplace. One of the reasons why we buy power we have seen improvements over the last two years, from a significant number of generators is that it gives and that is good. We can now balance the position us a forward position so that we are not changing our day-ahead. But in terms of further down the curve I prices constantly for our customer base. In fact, we think it is still very difficult. One of the reasons why have only changed our price once in four years on the Good Energy’s business model has grown up as it has electricity side recently. is because by dealing with smaller generators we can In terms of the percentages, that changes. Obviously, get a forward position. But I do worry personally we trade in 100% renewables, so we have wind and about some changes in policy we are seeing that might solar on our portfolio. How much we are selling and restrict that going forwards rather than improve it. buying in the day-ahead market will change on a daily Alistair Phillips-Davies: Also, further about liquidity, basis. Essentially, we have a very different business I would just add that you get unintended consequences model. We do buy power from our own generation as from things like a carbon price support mechanism well, but we will balance that in the day-ahead market that makes it incredibly difficult to trade power in a as well. period where you have a tax rather than something Tony Cocker: Our approach is to hedge over the front you can hedge in terms of the carbon price. Therefore, three years both for our generation portfolio and for really there is very, very limited liquidity, if any our retail portfolio, but separately as I described liquidity at all, beyond the point in time where there earlier, and then also to use the day-ahead market. We is certainty from Treasury on what that carbon price put about 60% of our volume through the day-ahead support mechanism will be. It is not necessarily a bad market. Right from the beginning of this day-ahead thing but it is just because of the nature of it you can’t auction, which Alistair described, we have been very hedge your exposure to that tax and, therefore, trading supportive of building that to ensure that there is the power will give you a significant exposure, adequate or good liquidity in that market. Overall, we potentially, to how that tax is set. churn our volume, so sell and buy our volume, for generation about four times before delivery. To your Q136 Dr Whitehead: Ofgem’s liquidity project, did question about hedging and then day-ahead, we might indeed mount a challenge to provide, they said, robust hedge the volume out but then conditions might reference prices along the curve and they say that the change on generation so we might sell it back. We do big six in particular have failed to meet this challenge. that four times overall on average for the generation That appears to contradict what you have said this side of the business. morning in terms of the likelihood of a robust reference price indeed round the curve; unless hedging Q134 Dr Whitehead: Selling back to yourself? strategies actually detract from that? Tony Cocker: No, back to the market; backwards and Alistair Phillips-Davies: From my perspective, SSE forwards into the market. have clearly done more than anybody else to try to provide liquidity into this market and also to small Q135 Dr Whitehead: I imagine you should have a independent suppliers who may have issues. As I said, very robust reference price right across the curve on I think it depends where you draw the line going down the basis of that model, the model that, with the the curve. I think there is pretty good liquidity out a cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:58] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 27
16 April 2013 Tony Cocker, Juliet Davenport, Jim Poole and Alistair Phillips-Davies couple of years. Once you go much beyond a couple what public information Ofgem make available, we of years, you get these issues like the carbon price see significant differences and we would be happy to support mechanism, which make it very difficult to send that through to the Committee afterwards so you trade there or very risky. can have a look at it and decide what you make of it. Tony Cocker: I have to say I would not agree with There are also significant differences in cost to serve Alistair that SSE have done more than anybody else, and things like that as well. Some people have much but I would say that there has been progress made. higher cost to serve than we do. Having said that, our proposals to Ofgem were to absolutely put in place a no self-supply restriction, in Q140 Dr Whitehead: Do you have any view on that, line with the comments we just made, and to require Mr Cocker? all generators to trade at least 30% of their generation Tony Cocker: I agree that the data show that there are in the day-ahead market. When I say “all generators” significant differences in the cost of energy from the I mean all significant generators, which would include segmental accounts, and there are also significant a number of the players who you have not invited to differences in the cost to serve and there are these sessions today, so the standalone generators. significant differences in the profitability of the Those were two of the key things that we proposed to individual businesses. Underlying those differences, at Ofgem to further continue to improve the liquidity in the end of the day we are in a competitive market and the wholesale market, which we believe is vital both in terms of the price that we offer to our customers for competition in the market and for confidence in we have to be competitive. What we try to do is to the market. make sure we offer fair, competitive prices to our customers and simple products. Q137 Dr Whitehead: Just a closing thought: if you Jim Poole: The only point I would add is that, as has are all hedging in different ways as you have been mentioned, the breakdown is in those segmental described, how come the results are all so similar? accounts. I think it is a good reference place to go to Alistair Phillips-Davies: I think if you look at the see the costs. Clearly, that also highlights the average weighted cost of going into the supply profitability of the businesses being quite different in businesses across the different companies they are terms of their supply side of the business. EDF Energy actually quite different. Maybe we end up making has not made a profit in that part of the business since similar profits, but equally I think over the last two or 2009, so it is an improving picture but it is still not a three years you have seen reasonably steady rises in profitable business for us. We are focused on trying to energy. There have been small blips, like clearly the engage customers and grow our business in terms of last month or so has seen extraordinary prices for the activities that we have in the market, because that gas, but— is one of the challenges that we have. Although we are one of the major suppliers, we are a relatively Q138 Dr Whitehead: Forgive me, if you are trading small one of the major suppliers, and actually being mainly transparently on the day-ahead market, and bigger and having scale is something that we are very you are then hedging on forward markets in order to keen to do. An active, competitive and engaged offset the effect of that and each company is working market is something that we are very keen on. on its own information in order to hedge those results Juliet Davenport: I think also it depends on the type of what it has done on the day-ahead markets, you of product you are trying to deliver to your customer would anticipate that the results of the hedging for base and understanding what those customers want. each company would turn out to be rather different. Our customers particularly have appreciated stability Therefore, the outcome in terms of performance and in prices and I think customers do not want to see prices and what have you would also be different. But their prices constantly changing. What you see in that is not the case, is it? profitability may change from year to year in terms of Alistair Phillips-Davies: There is a very wide the supply business and not only the hedging policies variation in domestic electricity purchase costs. I note, are different but also the pricing policies will be just looking at the last year where I have all the different depending on what product you are information from, the highest company is 30% to 40% delivering. different from the lowest company there. You perhaps are not— Q141 Sir Robert Smith: I just want to ask Mr Phillips-Davies: what motivated you to make the Q139 Dr Whitehead: No, I am talking about the market more liquid? major generators and suppliers here; all the integrated Alistair Phillips-Davies: Essentially, as we generators and suppliers. understood it, there were a number of people who Alistair Phillips-Davies: Okay, so ScottishPower, were saying that the market was not liquid enough to EDF, E.ON, RWE, British Gas and SSE—I am just be fair to some of the smaller suppliers. What we did saying there are significant differences in the purchase was seek to put activities in place to try to provide costs of energy that appear in their accounts that more liquidity. We clearly have a large business. We Ofgem sign off and have been looked at by BDO. You have differing customer needs day in, day out, as you may not have seen the information, but I can give you win and lose customers, and we also have a large our view of the information. There are very significant generation portfolio. Having a reasonably deep and differences in those costs. I will send you a table if liquid market at a time when a lot of banks have you want. I understand exactly what you are saying exited the market because bank capital is not there to and I am just saying from what I see from analysing do it is helpful and, therefore, we were prepared to do cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:58] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
Ev 28 Energy and Climate Change Committee: Evidence
16 April 2013 Tony Cocker, Juliet Davenport, Jim Poole and Alistair Phillips-Davies that. Equally, with people criticising the big six for us with. Therefore I would imagine or I know that there trying to keep out small suppliers and whatever, we is a reasonable market through into 2015, but much were perfectly happy to say, “No, that is not true. We beyond that the market gets relatively patchy and, as will put our money where our mouth is”. We want to I say, the spreads between bids and offers are quite see a vibrant, competitive market, and therefore we wide at that stage. made available credit terms to those small suppliers Tony Cocker: Can I just clarify, you said if you sell all so that they could trade more actively. We are very day-ahead from generation, and I think your natural happy to see a deep, liquid and competitive market, assumption is we sell all day-ahead. You are reserving and we would support actions that delivered that. it all to day-ahead; you are not doing any trade, any Tony Cocker: In the business model that I described selling down the curve. In fact, what we do is we will earlier of how we operate the business as separate sell on our generation side one, two, up to three years businesses, each of which has to stand on their own out, but then we will constantly need to adjust our two feet, it is absolutely vital for us that we have a position as gas prices change and coal prices change. deep and liquid market in order to enable that business We will unwind it, and then we will sell on the day- model to work. So we had a clear self-interest in ahead market 60% of our generation. As I said before, supporting liquidity. In addition to that, I personally we churn four times. So, let’s say three years out, believe that it is very important to have liquidity in where liquidity just about starts—as Mr Phillips- order to engender confidence in the market and Davies just said—to today we will be buying and competition. selling that generation in aggregate four times before we get to full delivery, because we constantly have to Q142 Mr Lilley: I am obviously a bit obtuse, but if adjust that position. most of you are selling all your electricity into the market a day ahead, when you enter into longer-term Q145 Mr Lilley: The overall effect of that will be to contracts who are you buying from? smooth out peaks and troughs in prices but Alistair Phillips-Davies: From the large generators. collectively, if one of you happens to be particularly skilful at trading, then the others must be losing a Q143 Mr Lilley: So they are also selling you stuff fraction on the trading side. Trading can’t itself they do not have? generate profit. Alistair Phillips-Davies: No. There are large Tony Cocker: There are also other players in the generators, so— traded market. It is not simply the electricity retailers Mr Lilley: Oh right, the people we are not seeing. and electricity generators in the electricity market in Alistair Phillips-Davies: So, International Power— the UK. There are other players as well. Alistair that is now GDF—I would imagine would have a long before mentioned banks and there are also position in the UK because they have generation; they independent trading houses and that is true both in do not have a particularly big supply business. electricity and gas. There are a large number of Intergen is a reasonable-sized generator, and Drax participants in these traded markets. equally. I think the output from their power station is Juliet Davenport: I think there is another element to larger than their supply business. Then finally in the that as well, because obviously there is the case of EDF, I would imagine since they have bought forecasting, how much your customers are going to British Energy they have a significant surplus of use, what impact weather is going to have. The market generation, over-supply. So, all of those four people I of last resort is National Grid and as soon as you go would imagine would sell substantial volumes of into the market of last resort you are paying a penalty energy into the market that some of us would need to for being in the market of last resort, so you can be buy, because we can’t cover all of our supply business better as a trader by knowing exactly what your with the generation that we currently have or own. portfolio is doing. For us it is even more important because we trade wind and solar, so we need to know Q144 Mr Lilley: I can see that if you are supplying what the day-ahead weather is doing and we will be more than you are producing, you will have to buy trading that within day, an hour ahead, depending on from a third party, but I was thinking in terms of the what is happening with the sun and the wind. term of contract that if you are all selling just a day ahead, who are you buying from a year ahead? Q146 Mr Lilley: But if you are doing particularly Alistair Phillips-Davies: For instance, I suspect all well because you have better weather forecasters than four of those people will be looking to potentially the rest of us, which wouldn’t be difficult, someone hedge their business. I think generators look to hedge else will be losing. It is just demand. further ahead so they provide themselves with some Juliet Davenport: Potentially what you may not have certainty, particularly a generator who relies on coal, is gen-sets coming on to fulfil that position, because like Drax, because you will enter into forward expensive gen-sets are helping to balance the market. physical contracts to ship coal to the UK and therefore You are using those much less than you would need you will want some certainty of making a profit out to if you are better at trading. of it, so those sorts of people would. I think where Alistair Phillips-Davies: So, your assertion about you do get into difficulties, as I say, is where you get having a good weather forecaster is correct. If you to the end of where you have certainty on carbon price have a good weather forecaster, it helps, no doubt. support because the swing factor on that in terms of being able to hedge your position is very large Q147 Mr Lilley: But the trouble is, in talking about basically. It is just a risk that is very difficult to deal this, the public often gets the impression that traders cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:58] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 29
16 April 2013 Tony Cocker, Juliet Davenport, Jim Poole and Alistair Phillips-Davies are making a profit, but if one trader is making a referred to as the simple process earlier, Mr Coker, profit, another must be making a loss. and the Chairman referred to Ofgem and their remarks Jim Poole: I think the interesting thing is that the way that there were limitations to transparency and we are approaching energy is really around managing comparability, and that is particularly in relation to the risk of the business. the CSS, the new Consolidated Segmental Statements. They allow you or they require you to separate your Q148 Mr Lilley: Collectively it is worthwhile doing business out and show your gains and losses in terms it because you are smoothing things out? of your generation, in terms of your domestic and Jim Poole: Yes. your retail supply. The problem is though that there Mr Lilley: But certainly it would be wrong to suggest are inconsistencies here in the way in which you that there are people who are traders who are making account for things and there are various lacunae, shall a profit in aggregate. Some traders will be making a we put it that way, in the way in which the rules say profit; others will be making a loss. The overall effect that you have to allocate things. will be to smooth things out over time. That is a sort Just picking up on the trading element of what we of a question stated as an assertion. were talking about and in particular the hedging that Alistair Phillips-Davies: Yes. I suspect, rather like the you discussed with Mr Whitehead, any gains or losses foreign exchange market, ultimately probably end- on financial instruments such as hedging, which have user consumers will pay a small premium for the bid- a major effect on the profitability of your businesses, offer spread on the foreign exchange they are buying. the CSS include a checklist table where that trading Equally, the cost of us hedging out our exposures to activity can be allocated to the different segments, but our customers and doing that in a traded market, if there is also a box that says “another part of business”, you do it well that benefit will flow through to and that box is frequently checked. Can you say for customers. If you do it poorly, that dis-benefit will each of the three of the big six businesses whether either flow through to your customers or flow through you have allocated financial instruments gains and to a reduced bottom line. losses to that other part of the business box? Mr Juliet Davenport: I think an efficient use of resource Cocker. is what it comes down to. Tony Cocker: I haven’t been back through our Ofgem postings. Q149 Dr Whitehead: Your traders will have, clearly in terms of hedging strategy and down the curve, Q152 Barry Gardiner: It may be an unfair question preferential information about your own generation, to put to you on the spur of the moment. Perhaps and therefore the trading on the basis that that you could write to the Committee, all of you, and say preferential information will be loaded towards self- whether you have allocated those profits and losses to supply. the other part of the business box. Alistair Phillips-Davies: There are very clear rules in Alistair Phillips-Davies: We will write to you. I just the remit in European legislation, where any say for us we only have a generation and a supply information that we have in relation to generation sets business and they are reconciled to the accounts. we have to make available to the market for stock There is nothing else in there. I suspect it would be exchange announcements and things of that nature. the same for one other company as well. You are a Those rules been in place for—I don’t know if Mr publicly listed company in the UK, you have complete Cocker can remember—a couple of years now, transparency for the publicly listed companies in the something like that, so therefore a screen is publicly UK of what is going on. We will write to you as well, available to everybody. We have to post what happens but I believe it is— in the generation business and/or in the storage Tony Cocker: Can I just add, we will write to you as business. well. I am told that we have not ticked that box and the Ofgem accounts cover the retail business here in Q150 Dr Whitehead: Right down the curve? the UK and the generation business in the UK, and it Alistair Phillips-Davies: Yes. Well, if you make is as simple as that. nominations to National Grid, National Grid will then publish that as well about when there are outages and Q153 Barry Gardiner: Mr Poole, EDF Trading is a things of that nature. It is generally the very short- UK registered company, yes? term movements where you lose sets or where sets Jim Poole: It is not part of the EDF Energy have had a problem that is going to affect things in organisation in the UK. It is a group— the short term, which the remit market covers. Longer- Barry Gardiner: But it is a UK registered company, term we will provide information to National Grid and yes? they present plans as to roughly what is going on in Jim Poole: I didn’t believe it was actually, but—1 terms of how people are setting there. So, there is quite a lot of information available and we are very 1 Note from the witness: In response to Q153 from Barry careful to keep our traders or the people who hedge Gardiner MP, I said I did not believe EDF Trading was a UK registered company. This was incorrect—the business is our retail and generation business away from that registered in the UK (company number is 03750288) to the information until it is made public. They are not following address: EDF Trading, 3rd Floor, Cardinal Place, allowed to do anything with it until it is made public. 80 Victoria Street, London, SW1E 5JL. EDF Trading Markets Limited is also registered at the same address, with company number 04255974. This is the arranger for EDF Q151 Barry Gardiner: I want to begin to explore Trading, and is authorised and regulated by the Financial with you accounting and transparency and what you Services Authority as an Energy Market Participant.” cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:58] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
Ev 30 Energy and Climate Change Committee: Evidence
16 April 2013 Tony Cocker, Juliet Davenport, Jim Poole and Alistair Phillips-Davies
Q154 Barry Gardiner: Okay, interesting. It is 100% sometimes you use IFRS, sometimes you use GAAP? owned by its French parent company? I think EDF Trading uses GAAP, whereas EDF Jim Poole: It is, yes. Energy Holdings uses IFRS. Isn’t that just another way in which by using the different accounting Q155 Barry Gardiner: Indeed. In the year ending standards you are not able or the public is not able— 31 December 2011 it made pre-tax profits of £530 and indeed the regulator is not able—to compare million. Is that correct? apples with apples, but finds it is comparing apples Jim Poole: That is right, yes. I think that is euros.2 with pears? Why do you use those different Barry Gardiner: Euros? accounting standards in those different parts of the Jim Poole: I thought it was euros.2 business if it is not for confusion? Jim Poole: It is not for confusion. They are the Q156 Barry Gardiner: I thought it was pounds, but accounting standards that are relevant to the activities anyway, maybe you will write to us on that. that are undertaken by that business and how those The trading arm isn’t owned by the other UK-based results are consolidated within the group’s position. parts of EDF, and so its activities are not separately Barry Gardiner: Sorry, could you say that again? I reported within the segmental statements, although did not quite catch that. some of its revenues and expenses are allocated to UK Jim Poole: It is not designed for confusion. segments. Is that not right? Accounting can be— Jim Poole: So it is reported separately under our group financial performance, and it does the trading Q161 Barry Gardiner: It may achieve confusion, activity— but it is not designed for confusion. Is that the answer? Barry Gardiner: Not within the segmental Jim Poole: Accounting can be complicated, but our statements is what I said. intent isn’t to try to do that. It is to use the appropriate Jim Poole: Yes, so it is not within the segmental standards that are relevant for the parts of the business statements. and how those results are consolidated within the group. Q157 Barry Gardiner: So when you are looking at segmental statements, it is not giving you a complete Q162 Barry Gardiner: Mr Cocker, some companies view of the business, is it? can sell capacity and that earns revenue because it is Jim Poole: It gives you a complete view of the available for dispatch even if it is never used. For a business, of how those two businesses performed in plant with low fixed costs that can be a particularly relation to the energy that was procured from the profitable venture, can’t it? wholesale market, so it does isolate those businesses Tony Cocker: Yes. It depends on the price. from any trading activity. Barry Gardiner: It can be a particularly profitable venture. Is that right? Q158 Barry Gardiner: Yes, this is one of the things Tony Cocker: It depends on the price. Forgive me, we will come on to look at. The prices that can be can you maybe carry on, and I can understand where shifted around groups through inter-company sales you are headed? and loans and management fees and suchlike, that sort of transfer pricing is very difficult to get a handle on. Q163 Barry Gardiner: I would have thought you In 2011 you and EDF Trading had a short-term could always see where I am headed, but what I am intergroup loan of £1.6 billion, didn’t you, or was that saying here is—well, let me put this another way. You euros as well? can allocate that to different parts of the business, Jim Poole: I am not aware, sorry. can’t you? Tony Cocker: No, we are very clear. Generation profit Q159 Barry Gardiner: You are not aware of that? arises in generation, retail profit arises in retail, Perhaps you could check that, and when you do could upstream gas profit arises in upstream gas and you tell us about paying interest on that loan and optimisation or trading profit arises in trading. whether through that the company could repatriate profits to France and not show them in the Q164 Barry Gardiner: What about your overheads, consolidated accounts? then? Estates, administration, marketing, pensions, Jim Poole: Okay, I will check and respond. financing can be allocated to any of those segments, can’t they? There is no set method for doing that, so the way in which you do that may be entirely different Q160 Barry Gardiner: Thank you very much. Why from the way Mr Poole does it, may be entirely is that you use different accounting standards, so different from the way Mr Phillips-Davies does it, and 2 Note from the witness: “In response to Q155 from Barry therefore getting a handle on how you have allocated Gardiner MP I suggested that pre-tax profits from EDF those overheads and comparing again company with Trading should be 530 million euros, rather than pounds. I company is extremely difficult. suggested this because EDF Trading’s financial results usually are reported in euros. However Mr Gardiner’s figure, Tony Cocker: If we look at the Ofgem segment £530 million, was based upon a conversion to sterling from accounts, I would be very happy separately to discuss EDF Trading’s pre-tax profits, as reported in euros. EDF with you how we allocate overheads to, for example, Trading’s 2011 pre-tax profit was €614.5 million, which is roughly equivalent to £530 million. Therefore Mr Gardiner’s the residential business, the industrial and commercial figures were correct, and I retract my comments about the business and the generation business. I am very happy currency.” to discuss that. Of course what we are trying to do cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:58] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 31
16 April 2013 Tony Cocker, Juliet Davenport, Jim Poole and Alistair Phillips-Davies is to reflect the true profitability of the business and in profit in those businesses, and you can see that from therefore when we are allocating overheads, we are our published accounts and from our Ofgem reports. trying to reflect what drives those overheads. For example, is it accounts, is it staff numbers or what? Q169 Barry Gardiner: Are you saying to me that it We apply them on a sensible basis and I believe there would not be possible that where a trading arm is is also guidance from Ofgem on how to allocate some based overseas, profits from the UK business activities of those things. might fail to show up in the segmental statements presented to Ofgem? Is that what you are really Q165 Barry Gardiner: But you talked earlier, I telling us? think, about your trading arm based in Germany, Tony Cocker: I am saying there is a business that is didn’t you? based overseas that may make some profit from Tony Cocker: Yes. trading around the UK, but at the same time there is also a business based in Germany— Q166 Barry Gardiner: Are any of those allocated to that? Would they be? Q170 Barry Gardiner: But I asked you what will Tony Cocker: The trading business in Germany has show up in the segmental statement accounts. some services from us here in the UK— Tony Cocker: You are absolutely right; that will not Barry Gardiner: So you are able to allocate across show up in the Ofgem segmental accounts. there. Tony Cocker:—so we allocate some costs to them, Q171 Barry Gardiner: So, in that respect, there is a but it is relatively little service that they receive from failure of transparency, is there not? here in the UK. Tony Cocker: The Ofgem accounts deal with only parts of each of our businesses. They deal with the Q167 Barry Gardiner: BDO recently recommended retail business, and they deal with the generation to Ofgem that the Consolidated Segmental Statements business. They do not deal with the exploration and require suppliers to report on trading activities and production business, they do not deal with the gas that was not brought forward. It would not be in your storage business and they do not deal in our case with interests to have it brought forward, would it? the trading business. The key thing is I believe that Tony Cocker: In our case, it is a strange question. We the Ofgem segmental accounts were developed to simply receive a service from a trading organisation focus on the retail business, to give transparency of that is overseas. We have an exploration and the costs and profits of those retail businesses. I production business, which produces gas and oil both believe they do an adequate job of that, a good job of in the Norwegian sector of the North Sea and the that, of showing the transparency of the retail business British sector of the North Sea. It is sort of consistent here in the UK for the residential customers and to saying we should report also the profits in Norway; industrial and commercial customers. it is clearly a separate jurisdiction and we wouldn’t dream of doing that. We have nuclear power stations Q172 Barry Gardiner: So, if in fact it is not to your in Germany, and undoubtedly from time to time the advantage as a company to have trading excluded electricity from those power stations finds its way from the Consolidated Segmental Statements, why over here, and we would not dream of identifying the don’t you just include them? Why don’t you just say, profit of that for the UK. “Yes, let’s include them”? You have given a very strong argument that you gain no advantage from this. Q168 Barry Gardiner: But if you had done like Tony Cocker: I believe the data that we currently EDF had done—Mr Poole hasn’t written back to me provide give an accurate description of the retail yet and told me whether he did do it, although I think business here in the UK. he did—and had that short-term intergroup loan of £1.6 billion, the very fact that you do not have to Q173 Barry Gardiner: You have told me that there record the transactions or pay any interest on that is therefore information that is not provided in the loan, the way in which you can shift that between Consolidated Segmental Statements; you agreed with trading arms—what I am saying to you is that is me on that. So, even though there is information that extremely beneficial to the way in which you are able is not provided, you say, “Well, because we are giving to show either inflated or reduced profits in any one adequate, we will not give full”. That does not seem part of your business as it may suit the company at a to be a very robust position for open transparency particular moment in time. Is that not the case? and simplicity. Tony Cocker: No, I fundamentally disagree with you. Tony Cocker: That is not what I am saying. I think it The Ofgem segmental accounts are reconciled to our is a robust position for simplicity. We have a retail UK audited accounts, and they give a fair business and we are very clear on that, and there is representation of the profits in our business. If you then a question of how wide you want to cast the net. separate it out between generation and retail, our retail Do you want to cast the net to the E&P business in business makes a margin of less than 5%, as you have Norway, the nuclear generation business in Germany? seen from the Ofgem reports. Our generation business is profitable, and at the same time over the last five Q174 Barry Gardiner: BDO suggested in their years in our generation business we have invested report that it should be cast as wide as trading arms, more in capital expenditure in new power stations or but you disagree with that. Ms Davenport, you have upgrading existing power stations than we have made been in a sense observing this discussion because you cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:58] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
Ev 32 Energy and Climate Change Committee: Evidence
16 April 2013 Tony Cocker, Juliet Davenport, Jim Poole and Alistair Phillips-Davies do not have the same structure as the big six. What Jim Poole: Our EBITDA3 operating profit was £800 do you make of the openness, transparency and million and corporation tax I think is 24%, so I think simplicity of the way in which the accounts are it is the right amount that we would expect to pay. reported to Ofgem? Tony Cocker: I think if I look over the last five years Juliet Davenport: I think we would appreciate more and average it, our total profits for E.ON in the UK, transparency to make sure. One point of view is that so all the elements in the UK, not just the retail we are a publicly listed company here in the UK. We business but also including gas storage and have to publish our accounts and there is quite a lot exploration and production, were nearly £5 billion. Of that, our total tax contribution was £2 billion including of detail. I think in terms of any energy company, a corporation tax, PAYE, National Insurance, VAT and private company in the UK can restrict the amount CCL. Our total UK investment figure in that period that they publish as well. I do think there is a case for was £6 billion and we also paid £330 million on making all companies—not just necessarily the big six business rates. We do have a lower corporation tax but obviously start there—across the board have more rate, as you would describe, than the standard transparency so we understand what is going on. From corporation tax rate, but that is because we have my point of view, I think customers have lost trust in invested so much money, £6 billion in that period in energy companies full-stop across the board, and the capital expenditure. In addition to that, we have also more transparency we can provide to customers across invested nearly £1 billion to repair the deficits in our all types of energy companies the better. I think we pension funds for our existing pensioners and current need to start to rebuild that, and I think if we rebuild and deferred employees, which we believe is very that, we can see a better functioning energy market in important. We have a very big pension fund with lots the future. of pensioners; so, very significant investments into the UK, significant corporation tax and other tax paid. Q175 Barry Gardiner: Do you think including the Yes, our rate is slightly lower, but that is because of those very, very significant investments. trading activities in the CSS would aid that transparency and help rebuild that trust? Q178 Ian Lavery: At least you have said that. I just Juliet Davenport: I think that is possibly one route to wonder whether the other two gentlemen would say look at it, but I think you should look at the overall whether they enjoy paying less than the normal rate. market as well, and there should be a complete review Tony Cocker: Mr Lavery, I would not say I would of what is happening in companies and how that is enjoy— being reflected to consumers. Ian Lavery: Well, if you pay less, I am sure you enjoy it. Q176 Ian Lavery: At a time when energy costs and Tony Cocker: No, it is a rate. We have invested £6 energy prices are becoming unaffordable to many billion, and the way corporation tax works is the people, I am absolutely alarmed to learn of the fact depreciation on assets for corporation tax purposes is that out of the big six energy companies one of the different, at a different pace than the depreciation for big six never paid any corporation tax in any one of accounting purposes, and therefore you end up with a the last three years. In addition to that, it is suggested lower rate. But in due course, of course, all of that that three of the big six have enjoyed significantly less will come back. effective tax rates than should be expected. That is an Alistair Phillips-Davies: The majority of our profits absolute outrage as far as I am concerned. I might are made in the UK despite the fact that we invest be totally naïve. I wonder if each of the individual more annually currently than we make in profits. We companies could explain whether they are either one invest in CAPEX. I think we pay a pretty full rate, of the three that enjoy these significantly less than because the bulk of our activities is in the UK, just subject to normal UK corporation tax. The number I expected taxes, or indeed you are the company that quoted of £460 million was corporation tax plus NI has never paid any corporation tax within the last and other direct taxes but excludes VAT and things of three years? that nature because I don’t think they are direct taxes. Alistair Phillips-Davies: Okay, I will start. We are a Our total profits across the entire group are £1.3 UK-listed company. I think there was a survey based billion. So I think you will find that our rate is on our last report and accounts. We are between the somewhat as I stated. We are paying rather more than 30th and 35th largest company in the FTSE and we the average among large FTSE companies. If we are were the 17th largest taxpayer in the UK. We paid between 30th and 35th and we are the 17th largest around about £460 million of direct taxes last year, so taxpayer, we are paying rather more than many big I believe that means we pay our fair share. companies in terms of paying our fair share within the Jim Poole: EDF Energy, if I look at the performance UK. You can get our accounts to look at, but I think of last year, had a corporation tax liability of £200 that is what you would find, and that is why I quoted million. that statistic. 3 Note from the witness: “In response to Q177 from Ian Lavery Q177 Ian Lavery: Is that a significantly reduced MP, I said that “Our EBITDA operating profit was £800 million...”. However, EBITDA is the term for earnings rate? Do you enjoy better rates than others or is that before interest, and is not the same as operating profit. I what you would expect to pay? would like to clarify that “our EBIT operating profit was £800 million”.” cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 33
16 April 2013 Tony Cocker, Juliet Davenport, Jim Poole and Alistair Phillips-Davies
Q179 John Robertson: How much of your £6 billion Q186 John Robertson: What was the dividend to investment comes from the Government for shareholders recently, or last year? renewables? Alistair Phillips-Davies: Ours would have been in Tony Cocker: None of it. We have invested— excess of £600 million in total for the year. John Robertson: Because it is not all £6 billion from Jim Poole: So we returned to the group £400 million, your company. but I would stress that the inward investment was Tony Cocker: Yes, it is. £1.3 billion. John Robertson: A lot of it comes through the John Robertson: No, it is okay. I will come to the Government for investment in other areas, is it not? reason why I am asking the question in a minute. Tony Cocker: I am sorry, John, it is money that comes Tony Cocker: I do not recall the exact number, but it from our company. We have invested in the last— was less £200 million.
Q180 John Robertson: You do not get any money Q187 John Robertson: When you are calculating from the Government to invest into other areas; is that your dividends, does your dividend just mean the what you are telling me? retail part of the industry, or does it also include the Tony Cocker: We have invested in onshore wind, generating part of the industry? Alistair Phillips-Davies: offshore wind— For our business the retail part last year made about 19% of the overall profit John Robertson: You do not get anything for that? and the rest came from regulated networks and You have paid all that? generation and our dividend is obviously derived from Tony Cocker: We invest upfront. Obviously in the the profitability of all those three business, which case of the existing onshore wind farms and the totalled just in excess of £1.3 billion last year before existing offshore wind farms we will benefit from the tax. Renewables Obligation Certificate. Q188 John Robertson: I take it that is the same— Q181 John Robertson: Is that included in your Tony Cocker: That is the dividend for E.ON UK. investment figures? Tony Cocker: No, we invest upfront, and then— Q189 John Robertson: I just wanted to know John Robertson: Are you sure? because I have a problem with that. You are paying Tony Cocker: Yes, the ROCs, the Renewables out your dividends that cover your whole industry and Obligation Certificates, we will receive over yet when we ask you a question about how much effectively the lifetime of the plant. We have invested money you are making you always split everything up that £6 billion upfront in onshore wind, offshore wind, into retail and generation. We know from the figures refurbishing Ratcliffe power station £750 million—it that Ofgem have given us you are making roughly is about the same as Wembley Stadium—and also in 25% on the generating side of the business, as upstream gas in the North Sea, Huntington Field that opposed to, which is always what you quote, a 6% or just opened yesterday, and also in gas storage a 2% rise in retail. Yet when you pay your dividend facilities. out to your shareholders you bring them both together. Why can you not bring them both together when you Q182 John Robertson: You do not get any money are working out the price of your electricity for your from the Government to help you with that? The £6 customers? Why can you not reduce the 25% increase billion is purely out of the purse of the company? to 12% and do something that would help those that Tony Cocker: The £6 billion is investment from the really need it? Why can you not do that? To me you company. The Renewables Obligation Certificate is a just put the figures together and you use them for your subsidy from which we will earn in due course— own benefit and yet when it comes to the general public, and particularly those that are involved in fuel poverty, they are the ones that suffer and you guys are Q183 John Robertson: Do you know how much you still making 25% profit. In effect, all the companies get from that? when they sell it are selling it to themselves. You Tony Cocker: No. might have put it into the market, but it is your John Robertson: Could you write to us and tell us? electricity that you have generated, and now you are Tony Cocker: We can. selling it back to yourselves. It is a con, is it not? Jim Poole: If I can comment on that, in terms of in Q184 John Robertson: EDF, how much money do EDF Energy the supply business did not make a profit, you get for renewables and so on, and do you include as can be seen and as I mentioned earlier on. that into your investment bill? Jim Poole: The investment number I gave was £1.3 Q190 John Robertson: But what did you make in billion, which was the money that was invested last generation? year, primarily in our nuclear assets and our upstream Jim Poole: So the overall performance of the business coal gas generation and gas storage activities, and that in terms of EBITDA was £1.7 billion. is funded by the company. Q191 John Robertson: See this is the problem that Q185 John Robertson: You do not get anything ordinary people have, and we have many people who from the Government, then? tweet us and ask us questions on this. Their problem Jim Poole: No. is that you make all these billions of pounds of profit cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
Ev 34 Energy and Climate Change Committee: Evidence
16 April 2013 Tony Cocker, Juliet Davenport, Jim Poole and Alistair Phillips-Davies over the years in generating, you shove it basically to customers. If customers have any concerns about into a big pot and then you all go in and you bid for balances or excess balances they have with us we it and you get it. But you are the people you put the normally have a process to pay them back. but if we stuff in the pot in the first place. don’t and the customers request it. we will absolutely Tony Cocker: I am sorry; I am going to have to do so. If we are not living up to that then we will disagree with that picture. As I said right at the clearly take that away. beginning, the way we run our business is that each But your basic assertion is right, John, that we should business, whether it is retail or generation, is a not be sat on any significant balances of customers’ standalone business— monies, and that is correct. It does happen from time John Robertson: But not if you are a shareholder. to time. and we will repay them. Tony Cocker: I added them up. The ones that I have Juliet Davenport: Can I just— just described happen to be owned by E.ON UK plc, so I quoted the dividend. But each business has to Q195 John Robertson: Sorry, we think of you as one stand on its own two feet and— of the good guys at the moment, but if you want to John Robertson: Not if you are a shareholder. change your mind on it— Tony Cocker: No. First of all, from a profitability Juliet Davenport: Just a comment. We have about point of view, from an analytical point of view, our 2,000 customers, a proportion of our customer base, profit last year in our retail business was £234 million, who we pay a fee for depositing in advance and so our profit in our residential business per customer was we recognise that. That is potentially a way forward £27 per customer and in fact in our residential if people get a similar rate to what they might get in business over the next few years we will have to the bank on those credits. That is what we are looking invest in smart meters, which we believe will cost us at going forward over the whole lot. about £1.2 billion. So that is a huge— Q196 John Robertson: So you are one of the good Q192 John Robertson: Okay, I have made my point. guys? Let me ask you a question that one of the general Juliet Davenport: We already have customers on that, public has asked. How much money did you make so maybe yes. from interest from customers paying in advance during the summer for their winter energy? How much Q197 Sir Robert Smith: Obviously the argument profit did you make in interest? has been that the retail price of the electricity is set Alistair Phillips-Davies: I am not aware that we made by the market from the point of view of the any profit. We have clear rules about paying money companies, but part of the market is much less flexible back to customers. Ofgem have clear rules in place and that is the dynamic teleswitching customers. So. so— I wondered, for those of you who have dynamic teleswitching customers, how you set the price for Q193 John Robertson: But do you understand what them? these people—it is not just one person who has asked Alistair Phillips-Davies: It will be relatively similar this question. They are paying upfront and yet they and probably unfortunately for them—because there are paying for something that in effect they are not is a weighting of a lot of the policy scheme costs on getting at that point in time and you can use that to electricity more than gas—particularly those people money. It must be sitting in a bank somewhere, or you therefore who have electric heating, they will have maybe invested it. They would like to know probably bear an excessive share of the burden of what you have done with that money. those schemes. Looking at the figures recently, Tony Cocker: Let’s say a customer joined us in probably the rises in prices that may come over the September 2013 on the basis of a direct debit, then next couple of years will be bigger for those people they would owe us for much of the winter and then because they will get more allocation of costs from we— those particular schemes on a unit basis. I think there is definitely an issue around that. because what you Q194 John Robertson: Yes, but you have had all are potentially doing is disadvantaging people who these customers, most of them a long time, so what often fall into the more vulnerable and fuel poor do you do with that money? When you are getting it groups by lumping costs, which are seeing the biggest in the summer, what do you do with it? Do you invest increases, i.e. those from Government schemes, on to it, do you stick in the bank to get interest or what? those particular customers. I think that is a genuine You are not spending it on electricity, because we do issue and one that the Committee might want to have not need it. a look at. Tony Cocker: As Mr Phillips-Davies says, if the If you wanted to do something very simple and customer gets out of balance, if they have paid us too straightforward around that, you would clearly ask for much, then we pay them back. people to cap the ECO scheme. People have clearly Alistair Phillips-Davies: I would agree. You said that they believe the ECO scheme will not be obviously know that the industry has worked more expensive and in the impact assessment we are reasonably hard, I think, to try to make sure that we seeing costs run away at 50% plus above that. For repay credit balances to people but if we have a credit somebody to cap that cost I think would be very balance it would clearly be sat in our bank and helpful for customers generally, and particularly for therefore will help fund our business and we need to those customers who are more likely to be prepayment be aware that we have to pay those balances back electricity customers and therefore are more cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 35
16 April 2013 Tony Cocker, Juliet Davenport, Jim Poole and Alistair Phillips-Davies vulnerable groups. So, that is something you could that, both ECO coming up, CERT and CESP where, probably usefully do for those people. as I think you know, we were the first to complete. So, I think customers do understand roughly the Q198 Sir Robert Smith: But those customers also makeup of the bill, what is driving the increases and find it very difficult to switch because of the— the need for all of us to help with energy efficiency. Alistair Phillips-Davies: There are some customers who are on historic heating tariffs that have very Q201 Christopher Pincher: That is not what our unusual arrangements around metering and things like Twitter feed is telling us. One of the questions that that. Is that what you mean? was put earlier on is why are bills and payments laid Sir Robert Smith: Yes. on in such a complicated manner. Consumer Focus Alistair Phillips-Davies: Where there are fewer are saying that you could be much more transparent suppliers who offer deals for those particular people— in simplifying your bills. For example, you talk about yes, I think that is a fair point and a fair issue that we costs rising in terms of percentages. Unless you know have in our market, but equally, in respect of any of as a customer what the component of the bill that those customers that we may have, we are absolutely percentage relates to, which you probably do not, you clear and transparent on our pricing and I think it is do not know meaningfully what that price rise is. fair to say at the moment, given the burden of costs Tony Cocker: I think we can always explain better. and where we are on things like ECO, they are We are learning each time. I am not sure whether probably enjoying a slightly lower unit rate than they Consumer Focus’ reference was to the explanation of might do if we were charging them at a proper cost what makes up the bill, as in the costs that go into it, reflective rate. That was something I saw recently or whether it was the simple, “Is your bill on one announced, and that is why I flagged up that issue to piece of paper?” you. Going forward next time prices do change, I think they will see a bigger increase than other people. Q202 Christopher Pincher: I will give you an Those are the numbers that we are looking at. example. One big six supplier said that the cost of implementing the Government schemes has approximately doubled between 2011 and 2013. When Q199 Sir Robert Smith: Do you other companies you drill down, when you ask the company what is operate in the dynamic teleswitching? the component of the bill that relates to policy-related Juliet Davenport: We are looking at time of day costs, it is 17%. So rather than talking about a switching, which is not dynamic teleswitching, and I doubling of the cost for a relatively small component think with smart meters we could potentially offer of the bill and misleading your customers, why don’t more of those because they potentially do give you simply say, “As a result of Government policy customers the opportunity to load switch and therefore changes, we are adding an extra £25 or £30 to your reduce their costs going forward. What you have is a bill this year”? tariffing system that is more retrograde than our Tony Cocker: You are right, we can communicate current tariff in terms of buying train tickets. You better, we all have to learn and continue to improve can’t buy off peak and peak power easily and switch on communication. From the fundamental easily as well, but we are hoping to see, with smart conversations I have had with customers, they do metering coming in, that you may be able to offer understand that a portion of the bill is the wholesale more dynamic tariffs to individuals. But teleswitching energy cost, a portion is the cost of getting it to the is a very specific issue. door and a portion is the cost of Government subsidies either for energy efficiency or for renewable Q200 Christopher Pincher: Mr Cocker, earlier on generation. when you were talking about transparency you said, “We try as hard as we can to explain our customers’ Q203 Christopher Pincher: But can you not say bills”, and I am sure you probably all claim that you what the cost is in pounds and pence of Government would all try as hard as you can to explain your policy, what the cost is in pounds and pence for customers’ bills, but do you think customers would be transmission, what the cost is of wholesale costs? You surprised at that statement? must know them. Tony Cocker: When I meet customers and we discuss Tony Cocker: Yes, of course we can. the bills and what is the makeup of the bill, roughly Christopher Pincher: It is a very simple structured half from energy, 20% roughly from network cost, business, so why can’t you tell your customers what bringing the electricity or gas to their door, then those costs are? customers do understand that and they do understand Tony Cocker: There is no reason why we can’t. I think what are drivers on us: one, to give them that it is just how we explain this picture. You are transparency; two, to provide them with a fair price recommending we explain it in way A or way B. We and simple products; and, three, to control our costs, have explained it in way A, and you are saying maybe the costs we control, to help to hold the prices down it is a better explanation if we use way B. I think we where we can. So I think they do understand it when are both trying to explain it to our customers in as we discuss it with them, and they do understand that simple way as we can. many of the costs are going up as we invest in our electricity and gas system, to refurbish it and make it Q204 Christopher Pincher: But you would accept cleaner, and that the best thing that we can all do is that explaining in pounds and pence, which is what reduce energy waste. There is clearly a big focus on most customers are interested in—that is why if they cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
Ev 36 Energy and Climate Change Committee: Evidence
16 April 2013 Tony Cocker, Juliet Davenport, Jim Poole and Alistair Phillips-Davies switch at all they will switch probably—would be a Q207 Sir Robert Smith: In terms of understanding more simple and sensible way, a more transparent what is going to be happening to customers in the way, to use an overused phrase. future, you have talked about the investments you Tony Cocker: I am perfectly happy to explain it in have made in generating capacity. How does the scale pounds and pence. of the investments that you have made in the last couple of years compare with the needs looking Q205 Christopher Pincher: What about the rest of forward in the years to come in terms of generating you? capacity to meet the needs of this country? Juliet Davenport: Just as a general comment, our Alistair Phillips-Davies: I will go briefly. I think we customer service team and our marketing team get have done quite a lot on the decarbonisation agenda, very nervous when we have to do a price change. It although if we are going to meet the legally binding is like jumping into a very cold swimming pool, you targets for 2020, there is a lot more to be done. don’t know quite how it is going to feel until you get Whether I truly believe that everybody in Europe is there. We do a lot of work in terms of explaining what going to get there, given the current financial is going on, if our prices are changing, why they are constraints on Europe generally, I don’t know. That is changing. Generally—and slightly touching wood quite an interesting debate as to how much we really here—we have very good feedback in terms of how have to invest and whether people are all going to we have explained that and how that has come across. meet their targets or a number of countries are going I do not think there is any problem with explaining it to decide when they get closer they will not meet them in pounds or pence or percentages. You have to, to and therefore what the implications are for us. a certain extent, do it in both because some people The other thing is that in terms of going forward, we appreciate one way, some people appreciate another. I could do with having some of the legislation that is think you should do it in as many ways as possible, being brought forward at the moment clarified earlier using social media, using your website, using direct and made simpler. We have seen the regulator and letters. We have a lot of communication tools now that other people comment on the fact that the UK’s can improve this, and I hope that we are doing a good electricity system is tighter, we have a number of plant job on that. that are closing at the moment and the investments Jim Poole: To the point around engaging in that may need to be made for flexible thermal capacity transparency and simplicity, the breakdown you ask are not being made. If you want an example of that, I for we now produce, so we are deploying a new bill. would just ask anybody to re-run 12 December 2012 We have listened to some customer feedback about with a similar day in December 2013, and you will more clarity and more information and we are now find that all the major generating plant that were deploying a new bill that regularly shows the available in the UK were turned on and actually 5,000 breakdown of how the bill is made up to help build MW of that plant, or close to 10% of them, will not that education and transparency. We have also be available because they will be closed by the time significantly simplified, I think, what it is we offer to you get to December 2013. Therefore, the UK could, customers to make it easier for them to engage. We not necessarily will, if a similar situation arose have a now have just a standing charge and a single unit rate. very serious situation indeed in terms of security of We only have two tariffs in the market, which was supply. So the quicker we can get the clear policy something that generated some confusion before. As I pieces in place then potentially the more of a safety say, we have deployed new bills and annual net we will have and the more likely we are to avoid statements. We are very keen to see that sort of an issue. The thing to do is have a look on 12 engagement from our customers and to help our December 2012 and you will see that there are six or customers engage. Those that can’t engage, and seven major plants that will not be available that were particularly our vulnerable customers, we are all needed to keep the lights on that day. effectively now trying to automatically engage them in the market by moving them on to our cheapest Q208 Barry Gardiner: Mr Phillips-Davies, the tariff. supply market indicators, which you recently had a spat with Ofgem about, are indicators of the current Q206 Christopher Pincher: Mr Phillips-Davies, can state of the market and hence the future profits that I ask you to answer the question to the Committee but you as a company might make, and yet you have not to me, because I am afraid I have a health question heavily criticised Ofgem. You said, “Their that I need to ask now, so my apologies. methodology appears to have consistent bias towards Alistair Phillips-Davies: Fine, okay. Thank you. I will overstating profit margins”. Are you aware of the be very brief, then. Simply, the bulk of the information statement that Ofgem has released, I think since we that appears on the bills is often legal or regulatory have been in Committee, on energy supply margin requirements. I think the bills are a little complex and figures, where they say, “It is astounding that Centrica confusing for people generally. I think we should and SSE claimed that Ofgem initiatives to make the make that information available, put more on an link between retail and energy prices more transparent annual statement over the internet, through accounts is undermining public confidence in the energy or when requested, and we should seek to simplify the market”. They point out that this comes just over a bills for people. Therefore, we would welcome week after Ofgem fined SSE a record £10.5 million working with Consumer Focus and Ofgem to try to for mis-selling, and they say that you should be simplify people’s bills, to make it clear what they are supporting their aim of making the market clearer. paying and why they are paying it. How do you respond to that? cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 37
16 April 2013 Tony Cocker, Juliet Davenport, Jim Poole and Alistair Phillips-Davies
Alistair Phillips-Davies: We agree that we would Alistair Phillips-Davies: Yes, I think we do. I think a support Ofgem if they were making the market number of the businesses have worked very hard on clearer. What we find unusual is the fact that the trust and we will continue to work hard. Clearly what figures that people trumpet in reporting Ofgem’s happened two weeks ago is going to require us to numbers—I remember a year or 18 months ago when redouble our efforts. they talked about making £125 or £130 margins from customers—never seem to materialise in our bottom Q214 Chair: Do you think the way in which your line. company particularly have handled the mis-selling issue has increased or decreased the trust of your Q209 Barry Gardiner: Maybe they do not customers in that business? materialise because you see the writing on the wall Alistair Phillips-Davies: I would have thought for because they release those indicators. But you don’t some of the customers it would have decreased the dispute that they are a correct indication of the level level of trust but equally, having looked at comments of profit that you would make if you continued and listened to calls from customers who we have operating at that level, do you? spoken to over the last two weeks, I think there are a Alistair Phillips-Davies: Unfortunately there are number of customers who also feel that we have dealt errors in those figures. They consistently overstate the with the issue well. We remain the only company in consumption that people make. It is the most respect of any issues on mis-selling and complaints fundamental part of the errors they make. We could handling, and things like that, who have actually gone give you a list of the errors they make, but they out and tried to talked to our customers and fundamentally and consistently overstate the levels of recompense them for the actual losses that they may consumption that people make and therefore that have suffered. We are still the only company to do causes a fundamental overstatement of the that. profitability of those businesses. Q215 Chair: Can your industry not understand that Q210 Barry Gardiner: They point out that, “The there are those of us who support the idea that you weekly figures we publish are projections that will should make decent, fair profits, and want you to do inevitably differ from the figures in the company’s that so you can invest in the capacity that this country yearly statements. The margins in these statements are needs, and that the public tolerance of that would be for each individual supplier, and they reflect all the enormously enhanced if you adopted the same kind of tariffs it offers, including discounted rates where they make lower margins. These margins also reflect the basic approach to transparency in the way you run effective changes in energy consumption due to your business as most other industries take for weather and actual operating costs, which vary by granted? Can you not see that? company and vary year on year. Our weekly indicators Tony Cocker: I think we, as E.ON, have worked are a projection for a typical standard tariff consumer. hugely hard on this issue over the last 18 months. These indicators have been helping provide I completely agree with you; we recognised that the consumers with more information about the industry had lost the trust of stakeholders and many relationship between retail and wholesale prices customers. We worked very hard last year to improve since 2009.” transparency, to simplify our bill—got it down to one Alistair Phillips-Davies: I believe that their page—to reduce our number of tariffs, to simplify our consumption figures are overstated. I think almost tariffs so they are much more comparable, to each and every time that they have published those communicate much more clearly where we spend the numbers those consumption figures have been money that customers give to us, so on the network overstated. I do not think we have ever seen costs, the energy costs, our own overheads. We have consumption in UK at the levels that they have there. worked very hard. We have to continue to do that because we are on a journey, we have challenges Q211 Barry Gardiner: So, the row between you and internally and we all know we have not been as simple the regulators is going to go on? as we should have been in the past, and we need to Alistair Phillips-Davies: I do not know whether it is improve on that, we need to continue to do that. At row between us and the regulators. I think there is an the same time we also know that the whole of the issue about people being fair, honest and transparent industry, not just the big six, needs to invest and and we do apologise— therefore there are a lot of drivers that are pushing prices up. I think we have tried to be clear on what Q212 Barry Gardiner: Who has a better record on those drivers are and explain those both in public and that, you or Ofgem? also to customers in private, and we need to continue Alistair Phillips-Davies: On what? to engage on that. Barry Gardiner: Honesty and transparency. That was With respect to the question that Mr Gardiner had for not a question. Mr Phillips-Davies, we believe that the SMI has the right intent to give a transparent indicator of the Q213 Chair: We are a bit over time. Just to wrap this pressures on prices, and there are opportunities to up, on the basis of not just what you have heard today improve it and we would be very keen to work with but generally, do the three of you representing the big Ofgem to improve it. So I completely agree with you, six really have any conception of the level of public Chairman, that the industry has lost trust and the distrust of the way you run your businesses? industry is working hard—or in our case we are cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
Ev 38 Energy and Climate Change Committee: Evidence
16 April 2013 Tony Cocker, Juliet Davenport, Jim Poole and Alistair Phillips-Davies working hard—to try to regain that trust, and we will being the profitability of a business, and that is where continue to do so. we get a disconnect. I agree it would be good to have Jim Poole: I think we have taken lots of steps, so I something that was a robust indicator and I think it is think we do need to start looking at the things that we in our interest to work collectively to try to improve have done because they are, and customers are telling it and make it the case. us that they are, starting to have an impact. We have Juliet Davenport: Helping all of this and simplified our bills; we have simplified our tariffs underpinning all of this is making sure this down to two. We have launched a product where we marketplace is fit for multiple types of players in the proactively tell people if they could save money of place, not least customers, and to make sure that more than £1 a week with another supplier and we customers feel part of this marketplace, that they can have seen a significant response in terms of an engage, they can reduce energy, they can change the increased trust with us through that offer that we have way they use energy and in fact they can generate made. We have done, I think, the right thing for our their own. I think by doing that and by engaging them most vulnerable customers and the ones that are in part of this market we can rebuild trust. perhaps least likely to engage in the market by We have two-way partnership with our customers. automatically engaging for them and putting those They sell us power as well as us selling them power. customers on our cheapest product. We welcome more I think beginning to build that up as an overall work in terms of transparency. We think the marketplace and a possibility, and making sure there segmented accounts are a good reference point, but if are more market players in this marketplace, is we need to do more to make them clearer and more absolutely key to building trust for the future and easily understandable, then we should do that. bringing investment into this market. Coming back to the Ofgem supply indicator report, I Chair: Thank you for your time this morning. It has think the things you read out are some of the gone on a bit longer that we planned, but it is very weaknesses of it because it talks around the illuminating from our point of view, and I am grateful profitability of one product and it gets interpreted as to you all for coming in.
Examination of Witnesses
Witnesses: Paul Massara, CEO, RWE npower, Ian Peters, Managing Director, Energy, British Gas, Neil Clitheroe, CEO Retail and Generation, ScottishPower, and Stephen Fitzpatrick, Managing Director, Ovo Energy, gave evidence.
Q216 Chair: I am grateful to you for waiting. I am obviously we will resolve the problem, we will pay sorry we have overrun a bit. We will aim to wrap up compensation and we will apologise for that. by 1.00pm so you can protect the rest of your day. I will start on the same issue that we started the earlier Q217 Chair: Do you expect to be paying session with, if you were here. Could you tell us compensation? whether any of your companies have been involved in Neil Clitheroe: There have been instances where we any selling practices that you think were either illegal have had somebody who was doorstep selling in 2009 or unethical? who did not present products correctly. We have paid Ian Peters: If I can start, Mr Chairman, British Gas compensation where we have found that. We have has not been involved in any mis-selling investigation written to customers where we suspected that, we and is not currently under investigation, so to the best have had phone calls coming into us where we have of my knowledge there is no systemic mis-selling discovered it and we have corrected it and done that. practice in British Gas. Clearly with 30,000 people So yes, we have paid compensation to some talking to customers every day I can’t absolutely customers. assure every one of those conversations to be perfect, but there is no underlying mis-selling issue and there Q218 Chair: The question, if you did not hear it, was has not been in the last decade in British Gas. whether your company has been involved in any kind Neil Clitheroe: We take every instance of mis-selling, of mis-selling of tariffs that is either illegal or misleading customers very seriously and it is unethical? unacceptable. We are currently under investigation Paul Massara: At the moment we have one from Ofgem, are working with them. Where we have outstanding investigation by Ofgem, which relates found historical problems, where we have misled a back to August 2010 in relation to explaining of direct customer, we have paid compensation, we have made debits. That is on information finding and has been sure that we have put them on to the right tariffs and continuing on, I must say, for nearly three years now. paid compensation. We have done that over the last There has been no statement of case produced for it four or five years. We have changed significantly in and we are still talking to Ofgem. We do not believe this area. We no longer do doorstep selling, but more we have done anything wrong. Ofgem are still asking importantly we have improved every part of our sales the questions. But we, like many of the players in the process over the last two years. We have come top of industry, have done a huge amount over the last the Which? survey of telesales companies in the last couple of years to improve our services and our two years. So, we have improved significantly, and if practices. Therefore we believe now, as we operate in there are historical instances that we have, then this market today, that we are clean, completely. cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 39
16 April 2013 Paul Massara, Ian Peters, Neil Clitheroe and Stephen Fitzpatrick
Q219 Chair: I am sure that you recognise that not Gardiner—in our numbers. They all add up to the contesting cases that turn out to have been ones where total. the company was at fault may be a way, in some small Neil Clitheroe: We have a similar structure with three degree, of mitigating the degree of offence and businesses, the generation business, the energy mistrust that results from such cases? management business and the retail business. The Paul Massara: Absolutely, but at the same time I energy management business manages the buying and think you would want a process that is fair. The fact selling of energy on behalf of the generation and retail that this investigation has been going on now for business. All transactions, external transactions, nearly three years, with no statement of case being internal transactions, internal offsets, are priced at raised against us, also raises questions, I think, about market. There is no transfer price. Everything is how Ofgem does its investigations. priced at market. All of that reconciles back in terms of our accounts through to the statutory accounts, and Q220 Chair: If the company is absolutely confident obviously those are audited, but the key point for us that it has done nothing wrong, it can say so. If you is that everything that we have is referenced to the think you might have done something wrong, it would market prices. be in your interest to try to clear it up before Ofgem Paul Massara: Ours would be exactly the same, and have completed their process. as of 1 January in fact the generation business is now Paul Massara: Absolutely, I agree with you, and that a European generation business and therefore that is a is why we have not reached any settlement with separate P&L completely. The trading division will Ofgem. have their P&L and, effectively, the downstream supply business will have theirs. We trade everything Q221 Chair: So, you are not expecting any kind of effectively, or 90% of our supply, through the traded criticism from Ofgem at all? market and we buy from the market as well. Therefore Paul Massara: We believe we do not have a case to we have a very similar structure to everyone else. In answer on it. fact, we would not be allowed to pass profits around because of the taxation issues, that they would look at Q222 Chair: It is not quite the same thing, is it? Do whether there has been profits moved between you expect Ofgem’s conclusions, after three years’ jurisdictions or cases. So, we have complete investigation, to give you a completely clean bill of transparency and the transparency aligns very clearly health? with the segmental reports. Paul Massara: Will they find something? It is Stephen Fitzpatrick: We run a very simple business impossible to say, to be honest. They have not even model. We supply to UK customers only. We are a issued a statement of case so it is hard to know what UK-registered business; we have no overseas they are driving for. operations. We are in the process of splitting out our trading from our retail business. We think it is the Q223 Chair: Let me just put the question one more most efficient way to deliver better value for time. Presumably you have looked quite carefully customers, and at the moment we do not have any internally at what has happened. Are you absolutely generation. confident on the basis of that analysis that you have done nothing wrong? Q225 John Robertson: I am sure my colleagues will Paul Massara: Yes. come back with questions about corporation tax and things like that. There is this idea that RWE are Q224 Chair: Fine; thank you. On the question of the transparent and yet you put everything into one pot structure of your businesses, do you each have a from all over Europe together. How do I know what supply, a generation and a trading aspect of the you are doing in the United Kingdom? What do I business? know about your generation here and how much it is Ian Peters: We have a very clear separation between worth? How do I find that out? downstream supply and our upstream business. We do Paul Massara: Up until now you have had our also have a smaller storage business that is held out segmental reports that would give the position to one side through undertakings we made to Ofgem between the UK generation and the UK supply relating to the Rough transaction. Our trading operations are a route to market for both downstream business, which is completely visible and transparent. and upstream and are embedded in our upstream I think there has been a very good insight into what business. There was a lot of talk about transparency we are doing. in the previous meeting, so for the Committee’s benefit the trading division executes the hedging Q226 John Robertson: What happens from now on business for our downstream business and we are in? We can’t see that? charged a cost reflective fee, which in 2012 was £7 Paul Massara: No. From now on we will report both million. There is no transfer of value and every our retail profit and also our generation profit in the transaction is undertaken at market rate, so £7 million UK as a separate position so that you will have that is the small amount of executional cost passed to the full transparency, clearly to do it as part of the residential business through our trading arm. segmental statements. All of our numbers, as with one of the other suppliers, add up to our group accounts. There is no kind of Q227 John Robertson: Let me get this right; you are black hole—or lacuna I think was your word, Mr basically going to hide it? cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
Ev 40 Energy and Climate Change Committee: Evidence
16 April 2013 Paul Massara, Ian Peters, Neil Clitheroe and Stephen Fitzpatrick
Paul Massara: No, absolutely not. We are going to made up and how those different segments are likely continue to be transparent. I think it is completely— to be impacted so they can make informed decisions about saving energy. Q228 John Robertson: If you were transparent, you would not be here today and you would not be in front Q230 John Robertson: A question I ask at the end— of us so many times. The one thing the general public and I only thought of it when I was listening to your thinks is that you are not transparent. Why do you answers—is: when you pay your dividends to think they would say that? shareholders, how much are you giving them these Paul Massara: I think that is a broader and wider days? What was your last dividend? question that relates to having an honest conversation Paul Massara: I can’t remember what the last with consumers and I do not feel necessarily there has dividend is. It is probably £200 million or so.4 been an honest conversation. I do not think the suppliers have necessarily got it right in explaining to Q231 John Robertson: You obviously have too customers what is happening to their bills, how their many shares. What about you gentlemen? bills are made up, and indeed how their bills are likely Ian Peters: I would have to come back with the to be made up. I do not think necessarily that we have precise number. We have 700,000 small shareholders, it right, and I would share some of the concerns that which is a legacy of privatisation. my colleagues had earlier on before relating to Ofgem’s intermediate monthly reports, which I think Q232 John Robertson: Does this include all parts of are misleading and are not particularly helpful. I also the industry? I don’t know how you are going to do it would say that there has not been an open and if you are including part of your international wings. transparent conversation from Government about the Ian Peters: cost of Government policy and the impact on I suggest it does not give you the figures people’s bills. from Centrica in this context, because the dividends come from Centrica. Last year we reported £2.7 billion profit, of that, on the tax point, we paid £1.1 Q229 John Robertson: I made a statement to one of billion of tax, £773 million of that— your colleagues in the previous panel, and I am going to say the same thing to you, and that is it is always somebody else’s fault, “It was a big boy who did it, Q233 John Robertson: Don’t worry about the tax, and he ran away”. When are you—I mean you as a my colleagues will come back to that later. I am sure group of companies—ever going to take responsibility they have some nice questions for you. What I am for the problems that we have? The problem is that trying to say, the same point I made to your people don’t like you and they don’t like you because colleagues, is that the shareholders get all the benefits they feel you are ripping them off. You can cover it from the whole company and yet the general public anyway you like, you can use gobbledygook about are basically getting screwed into the ground because having an intelligent conversation with somebody, but everybody always talks about retail. I have to say that most of the people that you might Ian Peters: I was going to give you all the numbers, want to have a conversation with will not understand Mr Robertson. Of that £2.7 billion, around £600 what you are talking about. You might think that they million, less than 25%, comes from residential energy are being ignorant and that you are all knowledgeable, supply, the rest of it comes from our operations in but at the end of the day they pay the bills. North America. Our upstream business, which again Paul Massara: I totally agree with that. is a focus of some questioning, last year made £1.23 John Robertson: You need to get down the level of billion. That is pre-tax 17%; post-tax it is 13%. Given letting them understand what you really mean. I think the billions of pounds we invest in generating that, the at this point in time you are nowhere near that. To be return on that capital is in high single digits. So I think honest, Mr Massara, I think it is deliberate. that is a fair return for all of that. These need to be Paul Massara: Can I answer that question, if I can? looked at in the aggregate on a post-tax basis. There are a couple things. As an industry I would say that we have not helped ourselves; we have not helped Q234 John Robertson: Do you know how much you consumers to build trust, because I do not believe that get from Government to help you with that? we have given them the insight and the visibility. Ian Peters: Virtually nothing. When we look at the bill that people get on their doorstep, that bill is incredibly complicated. It is not Q235 John Robertson: They don’t give you the bill that helps consumers understand it. It is anything? interesting that there are 26 regulation issues from Ian Peters: Virtually nothing. I will have to come with Ofgem that require things to be changed on that bill. precise amounts. We are simplifying bills, we are changing bills, and I think we have to be more open and transparent. Q236 John Robertson: I wonder what they are The second issue that we believe fundamentally is that spending the money on, then. we have to explain to consumers how their bill is Ian Peters: There are some subsidies for exploiting made up and where those components of the bill are new gas fields. I think that is right. likely to go in the future. We are launching an Energy John Robertson: I think the exploitation is of the Explained series, which effectively will do that, both general public, if you ask me, never mind the oilfields. to the general press and to the public, but also to go out to the public and explain to them how their bill is 4 Note from the witness: “The actual number is £125 million.” cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 41
16 April 2013 Paul Massara, Ian Peters, Neil Clitheroe and Stephen Fitzpatrick
Q237 Dr Whitehead: No doubt you are all going to Ian Peters: For us it is a broadly similar story. To say to me now that you trade transparently on the day- ensure primarily security of supply we buy anything ahead market and then hedge in order to balance your two years up to cover all of that. We do leave open positions. Would that be an accurate description of positions in the short term, that is primarily to manage what you do as companies? weather volatility. How good your weather forecasters Paul Massara: That would be an accurate description are is relevant, but the majority of the position is of what we do. We trade about four times what we bought forward in layers. actually trade in the forward market. We trade four times—recycle in the forward market, but 90% of Q240 Dr Whitehead: Essentially the impression that what we do goes through the spot market, of all our one might get that the hedging is a post hoc activity, production. actually that is an initial activity? That is, you will Ian Peters: We do broadly similar. Again, in terms of secure your positions with over-the-counter trading. the multiples we sell about 30% of our generated Sometimes there will be an open position, but the power into the day-ahead market. In terms of self- minority of positions, that is the rump position that is supply, in 2012 the downstream business bought about left, will be then catered for on the day-ahead market? 10% of our power from Centrica Energy, the upstream Ian Peters: That is right, and it is why you do see operation, and only 6% of our gas. So, the underlying different outcomes in terms of hedging, because we self-supply percentages are very small. do not all hedge the same. We take different risks and Neil Clitheroe: We hedge over a two- or three-year different rewards along the way and that is reflected period and 30% traded in the day-ahead market as in the segmental accounts that come out. But you are well. right, your fundamental point, Alan, is pre hoc rather than post hoc. Q238 Dr Whitehead: You are obviously a different— Q241 Dr Whitehead: So what proportion of what Stephen Fitzpatrick: We buy between 12 and 18 you might call pre hoc trading really occurs over the months forward. We buy on the day-ahead market, we counter and what proportion really occurs in terms of buy on the within-day market, so a pretty what you might call competitive trades informed by straightforward situation. transparency of those forward markets at the point in which you are undertaking your initial trades? Is it Q239 Dr Whitehead: I am trying to understand this fair to say that there is very little relation between better. Your hedging strategies as companies are in what you are yourself generating and what you are what relation to any day-ahead trading? That is, to yourself purchasing at that point? what extent would you hedge before you went into Ian Peters: As I say, our own purchases from our day-ahead trading, and to what extent is the hedging upstream division is 10% in electricity and 6% in gas. as a result of what has happened as far as day-ahead I have no problem disclosing the splits but I do not trading is concerned? have them with me in terms of over-the-counter. Paul Massara: From our perspective, we would look Dr Whitehead: It would be very helpful if that could to hedge in the forward curve for two to three years. be sent to us in writing. We want to give customers a longer-term duration for Ian Peters: I would have to come back to you, their standard tariff. Obviously for fixed price because I don’t run the upstream division. contracts for standard fix we would have to match it Paul Massara: I think we would obviously be buying as best as possible. Then we would run into the day, to hedge our position. We have a strict hedging policy but it would lead to incredibly volatile prices for relating to our forward exposure in retail and therefore customers if we were to balance everything in for we have as systematic approach on how we hedge. customers and therefore we have a hedging We go into the market via the trading team, they give programme over two to three years, which I think is us a price and we buy. We do not know what the similar to many of the other players. generation team are doing at any time. They may be Neil Clitheroe: You obviously get an increased buying or selling from their generation; that is their certainty the closer you get to the point of delivery. choice. Two years out you can see maybe in January two years’ time an average weather pattern with an Q242 Dr Whitehead: But that is completely average customer base and you start buying a untransparent, isn’t it? proportion of your gas or your power for that delivery Paul Massara: For us, we know we are getting a in January, and then the closer you get the more market price from our traders and that is it. That has certainty you get. Maybe your customer number has to be the case from a tax position, and we have to increased, maybe volumes on average have dropped know that and we pay a small fee for doing that. We in terms of consumption, maybe the weather is do not know what the generation business is selling different, all the way up to the point of delivery. So in at the same time because it is completely ring- you are basically hedging against the certainty you fenced. In terms of whether that can that been seen know at that point. At ScottishPower we will leave through the segmented statements, no, it can’t be, but some positions open right the way through to the point then what you have is us purchasing at market rate of delivery, but three years before we are likely to that feeds into the margin for our supply business. have covered hardly anything because you don’t know what is going to happen in three years’ time at that Q243 Dr Whitehead: When you say you are half hour when you are actually delivering that power. purchasing at market rates, you are purchasing, I cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
Ev 42 Energy and Climate Change Committee: Evidence
16 April 2013 Paul Massara, Ian Peters, Neil Clitheroe and Stephen Fitzpatrick presume, on the basis of at least some information that want to be competitive in the market. It is one of but you have relating to your own generating activities? not the only consideration. Paul Massara: To the market, whether it is the OTC market, on who is trading out there. As we talked Q247 Dr Whitehead: Bearing in mind the way round about before, I think there are a lot of different that you are undertaking the hedging process and then players, independent power stations who are long, the patching process, shall we say, in terms of your other people are buying and selling, so there are trades overall positions, what perhaps I could suggest is that out there. if you hedge very well, you get that right, then you are banking those proceeds. If you get it wrong, the Q244 Dr Whitehead: But you will trade at the customer coughs up, so either way you win. market rates and you will trade on the basis of your Ian Peters: Well, no. If you look at—again, in the traders. How will your traders be incentivised in order spirit of transparency—British Gas’s residential to get the best deal on the forward curve prior to any accounts you will see movements up and down, and patching up, you might describe it, taking place on the there are years when, to be frank, we have hedged day-ahead market? How are they incentivised? Do well and we have passed that on in terms of lower you simply say, “Go out to the market and get the best prices to consumers and we have grown market share. deal, guys”, or are there any arrangements that can be There are years when we have lowered our profits informed by the nature of what it is that you are because we thought it was wrong to pass it on to the supplying yourself, i.e. are there any preferences on customer. So, it is one of a number of considerations. the basis of clearly a good market price for the fact that you have deals available to you that relate to over- Q248 Dr Whitehead: How might we know that you the-counter trading? are doing that? Paul Massara: Yes. As part of our formula, we would Ian Peters: To an extent, you can see the outcome in go to the traders and ask them to buy at market rate. terms of the overall margins around segmental We would want to make sure it is at market rate, accounts. British Gas have said that we aspire to make because that affects my P&L, whether they are buying an average return post tax of 5%, and the weighted and the generation may be selling to them but they average costs of gas and electricity, which are the will also be selling at a market rate. There may be a outputs of what we are discussing, can be derived bit of a spread, but that is it. If they decide to hold the from the segmental accounts. position and trade it for themselves, then that is their Paul Massara: I would absolutely agree with that. We trading position, and that is nothing to do with my P& lost money in the supply business in 2009, 2010 and L. My P&L is transacted at the market rate. 2011, and we could not pass that through to get a Neil Clitheroe: It tends to be based on staying within benefit and that is it. The fact is if you look at the risk parameters. What we are looking for from our consolidated reports they give a full breakdown of energy management area is to hedge within risk your energy input and of your margin, and the fact is parameters so it does not put a huge amount of risk on the whole the big six have earned 3% margins in at the point of delivery. Is the value at risk within the last four years. Those are the facts. parameters? Have they covered 18 months out, or two Stephen Fitzpatrick: Can I offer an observation? I years out, 10% of the power at that point in time? So, was a little bit confused as to the direction of the the measurement of our traders tends to be based on inquiry, but I have ended up completely agreeing with those risk parameters. the point that you have ended up making, which is that it can certainly appear to be, from an outsider’s Q245 Dr Whitehead: Your forward hedging strategy, point of view, a one-way bet. Our observation, as an and I appreciate that may be different between independent supplier that is only buying in the different companies in terms of, for example, how wholesale market, is that it appears to us that the free much of your positions you have covered early, how bets that our larger competitors have is that they can much of your positions you leave open, at what point be pretty sure, within a certain margin, of the demand on the curve you are taking positions. If you do that that they will need to satisfy their incumbent customer well you will make a particular return, won’t you? So base and they can hedge that. If they get it wrong, you would make a good return and you will be ahead they can be relatively comfortable that they will not of other companies in terms of your proceeds from lose too many customers. If they are able to achieve your positions. a better than market price, let’s say, they can use that Ian Peters: Yes. To go back to your earlier point, there lower commodity price to go out to win new business is no insider information here. There are no and undercut other competitors, including us. preferential deals, and our trading operation is simply If one of my large competitors wants to take a an executional function. They operate to deliver a directional position, betting that the market will go up strategy that we define, the downstream business. or down, I would say they can put the cost of that towards their incumbent customers that they know are Q246 Dr Whitehead: But if you do it badly— much less likely to switch away, and any benefits they Ian Peters: Then we can be out of the market. can use either in profits or they can try to grow a Dr Whitehead: The customer will have to cough up. market share through winning business on aggressive Ian Peters: That way we are not competitive or, if we discounting. This kind of one way, it is a legacy from get it right, the other way round. That plays into the the ex-monopoly nature of my competitors here. That broader decisions we make around our operating is what leads to anti-competitive behaviour, and that costs, our profit returns and the degree to which we is one of the main reasons why 15 years after cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 43
16 April 2013 Paul Massara, Ian Peters, Neil Clitheroe and Stephen Fitzpatrick deregulation you have a very small independent retail is not the issue it was perhaps three to four years ago. sector. We think this price inconsistency, the gap There are pockets where it is. For example, the between the cheapest prices available and the average average clip size in power is about 10 MW. Some of or the most expensive, is by far and away the biggest the small suppliers we talk to would rather it be 1 reason for lack of trust in the sector and also lack MW, so we are talking to them about changing terms of competition. to enable that. As a general statement, I do not think Paul Massara: I would fundamentally disagree with liquidity is a barrier to entry. that statement. If we go and bid or if we go and hedge Neil Clitheroe: Access for small suppliers to in the sector than somebody, then effectively, yes, that generation from the bigger companies and the would be a choice about how you would take that. independent companies is an important issue that The fact is that about 30% of all of the customers we everybody needs to facilitate. We wrote to 56 small lose now go to new suppliers. The reason they are suppliers a couple of years ago. We are currently going to new suppliers is because new suppliers are working with 20. We are transacting down to a clip not required to meet the cost obligations that we are size just now of 0.25 MW. Our lowest gas trade is at required to as a big supplier, that is ECO. The cost of 50 therms, and we have given extended credit lines to ECO now is probably somewhere between £70 to a number of smaller suppliers. Putting a smaller £100 per customer, which small suppliers have an supplier on an exchange, where they have to cover advantage for. So they have an inbuilt advantage to be that collateral, is very difficult when they are trying to in the marketplace. get started. So we are working hard with them. I think In a competitive marketplace you would expect there is more that we are trying to do. We are trying suppliers to react to that and therefore we do. We react to have more discussions on this topic, but I think to that by trying to match them or trying to get close that access to small suppliers, alongside the straight to them on the broker tables. That allows the liquidity point, is as important to bring more retailers discounting on the front, which allows the differential into the market. pricing. So because we have an ECO policy that does not apply to everybody equally, leading to a distortion Q251 Mr Lilley: in the marketplace, which is also leading to a Every economic transaction has distortion in the tariff structure. two sides. If you are buying electricity ahead on a hedging transaction, someone is selling it. It seems to me there are two kinds of sellers. There are generators Q249 Dr Whitehead: But the fact is that as three of who actually generate it—in other words, instead of the big six you are exercising very substantial power in terms of, as we agreed, your pre hoc trading only selling it to the daily market they are selling arrangements down the curve. Indeed, the Ofgem ahead to you—or there are banks who are themselves liquidity inquiry suggested that you do not have a taking the risk that when they actually have to deliver robust reference price down the curve in a way that in three months or three years’ time, the price will not would actually enable trading to be placed on a more be too high, the price will be low. Which is it? If it is equal forward footing in the market in general, i.e. companies trading between themselves, then it means you are in a position where you are able to generally that the companies who are successful in hedging hedge quite successfully in the forward market. Would ahead will be matched by others who are less you say that that ability to do that outweighs, in terms successful or fail. They wouldn’t say it like that of your overall market advantage, the disadvantages because they would lose their jobs, but less successful. that you may face in terms of what you are required If it is between banks and the industry, then if you are to undertake in regard to obligations as opposed to the doing well in hedging futures the banks will be doing very small traders? badly. Is there something wrong with my analysis? Paul Massara: Absolutely not. Paul Massara: I think generally the analysis is Stephen Fitzpatrick: I am just going to step in and correct. I think people may be hedging for different say that we have never faced any challenges hedging risk reasons, so people may have a different profile. in the wholesale market. We do not think that we are Some people will be selling three years, two years, at a disadvantage, and if any one of my larger one year; some people may decide they have to get colleagues or smaller colleagues would like to ask me rid of it, they have a plant that has to despatch and for a price I would be happy to quote them a price for they want to sell forward. Therefore, there are electricity or gas for two or three years. I do not think different risk appetites. In general there are two equal there is a lack of a reference price. I have no axe to parties who are coming to a fair price to trade on that. grind on that; I think— It may be banks, but banks have pulled back because of liquidity issues, but generally I think it is a fair Q250 Dr Whitehead: The Ofgem analysis is wrong? position. I think there is more that we could do on Stephen Fitzpatrick: We are on the record for the last transparency and it would help. I also think that two or three years as stating that the wholesale obviously with the Energy Bill coming in it creates a market—everybody wants more liquidity and more degree of uncertainty. We do not know what the transparency but it is by far and away a much smaller capacity mechanism is going to be like. We do not piece of the lacuna that is missing in the regulatory know how CFDs are going to be structured, therefore framework to drive more competition. I don’t feel at it is difficult to transact forward without a clear a disadvantage. position in the marketplace. Once we get that clarity Ian Peters: As a general statement—and we talk to I think that may also help liquidity as well, is an some of the small suppliers—liquidity, the aggregate honest point. cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
Ev 44 Energy and Climate Change Committee: Evidence
16 April 2013 Paul Massara, Ian Peters, Neil Clitheroe and Stephen Fitzpatrick
Q252 Mr Lilley: But I think the industry could help Neil Clitheroe: I think there are various aspects to itself if it could make it clear that they can’t all be transparency, and the transparency that we have profiting at the expense of each through hedging. between retail and the generation business is There is a degree of misunderstanding out there that improving. It improved in 2011 and we will improve somehow there is a magic, that hedging can make it more in 2012. In 2012 we are transacting everything money out of the customer. Well, except in the way based on market rates, and therefore our ability to that Mr Whitehead is aware of as sort of a “heads I actually move anything is reduced because it is all at win, tails you lose” system, I do not see how that can market rates and that is what is in the 2012 be the case. segmentals. We have also done a huge amount of Paul Massara: We certainly do not recognise the work on transparency with regard to bill breakdowns, “heads I win, tails you lose”. I think we are in a service standards and so on. competitive position and we look to see where the There is work that we need to do. We made further market is and where we are. We lose market and we recommendations to Ofgem in terms of the trading have to look every day at what tariffs are out there that we do. We have made recommendations to and how we compete. Ofgem that we will provide the information on the market for all our trades, provided other players do Q253 Barry Gardiner: You have all seen the first that, and we did that in the last liquidity consultation session so you know where I am headed. See if you of the RMR. So, there are a number of steps that we can head me off at the pass. have made since 2010. Are we there yet? No, but are Mr Lilley: Why don’t you go straight to the pass? we on line to do that— Barry Gardiner: You are such a killjoy, Peter. Mr Lilley: You have had the foreplay. Now let’s get Q257 Barry Gardiner: But you will provide the on to it. Committee with a note as to precisely why you moved Barry Gardiner: Right, here we are. Mr Clitheroe, in that £119 million of profit away from generation? 2010 ScottishPower moved £119 million of profit Neil Clitheroe: Certainly for 2010. away from generation in its Consolidated Segmental Statement and reclassified its carbon permits to Q258 Barry Gardiner: Mr Peters, there are areas of another segment. Why did you do that? accounting estimates, aren’t there, and they can distort Neil Clitheroe: I will need to come back to you on the presentation of figures can’t they? that one, Mr Gardiner. I do not know the answer to Ian Peters: Are you talking about allocations of that, in terms of the 2010 segmentals. overheads here? Barry Gardiner: No, I wasn’t, although it is a Q254 Barry Gardiner: But you understand, in terms perfectly reasonable one and I did mention that earlier, of what we were saying about transparency, all that but with you I was looking more at the depreciation we were saying in terms of having consistency of on asset values. Centrica has a disclosure that, presentation? “Generation EBIT earnings before interest and tax Neil Clitheroe: Yes. excludes depreciation of fair value uplifts to property, plant and equipment relating to the strategic Q255 Barry Gardiner: For you to have whisked it investment in British Energy”. Do you think that that out of one segment and put it into another looks as if is fair and transparent? what you are trying to do is either show less of a profit Ian Peters: It is very hard for me to comment on the in that sector or more of a profit in the other sector. specifics because I wasn’t a party to those Either way it is not exactly transparent, is it? conversations, and if there is anything I want to come Neil Clitheroe: 2010 was the first year of the back to you on— segmentals and there were improvements that we had Barry Gardiner: So you are going to have to write to make in 2011. I think the key improvement that we to us as well then, I take it? made was to reconcile the whole of the 2011 accounts Ian Peters: Yes, I suspect— to a statutory audited account. So those are our legal accounts, the legal entities, and we did that in 2011. Q259 Barry Gardiner: But you take my point about Those have been reviewed by Ofgem and they accounting estimates and depreciation of fair value represent an accurate split between the retail and on assets? generation businesses. In 2012 we made further Ian Peters: I do. As a slightly broader point, we have improvements; we will make further transparency not changed our methodologies for two years, and improvements as we go through that. The key thing I Ofgem and BDO recognise the consistency of that. I can say is that the 2011 accounts, which are the latest would surmise that the British Energy— ones that are within the retail and generation splits, are correct in those and have been audited by Ofgem Q260 Barry Gardiner: Have not changed it in two and are aligned with our statutory accounts. years? That is not an awful lot of time, is it? Ian Peters: We have only been going since 2010, but Q256 Barry Gardiner: Isn’t it the point that you this is the point about consistency and the way the have a discretion here as to which segment you show segmental accounts are put together. As I say, there something in and, by varying it, you vary it to suit are no black holes. Depreciation, to an extent, is yourself and that in itself impedes transparency on clearly a judgment call. The investment in British behalf of the consumer? Energy was conditional upon the valuation around the cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 45
16 April 2013 Paul Massara, Ian Peters, Neil Clitheroe and Stephen Fitzpatrick new nuclear build, so I suspect that is what is behind it Q266 Barry Gardiner: You never ticked the but I will have to write to the Committee and confirm. “another part of business” box? Ian Peters: To the best of my knowledge, but I will Q261 Barry Gardiner: Mr Massara, income and come back and confirm that when I write back on costs relating to the levy control framework and depreciation. Government policy are also not disclosed in full— Paul Massara: I will have to come back and confirm feed-in tariffs, warm home discount, renewables on that. obligation and the levy control framework. RWE npower states in a note that other direct costs of Q267 Barry Gardiner: Thanks very much. In terms generation largely relate to the Community Energy of the BDO recommendation, don’t you think that Saving Programme and power purchase agreement trading activities should be reported in the costs, but you do not break that down, do you? Consolidated Segmental Statements? Paul Massara: I do not think we do, not in that Ian Peters: I have already disclosed that there is no position. kind of out of market transfer. I have disclosed to the Committee, the £7 million that flows between the two. Q262 Barry Gardiner: Do you not think that again I think that is good in the spirit of transparency. As a to break it down would provide people with much general point, I think it would require the entire greater transparency here? market to move in unison. Paul Massara: I think the greater indication of programmes, giving people greater insight would be Q268 Barry Gardiner: Would you be in favour of helpful. There is a degree of competitive concern that? about it, but on the basis that these are post-dated, yes, Ian Peters: I would be sympathetic to that as long as I think that could be done. everybody else moved in the same way.
Q263 Barry Gardiner: Could you perhaps provide Q269 Barry Gardiner: Thank you. In that case, Mr us with a note after you have talked with your fellow Massara, when you are discussing with your directors as to whether you think you might be able colleagues the other positive news that you gave the to do that in the future? Committee this morning, could you perhaps discuss Paul Massara: I would need to go back and talk to whether you would be prepared to do that and disclose that as well? them, yes, sure. Paul Massara: I think it becomes problematic when you have a European trading business, which trades Q264 Barry Gardiner: Thank you. Mr Peters, some across all of Europe, and therefore you end up saying, of the companies, such as yourselves, offer additional “Well, are we disclosing what we are making in services, which can also distort profits presented at a trading in Romania, Hungary and Poland?” I am not group level. Centrica group offers boiler servicing, for sure that helps the average consumer to get insight to example. They are not presented in the segmental the segmental reports. Certainly, we could disclose statements. Particularly given your market share in what fee we have for doing it but, like everyone else gas, the very fact that you have that market share I think, we trade at market. There is a minute fee that means that you tend to get quite a revenue stream we pay the traders for transacting that we could pay out of that, don’t you, and yet that is not part of the anybody. We happen to pay our traders. But I do not segmental statements? think it is going to add to insight for consumers to Ian Peters: The segmental accounts only relate to understand what our trading position is across the residential energy supply, and all of our services whole of Europe. business, which covers everything from plumbing to Neil Clitheroe: In terms of being able to see for drains to electrical services, are all outside the scope ScottishPower that the energy management area is of the segmental accounts. At the aggregate level it simply a transactional area that is managing things on all adds through to the published accounts, so there behalf of retail and generation and it is effectively a are no black holes, but it is an entirely separate hedging mechanism, a post box mechanism for those business outside the scope of the Ofgem returns. businesses, then showing that on a confidential basis I think is fine, Mr Gardiner. Q265 Barry Gardiner: Can I ask all of you as well how often you have check listed, in relation to trading Q270 Barry Gardiner: Mr Massara, just a thought; activities, the “another part of business” box? you complained earlier in the session that the cost of Neil Clitheroe: We check listed it I think on the 2011. Government schemes adds approximately £70 to £100 We show that the activity is done within our energy to the consumer bills. Do you not think it is therefore management business and that is notated at the bottom odd that you are not prepared to disclose how much very clearly, and we actually show where the P&L those individual elements of the Government schemes impact of that activity is within our retail and actually cost you in your segmental accounts? generation business. It is very clear on the last page Paul Massara: No, I think I have said already that I of our segmentals where the responsibility and then think that is a good idea. In fact, we are going to go where the profit and loss impact is for those activities. out with an Energy Explained position where we will Ian Peters: To the best of my knowledge we have be showing people’s bills. As DECC themselves have never done it, but I will come back and confirm that said, 60% of the increase in electricity prices until when— 2020 is actually going to come from Government cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
Ev 46 Energy and Climate Change Committee: Evidence
16 April 2013 Paul Massara, Ian Peters, Neil Clitheroe and Stephen Fitzpatrick policy. It is absolutely imperative that we explain to to ask the representatives of the other companies if consumers that bills will be going up because there is they have and if they currently enjoy a significantly £110 billion of capital that needs to be invested in less than expected tax rate? refreshing the infrastructure, and that comes with the Ian Peters: From a Centrica point of view, the answer cost. to that is no. Our 2012 tax charge in aggregate was Barry Gardiner: I entirely agree with that. £1.1 billion; £773 million of that relates to the UK. Neil Clitheroe: That is shown clearly on That is a tax rate of 44%. It is one of the highest in ScottishPower’s website. Most customers see their bill the UK. We will pay £400 million of corporation tax, in terms of how much they pay per month, so we which makes us the sixth highest payer of corporation show very clearly for £100 direct debit precisely tax in the UK. On top of that, roughly the same in where every pound goes in terms of all those supplementary corporation tax and petroleum revenue obligations, in terms of all those delivery charges, in tax. When you add it all together, we are at the higher terms of all those wholesale charges. That is there on end of that range and that excludes the £140 million our website today. in National Insurance. To the investment point—and I will take issue with Q271 Barry Gardiner: Do any of your companies RWE on this—that is despite having invested £11 use base erosion and profit shifting or a tax haven in billion over the last five years, and £9 billion of that your accounting? is in securing energy supplies in the UK, most recently Ian Peters: Not to the best of my knowledge. the Cygnus gas field, which will keep 1.5 million homes going for the next 15 years. So, no, is the Q272 Ian Lavery: I think you were all present short answer. beforehand at the earlier panel, but I have to raise this Neil Clitheroe: In 2009, 2010, 2011, we paid £669 question. At a time when the public say the energy million in corporation tax. In addition, obviously we companies are making obscene profits, there are paid the usual other taxes: employees’ National hundreds of thousands of people being added to the Insurance, business rates, and so on. list of people in fuel poverty. There are millions of people in fuel poverty. It has been suggested that of the six big energy companies there are three of the Q274 Ian Lavery: Did you pay less than would be companies paying significantly less corporation tax expected? than would be expected and there is one company that Neil Clitheroe: Over the five years that we look at, never paid any corporation tax at all in the last three we have paid out £1 billion. We have paid less in the years. I wonder if Mr Massara could confirm how last two years because of capital allowances from the much corporation tax his company has paid in 2009, investments that we have made. Basically, in 2008 we 2010 and 2011? were making between £550 million and £600 million Paul Massara: We will not have paid corporation tax of capital investment. In 2012 we were close to £1 in those three years. The very simple reason why is billion. We have doubled our capital investment so because we have invested £5 billion in the last five we have seen a reduction because of that. The other years building power plant, creating jobs, creating reduction we have seen is just the reduction in the employment and helping to keep the lights on. If we corporation tax rate that has occurred in this country, had not made that investment, we would not have the which has affected deferred tax liabilities. But in deductibilities that we would be allowed. That is a terms of the overall numbers—and for an energy simple accounting UK rule. There is no mystery to it. company you do need to look at it over a longer There is no desire to not pay tax. We have fully paid period just because of the investment profile—we all our taxes, the substantial employment tax, business have paid £1 billion over the last five years. tax and all the other taxes. The fact is you are allowed Paul Massara: If I can just add one clarification. I depreciation for your investments, and we have been think over the last three years net profit has only been the biggest investor by a mile in the renewable about £40 million, including generation and retail.6 offshore business, and therefore we have allowed Compared to that, the £5 billion we have invested deductibilities. There is nothing amazing about that. over five years just gives you the view of where you In fact, I would go the other way to say if this country would be paying tax anyway. We have been losing wants to get £110 billion of capital invested, then the money in the retail business and in fact now we are basic levels you are going to need to allow people that losing money in the generation business too. deductibility. It is no different from any other industry. People should not be surprised that if you make heavy Q275 Ian Lavery: I am really sorry but according to 5 investment that you get deductibility for it. my figures over the period I mentioned before, 2009, 2010, 2011, npower’s pre-tax profits were nearer £750 Q273 Ian Lavery: I am sorry, but I am absolutely million and there wasn’t any corporation tax paid. It amazed that you have not paid any. To say that it is astounding, isn’t it? should not be a surprise—it absolutely is a surprise. Paul Massara: I have different numbers, so I can Looking at the other statistics for the other companies, come back to you on that.7 every other company has paid corporation tax, albeit at different levels. It might be an opportune moment 6 Note from the witness: “The correct aggregate EBIT for the years 2009Ð2011 is £31 million.” 5 Note from the witness: “Please see our letter to the 7 Note from the witness: “Please see our letter to the Committee on 17 April which provides clarity on our Committee on 17 April which provides clarity on our position on corporate tax and capital expenditure.” position.” cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 47
16 April 2013 Paul Massara, Ian Peters, Neil Clitheroe and Stephen Fitzpatrick
Q276 John Robertson: I am amazed about this as a negative position and over the warmer weather, over well. We have had E.ON who said they had invested the next three or four months, they will play catch-up £6 billion, which was £1 billion more than yourselves, with that. and they were paying, albeit a reduced—this is the Starbucks gambit, isn’t it? It is basically, “I employ Q280 John Robertson: Mr Fitzpatrick? so many people therefore I won’t pay tax”. Do you Stephen Fitzpatrick: I am glad I have the opportunity understand how the general public feel about this? to answer this one. About three years ago we decided Anybody watching these proceedings will be that it was a bit anomalous that we were asking absolutely shocked that you are willing to stand up customers to pay in advance over the summer and we and say that, “We deserve not to pay tax”. If I said would keep their money and not pay them any that I would get crucified. interest. So three years ago—about six months after Paul Massara: I think there is an informed debate we launched—we brought in Ovo interest rewards that needs to be had, which says there are general where we pay customers 3% throughout the year on accounting rules that if you make significant any credit balance at the end of every month. For investment creating jobs, education, if you create and keep the lights on—which I think we are all trying to every customer who is in credit over the summer we do—then you are allowed to depreciate. That is no are paying 3% interest to every single customer, and different from any other industry, and that is all we if they fall into arrears over the winter, as is the case have done. We just happen to have been a very big with many customers this winter, there is no interest investor and we have not made the profits out of the penalty. It is their money. We want to encourage them business that we expected. to pay the same amount throughout the year and we think that if there is any benefit that we get from that Q277 John Robertson: So you have used the rules we should give it right back to them. We set the rate to suit yourselves. at 3% so there would be absolutely no confusion as to Paul Massara: No, not at all. the fact that we were not making any money. In fact we lose money from this, but we think we would Q278 John Robertson: I can honestly say I am glad rather be above suspicion on this point. I don’t get my energy from you. If I did I would be Paul Massara: We manage it throughout the year and switching as soon as I left this room. I am so annoyed we may have balances from the customers in the about that. Let me ask you a couple of questions that summer but in the winter then clearly there is a big some of the general public have sent us, one of which deficit. Funding them in the winter and not funding I asked earlier. What are you doing with the money them in the summer is rolled into the general price, so that is paid during the summer months and that is we don’t pay interest, per se, but again if a customer stored up and makes interest for you? has more than £60 on their account they would Ian Peters: Can I take that one? Across a whole year automatically get it sent back. we try to get direct debits to balance out. The figures we have for 2012 would say across the whole of the Q281 John Robertson: They don’t have to ask for year, on average, we were owed £550 million by it? They would get it? customers in aggregate and we had £120 million of Paul Massara: Yes. credit balances on the other side, so net the interest free equation actually worked against us. More Q282 John Robertson: Here is a question that was particularly, if any customer has more than £100 on asked at our evidence session in Glasgow, and also their account at the end of the period we will people have been tweeting it to us, and it is, why are automatically refund it. We now have I think the low energy users penalised because the cost of usage unique ability for customers to go online and manage their own direct debits. They can get payment goes down the more you use? I thought we were holidays and if they want a refund at any time they trying to encourage people not to use it. can take it. I don't think anybody else can do that. Ian Peters: This is about how costs play through. At That is great in terms of putting customers in control. one level it can look quite seductive to tip it the other way, but I think the Committee should be aware of Q279 John Robertson: ScottishPower? And I am the distortions that will then create. One one of your customers. consequence—and there are probably three—is it Neil Clitheroe: We are pleased about that, John. We makes high consumers very profitable and low try to balance across the year. If a customer at the consumers unprofitable. I think the risk there is many annual point is more than £100 in credit then we pay of the vulnerable customers would get disengaged interest on that amount that is linked to the bank rates. from the competitive market because they would be I can’t remember the exact interest, I will have to loss making. Secondly, there is not a great correlation come back to you, but we pay interest on that amount between consumption and vulnerability, and I think and then we refund that to customers. It is something perversely one of the bigger beneficiaries of that we introduced about four years ago called “Credit would be second homeowners who are sitting there where credit’s due”, so we have done that for quite a with very little consumption. So there is a debate to long time. However, we do try to balance it across the be had in this area but I think we have to have it in year. It is better for customers to be paying the right the round, have a look at things in total, because I do amount over the year, and there are troughs. At the worry at creating loss-making customers at a time we moment with the cold weather most customers are in are trying to make pricing cost reflective. cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
Ev 48 Energy and Climate Change Committee: Evidence
16 April 2013 Paul Massara, Ian Peters, Neil Clitheroe and Stephen Fitzpatrick
Q283 John Robertson: The point that these people you end up in a position where you have this standing made was the fact that they probably would like to charge and then unit costs. If we can get to a point use more electricity in some cases but they can’t where National Grid and the other network companies afford that, but they seem to be penalised and the can charge per kWh then retailers can pass on those number of people that are in fuel poverty seems to be costs on a per kWh basis. Otherwise there is very little going up and up year on year. Here is a chance for that we can do that ends up in a good outcome for the companies to punish the people who are the big customers. users, and I am not talking about businesses. I Paul Massara: I agree with that. I think part of the appreciate businesses have to have a certain level. As changes under RMR is you are going to see more a city MP I have to say that, and the evidence session standing charges coming in. That is part of the we took was in Glasgow where we do have more than development. In fact, we have just moved from having a fair share of people in fuel poverty. The point I think a two-rate tariff ahead of RMR in order to put in the was well made. The fact is that they feel as a low user standing charges, and people have written to us who is probably trying to cut back on their usage they saying, “We don’t like having the standing charges are punished, whereas others who can turn everything because we are small users”. Some of those small on are winning on it and they don’t think that is fair. users are actually second homes, and so you may have Ian Peters: I recognise that perception. What I do a different approach to that than you do to people who think, though, is it puts the onus on us to do actually are in fuel poverty, which is clearly— everything we possibly can for all customers, particularly the vulnerable ones, to keep their bills Q285 John Robertson: I am sure something can be down and, despite rising prices, British Gas bills have done in that respect, but the small number of second gone up by an average of about 3% or 4% over the homes compared to first homes is a very small number last four or five years because of what we have done, of people. I understand where you are coming from particularly for the vulnerable market. Last year alone, but I don’t accept that as a reason for it. I have to put we spent £223 million, I think, helping precisely those the record straight because I have just been told that I customers insulate their homes better, do everything mis-said that Centrica’s bills have gone up by 6% and we can to get them on to the right tariff. So I think it not 3% or 4% as I said. is in the bigger context of working with our customers Ian Peters: The prices went up 6% last year. There is to help them keep their bills down. It is not just an important distinction between prices and bills. about tariffs. John Robertson: I am just putting that on the record just to make sure that people understand that. Q284 John Robertson: We talked to people in Ian Peters: I will accept that prices went up 6%. The California about the same thing, and they are getting bills went up— to the stage where they are talking about splitting the cost of electricity up depending on the time of day. Do Q286 John Robertson: Going back to the charging you think you will go down that road at some stage? by usage, one of the great fears in California, in Ian Peters: That will get enabled by smart meters, particular, is the fact that they try to encourage and British Gas are very happy to lead the industry. businesses to run at times when there is low usage so We have about 80% of the smart meters. We have that they can meet the requirements that they have. At rolled out about 600,000. They have a kind of some stage if we don’t start getting investment into embryonic time of use tariff within them. I would our electricity markets and start building some power expect within the next six to nine months to see a very stations, then we might get to the stage where we are significant breakthrough in enabling lower costs to talking about cutting people off because we don’t have lower price through smart meters. enough power to meet the needs, particularly as the Stephen Fitzpatrick: Could I make a suggestion here, coal-fired power stations are closing. Have you looked just on a practical point? If you want to see flat unit at this and thought about how you are going to handle pricing—and I think the perception that people that it? Again, I do not want to see the fuel poverty people use more energy get charged lower prices is to do with being the ones that suffer. two-rate tariffs that are set up to hide the fact there is Neil Clitheroe: I think you are absolutely right, Mr a fixed cost of providing the infrastructure. So a lot of Robertson, because the margin that is in generation is companies have in the past marketed “No standing reducing all the time. We have closed a plant, as you charge”. have seen, in Scotland in the last three months, at John Robertson: A lot of these accounts still have a Cockenzie. That is a good plant that we have closed, fixed price on it. It is hidden in the bill. and that has come off the system and other plants are Stephen Fitzpatrick: What I would suggest we do is coming off the system. I think as usual there are two we start the conversation around convincing network or three ways to solve that. One is we need plant, we operators that they should receive a pence per kWh need certainty in terms of that capacity, and that is transmission and distribution cost. As long as there is going through on the Energy Bill at the moment. a fixed cost to retailers for providing infrastructure There are things you can do on demand. We are seeing then the two options are you either create loss making a lot of business customers, refrigeration business low volume customers and you ignore the fact that a customers, we are giving a lot of energy advice to power line to a house that only uses a small amount them and moving their demand from the day into the of electricity and a power line to a house that uses a evening and you can level that out. But how far you lot is broadly the same. So you either ignore that fact can take the peak down with those activities is and lose money on small consumption customers or questionable. I think that peak will still exist. Those cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 49
16 April 2013 Paul Massara, Ian Peters, Neil Clitheroe and Stephen Fitzpatrick three peak half hours in the winter will still exist, and the broadest criteria for the warm home discount. We we need to provide that. So there is a lot of work to have uncapped it and 530,000 of my customers will do on this to provide more firm generation, and that benefit from that—they already have, actually, by will only come through some certainty through the March—which is much more than we were obliged to capacity mechanism that is going through the Energy do. I would support the point RWE made that there is Bill at the moment. a case for a mid-year review around ECO. There are Ian Peters: From my point of view, the primary many assumptions that have gone into that and we accountability for securing energy supply rests with have some reservations about how that is playing out. National Grid. But this is an investment story. I think We are doing what we can to roll it out at the lowest Centrica is doing its part. I talked about the Cygnus cost, but I think DECC’s assumptions are fragile and gas field. We have secured planning permission to would warrant a mid-year review. build an 850 MWh offshore wind farm. I think there Neil Clitheroe: You know my views obviously on is a debate to be had around storage. The economics Green Deal and ECO from the last Select Committee, of storage now are very fragile. I think, as we have but there is an interesting point on all of this and that just seen from the near crisis we had a few weeks ago, is what is happening to consumption in the UK. it would probably be a good thing if we had more Obviously all of these investments are going ahead storage but we need to look at how that is incentivised and consumption is falling, but the averages that are and remunerated. We, as a company, are doing our used for consumption at the moment, in terms of the part to invest in securing supplies for the future. Ofgem average—16,500 for gas, 3,300 for electricity—have not been updated since 2010 to Q287 Sir Robert Smith: One of the answers has reflect the reductions that all the companies are seeing prompted this observation that you are all, quite with regard to consumption. Therefore, when you look rightly, highlighting that Government schemes put at the bill values then the bill values are effectively costs on to bills that consumers have to pay, but then quoted too high, because there has been a drop. We you are also quite keen to take the credit for the are seeing numbers at 14,500 for gas, 3,100, 3,150 for insulation and energy saving measures you put into power. We are speaking to Ofgem at the moment people’s homes. Do you recognise that those are through Energy UK to try to influence that debate. But coming out of those costs that are being put on to that is an important point because we are not seeing people’s bills as part of the Government schemes? in the tariff tables the impact of all that investment Paul Massara: I think we would all say that fuel into average bills in the UK. I do think that is a lost poverty is a combination of economic poverty and the opportunity in terms of the transparency of what housing situation. Obviously that is a real issue, and energy is costing. so, although we have some of the lowest costs per Paul Massara: To add to that, I think we would have unit, we have some of the highest bills in Europe the same problems that others have suggested about because effectively the usage is so high. As an the Ofgem monthly analysis, on volumes and on types industry we have a real issue, as actually as society of tariff. Also in terms of when we are making we have a real issue with fuel poverty, because fuel decisions now, we are going into the market and poverty is not going down, it is going up, and we need making decisions about prices. We are having to make a way of tackling it. The sensible way to do that is to estimates of what ECO is going to be worth and effectively apply funds to those people who need it therefore we are having to factor in those costs. Those the most, who have the poorest housing. So I think don’t apply or don’t occur in Ofgem’s analysis. So that is absolutely the right thing to do. The question there are significant faults with that and the worry is we would have is do the design of those systems and that people jump on a headline and say, “Wow, I can’t the processes achieve that lowest carbon position at believe they are earning £125 a customer” but the best possible price? Our assertion would be that continuously, year after year, it comes out and shows on CESP it did not achieve that at the lowest possible that we are only earning 3% or 4%. To me that does price. Towards the end we were paying £50 or £60 a not build trust in the marketplace, and I think it is tonne of CO2 to get those obligations away, which is right that we get those numbers correct in order to get very expensive. We believe or we think ECO will be a sensible conversation. very expensive. The Government’s own position is it is 1.3, which is £77 a tonne. We believe it could be Q288 Mr Lilley: On profits and prices, opinion significantly higher. surveys consistently show that a very high proportion So we absolutely agree that it is needed to be done. If of consumers believe that the 50% increase in their anything, I would say that the Energy Bill is too light bills in recent years is largely due to the increase in on demand side management and it needs to have the profits of the energy companies. Indeed, when we greater emphasis on it. But everybody clearly has an went to Scotland that was the view of the audience interest in getting those costs in at the best and the that we had there. There were many activists, and lowest possible price for those people who need it. some members of the Committee believe it. I would Our concern is that the way that some of these like to believe that it wasn’t so. If it were so, it would initiatives have been structured means that those mean there was a margin being earned that had gone prices are going to be higher than they otherwise up from 100 to 150. Your profits are 50 of that 100, a would have had to be. third of the total. That is clearly extreme. We could Ian Peters: Just a couple of additions to your point, bring in the Monopolies Commission and bring down Mr Smith. We have done much more than our prices. I suspect it is not so, but it would be helpful if obligations, particularly around fuel poverty. We have we could have the information in a usable form. How cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
Ev 50 Energy and Climate Change Committee: Evidence
16 April 2013 Paul Massara, Ian Peters, Neil Clitheroe and Stephen Fitzpatrick much of the increase in prices in bills in recent years closely—nobody cares about the profits that energy has been due to an increase in profit? Not just the companies make if they feel they are getting good profit at the retail and supply end but the profit at the value. So all of the time that we have spent today, and generating end as well, because people outside do not all the time we have spent over the past years, about distinguish between the two, and rightly not. They are energy company profitability to me is a bit of a red part of the profit of the whole industry. We do not get herring because I think energy companies should be that. Somebody will say, “We only generate a fraction profitable. I think it would be great if we had more of what we supply and therefore we can’t throw the— profitable energy companies. It would mean more ”. What is the percentage to begin with and how much investment in the business and maybe more money has it increased? to spend on communicating the good that the energy Paul Massara: I think that data is there. It is all in industry does. But energy customers do not feel that the segmental reports. I think that the— they are being treated fairly because they keep finding Mr Lilley: Well, because it is all segmented— out that there is a new deal that they can get offered Paul Massara: But it is segmented between supply by another company or even the same company. Their and between generation and it is very clear, and that neighbour is paying less than they are. Their bills keep is— going up. I think it is a complex industry that, as industry participants, the larger industry companies Q289 Mr Lilley: For example, if the generation have done a very bad job in trying to simplify that for profits are 20% they are 20% of what, of the the customer. wholesale price that is going—so not 20% of the final I would make one proposal to the Committee, that bill, so you are shooting yourself in the feet. where we start to see a more uniform approach to Paul Massara: Absolutely. We announced in our last energy pricing so that there is less of a disparity set of results that our profits in the UK as a whole between the cheapest deals on the market and the most were up 25% and everybody goes, “Oh my goodness, expensive deals, then people become a lot less they are up 25%”. What they do not say is we have suspicious that they are being overcharged. All this invested £5 billion over the last five years and talk about profitability and where the money is going therefore you would be amazed if your profit doesn’t and so on, I think from a tax point of view it is go up. What they don’t say is in 2009, 2010 and 2011 perfectly reasonable to ask that if the profits are being we lost money in the retail business and are now generated in the UK that tax is paid in the UK. But making a wafer thin margin. What we have to do is otherwise I would say create a market where be able to communicate better, because fundamentally competition works and then people can see the results we are not earning above margin. for themselves, whether that is in generation or in supply. But if you have more competition you do not Q290 Mr Lilley: Some of us would like to help you, need to ask these guys about their profits because but give us the figures. If the bill was £100 in the past good companies will be profitable and poor companies and £3 of that was profit at the retail end and £5 was will leave the market. the generating end, and now it is £200 and it is £6, I I would suggest to Paul that if npower are apparently would like to know that but I do not have it in that not very successful in running their retail business form. over the past three or four years, then we will very Paul Massara: Sure. We can provide that for you. happily talk to you about taking over the business and I think we would do a much better job. Q291 Mr Lilley: You can say, “Look, okay, profits Ian Peters: I don’t always agree with Stephen but on have gone up a bit or down a bit or something but the this one I do agree with him. This is about stating big increase is either in fuel or in other operating costs, because of increased investments and these values and there is no doubt that since we have started absurdly expensive forms we make you produce writing to our customers saying, “These are the other energy in now or Government add-ons and things”. tariffs, the other prices you can get from British Gas” We ought to be able to get those but as something for it absolutely has changed the perception. the total bill, not segment by segment. Stephen Fitzpatrick: But, Ian, you run Sainsbury’s Ian Peters: We do that through our light bulbs. In Energy and you won an option yesterday offering short, British Gas residential’s profits in 2007 were customers buying Sainsbury’s Energy a £200 cash 571. They were 606 in 2012. So the short answer is back deal sweetener to sign up for 12 months. You none, but we lay out the breakdown—the moving did not offer that to your 9 million British Gas parts, wholesale, moving it around, transport and customers and so that is what leads to lack of trust. distribution—on the back of the bill every month for Ian Peters: There are two things on that. That was a our customers. particular transaction to do with collective switching Stephen Fitzpatrick: Mr Lilley, if I could offer one that involved local authorities, which was priced on a observation, from all of my time in the energy sector, particular basis. neither you nor the Government nor the Department Stephen Fitzpatrick: Next year for those customers of Energy and Climate Change nor Ofgem will ever the price is going to go up by £200 and they will chase these guys down on profitability because they wonder why. are always a couple of years ahead of the numbers Ian Peters: I am not saying that. If a British Gas that they are reporting to you. As an observation from customer phones up our call centre today, and asks for the customer’s point of view—and we speak to a lot our cheapest deal, we will explain to them the British of our customers all the time and we listen very Gas number and the Sainsbury’s number. cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG02 Source: /MILES/PKU/INPUT/030522/030522_030592_o002_odeth_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 51
16 April 2013 Paul Massara, Ian Peters, Neil Clitheroe and Stephen Fitzpatrick
Neil Clitheroe: Just coming back to the question, we price is going up. When the price is coming down or do provide those details, so for £100 that you spend static it is not such a source of aggravation. There is today in 2010 you would have been spending £81 as great complexity in the price of computers, but a monthly average. That £19 is made up of £4 of computers are coming down. There is great wholesale cost increase, £5 from the wires and pipes complexity in the price of mobile phones, but mobile increase that has come from the investment, £8 from phones are getting cheaper. People do not worry about VAT and various sort of ECO, green levies and so on, the complexity when things are going down. When a £1 increase— they are going up they blame them on you and if you Mr Lilley: VAT and ECO? They are different things. do not give us clear figures about where the profits Neil Clitheroe: In fact it is 5%, 5%, so it will be £2, are they will blame it on your profits, so it would be £2 to £10 between 2010 and 2013, and operating costs helpful for us to know where the profits are, what they are £1. So we do provide that detail on our website to are on average for an average consumer and how try to improve understanding of this. much they were a few years ago. Then, when the BBC comes out with one of their things, “Oh profits have Q292 Mr Lilley: That includes the generating gone up by so much” we will be able to say, “This is element in this? what they were last year. This is what they are this Neil Clitheroe: That is within that £4 increase from year. The big increase has come somewhere else”, if £46 to £50 for the gas and the power. it comes somewhere else. If it has come from rising profits, then we will be able to— Q293 Chair: That does not tell you what Peter says Paul Massara: We have already stated in our papers in terms of presentation from saying that the profits of the historical and the forward view of that, in terms the company came from— of profit margins and how the bills are likely to rise Neil Clitheroe: It shows the profitability. in the future by each of those costs. Chair: Thank you for your patience. It has been a Q294 Mr Lilley: The figures in our brief do not show helpful and illuminating session for us, and we look that. I would agree that complexity is a source of forward to seeing you again in due course. aggravation, but it is a source of aggravation if the cobber Pack: U PL: COE1 [SE] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG03 Source: /MILES/PKU/INPUT/030522/030522_030593_o003_odeth_Corrected Transcript.xml
Ev 52 Energy and Climate Change Committee: Evidence
Thursday 9 May 2013
Members present: Mr Tim Yeo (Chair)
Dr Phillip Lee Sir Robert Smith Albert Owen Dr Alan Whitehead ______
Examination of Witnesses
Witnesses: Professor John Hills, London School of Economics, Dr Nick Eyre, University of Oxford, and Jan Rosenow, University of Oxford, gave evidence.
Q295 Chair: Good morning. Thank you very much Q297 Chair: Professor Hills, if the Government for coming in. As you know, there is a lot of interest adopted your new definition of fuel poverty, should in this inquiry—although perhaps not intellectually in they set a new fuel poverty reduction target? your session—and when we had the energy companies Professor Hills: That is for Government and in the other day there seemed to be a particular Parliament—given that the original Act originates amount of interest, for some reason; I cannot quite from Parliament—to make those decisions. I think work out why. Perhaps you could start off by telling that giving people clear objectives to deal with serious us whether you think the Government is on track to national problems can be a helpful device. eliminate fuel poverty by 2016. Professor Hills: I don’t think the Government is going Q298 Chair: Of course it is for the Government and Parliament, but what would your advice be about to eliminate fuel poverty by 2016, however you whether we in Parliament, whether we as this measure it. Those of you who have seen the summary Committee, should recommend that they do that? of or read the whole of the report I wrote last year Professor Hills: My advice would be that there will see that, in the way that I suggest that fuel poverty probably should be a system of rolling targets, taking might be measured, and with the focus on the measure account of changing situations, that keeps officials’ which I think captures the scale of the problem best, and Government’s nose to the grindstone in delivering which I call the fuel poverty gap, given the central the greatest possible action to deal with a problem of forecast that DECC was producing for fuel prices over this kind. Where I would probably part company from the next few years—some of those increases have the original specification in the Act would be the use already happened—I was suggesting that that measure of the word “elimination.” If you look at the history of the scale of the problem would increase by as much of the child poverty target, which was originally as half, from where it was back in 2009, by 2016, announced by the former Prime Minister, Mr Blair, as rather than being eliminated. As you will have seen having the objective of eliminating child poverty, that from the report, I thought that was a profoundly language was modified to talking about becoming disappointing projection. among the best in Europe, for instance. We do not Dr Eyre: No, I don’t think the Government is on track have that kind of comparator as far as fuel poverty to eliminate fuel poverty by 2016. I don’t even think is concerned. it is on track to do so as far as is reasonably To be honest, what matters is what happens over the next five or 10 years and the scale of action. I would practicable, which I think is what it is obliged to do. much rather see meaningful targets that lead to a more rapid pace of change, directed at what can be done Q296 Chair: Why do not you think it’s doing that? over the next 10 years, than to focus on something in Dr Eyre: Because it is reducing the amount of 16 years’ time or whatever it is. When we get closer resources that are being committed, particularly to it, I am very happy to argue about whether we have through Government funding—for fuel poverty eliminated the problem, or reduced it to extremely low measures for England—and the affordable warmth levels, which is what I think the objective should be programme in no way substitutes for that and the parts in practical terms. We are so far away from that at the of CERT devoted to low-income customers. moment, that I am not sure that it matters. We are Jan Rosenow: I would agree with the previous going in the wrong direction and we need a scale of action that takes us in the right direction. speakers. I think ECO is going to take about 125,000 to 250,000 households out of fuel poverty; these are Q299 Sir Robert Smith: I should probably declare the DECC projections. I think, currently, we have that I am an honorary vice-president of Energy Action about 5 million households in fuel poverty; with a new Scotland, which has argued that your new definition, definition it is a bit less than that, but it is still Professor Hills, makes it much more complicated to nowhere near the figures that DECC are projecting for work out whether a household is to be classed as fuel this. I agree with Nick. The fuel poverty spending, poor because it requires a great deal of data to be according to ACE—the Association for the gathered on an individual basis. Is that a fair point? Conservation of Energy—has been reduced by about Professor Hills: Well, the proposal I put forward for 29% from previous fuel poverty budgets. So there is measuring the scale of the problem is based on a quite significant cut. precisely the same data as are used to create the cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG03 Source: /MILES/PKU/INPUT/030522/030522_030593_o003_odeth_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 53
9 May 2013 Professor John Hills, Dr Nick Eyre and Jan Rosenow existing fuel poverty statistics. I have suggested some of trying to get at the problem as it hits people in tweaks to that, which, in terms of the use of the terms of hardship, health and climate change, and surveys, could improve the way in which we allow for came to the conclusions I did. particular household situations, but it basically uses exactly the same information that we have at the Q301 Albert Owen: I respect that. I asked the moment. There is a big difference between the question because Ministers indicated to us that it was information you use to see how you are doing too crude, and used the headline that multi- nationally and whether you are going in the right millionaires, including the Queen, could be described direction, and the information you use on the ground as being in fuel poverty. So there was no pressure put to see which households need assistance and action on you to look at that because of the circumstances fastest. The existing measure is not that helpful on the and the crudeness? ground. It requires quite a lot of information about Professor Hills: I don’t remember anyone using the people’s income, and to measure it precisely would word “crude” to describe the existing measure. Many require a full survey of the house, in the same way aspects of the way it is calculated are sophisticated. that the sample properties are done. The conclusion I reached was that it did not deliver I actually think that the reverse could be true. The what people thought it delivered. You have mentioned way I suggest we focus on the problem—as the the potential for people on high incomes to be caught original Act suggested, we look at households that by it sometimes. That is true, and obviously you have low incomes and high need to spend on energy, would not normally expect a measure of fuel poverty and we look at the way that that creates the worst to capture people—you quoted the Financial Times problems for the people who are furthest away from story about the Royal Household— being out of fuel poverty, the ones who have the Albert Owen: I’m repeating what Ministers said. biggest fuel poverty gaps—allows you to think about Professor Hills: I think they’re probably repeating a the characteristics of the people themselves and also line I have repeated from a front page of the of the houses they live in, which you can then use as Financial Times. some form of proxy. You do not do a full survey of That is just not helpful because it leads to every house in the country; that would be conclusions—as some assessments of the Warm Front prohibitively expensive. programme did, for example—that a lot of money was However, we do know—I set out in the report the going to the wrong people. That happened because the information that I had available to me then, and I hope assessments were being done at a time when energy the Department has done more work since. That prices were particularly low, and the effect was that information allows you to say what proportion of the apparently we had almost licked the problem. problem is accounted for by particular kinds of According to the official indicator, the problem had houses. It is that information—looking at people who fallen by three quarters between the late 1990s and are off the gas grid or people who are in pre-1940s 2003 or thereabouts. None of the people I spoke to— properties and so on—that allows you to home in on I did quite a lot of consultation for my report— the people you want. It is that kind of information that believed that the underlying fundamental problem had matters, rather than the precise calculation that is used been reduced by three quarters over that period, yet from the sample service, either now or possibly in that is what the numbers were saying and I think that the future. fed some complacency in Whitehall about the overlap period. Those sorts of problems led me to think that Q300 Albert Owen: In the remit you were given by we were possibly not using the data we had to capture the Government, did they say that the original the problem in the right way. indicator was too crude and that you should look The second thing that struck me was the focus. It is deeper into it? What was the remit that you were very nice to have a single number to focus on—the given? number of households—particularly if you are Professor Hills: No. The first part of the remit was lobbying on something. It is particularly nice to have to ask whether fuel poverty was actually a problem a number that is going up rapidly, but that focus on the because, after all, there are all sorts of other aspects number of households caught, which moves around of hardship for people on low incomes and we do not rapidly with energy prices, can lead to you thinking have particular targets or measures for those. The first that some people are out of target when they should part of my remit was to look at that, and I reached the be in it, and others are now a problem when they firm conclusion that fuel poverty is a serious national shouldn’t be, and also possibly to focus on action that problem. tips people just across the line, because the easiest The second part of my remit was to look at the thing to do is to give someone who is just on the edge existing measure. I was not given any instructions as a bit of loft insulation so that they are on the right to what conclusion I should reach. I wasn’t pushed in side, which reduces the numbers. any particular direction, but looking at the way in The problem is the people on low incomes who have which the existing 10% indicator works it seemed to to pay £800 or £900 a year out of their very small me that it had some problems and led to misleading incomes over and above what a typical household has identification of who the priorities for action should to pay for their energy bills. Those are the people we be. It also gave some misleading impressions that in need to focus action on—the people who are furthest the past led to complacency in what the trends were away from the line—and that is why I suggest a focus in the scale of the problem. That was my own on the fuel poverty gap, and that the depth of the conclusion, and I then thought through different ways problem is the best thing to focus on, however you cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG03 Source: /MILES/PKU/INPUT/030522/030522_030593_o003_odeth_Corrected Transcript.xml
Ev 54 Energy and Climate Change Committee: Evidence
9 May 2013 Professor John Hills, Dr Nick Eyre and Jan Rosenow set up your programmes and whatever targets you set, Dr Lee: Equality means equal. I notice that you because that will focus your energy on using your chaired the National Equality Panel. Human beings resources to make the biggest difference. are not equal, and I am trying to understand what your definition of equality is. Q302 Sir Robert Smith: You mentioned that the Professor Hills: Oh, well, you could have a definition swing in energy prices made a huge difference to the of equality, and someone could set an objective that statistics. Do you think that it goes too far, though, to everyone in the country should have the same income, ignore energy prices as part of the problem? the same energy costs and wear the same suit or Professor Hills: I think, if you look carefully, that that whatever. is not what the framework I have suggested does. There are two different aspects to that. One is that as Q305 Dr Lee: Is that your objective? energy prices rise, more people are pushed into a Professor Hills: It is certainly not my objective. I position where the income they are left with after cannot think of any political philosophy, apart from paying necessary fuel costs would push them into the most extreme, that would set that objective. poverty. Some people are dragged into poverty by the particularly high level of their fuel prices, because the Q306 Dr Lee: My point is that your judgment of retail prices index or the consumer prices index does equality is subjective, is it not? not capture the cost of living to them as their energy Professor Hills: I think my job as an academic is to prices are so high. try to report on the extent to which, as a society, we On the one hand, the number of households or vary from that position. individuals captured by my measure varies as energy prices vary, but the thing that really changes is how Q307 Dr Lee: And what is an acceptable amount of big a problem that is for the people affected by it. variance? That is the fuel poverty gap. I can give you a copy of Professor Hills: I think that is something that society the summary of the report, if it will be helpful. You makes decisions about, and politicians like yourselves will see from the graphs in the report how that make decisions about what you feel is acceptable and measure of the seriousness of the problem has gone right. Different countries make different decisions, up and down. That is why I project that the problem and at different points in time we have been a more will worsen over the next few years as energy prices equal society than we are today, but that is— rise. Q308 Dr Lee: But you keep saying “more equal than Q303 Sir Robert Smith: Another statistical concern before”. I am trying to bear down on what is an is that using the median figure means that you would acceptable level of equality. Equality for me is that I never be able to eradicate fuel poverty. should be the same as Alan, the same as Albert and Professor Hills: I don’t think that is strictly true, but the same as Tim. Equal is equal; two equals two. If we it is certainly very difficult. We are using the figure of are getting into the realms of subjective assessment of median costs for the whole population, that is, “What what equality is, and indeed what reasonable is—I does a typical household have to pay to keep warm to notice your definition is “reasonable costs”—I wonder a certain degree?” We are then focused on low-income what it is. The 1980s are blamed for the gap between households who would have to pay more than that to rich and poor, but not much difference occurred, I keep adequately warm. It is possible—it would be notice, under the previous Government. There has very hard—to ensure that everyone on low income been a problem between the richest and the poorest, was below the level. You cannot get the whole but it is a subjective judgment about what is an population below the median, even in Lake Wobegon, acceptable difference between the rich and the poor. where, if you remember, all the children are above I am not saying that there is not a problem between average. You could theoretically get all people on low the rich and the poor; I am just trying to work out incomes below it, but that is not the issue. what you think. Underlying your report will be a sense The issue is whether you can get most people on low of grievance: “I don’t think it’s right that the top 10% incomes below that level. After all, people on low have x amount more than the bottom 10%.” The same incomes live, by and large, in smaller houses than applies to fuel costs. Unless we come up with some people with higher incomes. Then, when we get there, wonderful invention in the next 10 years, fuel costs we can have an argument about the people who are will continue to go up, so by definition, the proportion left near the line and are just above those median of people’s income being spent on fuel will go up. costs, but we are so far from that at the moment. We Does that mean that they are increasingly becoming have so many people who have costs way above that fuel-poor, or does it mean that they will have to make level. It would be very nice to have that argument in decisions about what they spend their money on in 10 years’ time—I would welcome it—when we have future as a result of the changed reality? got the problem down to the level where some people Professor Hills: Can I separate that out into two on low incomes have costs that are still £50 or £100 issues? I will be very happy to talk to you if the higher than the median, but let’s get close to that level Committee wants to carry on talking about equality before we worry about that. in general, income inequality and wealth inequality. I would be very happy to do that, but in fact, given Q304 Dr Lee: How much equality do you want to what the issue of fuel poverty is about, what happens see, Professor Hills? to the top 10% is completely irrelevant. The reason Professor Hills: In what respect? why I suggested that if one is taking a threshold, it cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG03 Source: /MILES/PKU/INPUT/030522/030522_030593_o003_odeth_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 55
9 May 2013 Professor John Hills, Dr Nick Eyre and Jan Rosenow should be based on what a typical or median of energy-inefficient tower blocks in west London and household is doing, is that that number is not affected how that has worked out. I think examples of that kind by what plutocrats are doing with their large ranches show what can be done, rather than using a great deal or multi-million-pound residences. I am looking at the of resources to demolish something and then rebuild position that people with low incomes are in by it. In terms of cost-benefit analysis—the benefit you comparison with the mainstream of society. get for each pound spent—renovation and retrofitting The issue, then, is whether we think it is acceptable— is probably much more effective than demolition and you may or may not—that somebody who has a low rebuilding. It seems to me that using the money we income would face very high costs to keep their home have got in the most effective way, whether it comes at a temperature that allows them to protect their from abolishing the winter fuel allowance, or from health. The evidence I reviewed in the interim report somewhere else, is the top priority. There is a lot that suggested that there are good reasons for thinking that can be done at very good value for money. living at low temperatures damages health, and that the scale of the problem is such that people who are Q310 Dr Phillip Lee: You could say that, but I am already facing hardship in different ways will have just saying that the winter fuel allowance is actually that hardship exacerbated by what they must spend to in place to try and prevent fuel poverty. My point is try to keep warm. that, if you are going to try and prevent fuel poverty, You say it is inevitable that fuel poverty will rise. I do or address it, I do not think it is— not think that is true. What one is looking at is a Professor Hills: If you look in detail at the report— product of both energy costs and the energy efficiency Dr Phillip Lee: I have not read the whole report. of the building that they live in, and that is something Professor Hills: I can point you to the precise pages that they can make a difference about. One of the where we make a comparison between the different conclusions of my report was that when you look at measures. I am afraid that the winter fuel allowance the evidence on what happens if you invest money in comes out very badly on all those grounds. energy efficiency measures in the homes lived in by everybody, but particularly people with low incomes, Q311 Chair: I should disclose an interest, as I am old there are measures you can take that are very good enough to receive the winter fuel allowance myself. value for money according to the kind of cost-benefit I have never expressed a view on its desirability or analysis that the Treasury, for instance, does. It is a otherwise. I have listened to the arguments with great good national investment, and that is the focus of the interest and the attack by my colleague. report. That has nothing to do with what has happened Jan Rosenow: If I may chip in, there seems to be to the incomes of, the top 1%. a difference in the principle of how you address the problem. One is a long-term investment, where you Q309 Dr Lee: Following on from that, one short invest in energy efficiency measures, and the other question. I have long thought that the winter fuel one is short-term help with rising energy prices. From allowance should be scrapped. Would you agree that a long-term perspective, the former—the long-term we could invest that money in social housing that is investment—seems the wiser investment. That is my energy efficient, with insulation and everything else? view on whether we should invest in short-term We could take that money and perhaps add to it. One financial help or long-term energy efficiency thing Government could do is get rid of the tenement measures. blocks that John Robertson often goes on about, which cannot be insulated. If they were to decide to invest Q312 Chair: Moving on a bit, do you agree with the in and build new social housing, that is probably the NEA that environmental and social levies are most that a Government can do to address fuel poverty regressive? in the way you have defined. Jan Rosenow: I do agree that the revenue-raising side Professor Hills: Again, there are several things there. of social and environmental levies, if raised by energy First of all, you will see in the analysis that we did in prices, is by definition always regressive. However, on the report, using the framework I set out, that the spending side, the provision of measures can be spending more money on the winter fuel allowance is progressive, and CERT and CESP have made attempts one of the least effective ways of tackling this to deliver a large proportion of the measures to low- problem. There are many other reasons why you income households, to offset some of the might want to have a winter fuel allowance, and the regressiveness on the revenue-raising side of things. current Government are committed to keeping it, but So I think you have to distinguish between the with those resources there are more effective ways revenue-raising side, which will always be regressive you could spend that money that would deal with fuel in the current system, and the spending side, where poverty. That is the very clear conclusion of the you spend the revenues on energy efficiency report. measures. But broadly, I would agree with the analysis There is then a second issue that you brought up, that NEA put forward. which is precisely what you do with it. The one point I would make there is that my biggest priority for Q313 Chair: Age UK suggested it would be better action would be taking measures with existing to levy those costs on a per unit, rather than a per property—retrofitting existing property. The centre household, basis. Would that be better? that I am part of recently published a report, which Jan Rosenow: We had a discussion yesterday between you might be interested in, called “High Rise Hope”, the two of us and the standing charge for electricity about the programme that has been insulating a series is, I think, about £15, probably, for most households, cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG03 Source: /MILES/PKU/INPUT/030522/030522_030593_o003_odeth_Corrected Transcript.xml
Ev 56 Energy and Climate Change Committee: Evidence
9 May 2013 Professor John Hills, Dr Nick Eyre and Jan Rosenow and the cost of CERT and CESP was more than £50 prepared to do, that could be made to work. However, per year. Some of the cost will be passed on a per unit people should go into talking about rising block tariffs basis and some of that will be passed on in the with their eyes open in that way. standing charge, but we have no insight into what the Professor Hills: And you should also be aware of proportions of that will be and how much is on the exactly the problem that we were just talking about— unit and how much is on the standing charge. On the people who would be hit hardest would be the average, we would probably agree that putting it on a people paying the very high unit costs who had the per unit or per consumption basis is less regressive. worst problems to start with. There is a little bit of a However, there will be fuel-poor households who chicken-and-egg situation here. At the moment, we consume quite a lot. For example, elderly people who have these people with low incomes with very energy- live at home 24/7 need to heat their homes. So I think efficient homes who would be hard hit by that, even you have to be quite careful with these sort of though in general people on low incomes would proposals. benefit from RBT. Dr Eyre: Can I just add something? I think that what you quoted was about environmental and social levies Q315 Chair: It depends how you do the formula, in general. It is important to distinguish those levies surely. If you had a free allowance, someone living in that support energy efficiency and fuel poverty, and to a very energy-efficient home might be getting their look at whether it is possible, as Jan has explained, fuel for free. for revenues that are raised in a regressive way to be Professor Hills: But only up to a certain level. used in a progressive way and for the overall balance Chair: Well, up to the level that a two-person to be positive, both in being generally progressive household would need. I can see the difficulties of and, in this context, in actually addressing fuel designing the formula, but I cannot see that the poverty. That is not generally true for all concept is open to the objection that you have put environmental levies. Where we are raising forward. environmental levies to fund new low-carbon supply, Professor Hills: The problem is that couples live in a for example, with proposals to put very significant vast variety of properties. amounts of money into contracts for difference, which Chair: Yes, absolutely. That is their choice, of course. are laid out on the same basis, you are going to get Professor Hills: Well, it may be a choice, but they all the regressive effects and none of the progressive may not easily be able to do something about it. If ones. I sometimes find it a bit odd that this debate you are living in a rural area, off the gas grid, in an focuses on the levies for energy efficiency and not on old property, in theory you do have an option of the levies for nuclear power, for example. moving into somewhere small in town, but that is a Professor Hills: Could I add to that? There is a very costly option in terms of the disruption of your tension. If the costs are passed on per kilowatt-hour, life and abandoning the property you leave behind. or whatever, that will be less regressive in general. It will hit lower-income households less hard, because Q316 Chair: It is always easy to find an extreme on average they use less energy. However, the cost of example that about 0.01% of the population might that is that the people with the worst problems—the encounter and say that that is a reason for not doing most fuel-poor—will be the worst hit. It seems to me something that is generally desirable. that that then makes the case for a dual strategy: yes, Professor Hills: Unfortunately, it is not 0.01% of the you probably would rather have more emphasis on the population who are living in extremely energy- per-unit side than on standing charges, for efficient properties at the moment. environmental reasons as well, but the corollary is that Dr Eyre: The broader point is that a rising block tariff you absolutely need to be taking action to help is essentially trying to use the price mechanism to eliminate the problems of people who have low dissuade people from using large amounts of energy, incomes and are living in G-rated or F-rated and they may be people who are more or less poor, as properties, because they will be hardest hit by that. John indicates. If you are going to charge people more The other side, which follows on exactly from what than the marginal cost for high uses, the real trick is Nick has been saying, is that it depends entirely on to use that revenue back in direct energy-efficiency how the revenue is used. It makes it very important programmes rather than simply relying on the price that a large slice of the action comes back to people mechanism. Marginal block tariffs will financially on low incomes, and it makes the case for a large achieve something, but it is much better to invest scale of the affordable warmth component, for making where you need the investment. sure that the CSCO part of the ECO is hitting the right people and that we are not in a position where people Q317 Dr Whitehead: One of the enduring issues of on low incomes are paying higher fuel bills in order the whole fuel poverty debate is that all the figures to subsidise the energy efficiency of people on high are based on extrapolation of the household condition incomes. survey, which I think covers about 8,000 homes. We have never known where anyone in fuel poverty Q314 Chair: Could we use rising block tariffs to actually is, yet we have a system of effectively address this problem? requiring energy companies to find out where people Dr Eyre: You could do, but that would mean are and then lavish devices on them to alleviate fuel regulating prices. That is the caveat that I always put poverty. As Citizens Advice pointed out to us recently, on that. Yes, if you are prepared to tear up the whole people may not be aware that energy companies are of the liberalised energy market, which I might be about to lavish goods on them. Indeed, last year, £50 cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG03 Source: /MILES/PKU/INPUT/030522/030522_030593_o003_odeth_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 57
9 May 2013 Professor John Hills, Dr Nick Eyre and Jan Rosenow million from Warm Front was unspent as a result. benefits are actually fuel-poor under the current Bearing in mind that that is what we are stuck with, definition, and only 19% of all pensioners. The what lessons might be learned for future policy from proxies we are using to identify fuel-poor households that record of identification and take-up concerning are not that precise. I think, however, that Affordable fuel poverty? Warmth is more targeted than previous schemes. I Professor Hills: Could I say two things on that? First, have seen some analysis from York university saying reiterating the distinction between how we measure as that about 37% of all the beneficiaries will be fuel- well as we can the scale of the problem at national poor households under the current definition, level, whether we are going in the right or wrong compared with about 20% to 25% under the CERT direction, and what we do on the ground, I think the priority order. trick is to take one’s best understanding of how you So it is an improvement, but we are still quite a long would measure the problem if you had perfect way off. The main reason for that, as John pointed information, and then translate that into relatively out, is that we are not looking at the energy efficiency simple-to-measure indicators on the ground that you of the property under the current indicators. We are know capture most of the problem, with the important focusing on income, benefits and age, but not the proviso that this is an area where we probably do not actual properties and their energy efficiency ratings. mind if we get it a bit wrong to start with. If you think about it and take seriously the carbon budget, climate Q320 Dr Whitehead: I am trying to get a better feel change and where the country must be by 2027 or for this. Is it effectively being suggested that that level whatever it is, we must go round most of the housing of inaccuracy is okay for future schemes, inasmuch as stock. That is one of the most important things we can that is about the best you can do? do to tackle climate change. Jan Rosenow: I don’t think it is. I think area-based In a sense, we are talking about the order we do it in. approaches achieve a higher targeting efficiency if If we do someone a bit early when we would have they are done properly, not just by focusing on had to do them later on, that’s not such a big problem. income. I think CESP was also based on income, If you are treating stock where someone has an looking at the bottom 10% of the income deciles. income that is a bit above the poverty line, incomes Again, that doesn’t achieve a very high targeting vary and people move between properties. We must efficiency. I think you have to design area-based work our way round the whole housing stock approaches in a way that captures low efficiency and eventually, so I would not be too nice about exactly low income. By that you achieve a very high how we set the objectives on the ground. We want targeting efficiency. things that by and large hit the right people in the right Dr Eyre: I think that is in the spirit of what John was order, but if we can find relatively simple proxies that saying about doing well rather than perfectly. Ideally, get us to the bulk of the problem, that is where we we would know the fuel poverty status of every should start. household and go through them in order, starting with the deepest, but in practice, we are not going to be in Q318 Dr Whitehead: But that is a bit of a “which is that position. Rather than looking for low-income, to be master” problem from “Alice in Wonderland”. high-cost households, looking for low-income, low- You may consider tackling all properties on the basis efficiency areas is probably a reasonable way to do it, that they should be energy-efficient and thereby scoop up people who are in fuel poverty and eradicate fuel and it has the outcomes you suggest. The targeting is poverty. Alternatively, you may target those in fuel not perfectly efficient, but it is better than a nationally poverty and incidentally make considerable strikes based approach. towards the energy efficiency of properties. Professor Hills: You do the best you can, but you Q321 Sir Robert Smith: If it is area-based, does it don’t get too hung up if somebody turns around also make roll-out and delivery more efficient? afterwards and says, “Well, that person wasn’t really Dr Eyre: Certainly, for some measures like external in fuel poverty,” because their income was £10 too wall insulation. If you could go up my street and do high or their property was not quite as bad as a block of 30 at a time, it would be more effective. It somebody else’s. We will need to get there eventually, also says something about the delivery agent. Large but yes, you do want to set a priority order, and you multinational energy suppliers actually don’t know want to look at anybody on a low income who is very much about the housing stock. That is one reason living in a property with an energy efficiency why they have struggled with parts of CERT, I think; certificate rating of E, F or G. Those properties need they don’t know much about their customer base in to be brought up to standard. You do not need to do a terms of its income characteristics, or about the lot of calculation to see whether somebody fits those housing stock in particular areas. That would indicate characteristics. that we should be looking to more trusted and more local organisations for delivery, whether that is local Q319 Dr Whitehead: But previous schemes missed authorities or the third sector. by 40% or 50%. There are many options open. I am not convinced that Jan Rosenow: Yes. If you look at the proxies that fuel poverty is best done through the big six energy have been used under CERT, they are mainly income companies, and I actually think the big six are not and age. The same will be the case under Affordable convinced it is best done through them either. There Warmth, like many income and means-tested benefits. is perhaps a degree of agreement that often does not Only about 30% of households on means-tested exist on these issues. cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG03 Source: /MILES/PKU/INPUT/030522/030522_030593_o003_odeth_Corrected Transcript.xml
Ev 58 Energy and Climate Change Committee: Evidence
9 May 2013 Professor John Hills, Dr Nick Eyre and Jan Rosenow
Q322 Dr Whitehead: SSE has suggested, for effectively, a market in all of this through ECO is that example, a central register or clearing house agency you get the most cost-effective delivery. So you do to match customers and presumably allocate them to want people to be catching the low-hanging fruit and energy companies in some way. Would that work to be doing this in the most cost-effective way. You better? Would that work? then get more done for the money that is being put on Dr Eyre: Well, if you’re going to do it through an people’s bills or, if it was tax-funded, from people’s energy company obligation, yes, you need some taxes—but in this case through their bills—but the mechanism like that. I guess I am saying that in the rules and the monitoring of those rules have to be set longer term, maybe an energy company obligation is up in a way that does not allow the energy companies, not the right way to address fuel poverty delivery. or the people who have the obligation on them, Professor Hills: In terms of delivery, I think there effectively to cheat by doing things that don’t really is an opportunity here, which I think some housing meet your objective. associations are taking up, but one of the great unsung I have, still sitting in a drawer, a whole load of light success stories of the recent period has been the huge bulbs that a former energy company sent to me—not improvement in the energy efficiency of the social even one I was still using—because it met one of their housing stock and the success of the decent homes obligations. That kind of extreme game playing has programme, under the last Government. But what that been ruled out, but it will be a continuing tension all means is that social landlords have actually got the way through—and this is maybe Jan’s area in experience of doing this stuff in their own property— particular: making sure that the rules that apply to the they need to do more; we need to push further on obligation are in line with, and can only be met by, that—and they also have local knowledge. Some of measures that really achieve your objective will be them are quite dispersed and quite large, but a lot of crucial. them do have local knowledge and, to some extent, are those trusted agents. It seems to me there is a big Q325 Dr Whitehead: But are we not back to the opportunity here for social landlords who have been “who is to be master” problem? Let us say you are doing this to become—whatever mechanism you have doing an area envelopment scheme and you are keen for financing—the intermediary that helps people do to get value out of that, obviously, in terms of all of this. I hope that is something the sector takes up. reducing the unit cost, and you might then deal with a lot of properties in an area. You might then, Q323 Dr Whitehead: Returning to Nick’s point depending on what part of ECO you are working with, about ECO and the way that might take up the torch, work with a housing association and go out into certainly there is a fair amount of evidence suggesting private properties in the area and get the whole that, as far as the individual approach is concerned, scheme working, at which point you have completely energy companies, in discharging their obligation, are not likely to go for people in fuel poverty living in gone off the question of the extent to which fuel poor solid wall homes and would perhaps prefer to do a households might in any way be identified. The DWP partial arrangement with a “better level” of customer, is increasingly sharing data, is it not, on identification? who would be partly taking the green deal up and Are there ways in which that DWP data sharing could partly doing ECO. be allied with those schemes to target better? If the Dr Eyre: Yes, I think it is important to distinguish— target were better, would that be at the cost of the ECO is essentially there to replace both Warm Front efficiency of the operation? in England and the CERT super-priority group Jan Rosenow: I think the response rate to the letter approach. It is actually two things. It is important to that the DWP sent out was very low. They sent a letter distinguish between the affordable warmth bit of ECO to all eligible households, but few of them responded and ECO in general. I am sure you are right. For to that. It is a problem of self-identification, I guess, ECO—the ECO carbon saving—the energy and people voluntarily saying, “I would be interested companies will be looking to factor in Green Deal in receiving measures.” There might be some data money or customers’ money generally. That is the issues with the DWP providing energy companies only way they are going to deliver that cost- with those data. That is why it sent out that letter, but effectively. Affordable Warmth, I suspect, will look the letter did not lead to the desired response rates. more like the CERT super-priority group approach. There is an issue about data protection and about getting uptake from eligible householders who are not Q324 Dr Whitehead: Yes, but that will be one way. responding to the offers. An energy company will go to a local authority and Professor Hills: We have two problems. One is that say, “Can you please discharge x percentage of our with the warm home discount there is matching of obligation by doing up all your system-built homes? data between the DWP and the energy companies. Thank you very much. We will then leave the area.” Some people get a reduction off their bill if they opt Dr Eyre: I think that is our best guess at the in. Obviously, a lot of people in that kind of situation moment, yes. do not take it up, so you miss some of the people who Professor Hills: Affordable Warmth itself I don’t you want. There is also a problem that not all of the think applies to social housing. Others will probably people on low income who you are worried about are know better than me on that. CSCO probably could receiving means-tested benefits. There is a group that cover it, but the Affordable Warmth part does not. you are worried about that the DWP does not even There is clearly a crucial issue in the administration know about. The people you are most worried about of all of this, which is that the potential of there being, are those who are entitled to means-tested benefits of cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG03 Source: /MILES/PKU/INPUT/030522/030522_030593_o003_odeth_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 59
9 May 2013 Professor John Hills, Dr Nick Eyre and Jan Rosenow one kind or another and do not claim them, because entitlement and an area-based approach is probably they are the ones left furthest below the poverty line. the right way forward. That is essentially what is Again, you would not want to have a system where being proposed in ECO, and when we see the final you counted it as a failure that you had not reached evaluation of CESP we may know a bit more about some households who had low incomes—you do not the relative strengths and weaknesses. I do not have a have a good way of measuring that—but were not problem with ECO having its different elements; the claiming benefits, because it is another of these areas biggest problem is that it is not big enough. where your targeting is inevitably fuzzy. It is never going to be completely precise. You can monitor on a Q328 Albert Owen (Ynys Môn) (Lab): But you did national scale how well you are doing, but unless we touch on this earlier: will it be a problem that there is have vast amounts of data sharing and households less funding available for schemes per se? reporting more of their circumstances to authorities Dr Eyre: Yes. than they do at the moment, we will never have Professor Hills: I would agree that you are trying to anything that is perfect. The idea that what you want achieve different things, and you therefore probably is something that is good, rather than perfect, is need all three elements. I would not put all my important. resources into community-based schemes. Our Jan Rosenow: May I add to that? The question you analysis based on the measurement framework I raised is very important: how much of the ECO suggested did not show such a high hit rate on fuel funding will go to fuel-poor households, especially poverty, if you target it by area of deprivation, for with the carbon saving obligation, although not so example. You have to have some other way of much with the Affordable Warmth scheme? The targeting, such as when a property was built and what impact assessment that DECC put out last year sort of property it is, otherwise you might be doing a suggested that most of the activities would focus on lot of good, but your hit rate of fuel-poor households the larger properties—wealthier households—and will not be so large. Unfortunately, the problem is there is a big question mark over whether the private- quite scattered, so some people will always be outside rented sector will benefit. Under CERT, I think 5% of any of the areas that you identify, which is why it is all the households that received benefits were right to have both kinds of targeting. privately rented, but nationally 13% to 14% of You want to remember that there is another households are privately rented. It was the same with objective—carbon saving in general. If the carbon CESP. There is a question mark as to how this saving part of ECO achieves that, well and good. The important sector for fuel poverty will benefit from royal household has very leaky palaces and we should the obligation. be doing something that anyway, but it is just a different problem from fuel poverty. The issue is the Q326 Albert Owen: You have touched on many of balance between three different parts of ECO, and I the points I was going to raise, but I wanted to recap think you have to look at the evidence of how well on ECO. There will be less funding for ECO than you can use either an area approach as your proxy for for the previous Warm Front scheme. How can we getting to the people you are trying to get to, and maximise that ECO? Are you suggesting that we probably at lower cost because you can envelope move away from targeting individual households and things, or— go to community-based schemes? Is that the general view of the three of you? Q329 Albert Owen: You indicated earlier that you Jan Rosenow: It is certainly my view that that would felt that local authorities were better placed to deliver be a more cost-effective approach. There would be a it. Yes? higher targeting efficiency by doing that. How exactly Professor Hills: They are not the only people, but you design the scheme is complex. One would want to many social landlords have experience of doing that, look into it. In general that would be a better approach and they have knowledge of the areas they operate in compared with what we are doing now. and are more trusted agents than some of the alternatives. As part of the delivery pattern, I hope Q327 Albert Owen: It would be less hit and miss in they will play a big role. terms of individual households and the data available. Is that what you are suggesting? Q330 Albert Owen: A large number of people, as Jan Rosenow: Yes, I think looking at the individual you indicated, are off the gas grid. They may have the household is a strategy that proved quite difficult most energy-efficient houses in the country, yet they under the super-priority group in CERT. Suppliers have to pay a lot of money for LPG or oil to cook and found it quite difficult to identify households. Also, to heat their properties. How do we deal with them? the targeting efficiency of doing that was quite low. Would it be better to spend money in those areas on We have seen that 30% of SPG customers, or maybe ground source heating and the extension of gas mains, a bit more, were in fuel poverty, so an area-based so that they have a more level playing field for their approach might be more desirable to increase the fuel prices? targeting efficiency and to make delivery more cost Professor Hills: You have to look at the value for effective. money of any intervention. I have not done enough Dr Eyre: I broadly agree with that. It is important to detailed work on that. bear in mind that there will be households with a big fuel poverty gap who are not in the areas that would Q331 Albert Owen: But there will some very be targeted, so keeping a balance between individual energy-efficient households that are— cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG03 Source: /MILES/PKU/INPUT/030522/030522_030593_o003_odeth_Corrected Transcript.xml
Ev 60 Energy and Climate Change Committee: Evidence
9 May 2013 Professor John Hills, Dr Nick Eyre and Jan Rosenow
Professor Hills: If they are in very energy-efficient Jan Rosenow: That is one option. Warm Front houses, the problem may not be large, even if they are became more targeted in the later stages. They off the gas grid. The ones I am really worried about introduced a SAP rating as one of the requirements are those in leaky old properties that are off the gas in April 2011, if I remember correctly. The targeting grid. There will be cases where different kinds of efficiency for the proportion of fuel-poor households investment will be more valuable, but that will be on that received benefits from Warm Front was high—it not a case-by-case basis but a type-by-type basis. was more than 70%, if we believe the models. So yes, in theory, that would be one of the approaches that Q332 Albert Owen: Do you think there should be a could deliver more on fuel poverty, but based on the special taskforce for rural fuel poverty? proposition that you actually have Exchequer funding Professor Hills: It’s an interesting idea. for that programme. Albert Owen: I think you will find that the evidence Dr Eyre: I think there is a case for looking, as Jan is there to show that most fuel poverty is in peripheral said, at the ETS revenues in particular. We all know and rural areas. it would be heresy with HM Treasury, because it Professor Hills: I’m not sure that is quite true. I counts as hypothecation, but actually these revenues haven’t revised the numbers in the last few days, but have been raised in a particularly regressive way on I think you will find that the problem is spread people’s energy bills and there does seem at least between rural and urban areas. What is important is some intuitive logic in applying them back to that it is different in different places, so in some areas addressing fuel poverty issues. it is about being off the gas grid and having very high Sir Robert Smith: I suppose the problem is they are costs, but there is also a very large urban problem. probably being spent at the moment. Some people living in tower blocks are not on the gas Dr Eyre: We all know there are problems with the grid because of restrictions on gas supply. public finances, yes.
Q333 Albert Owen: But many have the choice of Q337 Sir Robert Smith: Just one thing. It is fairly switching to dual fuel, which those in rural and obvious to those involved directly, but for those peripheral areas do not have. outside, a measure designed to reduce carbon Professor Hills: Some do and some don’t. The people emissions is probably not so effective in a fuel-poor we are most worried about are people who do not household, because the fuel-poor household, by have the resources to make the capital investments definition, is living in a cold environment. If you make that can deal with these problems. That is one reason the house more energy-efficient, they will use what why fuel poverty is a particular problem. Those of us money they have to continue to buy their heating to who are in a less energy-efficient property than it make better use of it. So you don’t reduce carbon, but might be can afford to make investments that pay for you improve their health and lifestyle. themselves—the green deal, and so on, is supposed to Dr Eyre: You do not reduce carbon as much in the help us do that—but giving somebody a low-interest short term. In the long term, I would hope that loan, or a 6.9% interest loan, to deal with a problem everybody would live in a decently heated house and, when they do not have the money to pay the loan at therefore, in the long term it saves just as much carbon all does not help. That is one of the reasons why fuel as doing the house that is properly heated now. poverty is a particular problem. Professor Hills: I would add that if we do not take action about people with low incomes living in energy Q334 Albert Owen: That is important. Regarding the efficient homes, we will then get a huge barrier to funding being decreased, through ECO, to previous any measures that use the price mechanism to try to schemes, you are indicating that the green deal is not encourage better use of carbon. You have always got the panacea to help with that. What else can we do? this group of people who are, as it were, in the front What other funding streams and extra money can be line and will be the people who suffer most from used to help these people? higher prices. So if you think that having a carbon Jan Rosenow: One of the proposals that have been price, or things that proxy for a carbon price, is part put forward—I am sure you are aware of it—is an of how we meet carbon objectives in the long run, energy bill revolution, recycling some of the EU ETS you have to deal with the problem of people with low revenues and directing them into energy efficiency incomes who are then hit by that. programmes. Broadly, that is an interesting idea that One of the biggest things that we can effectively do one should look at. But there are, generally, three something about is energy efficiency, both in delivery funding streams that are available. One is Exchequer of people’s energy and the energy efficiency and funding; one is looking at— insulation of their home. Those two things go together. I do not think that fuel poverty is a separate Q335 Albert Owen: Sorry, but how would that work problem from dealing with carbon. Dealing with fuel in practice? It is all right having these headlines, but poverty is a necessary part of also being able to do what can the Exchequer do that will help fuel things about carbon. poverty tomorrow? Jan Rosenow: Warm Front is a prime example. Q338 Sir Robert Smith: Just one other thing that came up. You mentioned people who do not claim Q336 Albert Owen: So it was wrong to abandon benefits. In effect, one of the quickest wins in trying Warm Front. More money should have been put into to get people closer to being out of fuel poverty is to it and it should have been more targeted. have benefit take-up campaigns and to make sure that cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG03 Source: /MILES/PKU/INPUT/030522/030522_030593_o003_odeth_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 61
9 May 2013 Professor John Hills, Dr Nick Eyre and Jan Rosenow those who are entitled to them are actually getting Q340 Dr Whitehead: Yes. The general wisdom, the benefits. particularly in thoughts from energy companies, is Professor Hills: Absolutely, and more generally, that bearing in mind that that £1.3 billion is explicitly things that reduce the level of poverty will reduce the not capped in the levy control framework, costs could level of fuel poverty, so there is a whole series of spiral up to more than £2 billion, perhaps £2.3 billion, measures. One of the suggestions that comes through in order to discharge obligations fully. the framework that I put forward is that we have Jan Rosenow: Yes. traditionally thought of fuel poverty as being a Dr Whitehead: Is that your view? That surely would problem of the elderly; but when you look at it in represent a very serious impact, for example on the detail you see there are also quite a lot of working- extent to which that cost gets carried over to bills. age families with children who are facing very high Dr Eyre: I think it is difficult to tell. I am wary of costs compared with their income, and compared with taking energy company judgment on this. They have the costs that other families face. If those families a long history of telling us that obligations would cost were out of poverty, the problem would be smaller. more than the Government said, and then For each individual pound tackling this particular miraculously delivering them for less than the problem, energy efficiency is your best buy, but Government said. But I also think we need to be anything you do in general to reduce poverty and the careful that they may not simply be crying wolf— extent of low incomes—getting people into work, or the nature of ECO, with new and relatively expensive whatever—will also help. measures, is that actually nobody is very sure how Jan Rosenow: These tensions, I think, go back quite much it will cost to deliver them. So there is a risk a long way, back to 1994, when the first obligation that the costs will be substantially higher than £1.3 was introduced. People were discussing exactly that: billion, yes, but I don’t think you will find anybody if we just have a market-based instrument that focuses who knows the answer to that question. on carbon and low cost, what will happen to low- income households? That is why Ofgem—at the time, Q341 Dr Whitehead: Will the competition between it was Offer—put in provisions for targeting energy companies help to keep that cost down, with vulnerable customers. Those tensions will never go competing companies knocking on the doors of local away with an instrument that is market-driven and at authorities, saying “I can do all your system-build the same time raises revenues via prices. There are houses at half the cost of the other guys”? certain tensions built into that instrument that you will Jan Rosenow: Of course it will. I think it always has always have to deal with. had that effect. That is one of the benefits of having a I think what is interesting is that for the first time we system with competition; energy suppliers will offer are actually using the obligation as a deliberate fuel different prices for different measures and different poverty policy, whereas with CERT, EEC and EESoP, contributions, so I think that it will help. However, I as they were called previously, they always said, “We agree with Nick that there are huge uncertainties. have these provisions in there as social equity DECC itself pointed out that there are uncertainties, provisions, not necessarily in order to target fuel ranging from £0.5 billion up to £3 billion per year— poverty.” Back in those days the Government were that was in the same impact assessment. I could not quite explicit that this was not a fuel poverty policy, say where in that range the real figure lies—nobody whereas now they say exactly the opposite: it is a fuel can—but there are uncertainties attached to this. I also poverty policy—and it is probably the most significant agree with Nick that we have seen that previous one after we terminated Warm Front in this country. obligations have been delivered much more cheaply So I think it is quite an interesting transition that we than the Government thought. I think they were about have seen, from a carbon market-based mechanism to 20% cheaper than was initially modelled. The honest a fuel poverty policy. answer is that we do not know exactly how much it will cost, but there are risks. Q339 Dr Whitehead: Where do you think the £1.3 billion that is being regarded as the amount that they Q342 Dr Whitehead: The Committee on Climate will come to each year came from? Change has suggested that one way forward might be Jan Rosenow: Do you mean, where did that figure to put a cap on individual treatments, so you would come from? say, for example, “You cannot treat a solid-walled Dr Whitehead: Yes. property at greater than x cost.” Would that be self- Jan Rosenow: That is the figure that I have seen in defeating, or would it be a way of maintaining costs? the impact assessment that DECC produced, which I have to say, first, that I am a little alarmed that is based—like previous obligations—on a list of the nobody knows what the real cost is going to be; various measures that are likely to be taken up, and secondly, the £1.3 billion figure appears essentially to then the cost per measure. be made up. Thirdly, what we do know is that since it Dr Whitehead: I appreciate that it was in the impact is an obligation, it will go on bills and will then be assessment, but where did it actually come from? capped one way or another if the alarming truth comes Jan Rosenow: I think this has been modelled within out that we really do not know how much this is going DECC, using various models, and they make to cost over a period of time. Are there ways in which assumptions—how many solid walls will we insulate? that might be done less, rather than more painfully? Is What is the cost per solid wall insulation? That is how the Committee on Climate Change on to something they have come up with that figure. that might work? cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG03 Source: /MILES/PKU/INPUT/030522/030522_030593_o003_odeth_Corrected Transcript.xml
Ev 62 Energy and Climate Change Committee: Evidence
9 May 2013 Professor John Hills, Dr Nick Eyre and Jan Rosenow
Dr Eyre: I think you would have to be quite careful Professor Hills: I think there is an issue of timing. about that, because the way you would expect costs My report was completed in spring last year; I think to work for newer measures, such as solid wall that most of the work on the ECO had been done by insulation, is that the costs would come down as the then. I very much hope that the Department has been experience of delivering them goes up. You would paying attention to the analysis that we did in the expect the cost to be lower at the end of the obligation report and that, as ECO evolves, they will be able to than at the beginning. So, if you capped at quite a low use the kind of framework that I put forward to help level, you risk nothing happening. You would then them design it. Given that I hadn’t written the report have to ask whether it is a quantity obligation or a before the Department was doing the ECO and that price obligation. I do not think you can do both very they didn’t tell me what to write, it would have been easily. My worry would be that you would be telling quite hard for them to have taken account of it; but I people that they have to do something, but that they hope they are now doing so. cannot do it at the cost for which it is available in the market. Q344 Dr Whitehead: Do you think they should do Professor Hills: You would also have to be a little that in any specific ways? I guess this is a question of careful about whether that would then become the redesign rather than design. norm. You put a cap on, at £10,000 or £8,000 or Professor Hills: Of ECO? whatever—I don’t know what figure you or they are Dr Whitehead: For example, in terms of the in-depth thinking of—and that becomes the standard. fuel poverty cohort. Dr Whitehead: It becomes a tariff. Professor Hills: Whatever action is taken, through Professor Hills: Yes, and that could be very whatever form, I hope that what I think is an insight inefficient; but I don’t know. in trying to identify people who have got the worst Dr Eyre: You would have to differentiate between problems, and trying to think through how you different types of property and different types of actually find them on the ground, could be helpful to insulation. I am not saying it’s not possible, but it them. I hope that, in the last year, since I did all of would be a little more complex than saying, “It’s this, that people who do that kind of analysis have £5,000. That’s the answer.” been pushing it further and that their work on the Jan Rosenow: To some extent it will be driven by the promised fuel poverty strategy will be informed by golden rule of the green deal. You have cross-funding that and will be better informed than my report was. whereby part of the solid wall insulation is basically So I hope that what we have given DECC—not just funded by the green deal, so the contribution the DECC, but other parts of Government as well—is a energy suppliers make will be determined by how tool that they can use to get on with it and deal with much of the cost is funded by the green deal in that this really pressing national problem. instance. To some extent, it is not a cap on the total Chair: Thank you very much indeed for that cost, but the contribution will be determined by the interesting and useful session. golden rule, which has been built into the green deal—if that makes sense.
Q343 Dr Whitehead: Professor Hills, do you think the Department looked at your report at all when designing the ECO? If not, should it have?
Examination of Witness
Witness: Gervase MacGregor, Head of Advisory Services, BDO LLP, gave evidence.
Q345 Chair: Good morning. Thank you for coming Gervase MacGregor: Obviously, I am an accountant along and helping us address some of the more and accountants love figures and data, and if we are complex issues that this inquiry is covering. trying to make some sort of comparison between one Could I start generally? The background, in looking company and another, one wants that data to have a at the accounts, is a level of public distrust now of level of consistency across the companies you are energy companies, some of which is possibly trying to compare. The other thing is that you cannot justified—they have sometimes contributed to it by fix something like this in one year—one set of things they have done—and some of it may just be financial statements or one set of CSSs—you have to look at it over a period of time. based on people’s difficulty in understanding the The recommendations that I put to Ofgem in view, information that is available. Were there particular had they been implemented, over a period of time recommendations in the BDO review that you think would have led certainly to more transparency over would have addressed that issue of distrust and would the performance of the six companies. Of course, have genuinely improved the transparency of more transparency and more data—first, making accounts? comparisons and, secondly, looking at how things Gervase MacGregor: Yes, but with time. Shall I give changed over time—may well have led to more some context as to our approach to this? questions. I think that is probably inevitable. But over, Chair: By all means, yes. say, probably a three-year period at the very least, you cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG03 Source: /MILES/PKU/INPUT/030522/030522_030593_o003_odeth_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 63
9 May 2013 Gervase MacGregor would have got more information out of it, and Q349 Chair: Ofgem suggested some time ago that possibly—probably—a greater understanding of “retail prices do not always track wholesale costs people who read these things and what is going on. closely, partly because retail margins act as an internal hedge for generation profits.” You could argue, Q346 Chair: Who do you think does read these therefore, that both generation and supply are part of things? the same overall market strategy, and should be Gervase MacGregor: Analysts, I am sure; people like considered together when you are evaluating whether yourselves; probably, people like the gentlemen who the big six prices are fair and justified. have been speaking before. I appreciate that there is Gervase MacGregor: One could look at that, but then an interest in the financial performance of the energy you would have to put trading in the middle. You left companies, and that people trying to understand that out trading, there. Trading, to the extent that it is not will reach a brick wall when it comes to trying to included within the financial statements of companies interpret what, these days, are relatively complex operating in this country, is quite an important part of documents—financial statements. They become even their overall business model. more complex when you have businesses which are undertaking a number of different activities: Q350 Albert Owen: You mentioned your review and generation, trading and supply. Ofgem’s response to it, and you identified eight recommendations. After consultation, Ofgem Q347 Chair: Ideally, we would like a world in which effectively decided not to take them forward in the these sorts of statements are accessible for consumers original form. Why do you think the BDO to understand as well. I am sure the average electricity recommendations were not taken up? or gas consumer does not plough their way through Gervase MacGregor: I am going to start by saying the various notes to the accounts of the big six that you will have to ask the individuals at Ofgem why that was the case. My view, based on our companies. Is there a way in which these statements discussions with Ofgem, is that there was a concern can be made more accessible and understandable to about the ability of the companies concerned to adjust consumers, rather than their having to go through to some of these changes, and perhaps a concern about some intermediary such as the Daily Mail? the costs that would be incurred. I have a particular Gervase MacGregor: At the moment it is very view about that, but I think that was probably driving difficult. I think, as far as any set of accounts is some of the thought there. I have some sympathy with concerned, this is a debate about education and the that, but not a lot. I saw in one of the companies’ extent to which individuals in this country get letters in response to the consultation that they properly educated in respect of financial matters. welcomed the fact that there was not going to be an Unless you can understand the most basic set of independent auditor crawling all over this, because accounts it is quite difficult to understand a set of they didn’t see why they should pass on the cost of sophisticated accounts, which means that you are the audit to the customer. That seemed to be a strange reliant on an intermediary. I don’t know about the way of looking at a way of dealing with something Daily Mail—well, it probably is the Daily Mail and like this. I doubt that is the case at all, actually. some of the other newspapers that look at these things on an informed basis. Q351 Albert Owen: So you think it is to do with the Chair: I’m one of the few members of the Committee costs? Could you explain to the Committee what the who started life as an investment analyst, and even I costs and benefits of your recommendations are? find the accounts quite difficult sometimes to Gervase MacGregor: In respect of each of the eight penetrate. recommendations, I went through and identified what Gervase MacGregor: It hasn’t got any easier. A lot I thought—I wrote the recommendation relatively more information is provided these days in respect of clearly, and then went through them saying what the business in their financial statements. It hasn’t got a benefits are. They are principally what I have talked lot easier to understand what’s going on. about before: transparency, consistency and comparability—to give a better insight into what is Q348 Chair: Is there any way that we can make the going on as far as these businesses are concerned. bills for domestic and non-domestic consumers a little On costs, the first recommendation, which seemed more instructive and informative about the profits of relatively sensible, was about each company having a the companies? coterminous year-end, or at least producing their CSSs Gervase MacGregor: That is an interesting question. on a coterminous basis because the business is A lot of people read their bills with horror, rather than seasonal. If you have one—you used to have two— anything else, these days. Putting more financial with a March year-end and the other four with a information on those things would probably scare December year-end, it makes comparison a little people off. I have read some of the evidence that some difficult. You only have one now, and moving SSE to of the big six gave on the transparency of bills and a December year-end will have a one-off year cost. the various regulations that they try to meet when they That is how I identified the benefit. The benefit there put information in there. If you want something that is greater comparability between companies, and the fixes it for everybody, it is just not there. I’m afraid cost is the cost that one of them has in producing 12- you have to do a bit of work to understand what’s month information to December or changing its going on in these things. accounting reference date. cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG03 Source: /MILES/PKU/INPUT/030522/030522_030593_o003_odeth_Corrected Transcript.xml
Ev 64 Energy and Climate Change Committee: Evidence
9 May 2013 Gervase MacGregor
Q352 Albert Owen: In pounds, how much would it Gervase MacGregor: Correct. have cost the big six to follow your Chair: Ofgem did not require that. They have this recommendations? checklist. Do you think that their checklist is Gervase MacGregor: I don’t know; I didn’t cost that. satisfactory? I don’t know, for example, how much it would cost Gervase MacGregor: No, not at all. My SSE to go from a March year-end to a December year- recommendation was including the trading in the end. It would have to accelerate one year’s audit and segmental accounts, not a checklist. The checklist is financial preparation. Scottish changed its year-end possibly open to interpretation. I don’t know the value not long ago from March to December, and you could of it. Including the trading gives you a much better probably find out from it how much it cost. I doubt idea of the total picture of the financial performance that it cost a lot given the overall size of such of the companies, if that is what you are trying to get businesses. to. The review was—my instruction was—to look at improving the way these CSSs are prepared. Quite Q353 Sir Robert Smith: One of your frankly, I would much prefer to see numbers, rather recommendations was an independent audit of than a checklist with some ticks on it. statements, and Ofgem came up with the idea of independent opinions. What is the difference between Q357 Chair: Why would the companies resist this? auditing and an independent opinion? Why wouldn’t they do it voluntarily? Gervase MacGregor: What it got is a review. That is Gervase MacGregor: Companies don’t necessarily do what it ended up with. The Ofgem recommendation things voluntarily if it requires more work or if it said: “We propose obtaining an independent means putting out information into the market. Why opinion…but not necessarily from an auditor”. It has would a company do something if it doesn’t need to ended up with a review. An audit will look at the do it? information in the CSSs and how that relates back to Chair: I was trying to work it out—okay, on the cost the underlying financial information. It will give some factor, you might not think it was an enormous cost level of assurance—that is the point of audit—that to separate that out. that segmental information has been correctly prepared and stated. The review does not do anything Gervase MacGregor: I very much doubt that the cost like that. As I understand it, it is a desktop review of producing trading information is that great. with no enquiries made of the companies or their Chair: Exactly. auditors. In some respects, it is the sort of thing that Gervase MacGregor: Just think about it. One any of us who are suitably qualified could do. What independent trading entity had, I think, turnover in € you get is not an assurance certificate from the 2011 of 175 billion. That seems to me to be an awful accountant doing the work but, in technical terms, an lot of trading and a lot of positions being taken during agreed-upon procedures report with a series of tests to the year. I would be astonished if those companies did make sure things add up and that there is a not have pretty granular information about those reconciliation, and reciting that that is what has been trades during the year, and if they did not, I think we done. It does not give an assurance. should all be a bit worried.
Q354 Sir Robert Smith: How often would you have Q358 Chair: So we can eliminate cost as being a had the audit done? genuine reason for not doing this. It seems to me that Gervase MacGregor: Once a year, at the same time their reluctance to do so voluntarily is only going to as the CSSs came out. reinforce the suspicion that this is an activity which can be used to confuse the whole picture—to obscure Q355 Sir Robert Smith: So it’s all about giving the what is really going on. wider consumer market confidence in the information. Gervase MacGregor: I can certainly see why people Gervase MacGregor: Yes, it is. If you look at the would take that view; it is a natural suspicion. I have work that was done by the independent accountant, it to say that when I spoke to them—I spoke to a number identified issues around—I am sorry to be technical of the finance directors of these companies in a again—differences in GAAP between groups of relatively informal way, as part of the review but just companies that are essentially non-UK and those that to try to get their views on things—I came away with are essentially UK-based. There were issues in trying a sense of their willingness and desire to improve their to do those reconciliations. There was no overall view transparency and to engage properly on these things, of the six as a whole to try to work out whether there but not really knowing how to do it. You cannot was any comparability. Essentially, you continue to expect just one of them to do it. It probably requires have six CSSs which you can only really read on a a direction that all of them have to do it, otherwise stand-alone basis, and six separate reports by the any single one is not going to take that decision. independent accountant on those six CSSs. Q359 Chair: Yes. But taking EDF as an example: Q356 Chair: On trading, which a lot of people are they have EDF Trading—a subsidiary of the French suspicious about as a way of—well, it reduces parent company—which made £513 million in 2011. transparency and gives companies some flexibility I am not sure it is the same year, but there was a big about where they move their profits to, and so on. inter-company loan. The opportunity to move profits Your recommendation was that trading activity should around, if you’ve got a trading company, is be included in the segmental accounts. considerable, is it not? cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG03 Source: /MILES/PKU/INPUT/030522/030522_030593_o003_odeth_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 65
9 May 2013 Gervase MacGregor
Gervase MacGregor: Just a couple of things. As far the Competition Commission—to disclose their future as that inter-company loan is concerned, all the strategy regarding the market. I am sure that any one information which I have been looking at is on a pre- of them would like to know what the others, in interest basis: EBIT—earnings before interest and particular one of them, is doing as far as its future tax—and EBITDA, which is earnings before interest, purchases are concerned. That would be tax, depreciation and amortisation. So really, the CSSs uncompetitive, so I am not in any way do not go down to that interest level; that is the first recommending it. thing. Chair: I don’t think anyone who reflects on it would The second thing is that, if there is a loan from the suggest that; but that objection, of course, does not holding company, under the normal rules you cannot apply to historical activities. be taking penal rates of interest out of one company— Gervase MacGregor: No. one jurisdiction—and sticking them into another company, because the Revenue services are going to Q363 Dr Whitehead: In the report you not only challenge that. I have no doubt about that. Yes, in mentioned concerns about transfer pricing but trading and the transfer pricing aspects of trading, as suggested that further work should be done on that. between generation and supply, of course there is an What sort of further work did you have in mind, and opportunity for profits to be moved around, within what particular concerns motivated your certain parameters. There is no doubt about it. recommendation? Gervase MacGregor: I am going to come back to the Q360 Chair: It seems to me that if Ofgem had trading point on this, and explain why. My concern is accepted your recommendation on this particular not about transfer pricing as a way of shifting profits matter, that would have been at least a step in the between taxing jurisdictions, because actually, when direction of greater transparency and improving the you look at the ownership of these groups—UK, trust which is, at the moment, conspicuously absent. Germany, France—if you are worried about transfer Gervase MacGregor: That’s why I recommended it. pricing as far as moving profits away from higher- It was all about improving the quality of those CSSs tax jurisdictions is concerned, they wouldn’t do that, and the reporting, and that is why I recommended that because the higher-tax jurisdictions are France and trading be put in. Germany. My concern is not about tax revenues being shifted around to minimise tax; my concern is much Q361 Chair: Is the trading done like an investment more about trying to understand the agreements which bank just trying to make money on the market, or is have been entered into with trading, and trying to it done as a genuine hedge to reduce the risks that work out, particularly where you have brokerage these businesses are facing? arrangements, whether the price being charged in the Gervase MacGregor: I think it’s quite complicated, centre by the trader is a fair reflection of the risks actually, what you are doing. On one side, you have a being borne by that trader, as opposed to the risks generation business; on the other, you have a retail which go with the generation and retail sides of the business. My understanding, from going through how business. the trading is undertaken by each of the companies, is this. Q364 Dr Whitehead: So the fair apportionment of First of all, on the amount of speculative trading— risk down the line where a company is essentially that is, taking vast positions simply by betting that the trading with itself? gas price will go up or down, depending perhaps on Gervase MacGregor: That is absolutely right; so, if the weather—for all intents and purposes we can put you think about it, the least risky part of the business that to one side, because not much of it goes on. But shouldn’t be paying a risk premium at all in respect of we are not talking about that. What we are talking any transaction; they should be receiving something, about is the companies themselves trying to work out whereas it is the other way round for the most risky what the future is going to look like as far as demand part of the business. It was really about trying to go is concerned and then coming up with pricing much more in depth—and I didn’t get into this at all— modelling to manage that risk over the period of time. to get into some sort of detail as to how that was That is what they are doing as far as the trading is working in respect of the companies and their trading, concerned. They are basically trying to work out what what benchmarking they were using, and whether the future demand is and keep their costs of purchase to apportionment of risk was fair. a minimum, because of course the closer you get to needing power, if you do not have a contract which Q365 Dr Whitehead: The relationship between will give you that power, the more money it will hedging strategies, buying long in the market and cost you. churning trading over on a number of occasions— coming up to the day-ahead market, for example— Q362 Chair: In terms of their reluctance to make appears, certainly to the outside observer, to give a these disclosures, if they are all required to do it, number of opportunities, shall we say, to transfer price there’s no commercial reason why they shouldn’t and risk, particularly the three or four churns in disclose the possibility of trading activity separately, trading that may take place between the long position is there? and the— Gervase MacGregor: No, not at all. The problem Gervase MacGregor: That is precisely my point—to would be if they were required—if I recommended try to understand the transfer pricing arrangements, to something like this, I think I would get in trouble with see exactly what is going on, to see whether there is cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG03 Source: /MILES/PKU/INPUT/030522/030522_030593_o003_odeth_Corrected Transcript.xml
Ev 66 Energy and Climate Change Committee: Evidence
9 May 2013 Gervase MacGregor a fair apportionment of risk. Now, as far as that as others have small amounts of power and just as you trading over two to three— have the ability for small generators of power to come into the market and provide it when it is necessary. Q366 Dr Whitehead: It is not just about risk, though, is it? It is about the question of the extent to Q369 Dr Whitehead: But in this market you do not which, as it were, you are buying ahead because of have smaller and larger players. You have very, very your dominant position in the market. You can then large players and very, very small players. The retrade as you get closer and closer to day-ahead, concern that I was raising was that the very, very possibly on a transfer basis or conceivably to your small players would have to undertake an entire own or the collective advantage. market operation—the whole lot—were they to trade Gervase MacGregor: Yes, there are two very good entirely independently. Actually, they come in under points there. First of all, there is nothing suspicious the wing, as it were, and track the large company’s about trading and hedging itself, and thinking into the trades, a little like the Costa Rican economy running future. It is a perfectly rational business activity, on the dollar. In fact, that company is effectively especially for these businesses. It is completely trading for them and then giving them the benefit of seasonal—the sun’s out, the sun goes in, that sort of that for their subsequent operations. That seems on thing—and allows them to try to work out what the one hand to be of benefit to that very small player, demand is. Of course, your view of demand is going but on the other hand it is further consolidation of the to change over a two to three-year period. The great way the market works. thing about being able to forward-buy and forward- Gervase MacGregor: It is not something that I know sell is that you can change your mind as many times about in detail, but it may well be that small players as you want up until the point when you actually have coming in and doing that essentially means nothing to buy something and deliver something. I don’t more than that they are acting almost as agents of necessarily have a problem with a company wanting the big players. Therefore, as you say, there is big to change its forward-buying on a regular basis if it consolidation. Why are the large companies doing this just starts reading the market differently, which of for the small companies? There will be some course it is bound to do. rationalist, capitalist reason, even if it is just On your other point, about the dominant position, that responding to regulatory and media pressure. is a big competition issue, really, isn’t it? I have to say that you have got one very big buyer and retailer Q370 Sir Robert Smith: You identify that the EU of gas. I am sure that everybody else would like to emissions trading scheme allowances were treated work out what it is going to be doing as far as the differently in the different segmental accounts. What market is concerned, because by definition if you are does that do to the overall presentation, and do you that big a player in gas of course you are going to have any thoughts on why it has come about? have some effect on future prices. It must be the case. Gervase MacGregor: They just treat things differently. One of my recommendations—again, I Q367 Dr Whitehead: So the big six, collectively, take you to my overall contextual point at the make the market as well as deal with the market, as beginning—was that if you are going to do things and it were. look at comparability, you need the information Gervase MacGregor: They do, but they don’t act, compared on a consistent basis. The carbon credits really, as a coherent group. I think what is probably and things like that are just one of a number of areas happening is that each of them is trying to guess what where I was recommending that you need to start from the others are doing and five of them are trying to the same base point. You need to have a consistent guess what Centrica is doing, just because of its approach to exceptional items, for example. You need market position. to reconcile back to the same starting points—EBIT or EBITDA. Otherwise, as I said before, you end up Q368 Dr Whitehead: You also have the with six statements that mean something on their own development within some companies that are but do not really mean anything as a group. effectively offering their service as a wing under which smaller companies can shelter. The small Q371 Sir Robert Smith: So would you treat them in company effectively takes on the trading the same way as trading. arrangements of the larger company, perhaps from an Gervase MacGregor: Yes. I would treat them so there efficiency point of view buying into its services so was consistency across the piece and so that when one that it doesn’t have to do it. Is that something that has looked at the CSSs, one could see how, on a company an effect on that market dominance, or is it a wholly by company basis, one could make a valid rational device from which everyone benefits? comparison. Gervase MacGregor: It is not something I have looked at, but from that description, and from some Q372 Chair: In the review that Ofgem did of the of the transcripts I have read of previous sessions, I 2010 segmental accounts statements, it noted that four would say that you have a market, which is made up of the big six had made significant accounting some very big players and some big players. It then adjustments—in one case, £340 million—which had gets down to smaller and smaller parts of the market. the effect of reducing the stated profits. Do you think In a market, you like to have smaller and larger that there should be a good method of presenting players, so that the market works properly and you exceptional items, so that they cannot apparently be have an ability for somebody to take on power, just used to reduce profitability? cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG03 Source: /MILES/PKU/INPUT/030522/030522_030593_o003_odeth_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 67
9 May 2013 Gervase MacGregor
Gervase MacGregor: It is one of the things that not have been, you need to be able to adjust for those Ofgem did take up in terms of getting a consistent things across the companies to aid comparability. approach as far as exceptional items are concerned. As far as reducing exceptional items is concerned, you Q374 Chair: An accounting adjustment is effectively are going to have, company by company, events that a paper transaction, or a paper calculation by the give rise to these sorts of things. They are not company. It does not necessarily have any bearing on necessarily bad things. If you have a massive how much cash the business has generated from one impairment charge because something has happened, activity or another. of itself that as an exceptional item is not a bad thing, Gervase MacGregor: Well, it might do. Your big but you do need the ability to strip it out of the impairment charges obviously do not have any cash ongoing activities so you can understand what the effect at all. If you are going through some sort of underlying financial performance has been. reorganisation and you are paying out genuine money to restructure something then that may well have—it Q373 Chair: The existence of exceptional items does probably will have—a cash impact. make it slightly harder to make consistent comparisons across the industry, doesn’t it? Q375 Chair: Is there anything else you think we Gervase MacGregor: It does. It is certainly true that should have asked you that you have not told us? some companies are a bit more free with their use of Gervase MacGregor: No, it has been very exceptional items than others, depending what it is comprehensive. Thank you for the questions. they are trying to show as far as their level of Chair: Thank you for coming in. It has been very profitability is concerned. One wants to be able to useful for us. adjust to that. If it has not been stripped out or if it is Gervase MacGregor: Thank you. something that was an exceptional item where perhaps there was an element of judgment over it and it should cobber Pack: U PL: COE1 [SE] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG04 Source: /MILES/PKU/INPUT/030522/030522_o004_Corrected Transcript.xml
Ev 68 Energy and Climate Change Committee: Evidence
Tuesday 21 May 2013
Members present: Mr Tim Yeo (Chair)
Dan Byles Albert Owen Barry Gardiner Christopher Pincher Ian Lavery John Robertson Dr Philip Lee Sir Robert Smith Mr Peter Lilley Dr Alan Whitehead ______
Examination of Witnesses
Witnesses: Andrew Wright, Interim Chief Executive, Markets, Ofgem, and Sarah Harrison, Senior Partner, Sustainable Development, Ofgem, gave evidence.
Q376 Chair: Good afternoon. Welcome back to the cost benefit analysis, so we did not think that the cost Committee. Thank you for coming in. As you know, associated with the usefulness of the information there is quite a lot of interest in this particular subject. released would be in the interests of consumers. I wonder if I could start by asking why Ofgem decided not to act on the recommendations from BDO, which Q377 Chair: On the question of trading activities, you commissioned to review the consolidated though, the costs would not be very great. These segmental statements. activities must be recorded in the books of the Andrew Wright: Yes, good afternoon. First of all, companies and audited. I am not quite sure why the thank you very much to the Committee for the cost point comes in there. “Not including trading opportunity to give evidence today. It is probably activities” means we do not have a complete picture worth taking a step back. Around about three or four of what the companies are doing. years ago, when we were conducting the energy Andrew Wright: I think this is the one that is gaining market probe, I think only one company published the most attention out of these three recommendations separate accounts for its retail business in the UK. that we didn’t accept. First and foremost, I would say That was British Gas. All the other companies either that BDO have said that there is no reason to expect combined those accounts with other businesses in the that the companies are not giving a fair picture of the UK or, in some cases, other businesses internationally. profits in the segmented statements and there is no We thought it was important that consumers, for evidence to support the view that profits are being reasons of confidence, had sight of these accounts; so taken out into trading businesses. Having said that, we put in place a licence condition requiring because we do not necessarily have a full picture of companies to publish separate segmented accounts for all the relationships between the licensed businesses generation and supply, supply divided into gas, and the trading businesses, we accept that there is a electricity, domestic and non-domestic. That is a possibility there are some missing pieces of significant improvement in transparency. information. If we were to require companies to When we did the RMR, I think there were some publish their trading figures, there would be two ways concerns about the comparability of these accounts, of doing that and BDO highlighted this. They talked the approaches companies took to transfer pricing, and about a narrow approach that would require us just we asked BDO to help us look at ways to improve to look at the trading profits associated with the UK these segmented accounts. We didn’t have to do this. businesses and not to inquiry any further than that. This was something we asked them to do because we BDO themselves said that would be of marginal value wanted to make these accounts as useful for and potentially confusing. consumers and indeed for competitors, as possible. The other possibility is a more in-depth and detailed BDO put forward eight recommendations. We approach, which would require the companies to accepted, pretty much completely, five of them. We disclose trading profits associated with businesses had good reasons not to accept the other three. Just to outside of the UK and to divide those trading profits be absolutely clear, we are the decision-maker here. It into proprietary trading, speculative trading and is for us to decide whether or not the changes are trading associated with hedging and procurement. necessary, proportionate and whether they meet our BDO themselves accepted that that information would cost benefit requirements. As for the three that we did be difficult to get hold of. There is a question of not include, one was to require the companies to whether companies overseas are required to give us publish trading profits; one was to requiring all that information and it would be quite intrusive in companies to publish on a common year-end; and I terms of requiring companies to do a lot of analysis. think the third one was to do further further work on We agree with that and our view is that in order for transfer pricing, looking at the implications of our this information to be useful to customers, it would be approach of requiring the companies to look at significantly intrusive and even then, there would be transfer pricing based on current wholesale prices. If question marks about whether companies had you like, I can go into each of them in turn. Generally, correctly allocated between speculative and hedging we did not accept those three recommendations and whether or not there were cross-border contracts because they did not meet our criterion of meeting our that we did not have sight of, because we would not cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG04 Source: /MILES/PKU/INPUT/030522/030522_o004_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 69
21 May 2013 Andrew Wright and Sarah Harrison necessarily have the power to make companies I am afraid Ofgem did not intervene very successfully disclose profits they were making overseas, for in that area. Until very recently consumers have been example. So all of these questions would still arise. confused by an extraordinary array of tariffs. Again, To get to the bottom of it absolutely we would have sometimes there is a suspicion, at least, that those to require the companies to run their businesses tariffs have been organised in a way that is more for differently. I think the view we have always taken is the benefit of the companies than for their consumers. that is not appropriate in a competitive market where To say this is going to be done for show is ridiculous. companies should be free to organise their businesses There are genuine concerns about the way in which as they see fit. these companies can continue to conceal from public view their activities and the profits they generate from Q378 Chair: The problem is that that fails to address different parts of those activities. It is unsatisfactory. the fact that there is now a complete breakdown of You commissioned some experts to review all this. consumer confidence in the trustworthiness and, You then ignored half of their recommendations and indeed, the integrity to some extent, of these it is no great surprise that consumer confidence companies who have a very dominant position in the remains very low. market. It is very hard for smaller companies to get Andrew Wright: I don’t think we need to apologise into this business and, therefore, at best it is an for our achievements in this area. Certainly the oligopoly. All the evidence we have shows Committee has done, as you know, an excellent job in considerable consumer suspicion about the way they holding us to account and indeed the industry to are treated by the Big Six in particular. You will be account. We identified issues around mis-selling in the aware that the performance of Ofgem has come under probe in 2008. We put in place new licence scrutiny, particularly from the Opposition. Given that, conditions. We have enforced those licence conditions I would have thought that it would be a pretty obvious vigorously. As a result the selling on the doorstep is thing to get the information. It is an incomplete now a thing of the past and I think consumers have picture. Of course it may be complex to get to the benefited from that. They no longer need to live in bottom of it, but that seems to be all the more reason fear of being tricked on the doorstep by energy for making a good effort at doing so. We have suppliers. I think we have acted robustly in these companies that are operating in all aspects of the areas. industry as generators, retailers and traders. The scope We have a duty to regulate these companies in a for them to continue at least appearing to pull the wool proportionate manner, not imposing unnecessary over people’s eyes remains almost unchecked. regulatory burdens on them. If our conclusion is that Andrew Wright: I can understand that any possibility requiring additional information from them does not of a gap in this information is unsatisfactory. add any value to consumers then it is right for us to Companies organise their businesses as they see fit on act in that way. You may disagree on that but that is an international basis, they combine their procurement the judgment we came to, partly on the evidence that activity and their trading activity and take all of their BDO supplied, that what we could reasonably do optimisation of their generation portfolio and their would be potentially confusing and would be of supply position through the same trading book—that limited use. What we would need to do in order to is arguably an efficient way of running these make it useful would be difficult to realise and costly. businesses. Unless we prevent them doing that and Those were BDO’s own conclusions as a part of require them, as indeed we do in our regulated their recommendation. business, to run separate ring-fenced supply businesses in the UK and prevent them from Q380 Chair: The BDO witness we heard from said benefiting from those types of synergies, it is difficult he did not see the value of the checklist that you to see how we can get to the bottom of it. produced regarding trading activities. They We could ask them to provide more information on a recommended an independent annual audit of the tokenistic basis, but I don’t think it would actually consolidated segmental statements, but you have shed a great deal more light on what is going on. Just chosen to produce an independent opinion. They to come back to it, the situation is an awfully lot better highlighted differences in accounting treatment across than it was three years ago and you can thank Ofgem the companies. We are still lacking some information for having made those changes. BDO made it very that would be quite valuable. clear that they had no evidence that the companies are Andrew Wright: Firstly, I think the independent doing anything untoward in terms of moving profits checklist adds value. It is worth saying there are other out of the UK regulated businesses into other bits of information of value to understanding trading. businesses, certainly not in a systematic way. I think The companies do publish their trading profits. We it would be wrong for us, just for the purposes of do require the companies to reconcile their segmented show, to make changes that impose costs on the statements with their published accounts, so it is industry. possible to look and see where the trading profits are. Sometimes these are published on as pan-European Q379 Chair: This is not for show. There are no basis but that reflects the reality of how these grounds for complacency at all. Until this Committee companies organise their businesses so it is not as if started taking an interest in the matter and the Trading there’s a complete absence of transparency in this Standards Department of Surrey County Council did, area. customers were being mis-sold tariffs. They were As far as the independent audit is concerned, actually being lied to by the representatives of the companies. BDO recommended that an independent auditor cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG04 Source: /MILES/PKU/INPUT/030522/030522_o004_Corrected Transcript.xml
Ev 70 Energy and Climate Change Committee: Evidence
21 May 2013 Andrew Wright and Sarah Harrison provide an opinion, which is what we implemented make accurate forecasts of the company’s profitability through PKF. They provided an opinion on how the looking 12 months ahead. The companies themselves changes we had made had been implemented and any are not even able to do that because unexpected things further recommendations to the improved happen. For example, you had Centrica in here earlier comparability. So we did implement that. We did not talking about the increased demand over the April commit to doing it annually. We will be doing it again period, which you can’t necessarily predict. Then until we are comfortable these accounts are settled there is the higher cost of meeting the CERT and down and there is no room for further improvement, CESP obligations. These are all changes that you can’t but we did implement that. It is not the case that they predict. So inevitably, because we do not have a asked for an audit, which would be quite an extensive crystal ball, there are going to be differences between and intrusive thing to do to companies that are our supply market indicators. already audited. Also, because we want to make what we are doing transparent, we have a published methodology which Q381 Chair: One thing that would not cost very we allow other people to replicate. We rely on public much is if they all have the same year-ends. It is a domain information and as a result, there are some one-off small cost to change from one quarter to simplifying assumptions in that. I think that makes it another to have the year-end. You did not want to practical to update the supply market indicator proceed even with that recommendation. regularly. As a result of that, we look at the Andrew Wright: Once again, I respectfully disagree. profitability of a typical customer, with typical First of all, it is of limited value. The year-end of consumption, on standard dual fuel tariffs. Now, that Scottish and Southern Energy and the other five is not the same as giving a forecast of the profitability companies is just three months apart, so the numbers of the companies. are quite comparable. There may well be differences The companies point out the differences; typical over that three months, but it is not going to be huge. consumption is not necessarily the same as average Secondly, if you are going to require Scottish and consumption. They have discounted tariffs that we Southern to change its year-end, you are going to don’t take into account. We use a simplified hedging require it to release into the financial markets strategy, an 18-month hedging strategy because we do information that it does not currently provide or you not know the companies’ hedging strategies. They do are going to require it to change its financial reporting not disclose it and we have no way of knowing. So year-end with all the implications and costs of that, inevitably there are going to be differences, but does and you may end up having to delay the release of that mean this is not useful? I don’t think it does. I information from all other companies because you think this is a useful indicator that provides a useful have to wait until that financial information is released indication. into the market and properly audited, which SSE does The particular accusation on consumption I think we not do until 31 March. accept. We change our definition of a typical Finally, although the costs overall may not be large, customer; we last did it in 2009 and there is a lot of there are significant costs on one party. All of that evidence that since then consumption levels, needs to be borne in mind against the limited particularly in gas, have fallen considerably and we improvement in transparency that would provide. I do need to take that into account. We have just initiated not think there is a great deal been lost by SSE having a review of consumption levels, both for the use in the a different year-end when you look at the statements supply market indicator and the average consumption that have been published so far. levels that are tended to be used in the media and elsewhere when quoting the size of a typical bill. This Q382 Sir Robert Smith: I had better remind the work is underway now and we will update the Committee of my entry in the Register of Members’ consumption assumptions, which should make the Interests to do with oil and gas, in particular a supply market indicator more reflective of a typical shareholding in Shell. The Big Six have raised customer. concerns about the supply market indicator and your assumptions about the amount of fuel they sell and, Q383 Sir Robert Smith: In 2010 when the therefore, it may be exaggerating their profits. They segmented accounts suggested an average profit also suggest your model has an oversimplified margin on electricity of 0.3% supply, the supply hedging strategy. How do you respond to that market indicator suggested a margin around 6%. concern? Andrew Wright: First of all, we have done the Andrew Wright: The supply market indicator, once exercise of calibrating or checking our supply market again, is an initiative from us to improve transparency indicator against actual results and it performs fairly in this market. Had we not taken this initiative there well. As I say, there are a couple of adjustments you would be no ongoing view of the forward looking have to make; the most obvious one being that we do profitability these companies are making. It enables not take account of discounted tariffs in the supply consumers, politicians and the media to have a market indicator. We are looking at the profitability of dialogue about whether or not price increases were a typical dual fuel customer on standard tariffs. justified, whether price increases are in the offing. It Sir Robert Smith: CSS is coming up at 0.3% and the is used by other agencies, for example, the Bank of SMI at 6%. England, to look at inflation forecasts. So it is a useful Andrew Wright: As I say, you need to compare like addition to the transparency in the market. You cannot for like. Hopefully, I can provide the Committee with expect us, in the position we are in, to be able to calibration work that we have done on this, if I can cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG04 Source: /MILES/PKU/INPUT/030522/030522_o004_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 71
21 May 2013 Andrew Wright and Sarah Harrison dig it out. We have done it internally as a check to see Commission activity has tended to be on wholesale whether or not there is broad consistency between the markets. supply market indicator and the published numbers. We look at it line by line in terms of what the cost of Q387 Barry Gardiner: Back to vertical integration, fuel is and so on. We see where the differences are surely the problem here is that it allows, as a business that we understand. They are not identical because model, companies to cross-subsidise different they are looking at different things, but we were activities and to distort the market. Until there is a broadly comfortable that the two were consistent. I do real attack on the ability of the companies to adopt not recognise those exact numbers but, nonetheless, a radically-integrated model then all the problems of we have gone through that exercise and we satisfied transparency and trust are not going to go away, are ourselves that there was nothing suggesting that the they? methodology we were using in the supply market Andrew Wright: No. I think you are right. Vertical indicator was grossly wrong, recognising that it is a integration could have an adverse effect on simplification for good reasons. competition if it allows vertically integrated players to foreclose the market. Generally, in competition terms, Q384 Sir Robert Smith: In answer to the Chair that would need to be some form of collusion, earlier you were saying how you would not want to otherwise competitors would gain market share at the tell them how to run their business, but obviously expense of each other or dominance associated with when it comes to the retail tariffs you are going to be that. We have focused on trying to generate sufficient telling them quite a lot about how to run their liquidity to enable new entrants, both independent business. What restrains you from feeling you should generators and independent suppliers, to compete on be telling them? level terms with the vertically integrated companies. Andrew Wright: Our responsibility as an economic That is where we are focused. regulator is to ensure the market works effectively. Once again, we think that is a proportionate Where it is necessary to require the companies to intervention given the scale of the issue and I think behave in a certain way in order to get a more we have had considerable success in that. There is effective market, either because we feel the consumers significantly greater liquidity on the short-term are finding it difficult to engage in a complex market markets, on the near-term markets, and there is lots of or that the companies are providing misleading evidence the smaller suppliers are now finding it information, for example, then it is appropriate to put easier to get hold of the products that they need, and in place licence conditions to deal with that. I do not we are seeing significant growth in the market share see any inconsistency. I think what we are talking of small suppliers, albeit from a very low base. So about is that in a competitive market in general you there are signs of improvement but we are not satisfied want companies to compete for different suppliers, with that. We are proposing to put in place obligations organise themselves and organise the way they run on companies which will have the effect of increasing their business as they best see fit in order to compete liquidity, particularly along the forward curve where I in the market. That is what we want to achieve. think the progress has been disappointing.
Q385 Sir Robert Smith: I suppose the bottom line Q388 Barry Gardiner: Mr Wright, you say that you is that, if it is a working market, if the company is are trying to get competition into the market and more efficient, then the consumer should get a share smaller companies in to break things up. The other of that. day I watched as a magpie had taken an egg from the Andrew Wright: If it is a working market then nest of a goldfinch. I watched the goldfinch for about absolutely, but, similarly, if a company is more 150 metres chase that magpie. Right? The magpie still efficient and has a competitive advantage over other obtained the egg. The idea that small companies are companies you will also expect them to make more going to be able to come into the market here and take profit. That is also a part of the incentives of getting away from the big companies in the manner that you companies to compete in the market. indicate you believe they could, is very unlikely. They are so small by comparison and their power-to-weight Q386 Sir Robert Smith: You mentioned quite a lot ratio is so poor by comparison that I cannot believe of them have overseas markets. Is there perhaps a that you believe that that is a sensible short-term need for international co-operation on creating some solution. more transparency in the trading figures? Andrew Wright: I am not being naïve here. I think it Andrew Wright: Possibly. I think that is an interesting would be wrong to say that smaller suppliers are yet question. Certainly in the wholesale markets there has at a stage where they are maintaining a consistent and been a lot of Europe-wide initiatives on transparency; credible threat to the Big Six. Having said that, they for example, about the amount of gas in gas storage are making considerable gains. Some of them are now and about flows in gas pipelines and REMIT, the getting to the scale where I think, in terms of the market abuse directive. So there have been a lot of customers— initiatives to improve transparency, particularly in the Barry Gardiner: They were bought out by the Big wholesale market. It is an interesting question about Six. You know what is going to happen with one of whether or not that could be extended to retail markets them in the near future. They try to grow themselves and certainly one worth thinking about. But generally, to the size but they then get bought out the moment for good reasons I think, the focus of European they become a threat. cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG04 Source: /MILES/PKU/INPUT/030522/030522_o004_Corrected Transcript.xml
Ev 72 Energy and Climate Change Committee: Evidence
21 May 2013 Andrew Wright and Sarah Harrison
Andrew Wright: If you look at the participation of the Andrew Wright: Yes, gladly. First of all, you are right small suppliers in changes of supplier, albeit that in saying this was an issue first identified in 2008 as leaves the big lump of disengaged inactive customers part of the energy supply probe. I suppose we have where they are, but if you look at the active part of been using a mixture of carrot and stick. We have the market, the small suppliers are more significant been trying to encourage industry initiatives that were than their market shares would suggest. Certainly already in train in 2008 to deliver and, to some extent, concerns that some of the big companies are raising the reason we have taken a long time in getting to about the small suppliers not being subject to some of where we are is that we wanted to give industry the the environmental obligations suggest to me that they opportunity to respond to the challenge. In part they are starting to feel the pain from competition from have done that. small suppliers. There have been significant increases in the volumes I don’t think we are there yet. I am not at all satisfied that we have sufficient competition from small traded on the day-ahead market, for example. The suppliers. There is also the independent generation day-ahead auction is now well established and the sector that has the prospect of undermining the short-term market is a critical part of the market. It is vertical integration in the industry as well. You should not only useful in its own right but potentially not just focus on suppliers. encourages other people to come into the market to trade on longer-term products as well. On top of that Q389 Barry Gardiner: What about introducing a companies now treat small suppliers far better than self-supply restriction? E.ON have recommended they used to. We used to have a litany of complaints clear and consistent prohibition of cross-subsidy. about the credit terms, the clip sizes and a whole Now, of course, at the moment it is very difficult to bunch of barriers about why small suppliers were not know whether that is taking place or not between able to get hold of the electricity and gas they needed generation supply activities. Wouldn’t those sorts of from the Big Six. measures help to improve transparency? I can’t say there are no complaints about this anymore Andrew Wright: We are going to be putting forward or they are completely happy, but it is a significantly our proposals on liquidity in the next couple of improved situation. You heard recently about Scottish months, certainly before everyone goes away on their and Southern, for example, providing collateral-free summer holidays, and I will be happy to come back trading opportunities for small suppliers up to a and answer questions on them. We have already set certain size. That is just one example. There are a out the shape of that, which we have talked about as number of others around the industry. We have made secure and promote; in other words, to put in place significant progress and we have been developing our obligations to secure the gains that have been already proposals and I think we have now come to the end made and to promote further liquidity where we think of that process. We can no longer wait for the industry it is necessary, which is predominantly along the to solve the issue by itself and we have to plug the curve. The important thing is that people who want to trade remaining gap that exists, but I think, in doing that, it are able to trade at fair prices. A self-supply restriction is far better that the industry steps up and solves this has many of the same challenges as a mandated problem itself rather than responding reluctantly to auction or a mandated market maker, which is, first of rules that we put in place. all, how do you enforce it? The self-supply restriction is only part of the issue. You want to make sure that Q391 Ian Lavery: You mentioned Scottish and the rest of the power is supplied into the market. In Southern. They suggested that a division of a trading doing that you need to make sure that it is done in a day into 48 half-hour chunks meant that liquidity in way that benefits people who want to trade. You have the electricity market was very granular. Is granularity the same issues about preventing companies from an issue and, if it is an issue, why is it an issue? trading with each other, making sure that the trades Andrew Wright: Granularity is a fact of life and, if are genuine, and I think there are real challenges with anything, the more granular it is then the more cost a self-supply restriction. reflective and the more efficient the market is likely I am not saying it is any better or worse than the to be. I think we would not want to remove the mandated auction or other approaches, but many of granularity of the market in the near term because it the same challenges exist. I don’t think it is a panacea. means that generators can respond to price signals in We will be coming up with what we think is the best and most appropriate solution to this issue, given the real time in an effective and efficient way. Electricity progress that we have already made in the short-term is a product the the price and value varies quite market. sharply over relatively short periods of time. That does make it fairly difficult as far as liquidity and Q390 Ian Lavery: Just continuing on the theme of trading is concerned. Having said that, as I say, the liquidity and competition in the energy markets, you day-ahead auctions, which are in half-hour chunks, are have been working on improving wholesale liquidity, reasonably liquid and it is not where we see the particularly in the electricity market, since you problem in the market today. I do not think granularity identified the problem in 2008 and further measures is an issue and, if anything, it would be nice to see will be introduced as part of the Energy Bill. Can you even more granularity because that provides a greater briefly explain what you have achieved so far and role of the market and reduces the role of the system what impact the Energy Bill provisions will have? operator. cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG04 Source: /MILES/PKU/INPUT/030522/030522_o004_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 73
21 May 2013 Andrew Wright and Sarah Harrison
Q392 Ian Lavery: If you think there should be more Tesco’s, at 10% less in year two, at which point you granularity, do you think in any way, shape or form it have no option but to supply your cucumbers to can be improved? Tesco’s because you have gone under their wing as Andrew Wright: Certainly. We are undergoing reform far as your entire supply is concerned. of the balancing mechanism and cash-out at the Andrew Wright: This is for generating you mean, or moment, the so-called significant code review of the supplier? balancing mechanism, and we are looking to improve Dr Whitehead: If you are a small company seeking that balancing mechanism in a number of ways. We to purchase and you went under the wing of a large are not looking to change the half-hourly settlement company, at some stage in that process of sculpting period, and partly for some of the reasons you talked are you not effectively— about in that liquidity may be not enough to justify it. Andrew Wright: You are effectively talking about We are not looking to change that, but we are looking companies, I suppose, cornering the market by buying to change the way prices are formed, to make sure up all the power a long time ahead and then dropping security of supply is properly reflected, potentially the terms of it. That would— moving from a dual cash-out to a single cash-out. Dr Whitehead: That would come under the sculpting. Those things are not directly affecting liquidity but You are then captured, are you? improving the operation of the balancing mechanism Andrew Wright: Yes, that would be a concern. To will help liquidity. It will give people increased some extent, that would be foreclosing the market confidence in the market. against smaller suppliers and new entrants. I personally have not seen a great deal of evidence or, Q393 Dr Whitehead: If you are a very large indeed, any evidence of that type of behaviour. We company trading you may well, as now appears to be know the companies buy in large chunks of power a the case, buy way down the curve, well in excess of long way out because that is the nature of the market. what you know that you are eventually going to have As you get further out you lose the granularity, so you to produce for the purposes of balancing, and you will tend to be only able to trade, for example, in base- then buy and sell, repeatedly, some of that in order to load power or maybe peak power but not in the balance off what you have when you get to day-ahead discrete chunks in times of day. You would expect and closure. You may then take on board small that, but I have not heard those accusations. Certainly companies in the process of buying and selling down if people are making those sorts of accusations, they the line and, indeed, you may take small companies should come to us and we will listen to them. under your wing and offer them facilities to trade as if they were you. Now, this is a rather different Q395 Dr Whitehead: You have not looked at, say, process to trading with yourself but, nevertheless, trading well down the curve; the extent to which that comes to the same result, which is the effective relates reasonably to the amount of purchases that making of the market in favour of particular very large may be necessary in order to deal with obligations or suppliers and, effectively, the capturing of small whether there is a wide margin between them? companies so that the terms they are on are no better Andrew Wright: No, we haven’t, only in that ever than whatever it is you are offering them as part generally the trading positions the companies take are of that wider process. Is that something that concerns confidential. We will have to make specific requests you or is that a development that you think is okay as to get that information, which we would not do unless far as liquidity is concerned? we had suspicion that something was awry. Apart Andrew Wright: You may need to clarify what you from the general concerns about vertical integration mean about the relationship with the smaller and the effect of that, which we have already spoken companies. As far as the practice of companies buying about, we have not seen any more general evidence large blocks of power, base load for example, a long that companies are foreclosing the market by way out and then refining and sculpting their positions purchasing power a long way in advance, in excess of as they get closer to the time, then that is exactly how their needs. If anyone has such evidence they should I would expect the market to work and that sounds to bring it to us. me like a description of an effective market. As they sculpt their positions they will be trading in different Q396 Sir Robert Smith: On vertical integration, times of the day, different days of the week, different how much of it is a natural product for investors half-hour blocks and, in doing that, I would guess that wanting to be on both sides of the risk so that if would then enable them to make available to smaller generators are doing well, suppliers do badly and if suppliers the shaped and sculpted products that they suppliers are doing well it is probably generators who may well need. If that is what is happening, I would are doing badly and therefore, while it is not quite so see that as an efficient and well-functioning market. I exciting, it is more secure? am not sure I have any particular concerns unless I Andrew Wright: That may well be a significant part am missing your point, which I may be. of it. I do not think that is particularly surprising. You could expect companies to look for efficient ways of Q394 Dr Whitehead: It is rather like if you are managing their exposure to the market and having a supplying cucumbers to Tesco’s and Tesco’s take your vertically integrated business is one way of doing that. entire supply of cucumbers year one and year two. Arguably that is an efficient way of running your Having given your entire supply of cucumbers to business. It reduces transaction costs and reduces the Tesco, they will then come back with an over-rider to risk premium and could lead to a better deal for say that you must supply your cucumbers to us, customers, provided you can be satisfied that there— cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG04 Source: /MILES/PKU/INPUT/030522/030522_o004_Corrected Transcript.xml
Ev 74 Energy and Climate Change Committee: Evidence
21 May 2013 Andrew Wright and Sarah Harrison
Sir Robert Smith: Doesn’t it then make it very 9% gas rise and 9% electricity rise. They are having difficult for people to operate who are not vertically a laugh, are they not? What are you doing about that? integrated? This is ridiculous. Andrew Wright: Yes. There may well be competitive Andrew Wright: It is worth taking a step back. We are advantages to being vertically integrated and some of the economic regulator responsible for ensuring that those may be legitimate. Some of them might be the markets work effectively. Companies set prices and products of the balancing mechanism and we are they— looking at reforms of the balancing mechanism to see John Robertson: You are the regulator, regulate. whether that can be improved. I suppose there is a Andrew Wright: No. The framework of competitive risk that that could be anti-competitive, but, as I say, markets has been established by Government since the we are looking to improve liquidity to try to ensure early days after privatisation. For more than 20 years that new entrants can compete on a level playing field. this is the framework in which we operate. I have not Nonetheless, once again it comes back to the same heard anything from the current Government to view that if companies want to organise their suggest that has changed. Indeed, it is set out in businesses in an efficient way we should not be European law that there should be competitive— discouraging them from doing that. John Robertson: We will talk about European law in a minute. You said things were better than three years Q397 John Robertson: You mentioned SSE a while ago. I have just given you a lot of figures that say it ago, about the free credit to small suppliers. Has is not. Ofgem considered requiring or incentivising the Big Sarah Harrison: If I could come in here, you are Six companies to do this? absolutely right; in a competitive market, which is the Andrew Wright: We have considered whether there is framework in which we are operating, there is a place anything that we ought to put in place on suppliers by for regulation. There is regulation, the first part of way of an obligation to provide free or cheap which we announced the introduction of last week, to collateral. We took the view that it was not put in place new standards of conduct to protect appropriate, that collateral is a normal part of doing customers. business and that would, in effect, be requiring these John Robertson: Last week? Every single one of companies to cross-subsidise. Having said that, we these companies has been putting their percentage up welcome this initiative and we would encourage within months of each other for all those years and others to look at this and other initiatives that may you are telling me things are better. How are they make it easier for new entrants to come into the better? business, but it is probably right that companies do Sarah Harrison: The reform package will reduce the that themselves. number of tariffs, so that if companies are making profits and putting up their prices, that will not be Q398 John Robertson: I know what you are saying, done on the basis of bamboozling and confusing that it is a good idea to do these things. To be honest, customers. We have been on to this. We have a they could all do a lot more, but you as a regulator package of reforms coming in and I think the other should be taking some kind of lead in this. You should test of this is not just about waiting for the regulation. be saying, “Okay, this is a good idea and SSE have It is how the industry is reacting. We have seen thought of it. So let’s go to Scottish Power and tell companies, like SSE and others, coming forward and them to go out and do this. We want you to do this”. saying, “Yes, we got it wrong. We need to do things Why not? differently”. We are seeing the effects of some of that, Andrew Wright: We have. Throughout the long time but that does not meant to say there is not a place that we have been trying to encourage greater liquidity for regulation. in the market, part of that is getting people to trade more, particularly in the short-term market, but part of Q400 John Robertson: What effects? A 4.5% rise that is ensuring companies treat small suppliers fairly. over three years and, according to newspaper reports Partly through stick and partly through carrot, we have today, tomorrow they will announce they have been doing a lot of encouraging. A lot of the increased their profits 30%. They have upped the improvements that you have seen across the industry prices every year—30% profit and they up their prices are down to the pressure that we have been applying by 9%. That is outrageous. Come on, that is on the industry to treat small suppliers better. We do outrageous. not think it is enough, by the way, and that is why we Andrew Wright: In a competitive market it is for the are likely to bring forward obligations that will companies to set their prices. We are doing everything reinforce and strengthen that. we can to try and make this market as effective as possible, including some of the most dramatic Q399 John Robertson: I am trying to tell you that, interventions or the most dramatic interventions since “you are not doing enough” is an understatement. We liberalisation to make it easier for consumers to have here the Independent today where it says, “SSE engage in the market and hold companies to account. prepares to announce a 30% jump in profits in its The level of profits the companies are making— division by supplying gas and electricity.” This goes John Robertson: Who is holding the companies to back to December 2010, when they put the prices up account here, by the way? I must have missed for gas by 9.4%. In September 2011, gas went up 18% something. If it was not this Committee, who brings and electricity 11%. They did bring it down in March them to account? I must have missed you doing 2012 by 4.5% but, lo and behold, we get to October, something. cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG04 Source: /MILES/PKU/INPUT/030522/030522_o004_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 75
21 May 2013 Andrew Wright and Sarah Harrison
Sarah Harrison: We share your concern. There is no the information. We are not getting that. You did say question that more needs to be done and what Ofgem you had done an investigation into the alleged is putting in place in the retail market is doing that. manipulation of gas prices and you reported that John Robertson: So are the— September last year. Eight months down the line, what Sarah Harrison: But it is also about making sure that has happened? when the companies foul up, and they have done, that Andrew Wright: We have been working hard on this we are there to take the action and to put in place the investigation, working closely with the FCA. financial penalties and to make sure that their action is John Robertson: Eight months. drawn to wider public attention. The impact on these Andrew Wright: The investigation is still underway businesses from a reputational point of view is and it is our policy not to comment on the progress of significant when the regulator intervenes and, quite current investigations that could lead to enforcement. rightly, we see those companies standing up and John Robertson: Are we likely to get something accepting when they get things wrong. this year? Andrew Wright: I am not going to comment on how Q401 John Robertson: Hang on a second, these are much longer it is going to take. the same companies who have talked about 2% and John Robertson: This is getting worse. 3% profits on the retail side and yet on the generating Andrew Wright: No, it is what we have to do. It is side they are making 17%, 18%, 19%, 20% profit. appropriate that we do not comment on ongoing You said earlier on, “Forcing companies to publish investigations that could lead to enforcement. That is figures is difficult and we will not look at it”. You are important in enabling us to do our job properly. the regulator. Sarah Harrison: It is important for the simple reason Andrew Wright: No, we— that at the moment when you are conducting John Robertson: Hold on a second. You talked about investigations, you want to create a climate that allows Europe as well. Customer Focus drew attention to people to come forward with information. By being powers under the EU Electricity and Gas Directives open and transparent, as attractive as it might be, you that Ofgem could use to force suppliers to disclose the might compromise your ability to be able to do that. relevant data. Why are you not using these bodies and So there is a reason behind this. That is not to say, these powers? though, that we are not obviously committed to Andrew Wright: All right, let us— progressing this investigation and I can assure you John Robertson: Is that not a help? I have to tell you, that Ofgem is putting the priorities and resources in I still have a real problem. When those companies place to do that, but also in this case working very gave the dividends out to the shareholders, I asked closely with the Financial Conduct Authority which is them whether they included the generation and the a key other regulator in respect of these market retail profits. They said yes, they put them out manipulation allegations. We are also doing so in the together. Well, if they can put them out together and context of looking forward to receiving new powers give dividends to the shareholders in the United that will be given to us by Government as part of the Kingdom we should be able to find out exactly how implementation of the directives put in place to tackle much money is involved. the market manipulation, abuse and insider trading Andrew Wright: All right, let me go back to the first that, if you like, are the subject of some of the of your comments. We have done more than any allegations that you have referred to. comparable regulator to increase the transparency of these companies and to make it clear where they are Q403 John Robertson: Part of the problem is— making money, in the generation business, the supply Mr Lilley: So you are stalling— business, in a consistent and fair manner right the way John Robertson: Hang on a second, Peter. Let me across the whole Big Six, whether they are finish and then I will let you in. internationally owned or UK owned. We are having Part of the problem is how long it takes to get your this discussion today partly because we have made judgment and while we wait people are having to pay that information available. I think we have a strong the increased prices and are wondering whether they commitment to greater transparency in this market. can actually pay their bills. We know that people do It is for the companies to explain their profits and to die of hypothermia in winter and we have had a rather explain their prices. Our job is to make the cold spell. If we do not allow these people to get as competitive market as effective as possible and we are cheap as possible fuel and energy then we have not not apologists for this market. We are on record, done our job. You take too long to do it. You are through the retail market review and the probe, in effectively closing yourselves down. The Opposition, saying the competition is not as effective as we would which I am part of, have already said they will close like and we are putting in place radical measures to you down. So my question to finish off is: can you simplify the market—once again, probably more afford not to have increased powers and to use these radical than any comparable sector—to try to make powers to bring these companies to boot? that work more effectively. If you wanted, there could Sarah Harrison: Absolutely we need the right be a legitimate public debate about whether powers. To be clear, when we have found ourselves in competition is the right way to manage this sector, but a situation where we don’t think we have the right this has been UK policy— powers we have been the first to seek them. Two examples: the powers to be able to award financial Q402 John Robertson: Hang on a second, to get the redress to customers when, for example, they have gist of it, you have to get people come and give us been mis-sold to, is a gap in our armoury. We are cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG04 Source: /MILES/PKU/INPUT/030522/030522_o004_Corrected Transcript.xml
Ev 76 Energy and Climate Change Committee: Evidence
21 May 2013 Andrew Wright and Sarah Harrison very pleased that the Energy Bill is going to bring symptoms of being an oligopolistic market and of those forward. oligopolistic power being exploited would be abnormally high returns on capital and abnormally Q404 John Robertson: Are you using the EU as high profits. Now, have you established whether or well, because you have not done that? Will you go to not they exist? It can’t take eight months. the EU and use the EU REMIT to try and bring these Andrew Wright: That is two questions. First of all, it companies to boot? is quite possible to get individual instances of market Sarah Harrison: This is in relation to wholesale manipulation and insider trading and market abuse in market transparency and pricing? competitive markets. That is a separate issue. Andrew Wright: Yes, exactly. First and foremost— Secondly, we are not apologists for the retail market. John Robertson: You are a bit reticent to do it? We have been clear that we think this market is not Andrew Wright: No. There are two things. First of all, competitive enough. the Government is in the process of putting in place Mr Lilley: Sorry, I just asked a simple question. Have the powers that we need to investigate and enforce you tried to establish whether there are excess profits? under REMIT, which will enable us to get access to Andrew Wright: In retail or in wholesale or— the information that we need to be able to do that. On Mr Lilley: In this market. top of that, the European regulatory agency, ACER, Andrew Wright: In the retail market we have done a will be routinely collecting all the trading data across lot of work looking at the competitiveness of the the whole of Europe, which will make a huge market, including looking at profits and whether or difference to our ability both to monitor and to enforce not companies raise their prices more quickly than and indeed speed up our enforcement because we will they drop them, whether they are making excess have access to that data immediately without having profits, comparing that against other sectors. We have to go to market participants to ask for it. done a lot of that sort of work, yes, and that is all in John Robertson: Sorry, Peter. the public domain.
Q405 Mr Lilley: No, I just wanted to reinforce your Q407 Dr Lee: If they are buying and selling to point because it seemed Ms Harrison was saying that themselves they can make the profits less in retail and you are deliberating stalling until you get more more in the generation sector. You have to look at the powers. Did I correctly interpret that? total profit across the entire company. You can’t just Sarah Harrison: No. do it in retail. Mr Lilley: You gave that as a reason for taking a long Andrew Wright: I do not want to be complacent time, that you were going to get— enough to give any of the markets we look at an Sarah Harrison: No. absolute clean bill of health. In the generation market, Mr Lilley: So it is not a reason? the power stations that are at the margin, the gas-fired Sarah Harrison: No, I think it is important to know power stations, appear not to be making any money at that investigations like this take time and— all at the moment. Companies are closing those Mr Lilley: Why did you mention the fact that you stations and mothballing them because they are were going to get more powers in future? making insufficient profits. That does not look to me Sarah Harrison: Because the REMIT regulations, the like a market where the competition is not sufficient. directive, has been established to give national Having said that, we continue to monitor the market. regulatory authorities like Ofgem and others in other We look for individual instances of market abuse and member states the powers to be able to— we look for evidence of anti-competitive behaviour Mr Lilley: So it is not a reason that it is taking more and problems with the market. We do that all the time. time? Chair: We have the Secretary of State outside, so we Sarah Harrison: But the point is— will just finish up with one final question. Mr Lilley: I am just trying to establish that fact. Do not bother to answer any other questions that I Q408 Dr Whitehead: When you did your retail haven’t asked. market review in October last, you proposed a pilot Sarah Harrison: No, of course. I am telling you— scheme for vulnerable and sticky customers and you Andrew Wright: The absence of that power means it said that you would set up a working group and does take longer to get hold of the information that undertake pilots, possibly. How is that coming along? we would otherwise be able to get in a straightforward Andrew Wright: Yes, we have started that. We are manner. This is potentially a long and complex focusing very much on getting the statutory investigation and we may not have reached a consultations out on the retail market review at the conclusion by now in any case, but that is a fact of moment, but we have already sent out the initial life at the moment. letters to establish that process. Do you have a timeframe, Sarah? Q406 Mr Lilley: Just pursuing the point of my Sarah Harrison: Yes. The workshops met for the first colleague, Mr Robertson. He is of the opinion that this time and it is worth bearing in mind that what this is is not a competitive market and you are saying, “Oh, about is trying to look, as you say, at those particularly we are assuming it is a competitive market”, in which sticky customers who are the least engaged and who case it is not quite clear why you are carrying out an are going to find it more difficult to engage in respect investigation. Surely it is supposed to be competitive. of the reforms that Ofgem is putting in place. You are looking to see whether it is operating as a One of the proposals on the table is something we competitive market or as an oligopolistic one. The have called the Market Cheapest Deal, which is a cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG04 Source: /MILES/PKU/INPUT/030522/030522_o004_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 77
21 May 2013 Andrew Wright and Sarah Harrison proposal whereby suppliers would have to put on their Sarah Harrison: Two things I suppose. In terms of bills information about the cheapest deal available in sharing information, for example, about customers the market, even if it were not from that particular who might be in receipt of certain benefits, we are not supplier. The workshops are about trying to work in the lead on that but what we have observed, in through the mechanics of that as an option, but also particular through the conclusion to the CERT and to look at, if you like, what sits behind that idea. That CESP schemes, was that suppliers and generators is about trying to provide an “at a glance” solution to were able to match and verify their information make it easier for customers who struggle to really against DWP data so that they could be assured that engage in the market to be able to see very readily the the measures were actually being installed in the best deal in the market. households for whom they were intended. Of course, I think it is interesting to note that, despite some of the value of having access to that is it reduces the the initial opposition, let us call it, from the industry search costs associated with targeting these measures. to that idea, nonetheless we have seen evidence that We are supportive of working with Government to the some suppliers are beginning to move into that space. extent we can to see further progress in that respect. It is interesting to note that EDF Energy’s Blue Price There are other ways that suppliers in particular and Promise commits to notify its customers of any distribution companies can act here. Many suppliers supplier deal that is more than £1 cheaper a week than and distribution companies maintain priority service its own deal and not put in place any termination fees registers, which gather information about some of if the customer then wants to switch to that deal. I their most vulnerable customers who have particular think this is an important area of the concept of never needs. One of the strands of our new consumer knowingly being undersold that we will want to vulnerability strategy is going to look at ways in explore now that our working group is up and running which we can improve the awareness of the priority not just with the industry but, critically, also with service registers and seeing ways in which suppliers customer groups who have some very good thinking and distribution network companies can make better and ideas about this. use of that data, not only to target their own services and support, but also potentially to share that Q409 Dr Whitehead: You also said to us a little information with other providers and organisations, while ago that you thought increased data-sharing particularly in the local communities, who might also would help identify affordable warmth group be able to provide additional help. households, for example, under ECO. What steps are Chair: Thank you very much. That has been very you taking to advance data-sharing among useful for us. companies? Are you considering an obligation on data-sharing or similar?
Examination of Witnesses
Witnesses: Rt Hon Edward Davey MP, Secretary of State for Energy and Climate Change, Rachael Crisp, Head of Energy Markets and Consumers, DECC, and Gareth Baynham-Hughes, Head of Fuel Poverty, DECC, gave evidence.
Q410 Chair: Good afternoon. Welcome back to the Chair: So, the fact we had a full-time Minister of Committee. Delighted to see you as ever, but we are State for the previous two and three-quarter years was disappointed not to see the Minister of State. an unnecessary waste of ministerial time. Mr Davey: I do not think there is any particular reason Mr Davey: No, I would not say that. I think a huge why he should not be here, but I am not quite sure amount of progress has been made in that period, but where he is today. I am sorry if I am not good enough Michael is a Minister with exceptional talent. for you. Chair: No, I was not casting any aspersions on you Q411 Chair: Right, okay. We are on our third at all. I am sure you will answer all the questions we Minister of State in about nine months. You have lost have very fully, but it does seem to reinforce the part- two of your most senior officials in the last few weeks. time nature of the Minister’s role if, on his first Ben Moxham has left No. 10. We noted that the Bill scheduled appearance at the Select Committee, we get took four months to appear after we had commented in detail on the draft. We note that a further four a last-minute message saying he is not coming. months has elapsed from the completion of the Bill’s Mr Davey: I did not realise it was last-minute. It has Committee stage before it returns on Report next been in my diary for some time. I have to say, I think month. Would you say this is a sign of a Department Michael is already making a big contribution to the that is functioning smoothly? Department and I am sure you will see that when you Mr Davey: If you don’t mind my saying so, do meet him. I think the links he is able to bring Chairman, if those same facts were described in a between DECC and BIS are a positive thing. As he slightly different way, you would reach a different has already remarked on a number of occasions, the conclusion. For example, the Energy Bill and EMR is companies he is seeing in his role as Energy Minister on target, if you said that, which is true. It is on are many of the ones he was seeing when he was BIS schedule, as we originally said it would be. We have Minister, so that is getting a very good message out. kept to the timetables, as we originally said we would. cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG04 Source: /MILES/PKU/INPUT/030522/030522_o004_Corrected Transcript.xml
Ev 78 Energy and Climate Change Committee: Evidence
21 May 2013 Rt Hon Edward Davey MP, Rachael Crisp and Gareth Baynham-Hughes
Moreover, the fact that the Energy Bill left Committee Q414 Chair: One could summarise the current and is only going to come back to the House after the situation as saying nuclear negotiations stalled; recess is because it was always a carry-over Bill. You investment in coal obviously unlikely until we have have to do the final stage, as you know, in the CCS; the gas investors are all holding back to see if Commons in the following session of Parliament to they can make more money out of the capacity meet the carry-over procedure rules. It might have market; and a lot of the renewables are waiting for the been taken this week, but there was a desire to have strike prices. At a time when there is increasing the Marriage (Same Sex Couples) Bill debated. After concern about the overall capacity available in the the recess, it is the next Bill scheduled to complete its remainder of this decade, it is a bit worrying that there final stage in the Commons. It seems to me the is so little new investment happening, isn’t it? legislation is very much on track as always planned. Mr Davey: You could describe it that way but I think As for officials, I have to say I cannot speak for Mr that would be inaccurate and unfair. First of all, we are seeing investment under the renewable Moxham at No. 10. I know there is already a negotiation. We are seeing at least one gas plant being replacement there, but for my own officials, the built in Carrington. The nuclear negotiations are not particular individuals, movement is a normal part of stalled. They are intense and lively and, I certainly their career development. There is nothing unusual believe, near a conclusion. This will be a remarkable about that. Senior officials come and go. With our new thing because no previous Government for a long time Permanent Secretary, Stephen Lovegrove, I think we has arrived at that position. Rather than the negative are in an extremely strong position and the morale in spin you put on it or interpretation you put on it, I the Department is very high. think the reverse is the case. With CCS we are at the preferred bidder stage with both the Scottish Q412 Chair: When you meet people from the energy Aberdeenshire project and the Yorkshire project to go industry, do they not sometimes say to you that they ahead with probably the biggest CCS projects in are concerned that some matters, including the Bill, Europe. Again, progress. I am not apologising for are progressing more slowly than they would like keeping to my timetable for draft CfD prices. from the point of view of making new investments? Mr Davey: The industry and investors always say they Q415 Chair: The spin I was putting on it was not want the next bit of the picture. I think the question negative so much as concerned that, at a time when to which we should be held account is whether or not we are anxious about the availability of supply, the we are giving that information at the time we said we Government’s position seemed a bit complacent about would. The issues now when you talk to investors are not really worrying about the fact that very little is not the issues that you were raising with me when I actually happening. first came before you because they have all been dealt Mr Davey: Can I say we are absolutely not with. The issues now are things like the draft strike complacent. We are engaging with Ofgem and prices for the contracts for difference, which we said engaging with National Grid. We are looking at the we would publish in July and we are on schedule to projections and I think you will see in some of the publish them. That obviously is a critical part of the announcements we will make in due course that we next stage. Most of the investors I talk to are now have a very clear strategy, on which we have been focusing their minds on that. consulting and working with industry and across Government. Q413 Chair: Why do you think so little investment Q416 Chair: We have arrived at a situation now is taking place in new generating capacity? where the Treasury seems to be leading on the Mr Davey: There was inevitably going to be a bit of nuclear negotiations. a hiatus as we changed the legal framework. While we Mr Davey: That is not true. got the renewable obligation certificates and banding Chair: The gas strategy was announced by the review done last July, which has helped and we have Chancellor of the Exchequer. The changes in tariff seen some investment as a result of getting that policy regulations were announced by the Prime decision, clearly those investors who are looking to Minister at PMQs on a day that DECC had not been the first contracts for difference when the new informed about. Does DECC have any role in energy obligation band certificate system closes are waiting policy these days? for the draft strike prices, as I have mentioned. Mr Davey: I am delighted that so many people across I would say that we have structured the process so Government are so helpful, but I do think, again, the that there are go-early options for investors. They do way you characterise things is slightly inaccurate. not have to wait until the Royal Assent. That is why, First of all, we are in charge of the nuclear when we set the draft strike prices in July, companies negotiations. We are working closely with the who want the final investment decision enabling FiT Treasury, as you would expect. Would you seriously CfDs, the core investment contracts, in the Bill will think we should not work with the Treasury on be able to start talking to the Department to sign those something as important as this? But we are very much and in March we published the criteria that we would leading them, so it is not the case with nuclear that use to judge those. I think we are going to see the the Treasury are leading. investment chain really get going at this juncture, As for the gas generation strategy, we developed it. which is frankly when one would have expected it to We had the pen. It was agreed with the Chancellor start getting going. that he would announce it at the time of the Budget. cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG04 Source: /MILES/PKU/INPUT/030522/030522_o004_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 79
21 May 2013 Rt Hon Edward Davey MP, Rachael Crisp and Gareth Baynham-Hughes
That was absolutely fine by us. That was the transferred over to any other Minister. Is Mr Fallon agreement ahead of the Budget. The position the doing it part-time or have other Ministers been given Prime Minister took at Prime Minister’s Questions extra roles as well? was in response to a question. I would point you to Mr Davey: If there are particular questions about the the fact that Ofgem were announcing their conclusions ministerial response I am very happy to answer them. for the retail market review a few days after that The ministerial responsibilities for Mr Fallon are on session of PMQs and the proposals that are going the website. They are not hidden away. They are forward for tariff reform are based on the retail market very transparent. review done by the independent energy regulator. I Albert Owen: Why have you not told us about them? think those facts as I have just described them slightly The question was to you, from us, why haven’t you jar, again, with your interpretation. told us about them? We hear in the media that we are going to have a different Minister of State. We hear Q417 Chair: Is the Government still serious about in the media that Mr Hayes has been promoted to have its energy reforms and the need for more low carbon an internal role within the Conservative Party. What investment or is it now pinning its hopes on the good does that say about your Department and energy burghers of Sussex allowing their county to be dug up policy? to discover lots of shale gas and we are going to have Mr Davey: We have had the benefit of the work of an almighty dash for gas? John Hayes, who took the Energy Bill through the Mr Davey: Our low carbon investments are very House of Commons, with some aplomb I should strongly committed to by all people across the add— Government. They are central to our energy strategy. Albert Owen: With a what, sorry? We have the levy control framework that was agreed Mr Davey: With some aplomb. last year. We have a tripling of support for low carbon Albert Owen: Right, okay. Is that what you call it? to £7.6 billion by the end of this decade. We have the Mr Davey: Then the benefit of Mr Fallon is I think Energy Bill that is reforming the electricity market to extremely good for energy policy. The fact that Mr provide the world’s first ever low carbon electricity Fallon brings a wealth of skills from his previous market. This is not a sign of a Government reneging career as well as the benefits he has as a BIS Minister on its low carbon agenda, far from it. I think the shale is something to be welcomed. I have talked to many gas agenda is extremely exciting, too. These are not people in the industry who think that is a good thing. mutually exclusive. Although we need to invest in a lot of low carbon, whether it is renewables, new Q419 Albert Owen: You are comfortable as nuclear or CCS, we will still need an awful lot of gas Secretary of State for Energy and Climate Change that over the next two decades, three decades or more. All you have a full-time Minister being replaced with a our analysis for decarbonising our economy and part-time Minister? society shows that, including our detailed carbon plan. Mr Davey: I think the question for me is can the work There is this myth that it is low carbon or gas. It is that needs to be done get done. Everything that I have low carbon and gas and the question people have to seen from Michael is that it is getting done in a very ask themselves is, “Do we want to increasingly rely professional, very diligent way. He is an extremely on imports of gas as production of gas from the North hard-working Minister. Sea declines or does not increase to what it used to be Albert Owen: I am not judging Mr Fallon on his and we have to import a lot more or, if there is a ability. potential opportunity for onshore gas being produced Mr Davey: Therefore, I think this Committee and you, from fracking, do we close down that option?” I think Mr Owen, should be relaxed about that. we must keep it open. I think we must explore that Albert Owen: I am very relaxed. I just need some option. We are doing that vigorously, though there are information from you. Are Mr Hayes’ responsibilities other people who disagree with the vigour with which going to be spread between other Ministers or are they we are going about this. We are doing it to make sure going to be taken over in a part-time capacity by a that it can be done in a way that takes the public with BIS Minister? us and can be done in a way that is acceptable and I Mr Davey: There is some look at the ministerial think we are leading Europe again in that. responsibilities that Mr Fallon has both at BIS and at DECC to see if there are things that can be taken off Q418 Albert Owen: I just wanted to come in on a his list of things. We have already, for example, taken couple of those points. Can I just go back to the role off him, from DECC, the work that Mr Hayes was of the new Minister of State and BIS? Who is his doing with respect to the deregulation agenda and boss? Is it your friend and colleague— Baroness Verma is doing that. I believe Dr Cable has Mr Davey: It is the Prime Minister, probably. done similar things at the Department for Business, Albert Owen: No, whose Department does he work Innovation and Skills. The ministerial responsibilities, for? Does he work part-time in your Department? I stress, are on the website. If you would like us to Does he work for BIS and seconded over to your write them— Department? What hours do you expect out of him? What duties do you expect out of him? Importantly, Q420 Chair: I am very sorry to interrupt you. Just the primary role of this Committee is to scrutinise on that point, I have looked at your website in the last your Department and yet we have not had any clear two or three minutes. The last update on Mr Fallon’s indication from you or your Department what responsibilities was on 28 March and it said, “The responsibilities that Mr Hayes had have been exact portfolio of the Energy Minister is still to be cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG04 Source: /MILES/PKU/INPUT/030522/030522_o004_Corrected Transcript.xml
Ev 80 Energy and Climate Change Committee: Evidence
21 May 2013 Rt Hon Edward Davey MP, Rachael Crisp and Gareth Baynham-Hughes confirmed following the appointment of the Rt Hon the mechanics of forcing suppliers to put consumers Michael Fallon in addition to his current role as on the cheapest tariff will work in practice. Minister in the Department of Business.” Mr Davey: As you know, the detail reforms have Mr Davey: I beg your pardon. I assumed it was on come from the regulator, from Ofgem, who I know the website. It ought to be on the website. I will ensure you have been talking to just now. What we are doing the website is updated. in the Bill is putting statutory backing to those Chair: Two months into his job— proposals, but it will be Ofgem who will take them Albert Owen: I am very relaxed but I am still not forward. I understand they will start implementing clear. Do you know what his responsibilities are, them this summer and hopefully there will be full Secretary of State? implementation by March 2014. There are a number Mr Davey: Of course I do. of elements to it, which we could go through. Albert Owen: Okay, so you will let us know in detail The element that you have particularly raised is that what they are? there are some customers of some energy companies Mr Davey: Of course. They are not a secret. I am who are on so-called dead tariffs, tariffs that are not sorry that they are not on the website. currently available in the market. They tend to be Albert Owen: You did tell me they were on the uncompetitive, so those customers are paying website. significantly more in some cases than they should be. Mr Davey: Yes, I did and I made a mistake. I Under Ofgem’s proposals, which we strongly support, absolutely apologise— those companies will have to move them down to the Albert Owen: We all make mistakes. tariff they have of that type, whether it is a variable Mr Davey:—that I do not manage my website on a type or a fixed type. Normally, in these instances, it is daily basis. a standard variable tariff that has become a dead tariff over time. That is one example that you mentioned in Q421 Albert Owen: One final point, Secretary of your question but, of course, there are many other State. You said that some of Mr Hayes’ aspects of the retail market review and the tariff responsibilities had gone to your colleague in the reform that Ofgem have put forward and which we House of Lords. For scrutiny purposes, it is going to support. be difficult for us to scrutinise the responsibilities that she has at DECC questions. Is Mr Fallon going to be Q424 Ian Lavery: How do you measure Ofgem’s able to answer some of those questions or, indeed, performance in delivery of policy objectives? yourself? Mr Davey: In terms of the tariff reform or more Mr Davey: This is not a new thing, to have a generally? Minister— Ian Lavery: More generally. Albert Owen: I am not saying it is new. I am asking Mr Davey: The Government when it came to power specific questions. did a review of Ofgem, had a lot of discussion with Mr Davey: Therefore, in terms of the previous the industry and consumer groups and so on, and we practices at DECC oral questions or, indeed, the Select decided that there were a number of things we needed Committee, where you want to ask Ministers to do. The strategic policy statement, the SPS, is questions about responsibilities of other Ministers, probably the core of it in terms of the accountability you are very free to go ahead. Of course I am and the framing of what Ofgem does. There are responsible for all policies, so you can ask me any clauses in the Energy Bill to take that proposal question you like in the Department. forward and it will set out in clear terms the different roles played by the Department and particularly Q422 Albert Owen: Okay. On that one, sorry, just to Ofgem and how that will work. I think that strategic drill it down, what Mr Hayes had as a responsibility policy statement is probably the core of how Ofgem has been transferred up to your colleague in the House will be held to account by the Government, yourselves of Lords. You will answer for it in the House of and others. Commons or will Mr Fallon? Mr Davey: I think it could be either Mr Fallon or Q425 Ian Lavery: In relation to Ofgem, it would be myself. When we, for example, are doing topical interesting to hear how you, as the Secretary of State questions you will have known from not just my for Energy, currently rate Ofgem’s performance. If Department but other Departments that we often you have obviously scrutinised it, which I am sure decide at the last minute who is going to take a you have, what areas for improvement have you particular question. identified as priorities? Albert Owen: Sure, but a specific question? Mr Davey: Let us start off by recognising that it is Mr Davey: If it was a written question, for example, very important that Ofgem has its independence in the it almost certainly would be answered by Mr Fallon. EU’s third energy package and I would support, as a former Competition Minister, the importance of Q423 Ian Lavery: The general public are very independent regulators. It is important that people interested in the cheapest tariff proposals, which was recognise they have that. Because of investment and outlined by the Prime Minister at PMQs. Your front- because of consumers, it is important that there is line Minister, Greg Barker, stated that the detail of the certainty there and that people do not think cheapest tariff proposals will be set out in secondary Government is going to second-guess or interfere with legislation. I wonder if you could give an idea of how the regulator. Of course, we take an active interest in cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG04 Source: /MILES/PKU/INPUT/030522/030522_o004_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 81
21 May 2013 Rt Hon Edward Davey MP, Rachael Crisp and Gareth Baynham-Hughes what they are doing, because that is very important for do that. We are doing it in a number of areas to the efficient and fair running of our energy markets. enhance protection for consumers. As for the I could point to one or two things that I think are particular example that you have cited from the welcome from Ofgem in recent times. First, the retail APPG, I would have to study that. market review we talked about. When we were in Opposition we were arguing that we needed to have Q428 John Robertson: I asked questions to Ofgem less complexity in the tariffs. Ofgem, through the about the connections with Europe. I know Europe retail market review, are simplifying the tariffs and I can be a bit of a problem for this Government, but think that will prove to be good for competition and your wing should be okay in relation to using it. I good for consumers. They have not yet told us their asked them Ofgem if they would go and use the EU conclusions from the consultation they have done on powers. It was Consumer Focus who drew to our liquidity in the wholesale markets, but we very much attention the EU electricity and gas directives, which welcome that they have said in their consultation Ofgem seem somewhat reticent to use, and also the paper that they intend to intervene to improve EU REMIT and legislation as well to look at how we liquidity in the wholesale market. That is something can get more information on the Big Six to find out that I strongly support and one of the reasons we put exactly what are in their bills and why they are in the in the Energy Bill some reserve powers to make sure bills. Ofgem seem to have a problem with using it. that the changes that come from their deliberations What do you think? Do you think they should be will actually happen. Those two examples of working with Europe on this? improving competition in the retail market, improving Mr Davey: My understanding is Ofgem have been competition in the wholesale market, are welcome working with Europe. developments and Ofgem deserves credit for taking John Robertson: No, not in talking to them. them. Mr Davey: In the development of the REMIT powers, I thought both the UK Government and Ofgem had Q426 Albert Owen: Can I just come in on Ofgem’s contributed to the debate at European level. As you role in particular? I understand what you are saying will know, we are implementing the REMIT. We want about its independence and getting on with it. As you to be one of the first countries in the EU to transpose know, there is an all-party group on the off-grid gas that. Some of the powers that were in REMIT we supplies that has come up with a report that has been already had in our legislation, but there were others debated and responded to by your Department. One that we needed to consult on. We have consulted on of their key recommendations is to enhance the them. Ofgem has been very much part of that, not responsibilities of Ofgem to the off-grid. I asked your least because they will be powers given to Ofgem. I predecessor about that. He said that it would be a am surprised, Mr Robertson, they said that because matter for Ofgem themselves to make the request. they are involved in the transposing of those powers When I asked the Chief Executive of Ofgem, he said because they will be powers given to Ofgem. that is a matter for Government. Can I ask you, as the John Robertson: I am sure they have heard what you representative of Government here, whether you have said. would welcome what the all-party group has done to have equal regulation off-grid as they have on-grid? Q429 Dr Lee: Moving on to wholesale energy prices Mr Davey: I am very happy to get back to you on and the future of UK gas prices, we are likely to that, Mr Owen. I have not looked at that detailed become increasingly dependent on supplies of gas by proposal. Again, it has not been made to me from LNG as the contribution from the North Sea declines. Ofgem and I am afraid I was not aware— Won’t this make the UK increasingly exposed to Albert Owen: No, just for clarity, from the all-party prices in Asian markets? group. Mr Davey: One of our long-term concerns is to make Mr Davey: I was not aware of the all-party group’s sure that we have a diverse energy supply, that we are recommendation. I apologise that I was not aware of not over-dependent on a particular energy source and, that, but I think it is worth reminding the Committee in this case, for our gas, which is going to be a very that when we have considered increasing the powers important part of our energy mix, it is important that of Ofgem, we have acted. For example, for— we are not dependent on one particular source. But we do have a very liquid gas market in the UK, Q427 Albert Owen: With respect, can I just ask your probably the most liquid in Europe if not the world. opinion on this? I obtained the opinion of your Yes, we have gas supplies still from the North Sea and predecessor, who said it was up to Ofgem and they we are doing an awful lot to enhance those supplies would be minded to take it on board if the regulator because they have been declining. We want to halt made that proposal, but the regulator said very clearly that decline if we can, but we also have pipelines from that it was up to Government. You do represent the Norway and from the continent as well as LNG. The Government. What is your opinion, just your opinion point I am trying to make, Dr Lee, is that we have a as the current Secretary of State? variety of supplies and that is the right thing, but I do Mr Davey: I am sure that we do not need Ofgem’s not disagree with your point that we should not be permission to give them extra powers. We are the over-reliant on one form of energy because it exposes Government. We can legislate to give Ofgem extra our economy. powers if we so chose to. I can’t answer for what my predecessor particularly said but I cannot see why, if Q430 Dr Lee: Yes, that is all very well. The problem we chose to give Ofgem more powers, we could not is that the Asian economies need the energy at the cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG04 Source: /MILES/PKU/INPUT/030522/030522_o004_Corrected Transcript.xml
Ev 82 Energy and Climate Change Committee: Evidence
21 May 2013 Rt Hon Edward Davey MP, Rachael Crisp and Gareth Baynham-Hughes time of winter and their winter is the same as ours. plants, which are quite interesting because they are Their seasons are the same, so the likelihood is we are different from some of the storage plants we have had going to need it as much as when they need it. If you previously in the country, which have been more long- add into the mix the rather bizarre decision by the term storage. It is quite helpful because it can deliver German Government over nuclear and Fukushima in the gas more quickly. There are a number that we have Japan, the likelihood is we are going to be dealing under way. with higher prices. The tanker coming out of the Strait One of the misunderstandings that we have seen, not of Hormuz, it is going to turn left, isn’t it? It is not least in the headlines a few months ago when we had turning right. that cold period, was that people seemed to think that Mr Davey: If you look at the recent flows you are we depended on the gas from these storage facilities. right to say that Japan has seen some very high hikes Because we have a diversified supply of gas, we take in the gas price it has been prepared to pay and that gas on any one day from a number of different has attracted quite a lot of the LNG that has been sources, including the pipelines we have with Norway around. That does not mean there have not been and the continent, including LNG and including the tankers from Qatar and other places that have come North Sea. Sometimes people think that the storage is to the UK. You are right, LNG is one part of the gas a critical part of the supply of gas to the UK on any market that is much more global by the very nature one day. That is not the case. It is part of the mix, but that it is on ships, but my point to you back is that we not the critical part. are not dependent on LNG. We have other forms of gas from the North Sea, from pipelines from other Q433 Dr Lee: Yes, but, of course, having that countries. capacity would allow us some buffer against a closure of the Strait of Hormuz event, for example, would it Q431 Dr Lee: Yes, but you said earlier that gas is not, which is not beyond the realms of possibilities at going to play a major part and we are going to need the moment, is it? significant amounts of gas. Fingers crossed, they can Mr Davey: I would suggest to you that if the Strait of recover further assets from the North Sea, and Hormuz closed you might be more worried about our fracking delivers whatever, but the reality is that we imports and the world’s imports of oil rather more are going to be increasingly dependent on gas as coal than about gas. switches off. That is true and, in view of the fact that Dr Lee: I know, but the problem is a lot of our long- our gas we get from Europe, the Norwegians are term contracts with the Russians are fixed oil barrel going to start—if the Germans start paying more for prices. So it does have an impact. it because they are having to import more because Mr Davey: The UK does not have very many long- they have switched off their nuclear power stations, term contracts with Russia, as you know. the chances are we have high gas prices ahead of us, Dr Lee: Yes, but if those countries have those don’t we? supplies, they are going to look elsewhere for their Mr Davey: You are right to say that if you look at supplies and thereby drive up the gas prices coming some of the forecasts by the International Energy from elsewhere, which we use from our diversified Agency and some of the market analysts, they do say base. The American shale gas, the Norwegian gas, all that gas prices are likely to stay high and potentially those prices will be lifted up by the fact that the gas to go higher. One of the problems, of course, in price from Russia has gone up because the barrel price working out where the future gas prices will be is has gone up. understanding the underlying demands in the three Mr Davey: If, Dr Lee, you are interested in the— regional markets that we have in the world; the North Dr Lee: Do you accept— American market, the Asian market and the European/ Mr Davey: I would like to answer your question. We North Africa market. That has been complicated by do a lot of work thinking about energy security where things in Germany and Japan, the nuclear switch-offs we look with colleagues across Government about that you have referred to. It has also been complicated “what if”. What if the Strait of Hormuz closes? What because we do not know how much unconventional if a pipeline has some maintenance problem or a strike gas we are going to get from fracking, particularly in so that the pipeline is not getting gas to the UK? We Europe and North Africa. I hope that will be look at scenarios where we take two or three things successful but, again, it is one of these uncertainties. happening and say, “Would we be secure for gas supplies if this, this and this all happened suddenly on Q432 Dr Lee: Sure, and also it would be further the same day?” We do that type of analysis because complicated by increased renewables because on cold you would expect us to do that. There may be some windless days you have to underwrite every wind security issues, I am not sure how that would play, but farm with gas. Moving on to the winter gas storage I am very happy to share with the Committee some of problems we also have, we have pretty limited that work. facilities. What plans do you have to develop seasonal Dr Lee: You do not have sleepless nights about it, is gas storage capacity? that what you are saying? Mr Davey: A number of new gas storage facilities are Mr Davey: No, I do not. I think we do a lot of being built, but one of the— preparatory work and, if anything, we have stepped Dr Lee: Whereabouts exactly? that up. Mr Davey: I do not know. My colleagues are not the experts in this area. We could give you the exact Q434 Dr Lee: Okay. Moving on to comparing gas details. Some of these are fast-cycle gas storage and electricity prices within the European Union, your cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG04 Source: /MILES/PKU/INPUT/030522/030522_o004_Corrected Transcript.xml
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21 May 2013 Rt Hon Edward Davey MP, Rachael Crisp and Gareth Baynham-Hughes written evidence states that UK consumers are paying of a large number of accounts promotes competition. the lowest gas and among the lowest electricity prices It has an indirect effect for all customers because it in the EU15 when tax is included. However, when tax enables smaller suppliers to gain access to a larger is excluded UK consumers pay a significantly above- number of accounts at relatively low cost. Winning average electricity price and slightly above-average new accounts in the energy business can be quite an gas price. Why don’t you use tax-exclusive figures expensive process, from knocking on doors, from to give a fairer representation of UK energy prices mailing and so on, but the auction process—collective compared with Europe’s? switching, which I have been really pushing, as you Mr Davey: We use the ones with tax because that is know, as Secretary of State—opens up in one go large what people pay. numbers of accounts. We have seen as a result of that some of the small suppliers increasing their customer Q435 Dr Lee: Yes, but when you are talking about— base. I think the trend on that side is such that while Mr Davey: Well— I am not saying we are there, we are seeing more Dr Lee: No, hang on a minute. When you are talking competition, not less. about wholesale energy prices, that is net. It is irrespective of tax. The price is not set on the markets Q437 Dr Lee: Okay. Finally, a question on liquidity. based on what the VAT level is in various countries. Contracts for difference proposals under the Energy We choose to add that on top of that. In this context, Bill will require a liquid market in electricity we are trying to work out whether we are paying contracts, and yet Ofgem has been striving to improve significant sums of money wholesale, separate from liquidity since 2009 with limited success. Does your tax. I am not on about how much it costs Mrs Bloggs Department have any alternative arrangements if down the road because she is paying VAT. I am on liquidity does not develop? about how much you are paying Vladimir Putin for Mr Davey: It is something we have been doing a lot your gas, and that is not subject to VAT. of work on, but Ofgem equally have been doing a Mr Davey: If you are saying that there may be more huge amount of work on it. They have learnt from the room for increased competition to make sure— period that you described where they have done Dr Lee: No, candour; not competition, candour. analysis for a number of years but, as I said in my Mr Davey: Sorry? remarks I think to Mr Robertson, the latest Dr Lee: Candour. consultation had some very strong proposals and I Mr Davey: Candour? understand that GEMA are looking at them to make Dr Lee: Yes, as in let us be transparent; let us final decisions following that consultation next month compare like with like is my point. and we look forward to their conclusions. Mr Davey: You were able to deduce from our figures We have made it clear that we want to see much that we presented after-tax figures, so we were pretty greater liquidity in the forward markets. That is good transparent on that and we always have been. I think for competition. It is good for transparency. I think it one of the reasons we have done that is that is what will help independent generators not just get contracts people pay. I think that is quite understandable. People for difference for electricity market reform but, obviously want what they are paying, understandably, anyway, enable them to manage their risk better. It and I do not disagree with your line of questioning, will be one factor in helping them get power purchase Dr Lee. It is a fair question to say, “Pre-tax, are we agreements so they can grow and compete with the getting the best prices?” We are getting, as you said, bigger companies. I could not have been clearer over around average, a little above, in electricity and that a protracted period that that is the direction of travel suggests that there is room for more competition. One that I support. of the obsessions I have in policy in both retail and Just in case anyone was in any doubt, we obtained in wholesale markets is to make sure we have as the Energy Bill reserve powers so that if Ofgem competitive markets as possible. proposals do not work, we would still have the powers to come and revisit the wholesale markets to get Q436 Dr Lee: Building on that, we have not seen any liquidity. I do not think we could have been clearer new companies of significant size entering the energy supporting the independent energy regulator and supply market. What do you see as the main barriers giving a clear steer that we want to see more to entry to provide the competition that you seek? competition in the wholesale markets. Mr Davey: You are talking about the supply to retail customers now? Q438 Sir Robert Smith: One of the concerns raised Dr Lee: Yes. with us about what is affecting bills is, of course, Mr Davey: We have seen quite a lot of smaller some of the levies for social and environmental companies. They do not yet have big market share, reasons that are put on to the energy bills. In your but I think the recent trends are in the opposite submission you talk about how bills are now 11% direction to the one you described, Dr Lee. One of the lower or will be £166 lower in 2020 by doing what reasons I am very keen on collective switching, which you are doing than they would have been without your I have regaled the Committee about before—this idea intervention. How have you come to that conclusion? of bringing consumers together so they can purchase Mr Davey: In order to make sure we are being as together and increase their buying power—is not only transparent as possible, the Government every year does it get better deals for those customers who see does a bills and prices report that analyses the impact the deal that is good for them after joining a collective of all our energy and climate change policies for switch, not everyone will but many do, but the auction consumer bills and business bills. It is quite a detailed cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG04 Source: /MILES/PKU/INPUT/030522/030522_o004_Corrected Transcript.xml
Ev 84 Energy and Climate Change Committee: Evidence
21 May 2013 Rt Hon Edward Davey MP, Rachael Crisp and Gareth Baynham-Hughes piece of work and the figures you described, Sir this Government when they were doing the spending Robert, come from that work. What that shows is all review and there was a decision that they would the different impacts on energy bills. The biggest, of continue with these levies on consumer bills. course, is the rise in wholesale gas price. We have Although you make that point that there may be some seen in recent years a 60% rise. Given wholesale gas poorer consumers who are not getting the benefits of is about 50% of the average dual-fuel bill, you can CERT or now ECO, yet are paying on their bills— see why that has been the big driver of higher energy and that is a valid point—I note that Professor John prices. Hills’ report into fuel poverty, when he looked at But in our bills and prices report we look at the other different ways of funding energy efficiency factors. We look at the network costs. We look at programmes to help the fuel poor, saw a case for the margins. We look at overhead costs. We look at taxes levy-funded approach, not least I think because it and we look at Government policies that you referred might force energy companies to be more effective in to. When you look at the average dual-fuel bill, 9% rolling it out. I think I am right in saying that he of it comes from Government policies. In 2013 that is thought it was a better way of delivering those £112. Yes, we have added to bills, but it is by no programmes. Gareth, do you want to add to that? means the biggest increase in the bills. That is far Gareth Baynham-Hughes: Yes. There is an outweighed by the increase in wholesale gas prices assumption built into the Hills review about the types and network cost rises. It is also important to of measures that would be delivered through remember what that 9% is going on. Some people investment in energy efficiency if it were done by think it is all on low carbon; far from it. The majority suppliers or if it were done by Government. The of the Government-imposed cost elements are on assumption that was in the review was that energy efficiency and measures to tackle fuel poverty. competitive pressures and so on would encourage That often is forgotten when you read these articles energy companies to deliver a more cost-effective that say it is the Government who are driving up costs. package of measures. I think that is something we Our measures are designed to help people save energy would expect to see under ECO. If you look at the long term and also to tackle fuel poverty. amount of money that used to go into Warm Front, for example, compared with a similar amount going Q439 Sir Robert Smith: Do you think there could in under ECO, we would expect more households to be a clearer breakdown of those impacts on the bill to be reached through ECO because it is more cost the individual consumer? effective per measure. Mr Davey: Quite a lot of energy companies do break down their bills. Obviously they may do that in Q441 Sir Robert Smith: One of the other different ways. One of the reasons why I think it is suggestions to maybe smooth the burden is to have a right that my Department publishes the bills and protected block of the tariff that is not subject to the prices report is—we put out the information there and levy and then levy on those consumptions over that let people challenge it, read it and debate it—is so that protected block. Is that at all attractive? there is an authoritative position. We look at our Mr Davey: I have not looked at detailed analysis, but impact of our measures on current bills and we believe I will give you my first instincts and it is the issue that without our policies, bills would now be higher. that the Chairman has raised with me before about the Our policies on things like product efficiency, energy rising blocks. He will recall that when he was Energy efficiency, have helped drive overall bills down Minister he received the same advice that I get, compared with what they otherwise would have been. namely that there are some energy users who use a lot When you then project forward to 2020, that saving of energy because they are large households who are is greater. Overall, if you look at all our policies very poor. If you restructure the tariff system in a together, which I think is the only fair way rather than number of ways, in the way you described of just taking a little slug as some people like to do, we restructuring the levy system, you might have an are trying to cushion consumers from these high gas unintended consequence of putting more weight on prices that Dr Lee referred to. It is a worry. We can’t some of these large households who are fuel poor. I control global gas prices, of course we can’t, but I am not saying that necessarily would follow from think our job as a Government is to try to cushion your proposal because I have not analysed it, but that people from the effects of those. That is why we have might be the outcome. taken those measures that are behind that analysis and Sir Robert Smith: I suppose another concern would it is why it is one of my obsessions to try to help be those who are not on the gas grid and rely on consumers who are feeling the pinch with high electricity for their heating would be similarly energy bills. penalised. Mr Davey: If they were high consumers, yes. Q440 Sir Robert Smith: One of the concerns is that, of course, the poorer consumers are paying the same Q442 Mr Lilley: You measure that element of the big chunk as some of the better-off consumers and, environmental levies and so on that falls directly on therefore, that method of raising funds is more household bills. The rest falls on industrial energy aggressive than general taxation. How is the debate costs, but you would agree with me, I am sure, that held as to whether something should be a levy on the ultimately all costs are borne by individuals. bill or funded through the general taxation? Companies do not exist. They are simply composed Mr Davey: I think the big debates on that happened of employees, shareholders and customers. Could you both in the last Government and the early stages of tell us what proportion of the total cost of all these cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG04 Source: /MILES/PKU/INPUT/030522/030522_o004_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 85
21 May 2013 Rt Hon Edward Davey MP, Rachael Crisp and Gareth Baynham-Hughes levies falls directly on household bills and what Mr Lilley: The idea that subsidies are a symptom of proportion goes through industrial bills? free markets is an interesting one. I will just round up Mr Davey: I do not have that figure to hand. and say could we have an answer to the question: what Mr Lilley: I did put down a PQ and I received a very share of the total environmental levies goes on confused answer, but it seemed to say roughly a third households and what share goes on taxpayers and goes on household bills and two-thirds via industry. I industries, if so called? think it was designed to confuse. Mr Davey: Yes, I have already said I will provide it. Mr Davey: I am happy to look out that written answer and see if there is any way we can make it clearer for Q443 John Robertson: On company profits and tax, you. If you have a particular point you wish to come today’s Independent has said that struggling customers back on, then we aim to try to make it clearer. prepare to receive the announcement that the SSE are Mr Lilley: That is what I am doing now. If it is two- going to have a 30% jump in profits in its division thirds to one-third, that would mean that the total cost supplying gas and electricity to the UK. Now, given being borne is three times the figure that you quote. that SSE put gas and electricity both up by 9% back Mr Davey: Let us be clear. In our bills and prices in October, what do you have to say about that? report that I referred to before, we do not just do it Mr Davey: To make sure that energy companies’ for consumers. profits are reasonable ones but not excessive, the Mr Lilley: You do it for industry, but industry does Government need to ensure that we have proper not exist. It is employees, shareholders and customers. competition both in the retail sector and the wholesale Industry does not pay the bill. Employees, sector. It is absolutely critical that the consumer is shareholders and customers pay bills. not ripped off and our best way of doing that is with Mr Davey: I do not deny the instance that you are competition. Of course, when energy companies have referring to, but the point might well be that the poor behaviour with mis-selling, as we have seen people who own those industries that you are referring recently, it is absolutely vital we have strong to may not be only domestic residents because, as you consumer protection laws and Ofgem can levy the will readily be aware, many industries are fines, which we have seen. Poor behaviour can be multinational and they have owners who live all round cracked down on, but competition is in many ways the world, so we get into quite a complicated system our bulwark to make sure that profits are reasonable of the distributional effects of these levies. Moreover, and, let us be clear, there have to be some profits. they may be a smaller part of the population compared John Robertson: 30%? with the analysis that you would do on distributional Mr Davey: Let me just— effects for consumers. If you are suggesting that it is John Robertson: When you are talking about— somehow wrong to separate the two, I would disagree Mr Davey: That is why we may well need more with you. I do not disagree with the fact that, of competition. It is what I have been talking about the course, it is individuals who pay bills, but I do not whole time. I am absolutely not complacent about think it is true to say that there is a complete map- this, Mr Robertson. We have to act. over with other analysis in terms of the individual with economic interest in the industries that we are Q444 John Robertson: You say competition is great. talking about. They have all put their prices up within months of Mr Lilley: No, but it is incomplete to present each other, to round about the same figure. The households as if they are the people who pay the bills highest was 10.8% and the lowest was 7%. They are and industries as if that is something that does not all the same. Where is the competition? consist of— Mr Davey: I think the price rises were different and Mr Davey: I would be interested in the methodology one of the major reasons for the prices going up was, that tried to merge the two. I think it would be— regrettably, the rises in global gas prices that Dr Lee Mr Lilley: It is quite simple. You take the total cost was talking about. We absolutely have to make sure and divide by the number of households and you get that the energy companies feel the heat of an average figure. competition. It is one of the reasons why I am, again Mr Davey: Yes, but I do not think it would be an in answer to Dr Lee’s question, so keen to make sure accurate figure. that through things like co-operative energy buying, Mr Lilley: It would be an average figure. through tariff reform, that that competition bears down Mr Davey: It would not be an accurate figure for the on the energy companies. I think they should expect impact on the UK domestic consumer for the reasons that and they should expect me as Secretary of State I have already given you. and Ofgem as the independent regulator to be very Mr Lilley: Some of it might go abroad, as indeed hard on making sure we have the most competitive does a large slug of the subsidies we pay, most of market. which end up in foreign households. You never take that into account. Q445 John Robertson: Seriously, I think you are Mr Davey: I believe in open markets and global missing the point; either that or you are not getting markets. As someone who believes in free markets the right advice. The Big Six will tell you that they and free trade, I think that is an inevitable are only making 2% to 3% profit. As a matter of fact, consequence. The people who do not believe in free your own statement that we had in previous times said markets and free trade, I think, would undermine the 3% profit, but that is retail. If you go to generation, prosperity of our country. Our policies should not be they are making between 17% and 20% profit. When protectionist. they pay their dividends to shareholders in the UK, cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG04 Source: /MILES/PKU/INPUT/030522/030522_o004_Corrected Transcript.xml
Ev 86 Energy and Climate Change Committee: Evidence
21 May 2013 Rt Hon Edward Davey MP, Rachael Crisp and Gareth Baynham-Hughes they put the whole lot together. They do not just say, to give tax advantages to companies which are making “We are only going to give you a dividend on the that investment. While I completely agree with you 2%”. They say, “We will give you the dividend on the that we need transparency and we need to make sure 17% plus the 2%.” They are ripping us off and yet we that companies, and not just energy companies, all cannot get hold of the figures. We cannot get hold of companies, pay the tax that they should pay, if we also the books. That was the reason I asked you a question want to promote investment and encourage earlier on about Europe, who seem to be part of the investment, it is important that when a company uses way of getting some of this information. We hear of a capital allowances, as Parliament wanted them to do company, npower, who now want to consolidate their so, I do not think they should be criticised. accounts in Malta. With the best will in the world, this is a company that does not pay any corporation tax in Q447 John Robertson: Okay, but this is the same the UK. Please, how are you going to support the company that can’t tell us what they are generating in people in this country? this country. If they can do that, surely they can tell Mr Davey: We are determined to support the people us exactly how much money is involved in the in this country, whether they are consumers or generation of energy. Let me explain it to you, businesses, and we do support and have taken because you obviously do not know. You have the action—indeed, the last Government started this in generators and you generate the power. You put it into 2009—to get greater transparency in the accounts of a central area of which, funnily enough, the same energy companies. They are now required to have companies come around and buy it back off segregated accounts and, although that is a recent themselves and then sell it to the customer. That development, I think it has improved transparency. generating side is the one where they make the most There is a recent report by BDO for Ofgem to see money and the retail one is the one they say makes whether or not there are improvements to that new the least money. Why do they do that? Because it is system to make sure it is as transparent as possible, all a part of trying to hide the money at the other end so you and others and Government and the regulator that can be hidden within the European and the big can have that information. That transparency is critical multinational companies. to enable us to take decisions as we need to. If you Let me go on to another thing about your own want to talk about tax I am very happy to talk about Department. I wrote a series of questions on 10 May that, but I do think the transparency in the accounting and basically the questions were: “So, as the Secretary regime that the energy utilities face is very important. of State for Energy and Climate Change, how much has the Department given in subsidy to RWE npower Q446 John Robertson: But this seems to be related. in each of the last five years, and to what projects the It is not just about energy, I know. I have a rather money was earmarked?” I asked that for each one of large letter kicking about here from npower, from a the Big Six, and I received this extensive answer. “The Mr Paul Massara who gave evidence to us, pleading data is not collected in the format requested and could poverty always. I have to say, I understand what you not be provided except at a disproportionate cost,” are saying, he may not be breaking the law, but we which said to me you have not a clue how much is are doing nothing to hold these people to account. We involved, and yet I can go down the Library and they have two companies who pay corporation tax to the can give me figures of projects and money where the proper amount. We have three companies who pay Government has invested. some, and we have this company, which pays none. Secretary of State, it is not good enough. We have to That can’t be right. One of them can’t be right and the hold these companies to account, and I do not think other five wrong. There is something not right here. you are doing the job properly if you do not hold them Mr Davey: Mr Robertson, I am not going to go into to account. It is all very well making excuses for them, the details of an individual company’s tax affairs, not but we have people who cannot afford to pay their least because, not surprisingly, I do not know all the bills and we need to support them, not these massive details, but I will comment— companies. They can afford to support themselves. If John Robertson: I only asked a basic question, they can support themselves in tax avoidance, then without being fair to all the— they can certainly support the country in paying some Mr Davey: Can I just finish my answer, though? I did of the taxes that they are avoiding paying. note from your previous proceedings that Mr Lavery, Mr Davey: You are absolutely right that we have to I think it was, had asked Paul Massara a number of hold companies to account. They have to be held to detailed points on RWE’s tax affairs. While there were account for the way they behave in the electricity some interesting exchanges there, it is worth noting to market and the way they buy and sell energy. They the Committee that, in his reply to this Committee and have to be held to account for how they pay their the reply that I was copied in on, the argument he taxes. But I am afraid I reject your conclusion that made was that npower had been investing heavily in that is not happening and I can cite very recent plant in this country. They showed that they had been examples of record fines imposed on UK energy the largest investor of the Big Six over the last few companies for mis-selling, and I would have thought years and the reason why their tax bills were what you would have welcomed that, not failed to people have been saying at this Committee was mention it. because they had used the capital allowances passed John Robertson: Of course you did. in Finance Bills by the last Government, and Mr Davey: Moreover, Mr Robertson, in the Energy confirmed by this because they were making that Bill we have increased the support for consumers massive investment. The capital allowances are there because we have said that, where an energy company cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG04 Source: /MILES/PKU/INPUT/030522/030522_o004_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 87
21 May 2013 Rt Hon Edward Davey MP, Rachael Crisp and Gareth Baynham-Hughes is fined for bad behaviour, those fines do not just come Barry Gardiner: They have not taken any of them to the Government and go to the consolidated fund. forward in the form that they were recommended by They go to help those consumers who lost out. That BDO. They varied or not accepted every single one. is action that this Government is taking to make sure Mr Davey: I think, and I have always said this, that that consumers who are mistreated get proper we should keep this type of thing under review. This recompense, and I think you should welcome that. I is a very new regime. It has only been going a few would have thought you would want to welcome that. years. It is a unique regime, to my understanding, and John Robertson: I gave you the credit last time when therefore I think it is something that should be I said how well you had done. This time I am not celebrated and supported. If there need to be more going to do that, so you do not expect me to be nice improvements we are certainly happy to consider to you all the time. them, but this was a report to Ofgem, not to the Government. Ofgem have taken the views that they Q448 Barry Gardiner: Secretary of State, I was have taken. very glad that you mentioned the BDO report and that you are aware of that. You will probably recall that Q449 Barry Gardiner: Secretary of State, unless there were eight recommendations that BDO made. you had raised it in defence to Mr Robertson, I would Do you happen to recall the responses that Ofgem not have brought it up. I wanted to ask you about fuel made to those eight recommendations? poverty and the Hills review. The spend on fuel Mr Davey: As I recall, what BDO said was, overall, poverty overall, as you know, has been cut the way the accounts had been presented and dramatically. In 2010Ð11 it was £319 million. In segregated was fair and reasonable. So their overall 2011Ð12 it was £97 million. Five days ago you judgment— released the latest fuel poverty report from your Barry Gardiner: The trouble of just reading Department and under both the Hills definition and executive summaries, Secretary of State— the old 10% definition, fuel poverty has decreased and Mr Davey: Let me finish answering the question, Mr I want to give you credit for that. You will know that Gardiner. You did not mention this in your question, under the old definition it has gone down by 9.5%, but for the record it is important that the full picture and under your new definition it has only gone down is painted. BDO said that the overall approach was by 4.3%—but that is because, of course, the figures fair and reasonable, but they asked for some are also smaller in the first place—but the fuel poverty improvements and then we get to the gap has gone up. That means that, for those who are recommendations. My understanding is that Ofgem in fuel poverty, that poverty has become worse. In the have accepted some of those recommendations, but light of that, can you assure this Committee that you one or two they have not. I do not know— believe you have allocated sufficient funds to tackle Barry Gardiner: Not one in its original form. the problem? Mr Davey: Well, I don’t know if Rachel wants to— Mr Davey: First of all, I slightly disagree with some Barry Gardiner: “We do not intend to take forward of your interpretations of the facts. Let me explain this recommendation. We propose obtaining an why. First of all, I think, if you look at the full independent opinion at least for the first year, but not spending review period to March 2015, total spending necessarily from an auditor. We propose to take on fuel poverty programmes is being increased if you forward a variation of this recommendation. We do take account of the levies like the Warm Home not propose to take forward this recommendation. We Discount and so on. I do not accept that there have do not intend to take forward this recommendation. been overall— We propose to take forward a variation of this Barry Gardiner: Increased from where, from £97 recommendation,” and then the final two, “As a result million? of our amended proposals and recommendation, 3, 7 Mr Davey: Over the spending review period. I think and 8 are no longer required in their original form.” there is a slight difference in views, I am afraid, with In your response to Mr Robertson you pleaded BDO you, Mr Gardiner, over the amount of spend. Also— in aid, saying that this was an example of the way in Barry Gardiner: Sorry, I have just quoted two which these companies were going to be held to figures. Let us be clear whether you agree that those account and you praised the BDO report, but the BDO figures are accurate. That is all I did. I did not talk report’s recommendations have not been taken up by about anything else. I simply quoted that £319 million the regulator. That is the problem; critical was spent in 2010Ð11, and £97 million was spent in recommendations. 2011Ð12. Mr Davey: I start by going back to the key point, Mr Davey: I think you are focusing on taxpayer- which you did not make, which— funded schemes. In my analysis, I have included both Barry Gardiner: No, but you had already made it. taxpayer and levy funding. Mr Davey:—was that BDO said that they were a fair Barry Gardiner: It is overall fuel poverty spend. It and reasonable approach. They found no evidence of is both. distortions of company profitability. Let’s start with Mr Davey: Let me bring in the expert, but my that basis. They did make some recommendations, and understanding is, if you add both taxpayer-funded and Ofgem have not taken all of them forward and they levy payer-funded, the overall spending on fuel have not taken some of them forward in the way that poverty programmes has increased during the they were proposed. spending review period. cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG04 Source: /MILES/PKU/INPUT/030522/030522_o004_Corrected Transcript.xml
Ev 88 Energy and Climate Change Committee: Evidence
21 May 2013 Rt Hon Edward Davey MP, Rachael Crisp and Gareth Baynham-Hughes
Q450 Barry Gardiner: We are not talking about the for measuring something properly, which other spending review. I gave you two specific years, Governments have not done, so that you can make 2010Ð11, and 2011Ð12 and I gave you the figures for sure your policies are better targeted and better fuel poverty and the fuel poverty gap in those years focused? Fuel poverty, like much poverty, can be in accordance with your own report produced five grinding and with the depth of fuel poverty, just like days ago. If you want to tell me they are wrong that the depth of income poverty, it is essential that we is fine, but it is your report. understand that better. The fact we did not in the past Gareth Baynham-Hughes: I do not recognise those is a bad thing. The fact that we are going to in the figures on spending. I would have thought that total future is a better thing so we can target our resources spending on fuel poverty through taxpayer-funded more effectively. mechanisms that were in place at the time and through levy-funded and other similar policies would be way Q452 Barry Gardiner: Secretary of State, I have not in excess of that. You are absolutely right, in terms of criticised you for changing the way in which we the fuel poverty statistics, that they showed a fall in calculate it today. If you apply the Hills methodology the headcount under both the 10% indicator and the back to 2009, I think what you will find is that in low-income high-cost indicator and an increase in the 2009, under the Hills methodology, 2,697 people were fuel poverty gap. The gap is the new measure in fuel poverty. That came down in 2010 to 2,675. proposed from the Hills review that helps you The fuel poverty gap, which was 1,173, came down understand, precisely as you say, for those people who under Labour to 1,130. These are your own figures by remain in fuel poverty, what the impact is of changes the new methodology that you favour. What it shows in incomes and changes in prices and so on. That is a is that up until 2010 fuel poverty was coming down very helpful insight that we didn’t used to have under and the fuel poverty gap was coming down; so the the 10% indicator that shows you the depth of depth of poverty, the extent of that poverty, was continuing hardship for households that happen not to decreasing. What your figures under your benefit in a given year of the policies that are being methodology show is that, while the number of deployed. households concerned has come down by 4.3%, the actual depth of their problem has worsened. They are Q451 Barry Gardiner: Thank you. Mr Baynham- worse off. What I asked you, which I still have not Hughes, you would agree with me that, under the had a response to, is are you confident that you have report that you released, the depth of fuel poverty for allocated sufficient funds to tackle the problem or those in fuel poverty, which under your own latest perhaps I should say that you have spent sufficient figures is 2,570 households—under the old figure it funds out of those that you have allocated in order to was 3,202 households—for those people, fuel poverty tackle this problem? has become worse. Let me clarify also, for the Mr Davey: I think fuel poverty is a huge problem and purposes of the Secretary of State, that the figures are I think the figures that you show, that we have now from your Department’s audited accounts and are caused to be published, show the depth of that. You what you actually spent, because of course it is not are absolutely right to ask us whether or not our about what you budget to spend. It is about what you strategies are sufficient to meet that challenge. It is do spend and those figures are in your audited one of the reasons why we will shortly be publishing accounts. a framework for our policies on fuel poverty, and we Mr Davey: We may have been taking different will follow that up with the first fuel poverty strategy periods, because clearly our fuel poverty spend over to be published in this country for, I think, 12 years the period with the Warm Home Discount is coming or a bit longer than that. We are very much focusing on. Maybe they are not in the figures that you on that. I can’t prejudge the publication of the presented but, to be fair to the Committee, I am giving framework or the strategy and the resources that are you the figures over the spending review period. going to go into that because we are working on that Can I go to the point that you were just focusing in with both our stakeholders and within Government, on? Sometimes you are damned if you do and you are but the fact that we are taking this so seriously, the damned if you don’t. We published figures on fuel fact that we had the Hills review, the fact that we are poverty showing that, under the old definition, fuel making sure that we, for the first time, measure it in poverty was coming down. You welcomed that. I have a better way, and the fact that we are coming forward to say I think that is probably a temporary reduction with a framework and a strategy does suggest to me because we all know that prices have gone up and, we are taking this very seriously. therefore, we should still be incredibly worried about Barry Gardiner: I am delighted to hear that you are fuel poverty. Then you referred to one of the matters going to be publishing the new fuel poverty strategy that we are using, a new measure from Professor John shortly. Hills’ review, which shows that depth of fuel poverty Mr Davey: The framework shortly; the strategy comes has become worse. It is one of the reasons why we later because it enables people to respond. needed to introduce that figure, because under the old definitions we would not have known that. We would Q453 Barry Gardiner: Can you give us any idea not have known that. If you are going to tackle fuel about the timelines there? poverty, you have to measure it properly. Mr Davey: I think the framework is quite shortly. The Okay, if there has been a worsening that is something strategy will be towards the end of this year. we should be worried about and I am worried about Barry Gardiner: That would be imminent and by the it, but it is rather odd, is it not, that you get criticised end of the year? cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG04 Source: /MILES/PKU/INPUT/030522/030522_o004_Corrected Transcript.xml
Energy and Climate Change Committee: Evidence Ev 89
21 May 2013 Rt Hon Edward Davey MP, Rachael Crisp and Gareth Baynham-Hughes
Mr Davey: Yes. the affordable warmth element, the carbon saving Barry Gardiner: Thank you for that. communities obligation, and the second part of it, the John Robertson: Which year? other chunk, is the carbon saving obligation. Many Barry Gardiner: This year. people in fuel poverty will also benefit from that. We Mr Davey: Mr Robertson, this year, if it helps you assess that slightly over half of the Energy Company with marking of my— Obligation will be going to the fuel-poor. Again, that is a policy. We could talk about that we think the Q454 Barry Gardiner: Professor Hills suggested to Green Deal will be particularly helpful for the fuel- this Committee that a system of rolling targets that poor, but there are other measures as well. adapt to changing situations could be a better way of I have to say that a full analysis of what we are doing tackling fuel poverty than an elimination target. How for fuel poverty, even before we get to the refreshed effective do you think the current target is, and would strategy that I have mentioned to you, shows that we you consider introducing a different system such as are taking that obligation very seriously. rolling targets? Mr Davey: The proposal that Professor Hills comes Q456 Sir Robert Smith: In identifying those that out with, which is this low-income high-cost measure, could best benefit, it is becoming more difficult, as a in many ways is a more challenging measure because lot of houses have already been dealt with, to identify it is not an absolute measure. It is more of a relative those who are most in need of support to tackle fuel measure. Therefore, it will be challenging to meet and poverty because of the data-handling of the situation. it has these two elements, not just the numbers that Is there anything that can be done to overcome data are measured by this low-income high-cost measure protection and privacy rights so that help can be more but also the depth that we have been talking about. efficiently targeted? We have taken on board a huge amount of what Mr Davey: The current legislation only allows us to Professor Hills has said. I am not familiar with the share pension credit data and we have been doing that proposal of a rolling target. I am not sure where that very successfully in the Warm Home Discount has come from. Scheme I have just been talking about with Mr Gareth Baynham-Hughes: I think it was something Gardiner. Energy suppliers are able to use that data he mentioned when giving evidence to the Committee. to deliver further help, for example energy-efficient Barry Gardiner: Absolutely. He said this to us, yes. measures, to low-income pensioners. They can use Gareth Baynham-Hughes: I do not have privileged that data for a number of things to help tackle fuel information. I was just here watching it. My poverty. interpretation was that he was thinking about targets There are obviously other data sets that could be used that would allow you to incrementally improve the and we have certainly not ruled out expanding the situation of low-income, high-cost households. use of data-sharing, but I think you could immediately Presumably you would set five-year targets, and you imagine that we would have to go about that with would set absolute targets within that context, either some caution and some sensitivity. People do not around the level of the fuel poverty gap or around necessarily want their data shared widely and we need energy efficiency standards or something. I think that to respect that. I think there would have to be a full, was what he must have been thinking about. By proper debate in Parliament before we decided to contrast— expand the use of data-sharing. It has to be an option, Mr Davey: It was not in his report. but there are reasons why people are nervous about Gareth Baynham-Hughes: It was not in his report. that. By contrast to the 2016 one-off target that has been in place since 2000. Q457 Sir Robert Smith: Does universal credit help in any way, because it tries to capture data on a Q455 Barry Gardiner: Finally, under the Warm household basis and obviously it is the household that Homes Act, Secretary of State, you have a statutory is being affected by the condition of the home? obligation to do all that is reasonably practicable to Mr Davey: It may well, but I think it is relatively early eliminate fuel poverty. In the light of end of tax- days in universal credit. I think we should wait a little funded support for energy efficiency programmes and while before that system is bedded in. The DWP the closure of Warm Front, how do you respond to might think it is a step too far in their IT system’s those fuel poverty organisations who doubt that you redevelopment for universal credit to want us to use are meeting that statutory obligation? it for this purpose. As I said, we are not against and Mr Davey: I think we are meeting it because you have certainly have not ruled out expanding the use of data- mentioned things that are being phased out but you sharing and that might be an option. have not mentioned things that are being put in. We have a lot of policies, such the Warm Home Discount Q458 Sir Robert Smith: I suppose another way that I have mentioned to you, which is targeting around it is to try to identify areas that, on the whole, supporting support on 2 million of the lowest income would benefit from intervention because obviously it consumers, £130 directly off bills, and that is 1 is much more cost-effective to intervene on a million of the lowest income pensioners directly community basis than on an individual household targeted through that. That is new. That was not there basis. Help could be targeted at those areas that are before. Of course, we replaced CERT with the Energy most likely to benefit. Would that be a more— Company Obligation. We think it is a better approach. Mr Davey: Part of the Energy Company Obligation— It has elements that directly focus on fuel poverty with in fact I tweeted when I came into office—was to cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG04 Source: /MILES/PKU/INPUT/030522/030522_o004_Corrected Transcript.xml
Ev 90 Energy and Climate Change Committee: Evidence
21 May 2013 Rt Hon Edward Davey MP, Rachael Crisp and Gareth Baynham-Hughes create this carbon-saving communities obligation. It is was slightly over £2 billion, and that would not have worth £190 million per year and it does just what you received any Government support. There will be described. We do have within the ECO an area-based investments that are completely unrelated to any approach to tackling fuel poverty. support systems for low carbon. Of course, there will Sir Robert Smith: Does it have any specific targets be those energy companies who invested in onshore or directions towards those in the off-grid, rural area? wind and offshore wind and so on for whom the Mr Davey: I think, from memory, about 15% is ring- consumer, once those plants are generating, will be fenced for rural areas. contributing under the ROC system and the contracts Gareth Baynham-Hughes: That is right. for difference, but that is quite a transparent process. Mr Davey: Yes, there is that. People can see a wind farm. They know who owns it. They know the regime, so it is not something that is— Q459 Sir Robert Smith: You have already identified that you see the energy companies as an important Q461 John Robertson: If it is transparent, I would part of delivery because of the efficiencies that could not have thought it would be difficult to get the come from that. Do you not think there is a role for figures. I have some figures from the Library and they other trusted intermediaries like social landlords to tell me that through the RO obligation we have given market or encourage people to take up these schemes? them £251 million, which was up from £176 million Your energy company coming and saying “I am here the previous year. I can track some money, and there to reduce your bills” is still a counter-intuitive thing is £10 million that has been given from the Rhyl Flats for the consumer to accept. Offshore Wind Farm. There are figures there, but I Mr Davey: I am keen for lots of players to encourage have a horrible feeling that they are using part of these take-up of these schemes and to show people that figures to make it look—because they come to this these are schemes they should take up. We announced Committee, as you are, and they tell us all about the last week that we are spending just under £1 million money they have invested in this country, and yet, to create what we call the Big Energy Saving when I ask them the question, “How much of that Network. This is not some new bureaucracy, you will investment came from financing from the UK be pleased to know. This is using existing advisers Government”, they cannot tell me. Call me a cynic, from the CAB, from the national energy advisers and but I just think they are trying to hide something here. so on, to use that network that exists already, that we If somebody can’t tell me a figure and I know it is have seen in cases like Big Energy Saving Week, and there and they know it is there and they will not say, to create a permanent network of advisers who get then they are hiding it and I would like to know why. support with training and materials who can co- Mr Davey: I would have thought they would be able ordinate better so they can be a voice to promote these to explain that, if they had made an investment in, types of schemes and help people know what is say, an offshore wind farm, the Government scheme available. Of course, anyone can ring the Energy enables them to get money from consumers over the Saving Advice Service on 0300 123 1234. lifetime of that scheme because that cost is passed on. I can’t answer for them, but that is quite— Q460 John Robertson: Secretary of State, earlier John Robertson: You have told us a figure. you replied to my question while I was ranting at you Mr Davey: Indeed, but what I am saying is it is not about my written questions to Mr Fallon. I get the directly Government money going in to pay for the feeling you probably thought they were just a fishing wind farm. Okay? It is money that will come from exercise, but these questions were anything but a consumers who pay when that wind farm generates, fishing exercise. I do want to know what kind of because that energy is slightly more expensive than money this Government and previous Governments from other sources. invested in the Big Six—I want the figures for last five years. I have a horrible feeling that they have, Q462 John Robertson: Exactly, and take the credit shall we say, used the figures to mask their actual for it and also perhaps hide an expense somewhere, investment in this country and what they say they which allows you not to pay the tax you possibly have invested. The fact of the matter is I think part should be paying. There is a possibility, and I want to of the investment is money that the Government has make sure that I am trying to help them and make sure invested and probably you should be taking the credit that what they are doing is above board and correct. I for it, rather than them. I want to know what kind of just have a terrible feeling that the letter I had from money we are talking about because it is very difficult npower would probably be a carbon copy of the letter to work out their books at the best of times, but at that was received from Starbucks, which was a carbon least I can do an audit trail of your money to them copy of the letter received from Amazon. These and spent in this country. companies need to be looked at. Mr Davey: Maybe I can look at the written answer Mr Davey: I completely agree that companies who are you received and the question to see whether or not not transparent about their tax affairs need to be held we could be more helpful for you, but the issue is this: to account by their shareholders, their customers and there will be some investments that these companies the jurisdictions that they operate in. The Prime will have made that are completely private-sector Minister and Deputy Prime Minister have been transactions with no Government support and no extremely strong on this and at the G8 and at the EU consumer support. There would be no impact on level the UK is leading the charge for greater consumer bills. For example, I think it was npower transparency in tax. The Prime Minister recently which invested in the Pembrokeshire Gas Plant, which wrote to some of the UK territories to try to make cobber Pack: U PL: COE1 [O] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG04 Source: /MILES/PKU/INPUT/030522/030522_o004_Corrected Transcript.xml
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21 May 2013 Rt Hon Edward Davey MP, Rachael Crisp and Gareth Baynham-Hughes sure that they are being supportive of what the UK not just directed at the fuel-poor but will help the fuel- Government is trying to achieve. I think there is a poor; the tariff reforms we have talked about. I come real, strong direction of travel to make sure that back to collective switching, because one of the companies pay what they are supposed to pay and I reasons I set up the Cheaper Energy Together scheme completely support that. was to try to promote collective switching and energy John Robertson: As we do. co-operative purchasing—one of the ways I did that was to say that you could only get funds from Q463 Chair: There is a consensus that improving the Government to help you set up these schemes if you thermal efficiency of the housing stock through energy showed that your scheme was going to include the efficiency measures is a particularly cost-effective fuel-poor. There is quite a bit of evidence that the fuel- way to tackle fuel poverty, but minimum efficiency poor were among the group who switched least and, standards in the private rented sector are not due to be therefore, were not benefiting from competition in the introduced until 2018. Could that not be brought market. By trying to tie these energy-purchasing co- forward? operative schemes to the fuel-poor was one of our Mr Davey: One of the benefits of setting regulation a ways of trying to get extra help to the fuel-poor. few years away is it enables people to prepare for I have already talked about the Warm Home Discount. that and invest ahead. Of course, there is always an There are quite a few measures there and I think, argument about whether a particular year is the right while I agree with you that energy efficiency is the year. Of course, there is bound to be discussion. There best way of doing it, which is where you started from, is quite a lot of literature and empirical evidence that, I do not think we can simply do it that way, not least whether it is a car manufacturer and having to have cleaner emissions or whether it is, in this case, energy because it is going to take time to refurbish the whole efficiency in the private rental sector, giving people housing stock of the UK, even if you are just focusing some time to prepare for that is a sensible way to on those houses that are the most thermally inefficient. make sure you can achieve that without unintended We have to help people with bills. We have to help consequences and without negative effects. I am not people get the best deal from the market. saying that there is a science to choosing 2018. I am just saying that giving a bit of time for adjustment Q465 Chair: The energy companies are disputing the does make sense. Department’s assessment of costs of ECO. Do you have any comments on that? Q464 Chair: Just moving on to ECO to finish up Mr Davey: They have been disputing that for some with, your Department’s projections suggest that ECO time. It is interesting to note that, even in these early will take up to a quarter of a million households out days, some of their new figures are rather closer to of fuel poverty, but that is only a relatively small ours than closer to the ones they were publishing proportion of the estimated number of maybe 3 before ECO started; so the direction of travel is in the million or 4 million fuel-poor households, and only right direction. I hope that when Green Deal is in its around 50% of ECO will be directed at low-income next stage that will also help reduce costs and, of households. Given that ECO targets only a small course, we are going to learn. No one wants to see proportion of fuel-poor households, do you have any ECO delivered at a high cost. Of course not. When I plans to expand the scheme? talk to the industry, I say, “Well, give us your ideas Mr Davey: I think we have an agreement on how we about how we can achieve these objectives”, which take that forward to the end of the spending review. we have set out very clearly, “to reduce carbon, to Decisions beyond that will not be made immediately. improve energy efficiency of housing stock at a lower We want to learn from this scheme. It is in its early cost”. Doing it this way enables us to use competition days. I think there are many good signs already from and to use the learning from the scheme so we can the scheme and I think we just need to get some more achieve that. experience. For example, there are parts of the scheme I would hope we can come in at not just our estimate that we have designed that did not happen before, for of £1.3 billion per annum on these measures, but example the brokerage, to make sure there is greater maybe even lower. That would be an achievement. If transparency in prices and that other players beyond you look at the CERT scheme, I think I am right in the Big Six can come in and deliver so there is more saying that the analysis of the CERT scheme was that competition in the market. We have taken powers in it came in lower than the Department had estimated, the Energy Bill to require more transparency from the Big Six who have these legal obligations upon them even though the companies at the time had said that to make sure we get the proper cost information, the Department’s estimate was too low. These are because that will help us learn to make sure we are early days in ECO, but I think the evidence is coming doing things in the most efficient way. I think we have our way. Gareth, do you want to add to that? to learn some of those lessons before we decide what Gareth Baynham-Hughes: I am not sure there has comes next. I personally think the Energy Company been a final evaluation of the costs of CERT and Obligation should have a long life, but we should CESP, but certainly anecdotal evidence would suggest obviously see if it can be improved in the next that fears that it was vastly more expensive than iteration. Government estimates were not true. I think different I would say, though, Chairman, that it is not just the supply companies would have slightly different Energy Company Obligation that we are using to perspectives, but in broad terms you are absolutely tackle fuel poverty. There are lots of measures that are right. cobber Pack: U PL: COE1 [E] Processed: [26-07-2013 09:59] Job: 030522 Unit: PG04 Source: /MILES/PKU/INPUT/030522/030522_o004_Corrected Transcript.xml
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21 May 2013 Rt Hon Edward Davey MP, Rachael Crisp and Gareth Baynham-Hughes
Q466 Chair: I recognise that it would not be an price floor is it shows how important getting Europe’s enormous surprise if some of the anxieties expressed carbon market working is. Clearly, if the carbon price by the industry turn out to have been unfounded. Just from the EU emission trading system was producing to clarify, if the cost did exceed what you estimate, a price above the carbon price floor, we would not does that mean those costs would feed straight even be having this debate. That does show that through to consumer bills? carbon prices are important for long-term investment. Mr Davey: That is certainly possible and that is one If you talk to CCS developers, if you talk to renewal of the reasons why I take them very seriously. We are developers and new nuclear vendors, they see that trying to reduce all the pressures on consumer bills, getting a good carbon price will help us make this particularly the ones we can control. We have looked transition to a low-carbon economy in the most at this incredibly carefully and if there are more things efficient way. that we can do we will do them. While I understand some of the concerns about the carbon price floor, it is one of the reasons we have Q467 Chair: The Energy Bill Revolution Campaign introduced proposals to compensate energy-intensive suggested that the receipts from the carbon price floor industries from the indirect costs of the EU ETS and could be used to fund energy efficiency measures. Do we are getting responses from the Commission on you think that is possible? those proposals while we have done that. I do think Mr Davey: If it is a theoretical question, Chairman, the long-term approach is to reform the EU ETS. If I “Is it possible”, I think it is probably possible. make take this opportunity, Chairman, I think we need Whether it is likely I think is really the question. I do to see the European Parliament voting on back- not think it is very likely. Successive Governments loading before the summer recess and saying yes to and successive Chancellors have taken the Treasury back-loading. It is quite a mild reform of the EU ETS, view in these types of things that hypothecation is not but it is an essential first step and I was deeply the right way to go. There are some fights one has in disappointed that Parliament voted—by a small Government because you think you can win them and majority, but nevertheless it was a majority—against there are the fights that you think, “Maybe that is quite back-loading recently, and I and my Department and a tough call”. While I have great sympathy with the colleagues are trying to put the case for back-loading way the Energy Bill Revolution make their arguments and for getting Europe’s carbon market working and one can understand the power of their argument, properly. they are up against decades, if not centuries, of Treasury orthodoxy on hypothecation. Q469 Chair: I am sure on that point you would have the very strong support of this Committee and I Q468 Chair: Just on the point about the carbon price certainly regret that decision as much as you do and floor, it is, I suppose, now absolutely clear that it is regret the fact that some of my colleagues were simply a tax-grab by the Treasury. It serves no responsible for it. Thank you very much for your time. environmental purpose. It is a distortion in the market We look forward to seeing you again before the that penalises sections of British industry compared summer recess. We have a date, I think, in July to with businesses in the rest of the EU and there is no have a more general debate, although you may think energy or climate change policy justification for it at we have strayed slightly beyond energy price reform. all, is there? We look forward to straying even further in a few Mr Davey: That is a little unfair. I think— weeks’ time. Chair: Only very slightly. Mr Davey: I am sure my Minister of State is looking Mr Davey: It does give some signals for investing in forward to his appearance before you. low carbon technologies, but the way I see the carbon Chair: Thank you very much. cobber Pack: U PL: CWE1 [SO] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Written evidence
Written evidence submitted by Citizens Advice Introduction 1. Citizens Advice welcomes the opportunity to respond to the Energy and Climate Change Committee’s call for evidence on energy prices, profits and fuel poverty. 2. The Citizens Advice service provides free, independent, confidential and impartial advice to everyone on their rights and responsibilities. It values diversity, promotes equality and challenges discrimination. 3. The service aims: — to provide the advice people need for the problems they face — to improve the policies and practices that affect people’ s lives. 4. The Citizens Advice service is a network of nearly 400 independent advice centres that provide free, impartial advice from more than 3,500 locations in England and Wales, including GPs’ surgeries, hospitals, community centres, county courts and magistrates courts, and mobile services both in rural areas and to serve particular dispersed groups. 5. In 2011–12 the Citizens Advice service in England and Wales advised 2.03 million people on 6.9 million problems. Debt and welfare benefits were the two largest topics on which advice was given. In total we received 136,000 fuel related enquiries in 2011–12 including 97,000 about fuel debt, 2,600 enquiries about complaints and redress and 400 enquiries about selling methods. 6. We have limited our response those questions which best fit our areas of expertise. We have chosen to address prices and profits in tandem as it is difficult to consider these interlinked aspects in isolation.
Prices and Profits To what extent (if at all) should the Government or the regulator intervene in the market to affect the prices consumers (or certain groups of consumers) pay for their energy? Should any changes be made to the Government’ s current approach? AND
Many consumers believe that energy company profits are the reason energy bills have been going up in recent years. Is this perception fair? AND To what extent does the way energy companies communicate profits to the general public influence the public’ s perception of these companies? 7. Citizens Advice is extremely concerned about the ongoing exponential rise in consumer energy bills. In 2010–2011 the average electricity and gas bill grew by 8% and 9% respectively and the “big six” energy companies announced further increases of around 10% in the final quarter of last year.1 This rate of increase is significantly out of step with household income. In 2011 most benefits were uprated by 5.2% in April 20112 and will rise by just 1% this year while average earnings for full time employees grew by 1.4%3 and the minimum wage by 2.5% in 2010–11.4 8. A CAB in the South West reported the case of an elderly woman who had large gas and electric bills which she was unable to afford to pay and so had accrued arrears on both accounts. Her supplier was threatening disconnection if she did not pay what they wanted. She was unable to afford the amount they were asking and had cut down on the amount of gas and electricity she used to the point where she no longer had a bath and warmed up any water using the kettle rather than running the hot water tap. She had also been unable to afford to heat her home through the winter. 9. The economy is yet to show significant signs of improvement and welfare reform will result in an estimated two million benefit recipients being worse off. In addition, the worrying trend towards funding infrastructure, such as those contained in the current Energy Bill, and social policies, such as the Energy Company Obligation, through consumer bills rather than general taxation will place further upward pressure on bills in the coming years. In 2011–12 our bureaux received 97,000 enquiries about fuel debt and we expect these numbers to increase over the next few years unless decisive action is taken to address fuel poverty. 10. There is a common perception amongst consumers and many commentators that energy prices rise like a rocket when wholesale prices rise but sink like a feather when the wholesale prices fall. Suppliers strongly refute this claim and maintain that their profits have remained fairly steady at around 5% with changes in prices reflecting rises and fluctuations in wholesale prices. What is clear is that the way in which energy prices 1 DECC (2012) Average annual domestic electricity bills by home and non-home supplier and DECC (2012) Average annual domestic gas bills by home and non-home supplier 2 Office for National Statistics (2011) 2011 Annual survey of Hours and Earnings (SOC2000) and 3 Office for National Statistics (2012) Consumer Price Indices September 2012 detailed table http://www.ons.gov.uk/ons/ dcp171778_282923.pdf 4 Figure calculated using data on historical rates from http://lowpay.gov.uk cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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are set, which factors have an impact on the final bill a consumer receives and what proportion of the bill is accounted for by each of these factors is currently insufficiently transparent. 11. For example, a common theme in the communication by suppliers of the most recent price rises to consumers was the part played in the decision by the increasing number of obligations placed on suppliers by Government. The Government strongly refuted this claim, leaving consumers angry and confused. Uncertainty around these issues further erodes consumer trust in energy suppliers, reinforcing the idea that suppliers are all the same, as well as having an impact on the ability of consumers to understand the market and make informed decisions. 12. In order for suppliers to regain the trust of consumers, transparency and clarity around pricing is essential. Government and the regulator, along with suppliers, have a key role to play in ensuring that this becomes a reality. There should also be a more open, reasoned public debate around price rises from all parties, rather than the political points scoring in the media between suppliers, Government and Ofgem which has characterised recent price rises.
How effective is Ofgem in ensuring consumers get a fair deal? Are there any areas for improvement 13. Since the probe into the energy market carried out in 2008, Ofgem has overseen and contributed to some very welcome improvements in the energy market in relation to the policies and practices of energy suppliers. We also welcome the work they have done, and are continuing to do, in improving the identification and experiences of vulnerable consumers. We have worked closely with Ofgem on these issues, among others, and will continue to do so. 14. We would, however, like to see Ofgem act more quickly and decisively once a problem is identified. For example, while some significant improvements have undoubtedly been made, many of the problems identified in the probe in 2008 persist to the extent that Ofgem deem it necessary to introduce legally binding standards of conduct requiring suppliers to, amongst other things, treat customers fairly, communicate with consumers in plain and intelligible language and make it easy for their consumers to contact them. It is now more than four years since the initial probe was carried out and yet Ofgem is still consulting on measures to address these issues with even optimistic estimates placing the implementation of the first of these reforms several months from now. Meanwhile consumers are still faced with an impenetrable market, poor customer service and widespread bad practice.
Fuel Poverty Is the Government on track to meet its target of eliminating fuel poverty by 2016 and will reduced Government spending in this area affect their ability to achieve this target? 15. The latest official fuel poverty statistics showed that 4.75 million households in the UK, approximately 19%, were in fuel poverty in 2010. These figures do not take into account recent price rises and the income of many households rising by significantly less than inflation in the intervening period. Without a significant increase in Government spending on the energy efficiency of fuel poor homes the number households in fuel poverty is as likely to increase by 2016 as be eliminated. Research carried out on behalf of the Energy Bill Revolution estimated that 6.2 million households in England will be living in fuel poverty by 2016. We are therefore extremely disappointed that from January this year, following the closure of the Warm Front scheme, there ceased to be a Government funded energy efficiency programme in England. 16. The Green Deal and Energy Company Obligation, which is designed to replace existing schemes, will not, in our opinion, be sufficient to eliminate fuel poverty. Analysis by the Association for the Conservation of Energy found that the total budget targeted at fuel poverty in England will fall to £879 million in 2013 from £1.19 billion in 2009.5 We are also disappointed that the Energy Company Obligation will be funded through consumer energy bills. This is regressive and may have the perverse effect of pushing some households who do not benefit from the scheme, but will contribute to paying for it, into fuel poverty.
Has the Hills Review resulted in any changes to fuel poverty policy? How could its findings be used to improve the efficacy of fuel poverty policy? 17. Citizens Advice welcomed the final report of the Hills Review which gave a thorough, well researched analysis of the causes and devastating consequences of fuel poverty. Overall, we are also fairly supportive of the proposed change to the definition of fuel poverty to the Low Income High Costs (LIHC) approach favoured by Professor Hills, although we did raise concerns about particular aspects. In its response to the final report the Government proposed to implement the majority of Professor Hills’ recommendations. The Hills Review has therefore made a significant contribution to our knowledge regarding the causes and consequences of fuel poverty as well as prompting a significant change to the way in which fuel poverty will be defined in the future. 18. We were particularly pleased that the Government also announced in its response that it would be going ahead with Hills’ recommendation that the government should set out a “renewed and ambitious strategy for tackling fuel poverty, reflecting the challenges laid out in (the) report and the framework set out (in the report) 5 Association for the Conservation of Energy (2012) The impact on the fuel poor of the reduction in fuel poverty budgets in England cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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for understanding them.” This is long overdue. It is more than two years since the Spending Review in 2010 in which the Government announced its intention to commission an independent review to look at the fuel poverty definition and more than eighteen months since Professor Hills and his team were commissioned to carry out this task. Furthermore, as welcome and vital as the commitment to draw up a new strategy to combat fuel poverty is, this will take further valuable time to put together and longer still to implement. Meanwhile the fuel poor continue to suffer in cold homes. 19. While it is undoubtedly important to have an appropriate definition of fuel poverty which allows the Government and other stakeholders to accurately identify those most in need of assistance, it is now time to stop quibbling over the precise definition of fuel poverty and take action. Endless debate around the merits or otherwise of various definitions and indicators has been a significant distraction for all involved in the fuel poverty debate, at the end of which we are no closer to finding a solution.
Will the Government’s proposals to ensure that consumers are on the cheapest tariff have any impact on fuel poverty? 20. Citizens Advice welcomed the Government’s proposal to ensure that consumers are made aware of the cheapest tariff their supplier offers. In our view providing consumers with personalised estimates of the savings to be made from switching tariffs on relevant communications can reasonably be expected to act as a prompt for some consumers to contact their suppliers and switch tariff. The level of consumer interest and level of trust in the energy market is sufficiently low, however, that many consumers do not read the correspondence sent to them by their supplier and there is no guarantee that even those who do read the correspondence will be prompted to take action. Furthermore, while a consumer may be able to save some money by switching, and should therefore be encouraged and helped to do so, for many households even the cheapest tariff currently available is far from affordable and the efficacy of this proposal as a tool for alleviating fuel poverty should not be overstated. 21. That being said, as part of the wider package of reforms proposed by Ofgem and DECC we believe that this remedy will help some consumers to engage and reduce their energy bill. This may begin to help to alleviate fuel poverty for some households and is therefore worth pursuing.
To what extent do fuel-poor households engage in switching? What are the barriers to greater levels of switching from these groups? 22. Alongside the barriers to switching faced by all households, such as the complexity of the market, there are some groups of consumers who may face additional barriers. For example, consumers who are in debt to their energy supplier may be prevented from switching by their existing supplier. 23. A CAB in London reported the case of a man who wanted to switch supplier but was prevented from doing so due to fuel arrears of £800. He was told by his supplier that would need to pay £99 every two weeks which, as he was reliant on JSA and housing benefit for his income, was far from affordable. The client felt that he was being “held hostage” as he was unable to change to a supplier whose lower price would make his fuel bills more affordable. While the CAB could advise him how to ask his supplier for a more realistic payment schedule, they were unable to help him to switch to a cheaper deal. 24. Similarly, the options for those who have elected , or been obliged by their supplier, to use a pre payment meter are significantly more limited than the options for those on a standard meter. In addition, some of the cheapest deals available are only available to those paying direct debit and/or choosing to manage their account online. 25. Fuel poor vulnerable customers may face further barriers to engagement. Official fuel poverty statistics released by the Government show that 18% of vulnerable households6 in the UK were fuel poor in 2010, compared to 16% of all households.7 Vulnerable consumers, such as the elderly, disabled and those with mental health issues can find it particularly difficult to understand overly complex bills and communications from suppliers and can find it more difficult to exercise their rights and get problems put right. 26. A CAB in the North of England saw a lone parent with mobility problems living in rented accommodation. Following a discussion with the representative of an energy supplier she decided to switch her supply to his company. She was told by the sales representative that they would take care of the switching process, implying that it would be stress free for her. She was told by the supplier that she needed to provide up to date meter readings but she could not access her meters due to her mobility problems. She explained her difficulty and they said they would come and read them for her but she would need to make an appointment. She was left in a queue to speak to someone at customer services to arrange this appointment for so long that she gave up. She then received repeated calls from her original supplier asking why she had decided to leave them and stated that the quote she given by the new supplier was not correct for her usage and persuaded her to keep her supply with them instead. The client found the whole experience to be very confusing and stressful and wished she had never started the switching process at all. 6 A vulnerable household is classed as one containing children, the elderly, and/or someone with a long-term illness/disability 7 DECC (2012) Fuel Poverty 2012—Detailed Tables. Table 1. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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27. Experiences like these can be a key factor in damaging consumer confidence and trust in suppliers and discourage them from engaging in the market in the future. The complexity of the range of the tariffs available can also be particularly bewildering for some vulnerable consumers. Therefore, as recognised by Ofgem and the Government in their respective proposals for retail market reform, vulnerable consumers, and particularly those who are fuel poor, often need additional help and support to engage effectively in the market and make good switching decisions. Energy Best Deal, a scheme Citizens Advice runs in conjunction with Ofgem, which provides extra information and support to vulnerable people to help give them the confidence and skills to engage in the energy market and switch to the best deal for them provides an example of how this can be facilitated.
To what extent do fuel-poor houses currently take advantage of energy efficiency schemes? Could anything be done to increase the uptake? 28. Suppliers responsible for delivering the Carbon Emissions Reduction Target (CERT) and the Community Energy Saving Programme (CESP) have reported significant difficulty generating sufficient take-up of energy efficiency measures to meet their targets, particularly in regards to the “super priority group”. The Warm Front scheme has experienced similar difficulties and Citizens Advice were extremely disappointed that over £50 million, more than a third of the total budget, went unspent in 2011–12 and was returned to the Treasury. The scheme closed to new applications in January this year and we expect that the scheme will once again have failed to spend its budget despite the decision to award £25 million to the new local authority fuel poverty fund. 29. It is important to note that each of these schemes offered free energy efficiency measures and in some cases suppliers were even offering cash incentives to certain groups to allow them to fit measures for free. The Green Deal, the Government’s new flagship energy efficiency scheme, is based on consumers taking out a loan to pay for energy efficiency measures, to be paid back over time through their energy bill. It is likely, therefore, that Green Deal participants will face considerable challenges in generating sufficient interest from consumers. 30. One of the key factors in the underspend in the final two years of the Warm Front scheme was the failure of the Government and Carrillion to adequately publicise the scheme. Citizens Advice, along with other organisations with similar concerns such as Consumer Focus, took part in two campaigns to improve awareness and take up of the scheme in its final months, both of which contributed to a significant boost in take up. It is clear, therefore, that future energy efficiency schemes, starting with the newly introduced Energy Company Obligation, must be accompanied by an adequately resourced, sustained publicity campaign. February 2013
Written evidence submitted by SSE SSE is a UK owned and based energy company. It is involved in the generation, transmission, distribution and supply of electricity and the production, storage, distribution and supply of gas. This response considers all three parts of the inquiry.
Summary Energy prices — There are a number of costs which feed directly into customers’ energy bills. The wholesale costs of energy make up around half of the average bill. The rest is largely made up of the costs of using the energy networks and funding Government mandated schemes. — Around 90% of the costs in the average energy bill are out of suppliers’ control. — In recent years three principal factors have increased energy prices: the wholesale costs, the costs of using and improving the energy networks and the costs of Government mandated schemes, particularly those intended to improve household energy efficiency. — The UK’s energy prices are, on average, cheaper than in comparable EU countries. Government statistics show that in the first six months of 2012 the UK had the cheapest gas prices and the fourth cheapest electricity prices in the EU 15 (including taxes).8
Energy company profits — SSE is a broad-based utility. In its Annual Report and Consolidated Segmental Statements it is transparent about the levels of profit which it makes.9 — Given the breadth of SSE’s operations, and the many factors which make up energy prices, drawing correlations between energy prices and company profits is misleading. — SSE has publicly stated that over the medium term (3–5 years) it expects to make around 5% profit per customer account (less than a £1 per week per customer). This level of profit is reasonable for a business of the scale of SSE. It is less than other household services such as telecommunications. 8 DECC (2013)—DECC Energy Price Statistics 9 www.sse.com/uploadedFiles/Controls/Lists/Reports_and_Results/SSE_ConsolidatedSegmentalStatement_31032012.pdf cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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— Across the SSE group it currently invests more in the UK’s energy infrastructure than it makes annually in profit. It needs to make fair and reasonable profits across each of its businesses areas in order to continue investing at similar levels going forward.
Fuel poverty — SSE will spend around £50 million on support for its most vulnerable customers this year. — Any attempts to address fuel poverty must address the key issue of identifying vulnerable customers and tailoring support to meet their specific needs. SSE advocates that a central “agency” be appointed to match customers in need with the available support. — Household energy bills are dependent on the amount of energy used, therefore rising energy prices do not necessarily equate to similar rises in customer bills. Improved household insulation has reduced energy usage. So much so that if customers continued to use the same amount of energy as they did in 2005, a typical SSE customer bill would be around £400 higher using current prices.
Part 1: Energy Prices How energy prices are determined 1. There are a number of costs which feed directly into customers’ energy bills. Currently the wholesale costs of buying electricity and gas on international markets accounts for around half of the average customer bill. The rest is largely determined by the costs of using the energy networks (25% of the average bill), the costs of funding Government and regulator mandated schemes (10% of the average bill) and VAT at 5%. See figure 1 in annex.10 2. The majority of these costs, almost 90%, are determined by either international markets or set by the Government or Ofgem. These costs are largely outside of the control of energy suppliers and are passed through to customers in their energy bills. 3. As wholesale costs account for just half of an energy bill, attempts should not be made to draw conclusions solely by considering the relationship between the wholesale and retail prices of energy. The three principal factors which are increasing energy prices: — The price of energy in the wholesale markets—SSE (and the UK) operates in a global commodities market. SSE has a responsibility to secure the gas and electricity that customers need and prevent its customers facing the volatility of global markets. It does this buying energy in advance, sometimes up to three years. — The cost of using the electricity and gas networks—suppliers have to pay the companies which own the UK’s electricity and gas network for transporting energy along the wires, cables and pipes to customer’s homes. The cost of using the networks is controlled through a long-term regulatory formula determined by Ofgem and increases in costs are a result of significant and necessary investment undertaken by the networks in this infrastructure. — The costs of Government and regulator mandated schemes—these principally account for suppliers’ social spending, energy efficiency measures, feed-in-tariffs and support for renewable energy. These costs are introduced by the Government on the basis that they will be paid for by consumers through their bills (see points 9—14 for more). 4. Whilst UK energy prices have increased in recent years, UK consumers are, on average, paying less for their electricity and gas than those in many comparable markets in neighbouring European countries. DECC statistics show that in the first six months of 2012 the UK had the cheapest gas prices and the fourth cheapest electricity prices in the EU 15 (including taxes).11 This statistic not only assists when seeking to benchmark UK prices, it also demonstrates one of the benefits of the UK’s liberalised energy supply market.
How the factors making up energy prices have changed over time: 5. SSE has taken a number of steps to improve the transparency about how it determines energy prices. This includes publishing a market outlook which details the likely medium-term direction of energy prices. See figure 2 in annex.12 6. The contribution of each of the factors within energy prices has changed in recent years. Looking backwards, the trends from the last eight years are: — Wholesale prices have been volatile and have doubled due to international events, such as the Arab Spring and the Fukushima nuclear accident. However, these costs now make up less of the total costs in an energy bill than was the case eight years ago. — Retail prices broadly reflect wholesale prices. Its movement has a slight lag after the wholesale price reflecting the fact that companies buy energy up to three years ahead of customer use. 10 www.sse.com/MarketOutlook/ 11 DECC (2013)—DECC Energy Price Statistics 12 www.sse.com/MarketOutlook/ cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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— The costs of Government and regulator mandated schemes and network (UoS) costs have increased. — Profit margins have varied significantly and been both positive and negative at different times. Since 2004 they have been net negative. The rising costs of Government and regulator mandated schemes: 7. Of the factors changing energy prices over time, the costs of mandatory schemes are rising significantly. These costs are forecast to continue increasing in the coming years. 8. These costs account for policies such as supplier social spending (such as the Warm Home Discount), the Renewables Obligation, and energy efficiency programmes such as CERT, CESP and, from January 2013, the Energy Company Obligation (ECO). Next year a typical duel fuel customer could be paying over double the amount paid in the previous year to fund these schemes. 9. Of these costs it is the delivery of energy efficiency obligations which is principally causing this increase in costs. Research carried out by the economic consultancy NERA concluded that the annual cost of delivering ECO could be over £2.35 billion, far exceeding the £1.3 billion forecast in DECC’s Impact Assessment13. The costs of ECO will be borne by all customers of the larger energy suppliers and on a per customer basis this could equate to almost £100 a year rather than the £52.50 forecast by DECC in the IA. 10. The reasons for the potential ECO cost escalations are the potentially low take-up of Green Deal and the subsequent costs to suppliers of meeting their carbon reduction obligations. At the same time the costs to suppliers of identifying “hard to reach” customers to offer energy efficiency measures. 11. One of the reasons why the costs per customer of delivering the ECO are increasing is that these costs are not borne by smaller suppliers and their customers. In effect this means that smaller suppliers (>250,000 customers) are able to offer customers deals that do not account for the £100 in costs incurred by larger suppliers. This is detrimental to the majority of UK consumers and competition in the retail market. 12. If the Government intends to encourage competition in the retail market it should address barriers to entry not exempt small suppliers from policy costs. In the interests of equity across all UK energy consumers and to ensure cost reflectivity, all suppliers should therefore be levied (in some way) for the costs of delivering this Government policy. 13. Whilst SSE firmly supports the principle of improving the energy efficiency of UK homes as part of a long-term strategy to reduce household energy bills, this must be done cost-effectively. The Government should take these issues into account as ECO develops. For these reasons SSE has called for Government to cap the cost of ECO.
Part 2: Energy Company Profits 14. SSE is a broad based utility. The majority of its operations are in England, Scotland and Wales. SSE also has a growing business in Ireland. It is the second largest electricity generator in the UK, owns and operates economically-regulated electricity networks and has a 50% ownership of gas distribution networks. It also supplies electricity and gas to over 9 million customers. As well as this within its core businesses SSE is also the UK’s largest street lighting contractor, owns gas production and storage facilities and runs businesses in the water and telecoms sectors. 15. It reports to shareholders on its financial performance across the three core segments that make up its business: wholesale, retail and networks. With energy retail just one part of SSE’s business, and given the many factors that determine energy prices, attempting to drawing correlations between energy price rises and company-wide profits is misleading. 16. SSE is transparent in how it reports its financial performance to shareholders and customers. It breaks down performance in each part of its business in its Annual Reports14 and publishes Consolidated Segmental Statements to Ofgem which breakdown profits by each of the three core segments that make up its business.15 17. It has consistently said that it aims to achieve an average profit margin of around 5% over the medium term (3–5 years) in its retail business (this equates to less than a £1 per week per customer). A profit level of 5% in the retail business is fair and reasonable for a business of its size and scale. It is comparable to other household sectors such as food retailers and below that of telecoms providers. 18. Across the UK and Ireland SSE employs around 20,000 people and is investing the equivalent of almost £4 million a day in the UK’s energy infrastructure to maintain secure supplies and help decarbonise the UK’s economy. Without reasonable profits across each of its businesses, this level of investment would not be sustainable. 19. As a UK owned and based company SSE is a responsible tax payer and makes a significant UK tax contribution. PWC’s annual survey of the tax contributions paid by the companies in the FTSE 100 confirms 13 www.energy-uk.org.uk/publication/finish/5/752.html 14 SSE (2013)—Reports and results—www.sse.com/Investors/Reports_And_Results/ 15 www.sse.com/uploadedFiles/Controls/Lists/Reports_and_Results/SSE_ConsolidatedSegmentalStatement_31032012.pdf cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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that SSE is one of the most significant taxpayers in the UK contributing almost £400 million in 2011/12. This makes SSE the 17th highest tax contributor in the FTSE 100.16
Earning the right to make a profit: 20. SSE is aware that it needs to earn the right to make a profit, particularly in its customer facing retail business. Its customer service is consistently rated as among the best of the energy suppliers however it recognises that further steps could be made to improve transparency, simplicity, service and fairness for its customers. SSE has been first in the sector in introducing the following changes: — Restoring simplicity: by reducing the number of tariffs from over 60 to just three core products; — Enhancing transparency: by voluntarily improving wholesale electricity market liquidity and publishing a breakdown of costs on customer’s bills; — Improving customer service: by introducing a Sales Guarantee and offering all customers an Annual Energy Review to ensure they are on the right products and taking advantage of energy efficiency measures and financial assistance; — Introducing Customer Service Guarantees: in which SSE will give customers £20 if it does not meet the service standards which it sets itself.
Part 3: Fuel Poverty 21. Fuel poverty is caused by three principal factors i) the price of energy ii) household income and iii) the level of insulation and energy efficiency in homes. There are practical ways in which energy suppliers can support those customers who are in need, however it can only do this in collaboration with Government, local authorities, other interested stakeholders and the customer themselves. 22. SSE broadly concurs with the conclusions of the Hills Review into fuel poverty. What is needed following the report is a series of practical solutions which ensure measures target those customers most in need of support with their energy costs. 23. As a leading UK energy supplier SSE will spend almost £50 million in this year alone to provide support to customers who are struggling to pay for the energy they need. This accounts for a variety of assistance including the Warm Home Discount, access to discounted or free energy efficient products and benefit entitlement checks. The level of spend will increase in the coming years. 24. For SSE, the greatest challenge to addressing fuel poverty is identifying customers potentially at risk of fuel poverty and offering them the support that is available. Put simply, suppliers do not have the tools to identify those potentially at the greatest need, as for most customers they are equipped only with names, addresses and payment information. The data-sharing which informs the Warm Home Discount Scheme has seen some improvement in this area. However, there are concerns that suppliers are being obliged to seek information about their customers that are beyond the normal customer/commercial company relationship, such as benefits data and health conditions. 25. Therefore, any solutions to fuel poverty must address the key issue of identifying vulnerable customers and tailoring support to meet their needs. SSE has long advocated that some form of central “agency” be appointed to match customers in need with the support available. This will help to ensure that policies are meeting their intended aims.
Energy efficiency is the long-term solution: 26. Rising energy prices do not necessarily have to equate to similar rises in customer bills. The size of a customer’s bill is not just determined by the movements in prices, it also depends on the amount of energy used. Measures to reduce energy usage and improve the energy efficiency of UK homes are the long-term solution to reducing the cost to the consumer. 27. Household insulation has been improved in recent years through policies such as CERT and CESP and improvements in the energy efficiency of household technology. As figure 3 in the annex shows, this has reduced average energy demand for gas and electricity. The effect of this should not be underestimated. Using current tariff prices and usage for a typical SSE customer, bills would be around £400 higher if customers continued to use the same amount of energy as they did in 2005.17 28. As a result of the energy efficiency measures installed by SSE and other companies these trends are expected to continue for gas usage over the next few years. Electricity demand is harder to predict as electrical appliance usage is expected to increase. 29. Too often research into the relationship between wholesale and retail prices ignores the impact of reduced average demand. This is the case with Ofgem’s Supply Market Indicators, which can lead to an overestimate of profits as margin is attributed to sales that never happened as the energy was not used. 16 www.pwc.co.uk/tax/issues/total-tax-contribution.jhtml 17 www.sse.com/MarketOutlook/ cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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30. Over the long-term the Green Deal presents a significant opportunity for the further improvement of the energy efficiency of UK homes. SSE is fully committed to its objectives and continues to work hard to deliver a programme which works in the best interests of consumers. February 2013
ENERGY PRICES, PROFITS AND FUEL POVERTY INQUIRY: SSE RESPONSE Annex Figure 1 HOW ENERGY PRICES ARE DETERMINED
Figure 2 HOW THE FACTORS MAKING UP ENERGY PRICES HAVE CHANGED OVER TIME cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Figure 3
REDUCTIONS IN ENERGY DEMAND FOR SSE CUSTOMERS
Supplementary written evidence submitted by SSE
These Questions are Related to Electricity Only
1. What percentage of your total electricity trades are over-the-counter (OTC) versus trades on the wholesale exchange?
Currently approximately 25% of SSE’s electricity trades in the “day ahead” are OTC rather than over an exchange. For “forward” contracts, which make up the main proportion of SSE trades, OTC is closer to 100%.
2. What are your criteria for trading OTC versus on the wholesale exchange?
As a market participant, SSE will trade where the liquidity is, and currently in the “day ahead” for electricity there is most liquidity on exchanges. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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3. What is the average difference in price for your OTC versus wholesale exchange trades? In terms of market prices there is no difference between trading OTC or via exchanges. A potential difference will be on the credit terms that various market participants can receive in relation to their size. Over an exchange market participants are required to post collateral ahead of delivery to mitigate default risk, and due to limited credit and collateral due to the size of their businesses, small suppliers will have difficulty in trading in forward markets via exchanges. SSE has attempted to mitigate this natural barrier for small suppliers to trading in forward electricity markets by launching our Small Supplier Trading Commitment which assists smaller suppliers to trade along the curve and mitigating exposure to short term market volatility by SSE voluntarily taking on the credit risk for small suppliers via OTC trades.
4. Does your company deal in long-term contracts? Who has access to the information contained in the contracts? SSE trades via a number of contracts on variable contract terms and lengths, with a number of market participants. The detail of these contracts will be dependent on the deal agreed bilaterally, and due to commercial sensitivities will remain between SSE and the counterparty. SSE is open to trading with any market participant if on favourable terms. This being said, long-term contracts represent a small proportion of SSE’s electricity trading. The value of these trades will be appropriately apportioned to the relevant business area within SSE, and SSE looks to leave minimal profit/loss in the trading statement under Ofgem’s Consolidated Segmental Statements. Given that profit of all segments is disclosed and reconciled to the group’s UK accounts, there is no possibility to entirely disguise or hide profit.
These Questions are Related to Gas Only 5. What percentage of your total gas trades are over-the-counter (OTC) versus trades on the wholesale exchange? Currently approximately 99% of SSE’s gas trades are OTC rather than over an exchange.
6. What are your criteria for trading OTC versus on the wholesale exchange? As any market participant, SSE will trade where the liquidity is, and currently for gas there is most liquidity OTC.
7. What is the average difference in price for your OTC versus wholesale exchange trades? In terms of market prices there is no difference between trading OTC or via exchanges. The difference will be on the credit terms that various market participants can receive, relative to their size. As a large supplier of gas with a strong credit rating, SSE can secure favourable terms on many OTC contracts. If the trades had taken place on an exchange SSE would not be able to pass on the financial benefit to its supply customers accruing from its strong credit rating. Smaller energy suppliers will face additional costs on OTC, without favourable terms being offer by producers, due to the natural limitations in credit and collateral. Due to the international nature of the gas market, looking to address this across would create additional costs to secure international gas supply contracts to the detriment to consumers and the wider UK plc.
8. What announcements have you made in accordance to REMIT? Where is it posted? If you trade gas outside of the UK within the EU, where do you post announcements for other EU markets? In compliance with REMIT, all of SSE outages have to be posted on it’s REMIT reporting site. SSE’s GB trading operation does not trade gas outside of UK and any trades made with international producers will be for delivery at the point of entry in the UK. As a group which operates solely in the GB and Irish (inclusive of NI and ROI) markets, SSE does have a trading team for our operations in Ireland, but as with the GB market they do not trade outside of the point of delivery in Ireland.
9. What access to market information do your traders have about any other division of your company? Do they have access to storage levels, upstream information if applicable (geological data), or daily production/ consumption data? There are Chinese walls in place between the regulated gas storage part of our business and trading, as with the regulated networks part of the business. SSE only sees public information from these parts of the business. For SSE’s non-regulated Storage and Generation assets it is subject to the rules of REMIT and cannot act on any outage data until these have been published on REMIT websites. For Exploration & Production (E&P) business, REMIT notifications are published by the field operators and SSE is unable to trade on any cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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information until they have published the relevant notification. Storage levels for SSE’s operations are publicly available through the NGT website. Longer term generation planning is published in OC2 data which is available through the Elexon bmreports website. A huge amount of other generation and consumption data about our assets and the system in general are also available through the bmreports website.
10. Does your company deal in long-term contracts? Who has access to the information contained in the contracts? SSE trades in a number of contracts on variable contract terms and lengths, with a number of market participants. The detail of these contracts will be dependent on the deal agreed bilaterally, and due to commercial sensitivities will remain between SSE and the counterparty. SSE is open to trading with any market participant. The value of these trades will be appropriately apportioned to the relevant business area within SSE, and SSE looks to leave minimal profit/loss in the trading statement under Ofgem’s Consolidated Segmental Statements. Given that profit of all segments is disclosed and reconciled to the group’s UK accounts, there is no possibility to entirely disguise or hide profit.
Additional Questions 11. How many of “immobile” customers do you have? Consumers are not homogenous and all have the ability to switch supplier in a competitive market. It is for this reason why SSE works hard to engage its customers to ensure that they are on the right deal for them. In 2011 it introduced Annual Energy Reviews to help customers understand the tariffs which are available, ensure they are on the right payment plan and to help them to take advantage of available energy efficiency measures to reduce their consumption and energy bills. SSE prioritised its most vulnerable customers when rolling out these Annual Energy Reviews. For prepayment meter customers SSE recently signed a voluntary agreement with Ofgem to increase the limit of debt at which they can switch suppliers to £500 (up from £200 previously). SSE has also committed to a number of awareness raising measures for their customers. This is intended to help switching amongst prepayment meter customers who are in debt to their supplier. Whilst switching supplier is regarded by some as an indicator of a competitive market, it is not the only indicator. As a result of the Annual Energy Reviews, and other measures to engage customers, many customers are switching between SSE tariffs. This level of switching within the same supplier is an important indication of consumer engagement.
12. Do you offer all customers all of your tariffs? If not, what are the reasons for not offering the full suite of tariffs? SSE simplified its tariffs in February 2012. It was the first large supplier to do so. Customers are able to access all of SSE’s tariffs, wherever possible. In some cases there are technological or practical reasons why they may not. For example, in the case of prepayment meter customers there are technological limitations on the number of tariffs which can be offered. In December 2012, however, SSE took steps to ensure a fairer deal for prepayment meter customers by giving them access to its cheapest tariff— something which cannot be said for all suppliers. SSE has taken further steps to help customers get onto the best tariff for them. In February 2013 it introduced a set of Customer Service Guarantees. Under these Guarantees SSE committed to always find ways to save customers money when they call. This could include informing them about the tariffs and deals that suit their needs; explaining how they could benefit from the discounts available; or offering practical tips to cut usage. To emphasise how seriously SSE takes its commitment to saving customers money, it discounts £20 off a customer’s next energy bill if it does not meet this commitment. SSE also signed up to a voluntary agreement with Government in April 2012 to always tell customers about the cheapest tariffs available.
13. What can you do to reduce the cost of customer service yet also improve your quality? SSE is the UK’s second largest energy supplier and its customer service has consistently been rated as the best of the large energy suppliers. It has been voted Best for Customer Service and Most Likely to be Recommended eight consecutive times in the uSwitch Customer Satisfaction Reports. It is also the only energy supplier to be awarded five stars by Consumer Focus for its customer complaints performance. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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An analysis of the most recent Consolidated Segmental Statements demonstrates that SSE has one of the lowest operating costs of the large energy suppliers. Cost to serve includes all costs to serve overheads and metering but excludes energy efficiency spend. Taking domestic electricity as an example: Domestic Electricity SP EDF EON RWE BG SSE Average Cost to Serve per cust £ 67.42 £ 87.50 £ 72.44 £ 92.63 £ 55.44 £ 47.06 £ 67.62
It is not possible to judge how this compares to the smaller energy suppliers as they do not publish this information or submit a Consolidated Segmental Statement. Nonetheless, SSE is always looking to ways to more efficient and reduce costs to consumers whilst maintaining quality. Any efforts to reduce the cost to serve are impeded by the increasing amount of regulation imposed on suppliers. For example, under the Energy Company Obligation suppliers have to complete ten forms to verify that a boiler repair meets ECO rules. It is critical that efforts are taken to cut this level of regulation as doing so could yield tangible cost benefits for consumers.
14. What proportion of calls/correspondence are caused by billing queries and by how much do you anticipate this will fall after the advent of smart metering? In the last financial year 2012–13 around 65% of calls/correspondence related to billing queries. This will inevitably come down once smart meters are rolled out to more UK homes. At this stage however an exact figure is difficult to quantify as it is dependent on consumer behaviours. May 2013
Supplementary written evidence submitted by SSE SSE Commitments made in Oral Evidence Dr Whitehead: No, I am talking about the major generators and suppliers here; all the integrated generators and suppliers. Alistair Phillips-Davies: Okay, so ScottishPower, EDF, E.ON, RWE, British Gas and SSE—I am just saying there are significant differences in the purchase costs of energy that appear in their accounts that Ofgem sign off and have been looked at by BDO. You may not have seen the information, but I can give you our view of the information. There are very significant differences in those costs. I will send you a table if you want. I understand exactly what you are saying and I am just saying from what I see from analysing what public information Ofgem make available, we see significant differences and we would be happy to send that through to the Committee afterwards so you can have a look at it and decide what you make of it. There are also significant differences in cost to serve and things like that as well. Some people have much higher cost to serve than we do.
From Consolidated Segmental Statements Range £78.20/MWh and £57.30/MWh = over 30%—as mentioned in oral evidence. Domestic Electricity SP EDF EON RWE BG SSE Average £m £m £m £m £m £m £m Turnover 1489 1673 2426 1751 3027 2504 2145 EBIT -128 -44 159 -34 145 93 32 Margin -8.6% -2.6% 6.6% -1.9% 4.8% 3.7% 1.5%
Volume 12.4 14.7 20 14.9 25.6 20.8 Sales ppu 120.1 113.8 121.3 117.5 118.2 120.4 Purchase cost ppu 78.2 57.8 61.8 57.3 58.7 66.4 Indirects 209 315 326 352 377 240 303 Customer Numbers (mill) 3.1 3.6 4.5 3.8 6.8 5.1 4.5 Cost to Serve per cust £ 67.42 £ 87.50 £ 72.44 £ 92.63 £ 55.44 £ 47.06 £ 67.62 Cost to serve per MWh £ 16.85 £ 21.43 £ 16.30 £ 23.62 £ 14.73 £ 11.54
Domestic Gas SP EDF EON RWE BG SSE Average £m £m £m £m £m £m £m Turnover 1026 888 1507 1344 4903 1828 1916 EBIT 117 -80 -81 -22 399 157 82 Margin 11.4% -9.0% -5.4% -1.6% 8.1% 8.6% 4.3% cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Domestic Gas SP EDF EON RWE BG SSE Average £m £m £m £m £m £m £m Volume 928.2 865.6 1453 1239 4099 1552 Sales ppth 110.5 102.6 103.7 108.5 119.6 117.8 Purchase cost ppu 53.6 60.0 63.3 57.1 62.4 64.3 Indirects 155 190 243 293 623 196 283 Customer Numbers (mill) 1.5 1.8 3.0 2.4 9.1 3.5 3.6 Cost to Serve per cust £ 103.33 £ 105.56 £ 81.00 £ 122.08 £ 68.46 £ 56.00 £ 79.81 Cost to serve per therm £ 0.17 £ 0.22 £ 0.17 £ 0.24 £ 0.15 £ 0.13
Written evidence submitted by RWE npower Key Messages — RWE npower welcomes the opportunity to respond to the Committee’s inquiry, especially as the level of trust in the energy industry is currently at a very low point. We believe that an honest and open debate about the drivers of energy prices and the true level of profit earned by energy companies will help to increase customers’ trust and engagement. — The majority of the final energy bill is made up of costs outwith the supplier’s control. Of the portion that suppliers do control (ca.15%), they have been extremely successful in reducing their operating costs in recent years through significant investment in systems and services. — By contrast, the upward pressure on prices in future years is increasingly driven by Government policies and not just wholesale energy costs. To minimise the risk of further rises in the short term, RWE npower is calling for a cap on ECO costs, a broadening of qualifying measures and amendments to eligibility criteria in order to improve the efficiency of delivery to ensure that costs do not exceed DECC’s estimate of £1.3 billion per annum. — Customers need an appreciation as to why energy prices are rising, but also that they can take action to mitigate some of the impact of these inevitable price rises by implementing energy efficiency measures. — RWE npower welcomes the thrust of Ofgem’s Retail Market Review but believes that tariff simplification must not be brought about at the expense of consumer choice or reduced competition and innovation. The perception and rhetoric regarding profits contributes to mistrust but is not borne out by the evidence. For example, Consolidated Segmental Statements (CSSs), produced for Ofgem, show that the large vertically integrated energy companies’ domestic supply margins have on average been less than 4% over the three reported years 2009–11. — The Government’s current policies are insufficient to achieve its Fuel Poverty targets and we endorse many of the recommendations of the Hill’s review as being an appropriate way of addressing fuel poverty. — Wider data-sharing is needed to improve the identification and targeting of vulnerable households eligible for free energy efficiency measures to ensure that delivery is as efficient and cost-effective as possible, particularly given that the costs are recovered from other consumers. — Energy efficiency measures also need to be joined up with the provision of Warm Home Discount, tariff advice and Benefit Entitlement Checks to give vulnerable households a comprehensive package of income maximisation measures.
Response to Questions Prices 1. What factors determine energy prices (wholesale prices, company operating costs, green levies, company profits etc)? What contribution do these factors currently make towards a typical household energy bill and how might this change over time? 1.1 The wholesale cost of energy is the largest component of both electricity and gas prices. For gas, wholesale costs are determined by global gas prices; for electricity, the wholesale price is determined by the underlying fuel costs and the “merit order” of plant. For electricity, the cost of carbon (driven by Government policy) will increase significantly in future to around 6% of electricity bills by 2020. 1.2 Networks costs (distribution and transmission) are the next highest component of energy bills. Suppliers cannot control these costs and rely on Ofgem to ensure that increases in costs are minimised. We cannot comment on the level of profit derived by the transmission and distribution companies from this component of bills. 1.3 Environmental and social costs (including carbon) account for c14% of domestic electricity prices and 7% for gas. For electricity, this could increase to c30% by 2020 whereas, for gas, the percentage is estimated to remain flat. We regard this distribution of policy costs as perverse against a backdrop where Government cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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needs to incentivise consumers to switch from gas to electricity if it is to achieve its carbon reduction goals. The recent announcement on the Levy Control Framework (LCF) mean that the costs of supporting low carbon generation will be capped at £7.6 billion in 2020 [ca. £74 per customer pa in 2020], providing a limit on future customer costs. Capacity mechanism and ECO costs are separate from LCF, with the latter uncapped and spread over domestic customers only. 1.5 Energy bills depend on consumption levels and DECC estimate that “by 2020 households will be spending, on average, 7% less compared to what they would be spending in the absence of policies”. However different policies will result in different impacts on different customer groups depending on each individual’s consumption level and their ability to make changes to this. Electricity prices will increase more rapidly than gas as a result of Government policies being levied mainly on electricity bills, while the potential energy efficiency benefits of ECO/Green Deal are seen mostly in gas consumption (to the particular disadvantage of off gas grid vulnerable customers), assuming there is sufficient uptake. 1.6 Company operating costs and profits are two areas of the bill where suppliers have direct control—in total accounting for c15% of the bill. Despite inflationary pressure, CSSs show that cost cutting initiatives by large suppliers have resulted in operating costs falling between 2010 and 2011 by c£100 million or 3% with further falls likely in 2012.
2. To what extent (if at all) should the Government or the regulator intervene in the market to affect the prices consumers (or certain groups of consumers) pay for their energy? Should any changes be made to the Government’s current approach? 2.1 There are two key justifications for market intervention: market failure and policy objectives. As regards market failure, there is no evidence (as opposed to rhetoric) of problems on the supply side. Ofgem’s key RMR concern is with disengaged customers. Whilst we support measures to improve customer engagement, concerns on this score can be over-stated. Our research shows that, in areas where npower used to be the incumbent supplier, 96% of customers have engaged in the market through switching to another supplier, changing tariff or changing payment type. Therefore, the extent of tariff simplification to encourage engagement needs to be weighed against reduced consumer choice and innovation opportunities. 2.2 We recognize that energy is unique as an essential product, provided in a competitive market, and this strengthens the need for consumer protection. However, an intrinsic feature of markets is that those who take the time and trouble to search for available offers get the best deal. The danger of applying this too indiscriminately is that it undermines the very objective that Ofgem is trying to promote, namely customer motivation to engage in the market. 2.3 The main justification for intervention in the prices for certain groups relates to the policy goal of alleviating fuel poverty. There are two main drawbacks to the current approach as compared to using the tax/ benefit system: 1. Energy suppliers do not have such ready access to information on those who qualify as Government does; and 2. Not all suppliers offer the Warm Home Discount. 2.4 As discussed elsewhere, a number of the Government’s market interventions have the effect of increasing prices. It is, therefore, important that Government designs these policies to deliver their intent in the most efficient way possible.
3. How effective is Ofgem in ensuring consumers get a fair deal? Are there any areas for improvement? 3.1 Given the modest and, at times, even negative profits of suppliers, it is clear that customers are receiving a very good deal. It is unclear to what extent this is due to Ofgem or to the vigorous competition that characterises the retail market. 3.2 Given the importance of customer choice in the market and the benefits of innovation, we believe Ofgem’s proposals to improve customer engagement through limiting suppliers to offer only four core tariffs are too restrictive. In order to offer choice and to allow for innovation, we believe that there needs to be at least six. However, we do agree that customers would benefit from enhanced information including some communication standardization (eg commons terms and the annual statement). We agree that supplier’s cheapest tariff messaging could increase engagement but such messages must be caveated to avoid misunderstandings and suppliers should be able to promote products with other characteristics that customers value. 3.3 We do have concerns around Ofgem’s treatment of discounts and rewards and believe that its proposals will make it more difficult to reward customer loyalty. 3.4 We believe that the powers to be given to Ofgem under the Energy Bill enabling customer redress where a supplier is in breach of its licence or other regulatory obligation need to be balanced by suppliers being able to appeal the decision on its merits rather than on the present vires or procedural bases. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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3.5 We also have some concerns that the proposals in the Energy Bill which focus Ofgem’s role on delivering Government policy may undermine the potential for it to act as a “critical friend” to Government in questioning whether policy is designed in a cost effective way for the benefit of consumers.
4. Could it be possible to benchmark energy prices to provide greater certainty about whether consumers are getting a fair deal? If so, how might this be achieved in practice? 4.1 Whilst we see a role for benchmarks, we do not see the Tariff Comparison Rate (TCR) as the way forward given that best buy tables already exist. TCRs run the risk of misleading customers into making inefficient decisions due to their national calculation basis. Their unit of representation (p/kWh) is likely to cause confusion relative to billed rates. Annual bill £ would be a more suitable unit but this then gives little value over personal projections. 4.2 Crude benchmarking may be an initial stage to promote customer engagement but, for actual switching decisions, we would advocate the use of personalised projections of costs based on a customer’s Estimated Annual Cost of their existing tariff and consumption level, which are already provided to customers.
5. Could any other measures be put in place to ensure consumers are paying fair prices for energy and to provide consumers with greater confidence in this? 5.2 We believe collective switching offers a way forward for some customers who have not engaged and who may be responsive to community-based or special-interest groups, possibly on a not for profit basis, but the success of collective switching as a feature of the UK energy market depends upon customer commitment and greater clarity on the roles and controls on agents
Profits 6. Many consumers believe that energy company profits are the reason the energy bills have been going up in recent years. Is this perception fair? 6.1 This perception is incorrect. Ofgem’s own benchmarking analysis concluded that reasonable energy supply profits “vary from 3% for a fully hedged utility to 9% for an independent supplier purchasing energy up to two years forward. The average energy retail margin over 2005–10 lies below the range of these benchmarks. However, the average energy retail margin for 2010 lies within this indicative margins.”18 6.2 This is supported by the CSSs where aggregate EBIT margins for domestic electricity and gas supply for 2010 and 2011 were c3%. Profits at these levels are not excessive when compared with other industries and government statistics show supermarkets, banks, clothing retailers and telecoms all returning higher margins; in many cases, substantially more.
7. Why is there so much uncertainty about the level of profits the large, vertically integrated energy companies are making? What could be done to improve clarity? 7.1 We don’t agree that there is uncertainty about the profitability of large, vertically integrated energy companies as they produce CSSs annually setting out revenues, costs and profits for gas and electricity supply (domestic and non-domestic) as well as generation. Whilst Ofgem continually looks for further standardisation there is a limit to how far this can be taken. 7.2 The profits energy utilities operating in the UK make are extremely transparent compared to other industries’ standards of reporting. All of the major suppliers provide detailed insights into their financial and social performance in their annual reports. This has been further enhanced by the publication of the CSSs, which we feel should be rolled out to all energy market participants.
8. How useful are Ofgem’s electricity and gas supply market indicators in monitoring the level of profits made by energy companies? Could they be improved? 8.1 As Ofgem states in Supply Market Indicator (SMI) Methodology (January 2012), paragraph. 1.6: “We are not trying to model supply business profits.” The paragraph explains that its modelling is based on a typical customer and does not take into account discounted and fixed price tariffs. Plainly, this approach understates costs and overstates profitability. 8.2 We believe that the SMI Report could be improved by breaking out Other Supply Costs to explicitly set out Social Costs, Environmental Costs and Delivery Costs. Releasing the full detail of the methodology including each element’s value to public scrutiny would further improve it. 8.3 The SMIs are a useful tool for giving directional guidance on profits made by energy companies. However, as noted by Ofgem in the past (see 8.1 above), they are not an absolute forecast of large suppliers’ 18 (Retail Market Review—Findings and initial proposals Supplementary Appendices, Appendix 9 (March 2011), para. 1.12, p.43); cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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profitability. There are a number of key differences between this Ofgem report and the costs experienced in reality, as set out by NERA analysis conducted in October 2011.19
9. How useful are the segmental generation and supply statements that major energy suppliers are required to produce in understanding where companies are making their profits? 9.1 We believe that the CSSs are useful in providing information on companies’ revenues, costs and profits for supply and generation. Although we have noted the limitations on standardising different companies’ financial models, there might be benefit for all the large companies to report on a calendar year basis. Given the stated purpose of the CSSs to provide new entrants with information on suppliers’ profitability, we consider that it would be appropriate for all suppliers to publish such information. This would also facilitate transparency around the case for exemption from delivery of Government social and environmental obligations and ensure the level of any exemption or relief is proportionate when compared with the economy of scale benefits enjoyed by larger suppliers.
10. Do Ofgem’s supply market indicators and the segmental reports provided by energy suppliers help to increase transparency and public trust in energy companies? Could they be improved to provide greater transparency? 10. More should be done to raise public awareness of these reports and greater transparency could be provided by regularly publishing the full detail of the methodology of Ofgem’s SMI Report (SMI) including each element’s value. The increased public scrutiny would be expected to lead to improvements in the Report.
11. To what extent does the way energy companies communicate profits to the general public influence the public’s perception of these companies? 11.1 We announce our financial results in much the same way as many other companies along with additional information provided by the CSS required under our licences. However, we see the public’s perception of energy suppliers’ profitability being much more heavily influenced by what the Regulator, politicians, stakeholder groups and the media say and publish. 11.2 One of the major problems the energy industry faces is that, due to the scale of the companies involved, the absolute level of profits quoted by the media are substantially higher than many other major UK companies despite margins being considerably lower. Similarly the volatility in profitability the industry faces means profit often moves from breakeven to low meaning a high percentage change. Many of the integrated suppliers have tried to influence the public’s perception by quoting £/customer profits in residential energy supply or pence in the pound profit but the success of such initiatives appears limited in the face of widespread negative media/ stakeholder comment.
Fuel Poverty 12. Is the Government on track to meet its target of eliminating fuel poverty by 2016 and will reduced Government spending in this area affect their ability to achieve this target? 12.1 As recent data shows, Government (in England) is falling well-short of the necessary level of reduction in fuel poverty and we do not believe that this situation will fundamentally change by 2016. 12.2 We do not believe that the answer is to replace Government spending (for example, on Warm Front) with programmes funded through energy bills, such as the Energy Company Obligation. The regressive nature of social and environmental obligations placed on energy suppliers is exacerbated by the fact that vulnerable customers may be the least likely to move to small suppliers, who are exempt from these costs and obligations. The cost of obligations is therefore very likely fall disproportionately on fuel poor customers.
13. Has the Hills Review resulted in any changes to fuel poverty policy? How could its findings be used to improve the efficacy of fuel poverty policy? 13.1 Not as yet as the Government has thus far only consulted on the new definition of fuel poverty proposed by Professor Hills. RWE npower welcomed the results of the Hills Review into Fuel Poverty and we hope that the Government will implement all its key recommendations as soon as possible. Please see our answers to 14 and 15.
14. To what extent are current fuel poverty policies reaching the right people? Are there any particular groups that are currently not getting the necessary support? And will this change under the move to ECO? 14.1 It is very difficult to establish whether current fuel poverty policies are reaching the right people, given the difficulties inherent in the identification of, and engagement with, those customers by suppliers. However, the Hills report suggests that even those households who are in receipt of a means-tested benefit account for only 62% of those in fuel poverty (according to the LIHC definition). This suggests that almost 40% of 19 Energy Supply Margins Estimated by Ofgem and NERA: Review of the Differences, http://www.energy-uk.org.uk/publication/ finish/5/435.html, Commissioned by Energy UK cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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those in fuel poverty are not eligible for help, even assuming that suppliers were able to identify and engage with them.
14.2 As the Hills report makes clear, by moving from the 10% ratio to the LIHC measure, the composition of the fuel poor will change dramatically. Therefore there will need to be a corresponding change in the targeting of supplier obligations—in particular the replacement or broadening of the core element within the Warm Homes Discount
14.3 We believe that the move to ECO may exacerbate the situation given that the majority of ECO funding is targeted at hard to treat properties. Also limiting the Affordable Warmth target to those in private tenure only, will significantly increase the difficulty (and therefore cost) of finding eligible recipients as well as preventing many fuel poor customers in social housing from accessing support under ECO.
15. What support is available for fuel poor households living in solid-wall and hard-to-treat properties? Could this be improved?
15.1 Under the ECO, fuel poor households living in solid-wall and hard to treat properties can access ECO funding under the Carbon Emissions Reduction (CERO) and the Carbon Saving Communities Obligations (CSCO). However, suppliers are obligated to discharge their ECO obligations as cost-effectively as possible, and will seek to maximise the carbon savings from every £ of ECO subsidy provided. As CERO is not focused on fuel poor households, this will almost certainly mean that households that are able to take out a Green Deal loan or can part self-finance will be more attractive to suppliers. This could be remedied by revising the targets and scoring system to compensate for this, while ensuring the overall cost of ECO is not increased.
16. Will the Government’s proposals to ensure that consumers are on the cheapest tariff have any impact on fuel poverty?
16.1 We agree with Government that these proposals may have a marginal effect for some customers but they will not in themselves make a significant reduction to the number of households in fuel poverty, particularly given the rising trend in Government policy costs over the remainder of this decade.
17. To what extent do fuel-poor households engage in switching? What are the barriers to greater levels of switching from these groups?
17.1 Consumer Focus’ recent report “Switched on—consumer experience of energy switching” found that vulnerable customers are much less likely to shop around, with the wealthiest consumers being around three times as likely to use a price comparison service as those in the poorest social groups.
17.2 Vulnerable customers therefore need access to meaningful information that will help them engage with the competitive market and make efficient switching decisions. We support proposals to standardise terminology. The Government’s proposals for cheapest tariff messages may help to promote switching within this group as could collective switching schemes run by trusted intermediaries such as charities or Local Authorities. Suppliers have also funded and supported activities such as Big Energy Saving Week and Energy Best Deal which seek to proactively engage vulnerable customers with the switching process by bringing the competitive market to them.
18. To what extent do fuel-poor households current take advantage of energy efficiency schemes? Could anything be done to increase uptake?
18.1 We do not believe it is possible (for us or anyone else) to confirm to what extent fuel-poor households take advantage of energy efficiency schemes, given that the identification of the fuel-poor is often the key issue. This is compounded by the known difficulties of engaging with the non-fuel poor in relation to delivering energy efficiency measures.
18.2 We believe that, whilst not a panacea, improved data sharing would provide a significant boost to take up of energy efficiency measures, as it would remove the need for households to prove that they were eligible for support.
18.3 We are concerned that the current commentary around tariff reform as a means of ameliorating energy costs is in danger of diverting customer attention away from energy efficiency, which is the only long term solution for delivering real and sustainable reductions in consumer energy bills. February 2013 cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Supplementary written evidence submitted by RWE npower RWE Commitments to Provide Follow up Answers 1. A breakdown of the costs of our social/environmental (CERT/CESP) costs in relation to the CSS? Our CERT/CESP costs are as follows: 2009—£149 million. 2010—£104 million. 2011—£139 million. They are required to be included as part of Other direct costs in the Ofgem Consolidated Segmental Statements rather than Indirect costs, which is where we would treat them internally.
2. A note reiterating/explaining our corporate tax position Paul Massara’s letter to Tim Yeo of 17th April sets out our corporate tax position. The factsheet we produced on 18th April quantified the three main adjustments in moving from Operating Profit towards taxable profits as described in that letter. For convenience they are both enclosed as attachments.
3. How often you have check listed, as relates to trading activities, the “another part of business” box? We reviewed very carefully the Business Functions Template, including its Explanatory notes shown on page 9 and 10 of our YE 2011 CSS to ensure that it was prepared in absolute accordance with Annex 2 of the Ofgem Guidelines. The Business Functions Template accurately and fairly represents where business functions are performed and in which segment the profit or losses of these functions are recorded. Trading is involved in performing certain aspects of the specified business functions, as explained on pages 9 and 10 of our YE 2011 CSS (published on our website at http://www.npower.com/idc/groups/wcms_content/ @wcms/@resi/documents/residential/con_seg_statement_2011_pdf.pdf and enclosed as attachment). In all cases where the functions are performed in “Another part of the business”, the profit or losses are reflected in the appropriate Generation or Supply segment. All these activities are performed under arms-length, commercial arrangements and are at fair value in accordance with all applicable legislation and standards.
4. Clarification of the difference between the profit numbers cited by Ian Lavery and those cited by Paul Massara There appears to be some confusion as to why there is not just one single measure of profit in circulation. We would like to point out that this is directly because different users of financial information require it to be presented on different bases. The main examples, as they apply to RWE npower, are as follows: A. Companies House—the Companies Acts require UK financial statements to be filed for each individual legal entity. These are often referred to as the statutory accounts. There is no requirement on us to file group accounts. We prepare our UK entity accounts under UK rather than International accounting standards. It is the profit before tax in these entity accounts which is the starting point for the computation of UK taxable profits, which (unlike in some other countries) is also done on an entity by entity basis. B. Ofgem—as a condition of our generation and supply licences, our Regulator requires “Consolidated Segmental Statements” (CSS) which have a strictly defined content. The main profit measure is EBIT (earnings before interest and tax) stated for each business segment. However this does not correlate to the results of any particular legal entity or group of entities, not least because certain items are required by Ofgem to be excluded—either because they relate to activities not regulated by Ofgem, or because they are of a one off nature and could be misleading to include in what is intended to be a profitability measure than can be compared on a like for like basis with competitors. C. Parent Company Accounts—in common with three of the other five large companies at the hearing, RWE npower is part of a larger group (in our case headed by RWE AG of Germany). Multinational groups report under International rather than UK accounting standards. It is common to refer to the results of respective divisions or countries using Operating Profit as the measure. For RWE, this is EBITA (earnings before tax, interest and amortisation). It also does not include “non-operating” costs, for example the one off impairment of our coal station value of £249 million in 2010. In RWE npower’s follow up letter to Tim Yeo, as Chair of the ECC Select Committee, we quoted our profitability (or lack of it) at the EBIT level per the Ofgem CSS mainly because each of the 6 main energy suppliers are required to file these statements under a comparable basis. The aggregate EBIT for the years 2009–11 was actually £31 million, although I believe I incorrectly rounded this to £40 million in the hearing when presented with the cumulative Operating Profit figure of £766 million. Although it necessarily exposes some of the complexity around the preparation of the CSS results, for completeness we also enclose a reconciliation between the Operating Profit referenced by Mr Lavery (£766 million) and the EBIT we referenced in our letter earlier last week (£31 million). cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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See attached Table 1 5. Peter Lilley asked for greater clarity with regard to how much of the [customer] bill is profit and how this is divided between retail and generation The sum of all the individual bills that householders receive effectively equates to the turnover of our domestic supply business. The profit for the retail business is that turnover less its costs, which importantly includes the cost of buying the power and/or gas and then distributing it. Our retail business pays distribution costs to the infrastructure/energy companies that own the respective gas/electricity networks. Ofgem regulates these businesses as well as our retail business, but RWE npower does not own any network assets, so there is no profit element in these costs for us. As regards the cost to the retail business of buying the gas and power, it does not buy it from our generation business. The commodity cost to the retail business cannot be related to any one particular producer of gas or electricity. In other words we do not self-supply, and so the retail business simply uses the wholesale prices it pays as one of the costs after which retail profits are measured. The question as posed could not be similarly applied to a retail supplier with no generation assets at all. But it is no more applicable to us, not only because we do not self-supply, but also because neither our generation output nor our gas production is matched to our retail supply. Our profits from generation can be seen separately from the CSS, and reflect the extremely competitive nature of the generation market. Currently very thin margins can be made from generating from gas fired plant. These profits are required to fund the massive investment we have made in our generation portfolio. In summary: — The profit on the customer bill reflects how much we make from our supply business and so is comparable with other supply companies; — We do not “self-supply” and so use the wholesale prices as a reference from which profit can be measured; — Similarly we have little in the way of upstream gas production and so source our gas for customers almost exclusively from the wholesale market.
6. Should trading be included in the Consolidated Segmental Statements? RWE Supply & Trading GmbH (“RWEST”) is RWE’s global trading business that is headquartered in Germany with trading desks in Swindon, London, Singapore and New York. Being a global business engaged in almost all aspects of energy trading, the majority of its business areas are not only irrelevant to the UK consumer bill, it is simply not possible (or at all helpful) to allocate a percentage of its profits or losses to a GB energy supply or generation business. Indeed, there is simply no correlation between the relatively volatile profit or loss of a global trading business and the UK customer’s bills and therefore inclusion of its results would make comparison between companies impossible. Furthermore competitors have, for various commercial and operational reasons, significantly different approaches to trading, again making comparisons difficult if trading company results were included. RWE’s trading business is separately managed and under a different ownership structure from the GB licensed retail and generation businesses. It has no influence over customer pricing decisions nor does its P& L affect the performance of the retail supply company. Despite this business separation, RWE believes it is important that UK customers benefit from the economic efficiency that wholesale markets provide and also from the economies of scale that derive from having access to RWE’s existing trading facilities. As such, both the retail and generation businesses have Service Level Agreements with RWEST for it to provide certain services at arms-length (cost-based) prices. For 2011, charges were approximately £2 million for the retail business and £3.4 million for the generation business. These fees cover out-of-hours operations, nominations to central systems, shared IT resources, use of credit and brokerage fees. All commodity transactions between the companies are entered into at arms-length, fair market prices which are subject to stringent intercompany audits and fair-value checking procedures. There is no transfer of profit or loss between the licensed GB retail and generation businesses and RWE’s global trading business.
7. Dividends paid The ECC Select Committee asked how much we had paid out in dividends. Please find below a record of the dividends paid out of the UK in the period 2009–12: 2009: £120 million. 2010: £120 million. 2011: £125 million. 2012: £125 million. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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This was less than Mr Massara estimated during the hearing. No future dividends from the UK are currently planned.
Follow up Questions from ECC Select Committee Questions on Trading These questions are related to electricity only
1. What percentage of your total electricity trades are over-the-counter (OTC) versus trades on the wholesale exchange? UK Power: In 2011, on a gross basis (ie trades where RWE was either a buyer or a seller) RWE traded 406TWh of power via almost 243,000 trades. Of these trades 203,000 (or 18TWh) were exchange traded and 39,000 (or 389TWh) were non-exchange traded. That is, 84% of trades in terms of number and 4% in terms of volume were exchange traded. The significant difference between the number and volume of trades is that the exchange markets in the UK mainly operate in the short-term.
2. What are your criteria for trading OTC versus on the wholesale exchange? Our criteria for trading OTC versus on an exchange are a combination of (a) product availability, (b) product price, (c) transaction costs (ie broker charges, exchange and clearing costs), (d) collateral costs and (d) remaining risks (including credit risk). The most important driver of all of these criteria is product price—we will normally transact wherever the price is most attractive (ie the highest if we are selling the product or the lowest if we are buying the product). It is this access to different markets and products through traded markets that ensures that we are able to procure commodities for the most efficient prices for our customers.
3. What is the average difference in price for your OTC versus wholesale exchange trades? There is no systemic difference between the price of OTC versus exchange trades. The market ensures that any significant difference in price, over and above that due to differences in the product, timing or transaction costs—is removed by arbitrage; traders buy the cheaper product (wherever it was traded) and sell the more expensive product (on the other platform) to ensure that prices return to an equivalent basis. Other than the means of execution, many other aspects of OTC and exchange trades are also increasingly similar. For example, many OTC trades are now given up for clearing and—under REMIT—data on OTC volumes and prices will be reported to regulators and published on a commensurate basis to exchange trades.
4. Does your company deal in long-term contracts? Who has access to the information contained in the contracts? RWE Group does sometimes enter into longer-term UK power contracts, the details of which are commercially confidential. It should be noted that these agreements are occasional, highly-tailored and bespoke arrangements that would not be expected to affect day-to-day trading and pricing in the wholesale markets. Although not explicitly controlled or restricted, the distribution of contract details is kept to a minimum to protect commercial confidentiality and any information pertaining to those contracts which qualifies as inside information is covered by strict internal REMIT compliance rules and procedures. These questions are related to gas only
5. What percentage of your total gas trades are over-the-counter (OTC) versus trades on the wholesale exchange? UK Gas: In 2011, on a gross basis (ie trades where RWE was either a buyer or a seller) RWE traded 50.5 billion therms of gas via almost 49,000 trades. Of these trades 7,900 (or 500 million therms) were exchange traded and 41,000 (or 50 billion therms) were non-exchange traded. That is, 16% of trades in terms of number and 1% in terms of volume were exchange traded.
6. What are your criteria for trading OTC versus on the wholesale exchange? See answer 2 above.
7. What is the average difference in price for your OTC versus wholesale exchange trades? See answer 3 above.
8. What announcements have you made in accordance to REMIT? Where is it posted? If you trade gas outside of the UK within the EU, where do you post announcements for other EU markets? RWE Group complies fully with REMIT regulations. All relevant information relating to the electricity business is published on the RWE transparency website “www.rwe.com/rwetransparency“ which provides all essential information about the individual units of the power stations. This page can easily be found by a cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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simple search in an internet search engine and as a result, any interested user can gain a precise picture of the output of RWE power stations. RWE’s sole subsidiary company with gas production assets is RWE DEA, which supplies gas from its portfolio of equity gas fields. The production capacity at each of RWE DEA’s fields is significantly lower than the level at which changes in their availability would be likely to significantly affect wholesale gas prices and hence qualify as inside information which is required to be published under REMIT. RWE DEA nevertheless has the facility to publish information on field availabilities here: http://www.rwe.com/web/cms/en/1375240/ rwe-dea/at-a-glance/transparency/ in the event that disclosure should be required to meet our obligations under REMIT. RWE will also fully comply with regulations to report OTC transactions under REMIT and the Regulation on OTC Derivatives, Central Counterparties and Trade Repositories. ACER and ESMA and national regulatory authorities are currently consulting on the definition of the technical standards and protocols to facilitate this.
9. What access to market information do your traders have about any other division of your company? Do they have access to storage levels, upstream information if applicable (geological data), or daily production/ consumption data? RWE Group complies fully with REMIT regulations and therefore our traders only have information that has already been made publicly available under REMIT or which is not classified as inside information under REMIT. RWE does not own any gas storage assets in the UK and to the extent storage capacity is required it is contracted for with third party providers by each Group subsidiary. RWE Supply and Trading (RWEST) has gas supply contracts with RWE DEA (DEA) which provides DEA with a route to market for their gas production from the UK Continental Shelf, although—as noted in the response to question 8—the level of flows under that agreement would not qualify as inside information under REMIT. RWE Npower procure and hedge the consumption of their gas consumers independently on an arm’s length basis with RWE Supply & Trading and at prices prevailing in the wholesale gas market.
10. Does your company deal in long-term contracts? Who has access to the information contained in the contracts? See answer 4 above, which is the same for both UK Gas and Electricity.
Additional Questions 11. How many of such “immobile” customers are there? Based on 2012 data, our best estimate is that approximately 410,000 electricity customers (or 7.2% of our 5.7 million domestic energy base) havd been supplied continually by npower in the same property on our standard (or equivalent) tariff since deregulation. This data is taken from our SAP and legacy billing systems and excludes those customers who have at some point since 1999 taken gas from us, or have selected a non- standard tariff.
Assumptions Inclusions 1. “Standard” tariff includes both single rate and Economy 7, in addition to legacy complex-metered tariffs, such as SuperTariff or off-peak given that stakeholders and customers would also see these as “standard” 2. Customers who have changed name—such as on death, marriage or divorce—are included where the account name has been amended as opposed to a new account being opened. This is the agreed business process in the majority of cases where an existing family member continues to live in the property
Exclusions 1. Customers who have moved from an npower-supplied into another npower-supplied property are deemed to have engaged. At home move they would have contacted us to provide their details and our business process is to offer gas at that point (which they may or may not have taken) 2. Customers who have requested that their current account be closed and a new one opened on divorce or death are excluded. This typically happens when there are significant legal processes in place that require the customer’s current account to be closed. Note that we are unable to accurately track customers in this scenario Customers who have at some point selected gas or an alternative electricity tariff from npower. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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12. Do you offer all customers all of your tariffs? If not, what are the reasons for not offering the full suite of tariffs? It is our policy not to distinguish between new and existing customers when we make products available. From time to time, we may incentivise customers to take a tariff through a particular channel such as internet, telesales and, again, these offers would be available to both new and existing customers. However, some customers (whether new or existing) may be excluded from taking a particular tariff due to their choice of payment method, meter type or service channel.
13. What can you do to reduce the cost of customer service yet also improve their quality? We have already started a number of initiatives to help with the two major contributors to cost. Firstly the implementation of a new customer management system is specifically designed to take steps out of the process that slowed down the efficiency of activity. This makes it easier for the customer facing teams to process customer requests, reducing time taken and improving accuracy and quality of delivery. The second element of the strategy in Customer Service is a top to bottom diagnostic review of every process, performance management system and organisational design to make sure that the customer is the first thought for the whole organisation. By engaging directly with the people who serve customers and stream lining the processes they use, giving them more skills, focusing on the way we treat customers and building the right support organisation, we will deliver more efficiency and reduce cost but also drive a better customer quality. This is about delivering on customer promise, all the time, every time. In a highly competitive market everyone needs to focus on cost reductions. Over the period 2010–12, we took out over £300 million of costs from the business and have further plans to reduce costs in 2013 and 2014. These cost reduction programs where the main reason that we moved from loss making in retail in 2009, 2010 and 2011 to a small profit in 2012.
14. What proportion of calls/correspondence are caused by billing queries and by how much do you anticipate this will fall after the advent of smart metering? In 2012, we received 5.2 million inbound contacts relating to billing enquiries. Total inbound enquiries were 9.1 million. The Smart business case assumes that there will be a substantial decrease in billing enquiries but technical queries will replace most of them. We don’t anticipate any net saving until 2018. We haven’t split billing calls out specifically from other types of call but have assumed that in 2013 we will get 1.45 calls per Smart customer reducing to 0.95 calls by 2019. This would equate to 8.2 million calls in 2013 and 5.3 million in 2019.
15. If the billing problems were sorted out, do you think this could encourage new entrants to come into the Supply business, as you might not have the big upfront cost of establishing large customer call centres to cope with the inevitable problems. Big contact centres are often seen as a cost of failure, but it is also true to say that a significant percentage of customers still like the personal touch of a voice. The real challenge is to get the right balance between access to people who can explain and guide but also giving the customer the choice about how they contact us. Clearly, today the bill is a key generator for contact but it can’t continue to be the main reason. Building a relationship with customers based on trust and the right expert advice should increasingly be the driver and is clearly the way forward. In order to maintain dialogue and build that trust sometimes a voice can help more than a web site but choice is the key element. Hence, even if new entrants are able to avoid billing problems, they will still need to communicate with customers. Provided they can do it more efficiently than incumbents, it should not be a barrier to entry. May 2013 cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
Energy and Climate Change Committee: Evidence Ev 115 £m (50) 12 117 31112 440 64 128 (5) 22 12 220 233 311145 764 (38) 168 (81) (128) 240 2009 2010 2011 3-year total Notes (238) (154) (56) M 247 272 357 Table 1 Made up of Generation Domestic Supply Non-domestic supply €€ RWE NPOWER RESULTS—RECONCILIATION FROM RWE AG ACCOUNTS TO OFGEM STATEMENTS Operating result of division“Operating in result” RWE is AG earnings groupOperating before accounts result interest, in in tax GBP and (but non-operating still amortisation underDifferences IAS) between International andPensions—mainly UK deficit accounting payment in not 2009–10 Amortisation—“non-operational” in so IAS not P&L inOperating IAS result operating in profit GBP under UK GAAPItems (IAS to for be 2011) adjustedOut per of OFGEM scope guidance (non-regulated)One activities, off mainly item—coal Cogen stationOther impairment one (not off tax items deductible)Other adjustments OFGEM Earnings before interest/tax (as per our website) £m (73) (135) (73) (43) (88) n/a (81) (18) (249) n/a (128) (33) 240 31 cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Written evidence submitted by Age UK Key Points — We welcome recent proposals to simplify the number of energy tariffs available; this will have a positive impact on older consumers many of whom are on poor value legacy tariffs. — We have been frustrated by the length of time it has taken the regulator to effect change in reducing the complexity of the energy market and would be concerned if there was any further delay in implementing these changes. — Whilst we welcome current Government action on fuel prices it is entirely focused on gas and electricity prices, with no proposals for households off the gas-grid. We would like to see the Government take more steps to encourage collective purchasing for heating oil and LPG. — The most effective way of making progress on fuel poverty for this and future generations is to improve the energy efficiency of our housing stock. — Green Deal and ECO may make valuable contributions to improving energy efficiency of homes but they are insufficient to make any significant impact on the numbers of people living in fuel poverty, including the many older people who live in cold homes. — Age UK want to see a more vigorous programme of investment, starting with the areas of poorest quality and thermal efficiency which could be funded by the new receipts Government will receive from carbon taxes (estimated to be about £63 billion between 2011 and 2027).
Introduction 1. Age UK welcomes the opportunity to respond to this inquiry into energy pricing by the Energy and Climate Change Select Committee. Age UK”s mission is to improve the lives of older people, making a practical difference to people today whilst working for a better later life in the future. We are a charity and a social enterprise that in 2012 provided quality information and advice products to over six million older people. We are driven by the needs and aspirations of people in later life. Our vision is of a world in which older people flourish and we believe that as well as confronting the challenges that come with an ageing society, we should also focus on maximising the benefits of living longer. 2. In 2011 Age UK received over 75,000 calls from older people to our national Advice line, seeking advice on Spread the Warmth issues; helped 7,000 people through home energy checks; distributed over 513,000 copies of an information guide full of tips on how to stay warm and well in winter and distributed 640,000 thermometers to help older people check and keep their homes at the right temperature. We help to disseminate Met Office Cold weather alerts throughout the winter period which enables older people to be targeted with support. 3. Around six million older people in the UK are living in fuel poverty20 and every winter, tens of thousands of older people die or become seriously ill in the UK because of the cold. Age UK calculated this costs the NHS in England £1.36 billion, not to mention the associated cost to social care services which is likely to be substantial, and the personal impact this has on the families of those individuals affected. Rising energy prices, which threaten to push ever more older people into fuel poverty, are a key factor in this as is the poor quality of much of our housing stock (much colder countries than the UK have significantly lower death rates thanks in part to better insulated homes) and a lack of awareness of the need to keep warm 4. Below are our views in more detail on two of the main areas highlighted by the Committee in its call for evidence.
Prices 5. Energy prices are rising significantly and consumers are increasingly confused by the range of tariffs, payment options and information available to them. 6. Age UK has conducted research into the coping strategies of older households on low incomes.21 While this found that older people went to great lengths to buy their food as cheaply as possible they had real difficulty in making accurate fuel price comparisons. The report concluded that the complex, opaque information from energy suppliers resulted in “confusion and anxiety in being unable to manage their energy bills”. The report called for “simple clear information and advice about energy prices and a way of being able to compare different tariffs that is not only internet based.” 7. It is simply unrealistic to expect consumers to be in a position to tell if they are paying a fair price for their energy. It is the role of the regulator to ensure fair pricing, make the market work more effectively in the interests of consumers and to be prepared to step in and take action if needed. We are concerned that it has not delivered effectively on this responsibility in recent years. 20 Age UK estimate derived from analysis of Trends in Fuel Poverty England, DECC 2012 http://www.decc.gov.uk/en/content/ cms/statistics/fuelpov_stats/fuelpov_stats.aspx (Table 17). For the years 2003 to 2010, households where the oldest person is aged 60 or over made up over 50% of all fuel poor households. For the last reported year (2010) there were 1,886,000 households 60+ in fuel poverty compared to an all-age total of 3,536,000 (53.34%) 21 Living on a Low Income. February 2012 cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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8. It is clear from Ofgem”s retail market review that the energy market at present does not currently operate for the benefit of consumers, the market is too complex and many people do not feel empowered to switch suppliers due to the lack of clear and straightforward comparisons and general levels of scepticism about the process and what benefits it may have. 9. The multiplicity of tariffs merely causes consumer confusion. We therefore welcome recent proposals to reduce the number of tariffs that energy companies can offer. A maximum of four tariffs per payment method is reasonable and we would agree with the conclusions of Ofgem”s final consultation on the Retail Market Review (RMR) that it will allow some flexibility for suppliers to innovate without having too much complexity for customers. 10. The proposals are likely to mainly benefit “sticky” customers who thus far have not switched. This would include many older people, who have never switched from their original monopoly supplier and are on poor value legacy tariffs. If properly implemented, this would be a positive development. 11. Age UK has been disappointed to date by the length of time it has taken the regulator to get any significant change in the multitude of energy tariffs on offer, given that these problems were first identified in Ofgem”s Energy Supply Probe published in 2008. We hope that the decision to include these requirements in the Energy Bill will not lead to further delay. We do however welcome Ofgem”s commitment to give greater priority to monitoring that energy companies are adhering to their licence conditions. 12. Age UK wants to see a far greater degree of transparency in fuel bills, all households have the right to know what contributes to their energy bills. This is particularly necessary if consumers are to be able to make a true comparison. Social and environmental obligation costs are increasing but they are not shown separately on energy bills. We think it is disingenuous to encourage consumers to reduce their energy consumption if they remain unaware of the charges in their energy bills not affected by their consumption. 13. As well as being shown separately, environmental and social costs should be charged on the basis of consumption rather than, as at present, on a per household basis. Low income households tend to use less energy, so charging by consumption would be less regressive. In addition it is not clear how older people who receive Warm Home Rebate will be made aware that they will lose this rebate if they switch to a smaller supplier who does not have social and environmental obligations. 14. Collective switching, which is increasingly an avenue being explored in some parts of the country, may also help some people achieve lower energy prices, but as with any other form of switching after the initial switch it will offer diminishing returns. It is important to remember that 4.6 million people in England do not have access to mains gas, of which we calculate around 1.5 million are over 65. In the absence of regulating fuel oil we think that practical solutions such as collective purchasing would be helpful. Around half of those off-gas use oil heating which is expensive and has high exposure to market price fluctuations. 15. Access to the cheapest rates should not be prejudiced against older people, many of whom are on low incomes and prefer to pay by standard credit rather than direct debit to ensure they do not go overdrawn. One reason for this is that energy suppliers continue to predominately offer direct debit payments on a calendar month basis, despite the fact that the banks have advised us that they could offer direct debits with different time periods. If customers could be offered direct debit payments on a weekly or four weekly basis, it could encourage more low income customers to switch to this cheaper method of payment.
Fuel Poverty 16. The recent review by Professor Hills recommended a new measure of fuel poverty. We agree that it is important to have a robust measure in order to effectively target resources where they are most needed. We think that the new definition is based on more rigorous principles than the current definition but think that the current definition is under-responsive to changes in energy prices and does not adequately capture the link between a household”s need for energy and its ability to afford energy. The new measure will bring some additional households into fuel poverty, but will exclude others currently counted, including many older people, some of whom are likely to be among the 26,700 excess winter deaths recorded in England and Wales each year. 17. We are mindful of the time it has already taken to consider the definition and also the fact that changing it will do nothing to change the reality for many older people who struggle to keep themselves warm in hard to heat homes; and for those who die as a result. 18. The state of UK”s housing stock is deplorable and increasing the energy efficiency of homes is by far the most effective way forward. It will reduce levels of fuel poverty for vulnerable people (including many older people) and leave a lasting legacy for future generations. 10% of dwellings in England fail the “decent homes” criteria because they do not provide adequate thermal comfort.22 Over half a million older households live in properties that are “hard to heat”.23 19. Age UK wants to see a more vigorous programme of investment into improving the energy efficiency of the housing stock, starting with the areas of poorest quality and thermal efficiency. Age UK thinks this 22 English Housing Survey 2012 23 J Pett (2002) Affordable Warmth in “Hard to Heat” Homes: Finding a way forward, Association for the Conservation of Energy cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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could be funded from the new receipts Government will receive from carbon taxes estimated to be about £63 billion between 2011 and 2027. 20. As Hills has observed, energy efficiency policies targeted on low-income households are a very effective way to address fuel poverty. In addition, using carbon taxes in this way could stimulate the economy, create jobs, decrease household expenditure and save consumers money on their energy bills in the long term. 21. Now that the Warm Front grant scheme to improve heating and/or insulation has finished, the Government is relying on the Green Deal and ECO alone to improve the energy efficiency of the UK”s housing stock. Whilst these programmes are likely to make welcome contributions they are simply insufficient to deliver warm and well-insulated homes on the scale that is needed to reduce levels of fuel poverty. 22. We are aware that the question of how many people Green Deal and ECO will actually help has been a matter of some debate. The Government”s own impact assessment estimates that the net reduction in fuel poverty from Green Deal and ECO is only between 125,000 to 250,000 households by 2023, a mere drop in the ocean compared to the four million households currently classified as being in fuel poverty. In our view, it is important that there is a clear, agreed method for monitoring the success of the policy 23. The Green Deal is a market-based system that enables people to fund home energy-efficiency measures such as cavity wall and loft insulation from the future savings generated. This takes the form of a loan of up to 25 years, with loan levels limited to ensure that the repayments are no greater than the savings made. 24. Alongside this, the Energy Company Obligation (ECO) will provide grants for vulnerable customers and hard-to-insulate properties, for example, those with solid walls. These groups are unlikely to be able to qualify for Green Deal because the measures for these types of home are considerably more expensive. 25. We estimate that even if the whole of £1.3 billion ECO funding is targeted at the fuel poor it is not nearly enough to eradicate fuel poverty. As it is, only between 40–50% will be targeted in this way, also in effect meaning that poorer households will be subsidising the better off since ECO costs will be levied on a flat rate basis. 26. Many older people express serious concerns about taking on debt. While technically the Green Deal loan would be secured on the property, with interest rates expected to be around six–8%, it is unlikely to be attractive to many older people. 27. Rural fuel poverty work has also been under-resourced and needs greater attention from the Government and energy companies to improve housing stock in these areas. In excess of 1 million rural households were living in fuel poverty in 2009—that is around one in four of all rural households. Fuel poverty is exacerbated in rural areas due to the high number of solid wall properties and off-main gas households and lower than average wages. This is particularly an issue for older people as the rural population contains around twice the percentage of retired people as the general population. 28. There are other avenues that should also be explored. In terms of changing behaviours Age UK think that providing personalised advice to customers and training people (such as tradesmen) to be energy aware can be highly effective. In addition to providing specific energy efficiency checks all our handypersons in our handy van service are trained to help and advise people on the simple things they can do to improve their home”s energy efficiency. February 2013
Written evidence submitted by Which? 1. Introduction 1.1 Since the cost of energy is consumers’ number one financial concern,24 it is worrying that three quarters pay more than they need on expensive standard tariffs—a collective overpayment of £4 billion annually. While the factors and costs that determine prices are complex, the current market arrangements provide little assurance to consumers about the fairness of energy prices. 1.2 When the GB market was liberalised there was an expectation that all consumers would benefit from competitive prices. This has not materialised. Competition in the retail market is weak, with only 5–10%25 of consumers actively engaged,26 providing little incentive for suppliers or generators to be efficient and offer the lowest prices. Furthermore, the effectiveness of wholesale market competition is not clear due to a lack of transparency and information. Finally, there is little scrutiny of how government policy costs are attached to consumers’ bills, with considerable faith placed on the energy market to deliver programmes efficiently and cost effectively. 24 82% of consumers cited energy prices as their top financial concern. Populus, on behalf of Which?, interviewed 2060 UK adults online between 4th and 7th January 2013. 25 “Retail Marker Review—Initial Findings and Proposals Report”, Ofgem, 2010. 26 Which? does not consider this level of engagement is ever sufficient to drive effective competition. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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1.3 These factors are not only important for today’s prices, but also future energy bills since Electricity Market Reform relies on effective wholesale market competition to provide robust reference prices that will act as benchmarks for future generation. 1.4 The opportunity presented by the Energy Bill and Ofgem’s Retail Market Review to tackle retail market competition must not be missed. Action is also needed to ensure that wholesale markets become truly competitive and the costs of government policies are scrutinised rigorously. Without reform, consumers will continue to have little confidence in the fairness of the prices they pay and it will be difficult to convince consumers to support the £110 billion investment needed to decarbonise and renew the energy system.
2. What factors determine energy prices (wholesale prices, company operating costs, green levies, company profits etc)? What contribution do these factors currently make towards a typical household energy bill and how might this change over time? 2.1 Consumers’ energy prices are constructed of six costs.27 Greater evaluation is needed of the effectiveness of the retail and wholesale markets and the cost of government programmes to their influence on the prices consumers pay. 2.2 Wholesale costs constitute over 60% of domestic energy bills.28 These have contributed to the substantial increase in prices in recent years and require particular analysis. These costs are derived from a complex set of interactions with suppliers sourcing energy through self-supply arrangements within vertically- integrated companies; purchasing it directly from a vertically-integrated or independent electricity generator/ gas producer; or buying it from the wholesale markets. 2.3 The volume of energy that goes through each of these routes is not clear. Furthermore, it is not possible to know how much energy is traded over the wholesale markets. However, in 2010 it is estimated that equivalent of 6% electricity and 10% gas consumption volumes were traded over-the-counter (OTC) over wholesale markets.29 It is important to note that this trading influences the prices paid by suppliers wherever they source their energy from. Price information from the markets is limited but is often used to inform the transfer prices that dictate the cost of selling energy within a vertically integrated company30 as well as informing the direct contracts between suppliers and generators.31 These arrangements raise a number of concerns that are set out in 3.7. 2.4 The impact of government programmes on electricity bills has been relatively small so far. However, as low-carbon generation makes up a larger share of electricity and the EU ETS carbon price increases, the impact of support costs on prices and bills will grow.32 Since the majority of these costs are applied through electricity bills, people with electric heating—often the fuel poor—will be disproportionately affected. 2.5 There is significant uncertainty about the cost of the Energy Company Obligation (ECO) and its impact on bills. DECC estimates that the costs could range from £0.53 to £3.09 billion annually33—though there is no cap on the cost. If Green Deal finance is unattractive to consumers then ECO costs may increase as suppliers spend more to meet their ECO obligations. 2.6 Other government programmes also attach costs to consumers’ bills, such as smart metering. This is estimated to cost £11 billion and the main control mechanism on these costs is the retail market, which is acknowledged to be ineffectively competitive. As with ECO, there is no cap on the final price that consumers will pay for this programme. 2.7 Finally, while the cost of retailing energy should be a small component of consumers’ bills, ineffective competition reduces pressure on suppliers to ensure that their costs are as efficient as possible and also limits downward pressure on wholesale costs. This will remain a source of inefficient costs unless competition in the retail market becomes more effective.
3. To what extent (if at all) should the Government or the regulator intervene in the market to affect the prices consumers (or certain groups of consumers) pay for their energy? Should any changes be made to the Government’s current approach? 3.1 Competition driven by engaged and informed consumers is often the most effective mechanism to drive efficient prices. However, since the current regime is failing consumers, the Government and regulator must intervene. 27 Wholesale energy, supply costs and profit margins, distribution charges, transmission charges, VAT, environmental charges and other costs—source: “Updates household energy bills explained”, Ofgem, January 2013 28 “Updated household energy bills explained”, Ofgem, January 2013 29 “UK Energy Policy and the End of Market Fundamentalism”, edited by Ian Rutledge and Philip Wright, Oxford Institute for Energy Studies, 2010 30 “Ofgem Segmental Statements Review”, BDO LLP, January 2012 31 Gas: “Continental European Gas Hubs: Are they fit for purpose?”, page 62, Patrick Heather, June 2012. Electricity: For example, EDF Energy offer power purchase agreements that are index linked. http://www.edfenergy.com/products-services/large-business/ large-business-products/export-low-carbon.shtml 32 “Household Energy Bills—Impact of Meeting Carbon Budgets”, Committee on Climate Change, December 2011 33 Green Deal and Energy Company Obligation consultation, DECC, November 2011. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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3.2 The Government and Ofgem’s intervention via their tariff proposals contains a serious risk of allowing competition to remain weak since it will not improve the comparability of energy tariffs. Prices still cannot be compared at a glance and this will constrain competitive pressure on energy bills. 3.3 The Government should further amend the Energy Bill to introduce single unit pricing for energy tariffs. This should address the problem of consumer disengagement in a way that is less restrictive and more conducive to innovation than explicitly capping the total number of tariffs a supplier can offer. 3.4 Alongside this proposal, our recent report “The Imbalance of Power—The Retail Market” sets out a package of measures34 that offer the best chance to make competition work effectively. If these reforms are introduced and consumer outcomes still do not improve by 2015, then the wider structure of the retail market should be fully reviewed including consideration of a “fair price guarantee”. 3.5 A fair price guarantee does not equate to a return to a full price cap model for all tariffs. There are energy markets, such as in the US State of Illinois and Northern Ireland, where both regulated and competitive tariffs exist. These hybrid models can enhance rather than hamper competition, while ensuring the interests of consumers are protected. The regulated tariff acts as a price to beat for competitors, delivering choice for those that want it while ensuring fair prices for those who do not engage. 3.6 The Government should take backstop powers to enable the regulator to introduce a fair price guarantee for the default open-ended variable rate tariff. This would send a clear message that every effort must be made to improve outcomes for consumers. If effective competition does not develop, then the government will have the power to intervene swiftly. 3.7 Beyond action in the retail market, the Government must consider the steps necessary to ensure that the wholesale electricity and gas markets are transparent and competitive. As set out in 2.3, the fact that wholesale markets are dominated by uncleared OTC trading—with 80% of electricity traded and 70% of gas traded in this manner35—raises concerns. Uncleared OTC trading has similar vulnerability to manipulation as Libor— including no formal data collection—and accusations of this occurring have recently been made. This raises questions about whether contracts linked to OTC indexes are value for money. Furthermore, there are issues with the competitiveness of the wholesale electricity market36 and there have been allegations of manipulation in the gas market. As a result, questions must be asked about whether prices are as competitive as they should be. 3.8 The Government and regulator should also consider how the six major suppliers benefit from wholesale electricity and gas prices, as well as the way that their business structure has a wider impact on competition in the wholesale markets. These suppliers are part of larger vertically-integrated companies covering 98% of the retail market and 70% of total GB electricity generation capacity.37,38 This structure appears to present little incentive for companies to keep wholesale prices efficient, if it reduces the overall margin for their generation business. The vertically integrated structure also obscures the interactions between the most influential group of generators and suppliers, since their dealings are behind closed doors. This reduces the information available to external observers and raises questions of how costs are passed through to bills. 3.9 Given the role that wholesale markets play in encouraging investment and therefore their impact on future energy prices, the Government and regulator should consider what action is needed to ensure that price information is robust and that the markets are competitive. Which? called for the Government to establish an independent review to scrutinise the above issues following the six major suppliers’ price rises in October 2012. Such a review should identify the measures required to increase wholesale market transparency and competition. 3.10 This Select Committee inquiry should therefore explore the full range of actions available to the Government and regulator to deliver transparent and competitive wholesale markets. Which? believes that this should include consideration of a self supply restriction and the legal separation of the supply and generation divisions. The latter option could be informed by the approach taken by the regulator for distribution and network businesses that are owned by vertically integrated companies. 3.11 Our call for a review in October 2012 also argued that Government action is necessary to ensure that there is more robust scrutiny of the cost of policies. For example, the Government cannot simply pin its hopes on the retail market to keep a lid on the cost of smart metering. For ECO, a system must be in place to allow 34 The package of measures set out in “The Imbalance of Power—The Retail Market” includes: Introduce a single unit rate— deliver “at a glance” comparability by charging the same price for each unit of energy; limit segmentation—allow one default tariff and make all tariffs available for all payment methods; Ofgem to review the case for national pricing; switching sites and the switching process must be improved; ensure that market conditions—in the retail and wholesale markets—enable new entrants to thrive; and implementation of Ofgem’s proposals on communications, complaints and market monitoring at the earliest opportunity. 35 Electricity: “GB wholesale electricity market liquidity”, Ofgem, summer 2011 assessment. Gas: “Continental European Gas Hubs: Are they fit for purpose?”, Patrick Heather, June 2012 36 The GB electricity market is known to have low levels of liquidity and churn, as well as wide-bit offer spreads for certain types of electricity products, as documented in the liquidity work stream of Ofgem’s Retail Market Review. 37 There is not the same degree of vertical integration of upstream/ mid stream gas as there is of electricity generation. This reflects two drivers of vertical integration in the British energy markets—the expensive nature of electricity generation assets and changes to the electricity trading arrangements. However, there is some vertical integration in gas production and supply. 38 “Retail Market Review: Intervention to enhance liquidity in the GB power market”, Ofgem, February 2012 cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Ofgem to monitor how much is passed through to consumers in bills and to scrutinise these costs to ensure value for money. 3.12 Finally, the Energy Bill should be amended to ensure that a robust regime of scrutiny is put in place to protect consumers from the costs related to Electricity Market Reform. As previously recommended by the Energy and Climate Change Select Committee, transparency and scrutiny of the contract process must be written into the Bill to ensure that consumers are protected as far as possible. The Bill should ensure that the independent panel of experts has consumer representation and is responsible for scrutinising strike prices and that all strike prices are published before Contracts for Difference are signed.
4. How effective is Ofgem in ensuring consumers get a fair deal? Are there any areas for improvement? 4.1 Ofgem’s remit is to protect consumers through promoting effective competition. Competition was intended to be primarily price-focused, with additional customer service benefits stemming from it. Consumers were to be the engine of competition, choosing the cheapest offers without compromising on service. Yet, despite the fact that the price of energy is a primary financial concern, people appear powerless to take advantage of what limited competition the market offers. 4.2 For too long Ofgem has ignored the need for comparability, instead prioritising supplier claims of a need for complex tariff structures to recover different types of costs and deliver “choice” and “innovation”—two areas where suppliers have delivered little that is beneficial. 4.3 The limited competition that exists is played out in a small segment of the market where suppliers vie for the most engaged consumers with attractive fixed term deals. As a result, many people are effectively excluded from the most competitive deals, while accusations of loss leading are a common complaint from suppliers struggling to gain a foothold in the market. 4.4 Ofgem recognised these problems in the Energy Supply Probe in 2008, yet its review of the retail market has been ongoing for the last five years and its approach has changed markedly in that time. Whereas the Probe attempted to ban discrimination between different groups of customers, the Retail Market Review (RMR)— correctly, in our view—seeks to improve outcomes for consumers through more effective competition. 4.5 There is much to welcome in the latest RMR package. The focus on increasing wholesale market liquidity and transparency is of fundamental importance in ensuring independent suppliers and new entrants can mount a credible challenge to the six major suppliers. Furthermore proposals to simplify bills and other communications, improve the switching process, provide better reporting of complaints data and monitor the development of competition in a more meaningful way are welcome. 4.6 However, the tariff proposals will not allow prices to be compared at a glance, limiting competitive downward pressure on bills. Furthermore segmentation based on payment method or online account management will still be possible, meaning any competitive pressure that there is cannot be guaranteed to deliver benefits across all consumer groups. 4.7 Ofgem should amend their RMR proposals and finally enable consumers to play their designated role of driving effective competition to keep prices in check. This requires Ofgem to introduce unit pricing; limit segmentation by allowing one default tariff and make all tariffs available for all payment methods; review the case for national pricing; and improve the switching process. 4.8 Ofgem have attempted to improve the transparency of the link between the generation and supply arms of the vertically integrated companies through the introduction of market indicator reports, reporting requirements and an investigation into transfer pricing. 4.9 With regard to the wholesale markets, Ofgem has focussed on the ability of small suppliers to gain access to energy to challenge the major suppliers’ position. While the regulator acknowledges that reference prices must be improved, information and transparency has not been viewed as a vital element to improve confidence in the efficiency of wholesale markets. Ofgem should now address this. Unless information is available, it is difficult to see how the regulator will determine whether the markets are working effectively and whether consumers can be confident in the prices they pay.
5. Could it be possible to benchmark energy prices to provide greater certainty about whether consumers are getting a fair deal? If so, how might this be achieved in practice? 5.1 Benchmarks could be an effective mechanism to provide confidence in prices. Furthermore, a benchmark could be used as a robust basis for tracker tariffs. 5.2 Two options could be considered, a wholesale market index or a benchmark retail price, such as the fair price guarantee set out in 3.5. Both would require improvements to the transparency and robustness of the underlying wholesale energy market, as set out in 8.2. However, an international benchmark should be avoided since comparisons of international energy prices are often misleading and cannot be compared on a like-for- like basis. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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5.3 Both the State of Illinois and the Northern Ireland hybrid markets have an effective benchmark retail price through a regulated default tariff. This allows consumers to benchmark the value of other tariffs and it is a price to beat for suppliers.
6. Could any other measures be put in place to ensure consumers are paying fair prices for energy and to provide consumers with greater confidence in this? 6.1 Ofgem’s RMR sets out a new set of measures of competition, which should give a truer assessment of the effectiveness of competition and whether consumers pay a fair price. If consumer outcomes have not improved by 2015, the hybrid model set out above should be considered, as set out in 3.5. This model could guarantee a fair price to all, whether they engage or not, through a regulated benchmark tariff and give more confidence in the value of energy tariffs.
7. Many consumers believe that energy company profits are the reason energy bills have been going up in recent years. Is this perception fair? Why is there so much uncertainty about the level of profits the large, vertically integrated energy companies are making? What could be done to improve clarity? 7.1 The major suppliers are part of vertically-integrated companies and able to move risk and margins around the company. This means that a supply business may look less profitable because the charges applied to that business are higher than would otherwise be expected. This is compounded by the fact that four of the large energy companies are international, so risks and margins can be shifted within the national and international dimensions of the companies. This has limited the usefulness of the new segmental information and there remains a lack of transparency and clarity.
8. How useful are Ofgem’s electricity and gas supply market indicators in monitoring the level of profits made by energy companies? Could they be improved? 8.1 Ofgem’s indicators are speculative projections of net margins on “typical” accounts based on estimations of expected wholesale and operational costs, as well as purchasing practices. The analysis reveals little more than was already known—that retail competition is weak and that companies may take advantage of this. 8.2 Building on the proposed new market indicators, Ofgem should monitor generation, production activity and margins; wholesale energy trading, including volumes of physical and financial trading; and the numbers of market participants. Ofgem should develop robust wholesale energy indexes against which movements of domestic tariffs could be monitored.
9. How useful are the segmental generation and supply statements that major energy suppliers are required to produce in understanding where companies are making their profits? 9.1 While these statements are welcome, their usefulness is limited to a top-level assessment of where the margins and costs lie across the generation and supply businesses. The statements do not differentiate trading arms, they do not provide information on the different business structures or the ways that companies assign risks and margins to different business arms. The pan-European nature of four major suppliers adds an additional dimension as costs are not only moved within companies but also between national entities. As a result, limited insights can be drawn. 9.2 Ofgem should require a breakdown of trading activity. Further analysis of transfer pricing activity would enable a better assessment of the allocation of risk and margins between the supply, generation and trading functions in these companies. February 2013
Written evidence submitted by E.ON Summary i. We still believe a competitive market is the most effective structure to ensure customers pay no more than they have to for their energy. However we are supportive of appropriate intervention to help make the market work better for customers and particularly to increase customer trust. Our Reset programme has led us to a simple but innovative presentation of our tariffs through a new online tool and supported by customer communications and advertising, encouraging customers to check that they are on the best deal for their circumstances. This is underpinned by our strategy focused on making sure that all of our customers get a fair deal. Since we launched our customer communication and advertising campaign towards the end of last year, over 300,000 customers have already switched to one of our new products. ii. We are actively taking steps to deepen engagement with our customers, providing information to explain why energy bills are changing and to be transparent about the profitability of our activities. Having an open and honest conversation with the public will, in our view, help to regain public trust. This must be supported by other groups who influence customers’ trust in energy companies. We would like to see greater use of companies’ segmental reports and the market indicators report in commentary. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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iii. The report by Professor Hills on the nature of fuel poverty is timely. We support his view that the fundamental cause of fuel poverty is low energy efficiency and that attention should therefore be focused on addressing the causes of this. iv. The introduction of the Energy Company Obligation (ECO) is a welcome step forward with greater emphasis on ensuring more efficient and effective heating systems for customers on low incomes and hard to treat homes. However the current structure of ECO should be reviewed to minimise cost to the customer. The Government, however, must give clear guidance to local authorities and social housing providers to apply a consistent and positive approach to solid wall insulation under planning regulations. Without this the costs of ECO will be higher and some schemes beneficial to fuel poor customers may be deferred.
Prices What factors determine energy prices (wholesale prices, company operating costs, green levies, company profits etc)? What contribution do these factors currently make towards a typical household energy bill and how might this change over time? 1. The key drivers of energy prices include the cost of purchasing energy in the wholesale market, regulated network charges, the cost of meeting government environmental and social obligations and taxation policy. This is illustrated in Figure 1.
Figure 1 THE COMPONENTS OF AN AVERAGE WEIGHTED E.ON DUAL FUEL BILL
2. We expect the cost of meeting environmental and social obligations to rise during this decade. For example, the cost of the Government’s social schemes, which often focus on providing subsidised or free insulation, have more than doubled in the last twelve months. In addition, the introduction of a carbon price floor will impact bills from April 2013. There is also a need to upgrade the network infrastructure to connect new generation particularly in Scotland, Wales and parts of England in addition to new offshore requirements which will drive up regulated transportation charges. Network costs are now more than 10% higher than last year and are expected to climb higher still in 2013.
To what extent (if at all) should the Government or the regulator intervene in the market to affect the prices customers (or certain groups of customers) pay for their energy? Should any changes be made to the Government’s current approach? 3. It should be clear what Ofgem and Government are each trying to achieve. For Ofgem this means a vision of how the market is expected to work later this decade; for Government it means clarity over its role and the regulator’s. Without this clarity, innovation and new entry might be inhibited and there will be doubts over the stability of UK regulation. 4. A competitive market is the most effective structure to ensure customers pay no more than they have to for their energy. Ofgem should intervene only if action is needed to help make the market work better for customers. Examples include the steps Ofgem are taking to increase transparency over suppliers’ cheapest cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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tariffs and to ensure clear and consistent presentation of tariffs. We support these steps, although Ofgem needs to ensure that the changes they make will actually make the market work better.
5. If, however, there are remaining concerns, the industry should be referred to the Competition Commission for an in-depth analysis of how the market is operating. Government also has an important role to play to deliver objectives that are broader than competition, for example introducing policies that are targeted at a particular group of customers, such as with the Warm Home Discount (WHD). Where intervention has been deemed appropriate, it is important that successor policies are developed so that there is a settled regime before the existing policies end, which in the case of the WHD is little more than two years away.
How effective is Ofgem in ensuring customers get a fair deal? Are there any areas for improvement?
6. Our Reset programme has led us to a simple but innovative presentation of our tariffs through a new online tool and supported by customer communications and advertising, encouraging customers to check that they are on the best deal for their circumstances. This is underpinned by our strategy focused on making sure that all of our customers get a fair deal. Since we launched our customer communication and advertising campaign towards the end of last year, over 300,000 customers have already switched to one of our new products. Whilst we do not agree with all of the RMR proposals, we wholeheartedly support the overall objective of increasing customer trust in the market.
7. We have also called on Ofgem to have a vision of the market later this decade. This vision should reflect Ofgem’s view of what competition and customer choice should look like, the potential for innovation and Ofgem’s role in the market. We believe Ofgem should be confident in its ability to manage principles based regulation whilst avoiding the restriction and risk of detailed regulation to ensure customers get a fair deal in the market.
Could it be possible to benchmark energy prices to provide greater certainty about whether customers are getting a fair deal? If so, how might this be achieved in practice?
8. In principle a pre-tax comparison with other EU countries will give reassurance that the GB market is delivering a fair deal for customers. We would suggest that DECC commission such a study. This would need to separately identify differences arising from geography, such as wholesale gas costs, from those associated with competition, such as operating costs, or regulation, such as networks charges.
9. Within the GB market, customers should be able to benchmark themselves through clearly comparable prices. Then, if they are aware of other prices and hence price differences, they are presumably comfortable with them. Ofgem’s change in direction from a uniform standing charge and national unit rates, as set out in the initial RMR proposals envisaged in 2011, to a tariff cap and a Tariff Comparison Rate (TCR) will make this much more difficult for customers. We have urged Ofgem to look again at their original proposal of a uniform standing charge (set by the regulator) and national unit rate which we believe will easily comparable for customers.
Could any other measures be put in place to ensure customers are paying fair prices for energy and to provide customers with greater confidence in this?
10. Ofgem could do more to promote customer awareness of cheaper deals. Government have encouraged this transparency through the voluntary agreement to signpost cheaper tariffs on bills. We would expect Ofgem to develop this lead through requiring: — a cheapest tariff presentation on annual statements; — prompt communication to online account managed customers of new offers; and — transparency on supplier websites of lower priced deals, including regional variations.
11. We would also expect Ofgem to ensure customers go on to the cheapest tariff whenever this can be done in a way that is consistent with their known preferences. In particular, at renewal, customers should go to the cheapest tariff of the same type, which could mean rollover to another, identically structured, fixed price contract. This is in customers’ interest, allowing them to stay on their preferred tariff type with least effort.
12. Government should legislate to bring third party intermediaries (TPIs) within the regulatory framework. Confidence in TPIs, and the energy savings shown by TPIs, will be essential for the energy market to evolve to a more customer led engagement. Licensing of TPIs would allow Ofgem to require investment in the residential sector, with the benefit of simpler and more helpful presentations which increase customer trust, and to raise standards in the small business sector.
13. These measures, when combined with strengthening Ofgem’s powers to require redress, will make the framework in energy as robust as in financial services and telephony. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Profits Many customers believe that energy company profits are the reason the energy bills have been going up in recent years. Is this perception fair? 14. No. Looking at last year, we reduced prices in February, and then held back from increasing our prices for as long as we possibly could whilst at the same time have worked hard to reduce our own costs as a business so that our customers can get the best price possible. We believe our profit levels are fair. Last year our domestic profit margin was less than 2%, and in the previous year, was below 1%. However, some 16 months after our last price increase, and almost a year since we actually cut our electricity prices, we recently had to make the difficult decision to increase our prices because the other costs which make up energy bills are rising: — The wholesale price is higher than it was and this year the Government’s Carbon Price Floor will add another charge to electricity bills which we regard as simply a tax. — Network costs are rising too, to finance much needed investment to upgrade the system, and are expected to continue to rise over the coming years. — The cost of the Government’s social schemes, which often focus on providing subsidised or free insulation and bill rebates through the Warm Home Discount scheme, have more than doubled in the last twelve months and is expected to increase further over the next few years. — Finally, the cost of increasing the amount of energy we secure from renewable sources is rising as deployment increases as is required to comply with the EU 2020 legally binding targets. As with the other costs mentioned above, this is expected to continue to rise over this decade.
Why is there so much uncertainty about the level of profits the large, vertically integrated energy companies are making? What could be done to improve clarity? 15. Although E.ON has interests in both generation and supply, we are set up to run these activities as separate profitable entities, and hence operate in practice as a vertically disintegrated company. We have reported generation and supply in our accounts for many years and also support Ofgem’s segmental reporting requirements. 16. We support no cross-subsidy between entities and non-discrimination. To underpin this, we propose amending the Electricity Generation Licence Condition 17A and the Electricity Supply and Gas Supply Licence Conditions 19B so that there is a clear and consistent prohibition of cross-subsidy between the generation and supply activities that are within the same group. Furthermore we believe there is merit in re-introducing some form of a self supply restriction, based on a traded volume obligation. These two measures will help to provide more clarity.
How useful are Ofgem’s electricity and gas supply market indicators in monitoring the level of profits made by energy companies? Could they be improved? 17. The indicators used by Ofgem are able to monitor underlying trends in the profitability of supply and generation. Such information is likely to be of some assistance to potential new entrants. We would also highlight that our own accounts provide segmented cost and profit levels in a segmented way. 18. As we set out above, E.ON operates effectively as a vertically disintegrated company. This is not necessarily the case across the market, and so it is not easy to compare data across companies, particularly where there may be circumstances in which one part of a business is helping to cross subsidise another activity. We believe this is not in the interests of customers as it distorts the market, and would therefore welcome measures to prevent such practices, similar to that which was in place prior to full market liberalisation.
How useful are the segmental generation and supply statements that major energy suppliers are required to produce in understanding where companies are making their profits? 19. The requirement on major energy suppliers to produce segmental statements on generation and supply activities is primarily aimed at disclosing the costs of these separate activities. The information is also a valuable tool to help inform interested stakeholders of the underlying profitability of generation and supply. We would like to see greater focus on the detail of these statements and the information being used to support comments via politicians and the media which influence customers’ trust of the sector.
Do Ofgem’s supply market indicators and the segmental reports provided by energy suppliers help to increase transparency and public trust in energy companies? Could they be improved to provide greater transparency? 20. Yes. Taking measures to ensure no cross-subsidy between entities and non-discrimination as we have already outlined will help to provide greater transparency. Whilst segmental accounting is welcomed, they have been misrepresented by the media and other stakeholders, which in our view has contributed to the current perceived lack of trust in energy companies. We believe the way to increase transparency and public trust is cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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for energy companies to better engage with their customers and explain how their bill is made up and what is driving change.
To what extent does the way energy companies communicate profits to the general public influence the public’s perception of these companies? 21. We are actively taking steps to engage with our customers and explain why prices are changing. As part of this strategy, we are also explaining to customers and other stakeholders the margins that our supply business is making, highlighting that these are relatively low compared with other retail operations that they will be familiar with. We accept that there is more that can be done. But by being open and clear with customers to explain why bills are changing is in our view the way to regain public trust in energy companies.
Fuel Poverty Is the Government on track to meet its target of eliminating fuel poverty by 2016 and will reduced Government spending in this area affect their ability to achieve this target? 22. Our understanding is that the government’s target is to take whatever action is reasonable, within the current resource constraints, to alleviate fuel poverty, rather than to actually eliminate fuel poverty. We are not able to say whether current actions are as much as could reasonably be done, but as supporters of the Energy Bill Revolution, believe that activity should be increased as soon as practicable.
Has the Hills Review resulted in any changes to fuel poverty policy? How could its findings be used to improve the efficacy of fuel poverty policy? 23. Yes. The Hills review has shifted emphasis from total numbers (in fuel poverty) towards the depth of fuel poverty and consequently helps ensure measures are directed at those most in need. 24. We therefore welcomed the depth of the analysis of the nature of fuel poverty provided by the report commissioned by Government from Professor Hills. We support his view that the fundamental cause of fuel poverty is low energy efficiency and that attention should therefore be focused on progress in addressing this. We agree with his insight that those with an average or below average cost of ensuring adequate warmth, even with very low incomes, should not be considered as fuel poor. This would require policy to focus on households with low incomes that consume above average levels of energy, which we believe is the right approach.
To what extent are current fuel poverty policies reaching the right people? Are there any particular groups that are currently not getting the necessary support? And will this change under the move to ECO? What support is available for fuel poor households living in solid-wall and hard-to-treat properties? Could this be improved? 25. As recognised by the Hills Review, energy efficiency improvements provide a long-term, sustained solution for households suffering from fuel poverty, whereas financial support offers only short-term respite and must be provided on a repeat basis. 26. Households in or at risk of fuel poverty have benefited from the Warm Home Discount, which is complemented by CERT and CESP, providing funding for energy efficiency measures. However whilst some households with low disposable income and above average energy consumption levels have benefited from this, harder to treat properties have been largely ignored. 27. We therefore welcome the role of the new Energy Company Obligation (ECO) in improving energy efficiency and ensuring more efficient and effective heating systems for customers on low incomes and hard to treat homes. However our central forecast of the cost of ECO is around £2bn per annum, with a significant risk of higher costs for energy customers compared with DECC’s forecast of £1.3bn. 28. The short first period of ECO to March 2015 is particularly disappointing as Government had raised expectations of a longer term scheme which would give confidence to develop longer term partnerships. To reduce the risk of ECO costs spiralling, Government should allow energy suppliers to have greater flexibility in how they meet targets over time, with a defined consequence that a shortfall in one period means that more has to be delivered in the next period. 29. The Government must give clear guidance to local authorities and social housing providers to apply a consistent and positive approach to solid wall insulation under planning regulations. Without this the costs of ECO will be higher and some schemes beneficial to fuel poor customers may be deferred.
Will the Government’s proposals to ensure that customers are on the cheapest tariff have any impact on fuel poverty? To what extent do fuel-poor households engage in switching? What are the barriers to greater levels of switching from these groups? 30. Yes. Customers should go on to the cheapest tariff whenever this can be done in a way that is consistent with their known preferences. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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31. We do not have data on switching by fuel poor customers, but note that Customer Focus’s recent report “Switched on?” shows that switching is almost as high amongst prepayment meter customers as direct debit customers (page 12). Switching is less amongst quarterly billed customers, which is more commonly the payment method used by the elderly. We believe the key barrier is a perceived lack of trust in the market. However suppliers and, in the relevant parts of the RMR, Ofgem are doing all that is reasonably practicable now to increase trust. February 2013
Supplementary written evidence submitted by E.ON Questions on Trading These questions are related to electricity only
1. What percentage of your total electricity trades are over-the-counter (OTC) versus trades on the wholesale exchange? This varies on a season by season basis but generally around 20% of our electricity trades are exchange based on a gross volume basis
2. What are your criteria for trading OTC versus on the wholesale exchange? Our decision is based on maximising value, and takes account of: — Best liquidity (which platform(s) the products we trade are actively traded on); — Price (we seek to trade at the best possible price); — Transaction cost (the fees charged to complete the transaction “brokerage, clearing fees etc” ); and — Credit (the level of exposure we are prepared to take on against a potential counterparty default and the costs of managing this exposure)
3. What is the average difference in price for your OTC versus wholesale exchange trades? This may be a very misleading figure as the exchange trades are all at a relatively short period of time before delivery and therefore the “basis” is different. The longer time between the execution of a trade and its delivery the greater the risk premium that it contains. For the last winter period 0.81 £/MWh was the average difference in price between our exchange trades and OTC trades—the exchange price being the lower.
4. Does your company deal in long-term contracts? Who has access to the information contained in the contracts? Yes we do deal in long-term contracts (by which we mean something that is delivers from four years onwards with an external counterparty). Access to the contract details is limited to those people within our organisation who need to operate the contracts. Clearly these contracts are commercially confidential and so externally only the named counterparties, their agents and associates, along with any competent authority making a proper request have access to the information contained in the contract. If such a contract refers to industry standard documents (for example Grid Code, Balancing and Settlement Code, EFET or GTMA), then clearly these are a matter of public record. These questions are related to gas only
5. What percentage of your total gas trades are over-the-counter (OTC) versus trades on the wholesale exchange? Generally around 30% of our total gas trades are on the wholesale exchange as opposed to over-the-counter.
6. What are your criteria for trading OTC versus on the wholesale exchange? — Best liquidity (which platform(s) the products we trade are actively traded on); — Price (we seek to trade at the best possible price); — Transaction cost (the fees charged to complete the transaction “brokerage, clearing fee’s etc” ); and — Credit (the level of exposure we are prepared to take on against a potential counterparty default and the costs of managing this exposure. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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7. What is the average difference in price for your OTC versus wholesale exchange trades? We do not calculate any price difference for our past gas trades. We do not believe this would be possible as it would assume that at any time both markets would have had attractive prices.
8. What announcements have you made in accordance to REMIT? Where is it posted? If you trade gas outside of the UK within the EU, where do you post announcements for other EU markets? For both power and gas, REMIT requires announcements about information on assets that if made public would be likely to significantly affect the prices of the related wholesale energy products. For power, the threshold for such announcements has been clearly set at 100MW across all EU markets. For gas a threshold has not been set. Ofgem has recently asked what an appropriate GB gas market threshold for inside information would be and we are contributing to this consultation fully. Our view, provided to the regulator, is that 10 million cubic metres (mcm) should be adopted as it is already in place in the Great Britain gas market as the threshold for real-time gas flows into the NTS. This means that E.ON is making announcements on power, using the sites listed on the link below, but E.ON has not made any announcements for gas. http://www.eon.com/en/business-areas/trading/market-transparency.html
9. What access to market information do your traders have about any other division of your company? Do they have access to storage levels, upstream information if applicable (geological data), or daily production/ consumption data? E.ON Global Commodities (our stand alone trading business) does not have access to storage levels, upstream information, daily production/consumption data from other divisions other than that which has been made available by National Grid Gas on their transparency platform or that is available in the public domain.
10. Does your company deal in long-term contracts? Who has access to the information contained in the contracts? Yes we do deal in long term contracts. Access to the contract details is limited to those people within our organisation who need to operate the contracts. These contracts are commercially confidential and the information is only available to the named counterparties, the agents and associates, along with any competent authority making a proper request. Where (and if) such contract refer to industry standard documents these are a matter of public record.
Additional Questions 11. How many of such “immobile” customers do you have? The tables below show the number of customers who are currently on-supply with us listed by the length of tenure, as well as the number of customers who have switched away in similar periods. The statistics will not always necessarily add up to our exact customer numbers. This is because the customer switching numbers include those who have switched to another supplier and then switched back to us again. At the end of September 2012 we launched a new range of tariffs designed to make things simpler for our customers and have been actively encouraging our customers to think about whether they are on the best E.ON deal for them. So far we have seen approximately 424,000 customers moving from one of our old tariffs to one of our new, simpler tariffs.
E.ON customers that are currently on-supply by tenure Customer Tenure Volume of Customers 0–5 years 2,556,475 5–10 years 1,016,537 10–15 years 632,614 Over 15 years 679,624 cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Absolute customer losses in five year intervals Period of time Customers switching (inclusive of customer switching in and out) 2008 to 2013 3,740,947 2003 to 2008 3,697,294 1998–2003 1,211,951 Pre 1998 19,239
12. Do you offer all customers all of your tariffs? If not, what are the reasons for not offering the full suite of tariffs? The only restrictions on which tariffs our customers are offered are based on meter type, loyalty and vulnerability. We do not engage in so-called “deep discounting” and offer the same tariffs to new customers as to our existing customers with additional loyalty rewards after one year. Below is a breakdown of our tariffs by meter type and any restrictions.
Credit Customers E.ON Energy Plan—open to all credit meter customers E.ON Energy Discount—open to all credit meter customers E.ON one year fixed—open to all credit meter customers E.ON two year fixed—open to all credit meter customers Age UK one year fixed—restricted to those credit meter customer over 60, or over 50 and on the Priority Services Register. These restrictions exist as this is a tariff specifically designed along with Age UK to cater for older and more vulnerable customers
Prepayment Customers Prepayment standard—open to all prepayment customers Prepayment Reward—open to all prepayment customers who have been E.ON customer for more than a year. The restriction exists as this is a tariff designed to reward loyalty
13. What can you do to reduce the cost of customer service yet also improve your quality? At E.ON we have a clear focus on providing our customers with excellent service; including helping them find their “Best Deal” and actively aiding them in reducing their energy use. Over the last eighteen months, we have made a concerted effort to improve our service to all new and existing customers through our Reset Programme. For example: — Our customers told us that our bills were too long and complicated. In response we made changes to our bill, reducing it down to a single page and simplifying the language and layout. — Our customers told us that they wanted to be on our best deal for them and they felt the process to get there was too complicated. As a result we simplified our tariffs, offering a choice of no more than five tariffs and proactively contacted customers encouraging them to check if they were on the best deal. We also designed an online tool for customers to easily check if they were on the best E.ON deal for them as well as proactively mentioning it to customers when they called us. — Our customers were not happy paying to call us and wanted a free or local rate number to call instead. So last year we moved the vast majority our lines to either cheaper or free rate numbers. These are just a few examples of changes that we’ve made and continue to make. We believe these changes are working and were delighted to win the uSwitch Service Award in 2012. However, we know there is still more to be done. We’re also focused on reducing our own operating costs. Improving our internal processes and getting more efficient helps our customers and minimises costs as it reduces the likelihood that they will need to contact us because something has gone wrong. We also continue to invest in our colleagues to ensure better service for our customers. For example, we’re training all our customer service and field colleagues in energy efficiency. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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14. What proportion of calls/correspondence are caused by billing queries and by how much do you anticipate this will fall after the advent of smart metering? Approximately 5.7 million customer contacts each year (including telephone, email, mail, online) are in some way related to billing issues, this is around two thirds of all contact. We believe smart metering offers the opportunity to simplify processes for both us and our customers making it easier for customers to understand the energy they are using and reduce the need to contact us. Assuming we get near 100% coverage for the network responsible for communicating with the meters and this is reliable (as has been promised by those bidding for the Data Communications Company contract) we expect to see a significant drop in calls of this nature as all bills will be based on actual readings rather than estimated readings. The Department for Energy and Climate Change’s Impact Assessment, using statistics verified on aggregate by suppliers, estimated inbound call volumes could fall by around 30% over time.
15. If the billing problems were sorted out, do you think this could encourage new entrants to come into the Supply business, as you might not have the big upfront cost of establishing large customer call centres to cope with the inevitable problems? Any new entrants to the retail market today already start with new, clean data and therefore we would not expect them to have historic issues with billing in the same way as do existing suppliers. This would be the case providing that the registration process is managed properly and the new entrants provided upfront investment to ensure effective systems were in place. It is worth noting that, as smart metering becomes more established across the country and the quality of data improves, these costs will be reduced.
E.ON Commitments made in Oral Evidence Barry Gardiner: It may be an unfair question to put to you on the spur of the moment. Perhaps you could write to the Committee, all of you, and say whether you have allocated those profits and losses to the other part of the business box. Tony Cocker: Can I just add, we will write to you as well. I am told that we have not ticked that box and the Ofgem accounts cover the retail business here in the UK and the generation business in the UK, and it is as simple as that. — We assume that Mr Gardiner is referring to Table 4 of the Consolidated Segmental Report, which we published in accordance with OFGEM’s 2012 Amended Guidelines. Table 4 has three categories to which certain business functions are allocated. These categories are; “Generation”, “Supply”, and “Another part of the business”. The “tick” that Mr Gardiner refers to indicates that the business function and any profits and losses related to this function reside in the same business area. Mr Gardiner’s question is whether we have allocated any profits and losses outside the supply or generation parts of the business to “Another part of the business”. As Dr Cocker said in the witness session, we have not done so. — As can be seen in Table 4 of our Consolidated Segmental Report (http://www.eon-uk.com/E.ON_ 2011_Segmental_Report.pdf), all but one of the business functions’ profits and losses reside in the same business area as that function. The exception is—”Responsible for determining hedging policy”. The function is displayed in the table with a “P/L” in the “Generation” category, indicating that this business’s financial performance is affected by the hedging policy of the Group. The F in the “Another part of the business” category indicates that generation hedging policy is determined elsewhere. . It must be emphasised that this function is about responsibility for determining hedging policy, not implementing the hedging activities. The “Supply” category contains a “tick” indicating that it does determine its own hedging policy and has its financial performance affected by the realised results of that policy. — Table 4 was included in the Consolidated Segmental Report for the first time last year, as a result of specific guidance received from OFGEM. We feel it is worth noting that we discussed the presentation of the “ticks” with OFGEM extensively prior to publication. — We had extensive discussions with OFGEM concerning the presentation of the mark to market (by which we mean the transitory impact of valuing a derivative at the balance sheet date) impacts of valuing our derivative financial instruments within the Consolidated Segmental Report. — The result of these discussions was that we agreed to disclose the mark to market results as part of our reconciliation to the audited E.ON UK plc Annual Report & Accounts in Table 2 of the Report (under the heading “Net derivative losses”), rather than within the Consolidated Segmental Statement (Table 1) itself. — This is because these changes in valuations of derivatives could be very misleading and would prevent meaningful comparisons between different companies’ statements and also between different years for the same company. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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— To illustrate the volatile nature of these figures, our 2010 Consolidated Segmental Report Table 2 shows net derivative gains of £185 million, the comparative figure in our 2011 Report shows net derivative losses of £693 million. Neither of these losses or gains were actually realised and this was just a valuation adjustment at the time of reporting; only upon maturity can their true value be assessed. — Therefore, derivative financial instruments that are held in any part of E.ON’s business that have not yet reached the point of maturity are not included in the Consolidated Segmental Statement. At any point in time before a derivative has reached maturity, its value is based on the current market price. The potentially volatile nature of such derivatives means that if they were to be included in the Consolidated Segmental Statement they would give a false impression of overall profitability. This view is shared by Ofgem as well as the reviewing accountancy firms—BDO and Pannell Kerr Forster. May 2013
Supplementary written evidence submitted by E.ON RENEWABLES OBLIGATION CERTIFICATES—INCOME 2006–2012 Overview The energy sector makes a significant contribution to UK economic growth and will continue to do so in years to come. We support the desire to encourage more transparency, which in turn promotes important discussions around how the energy sector can continue to thrive economically with the right policies in place. We provide a significant economic contribution to the UK from both taxation and investment in infrastructure, regularly exceeding our profits. Over the last five years our total profits for E.ON business in the UK were nearly £5 billion. Of that, our total tax contribution was £2 billion including corporation tax, PAYE, National Insurance, VAT and CCL. Our total UK investment figure in that period was around £6 billion and we also paid £330 million on business rates. At the ECC Committee we were asked for details of the income we receive from Renewable Obligation Certificates (ROCs)—that is the income received after an investment has been made and once the project is generating.
ROC Value There are two types of benefit received under the RO—buyout avoidance and income from the redistribution of the buyout fund. For the purposes of government financial planning, the value of a ROC is made up of the buyout price, ie the payment avoided by the supplier for presenting ROCs to Ofgem, plus the portion of the buyout fund redistributed to suppliers who presented ROCs. Eligible renewable electricity generators report the amount of renewable electricity they generate on a monthly basis to Ofgem. Ofgem issues ROCs to electricity generators relating to the amount of eligible renewable electricity they generate. Generators sell their ROCs to suppliers (or traders), which allows them to receive a premium in addition to the wholesale electricity price. Suppliers present their ROCs to Ofgem to demonstrate their compliance with the RO. Suppliers who do not present enough ROCs to meet their obligation must pay a penalty (known as the “buy-out price”). The money Ofgem collects in the buy-out fund is re-distributed on a pro-rata basis to suppliers who presented ROCs. E.ON’s Renewables business in the UK acts as an agent to our customer business in the purchase and sale of ROCs to allow our customer business to meet its obligation. This is comprised partly of ROCs representing our own renewable energy generation and partly of ROCs representing generation from the market. This has increased as we have grown our renewable portfolio (as can be seen from the number of ROCs). We now have four operational offshore wind farms (including our share in London Array), 19 onshore farms and two operational biomass plants (including the conversion of our Ironbridge coal fired power station). cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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The table below sets out the prices between 2006 and 2012 as published by Ofgem, the number of ROCs claimed by E.ON and the benefit received by our generating assets. EON Asset ROC Buy-Out Price Recycle Overall ROC Value Overall Benefit to Claims £/ROC £/ROC £/ROC EON
2006–07 371,309 £33.24 16.04 £49.28 £18,298,108 2007–08 448,807 £34.30 18.65 £52.95 £23,764,331 2008–09 556,361 £35.76 18.61 £54.37 £30,249,348 2009–10 791,835 £37.19 15.17 £52.36 £41,460,481 2010–11 1,424,156 £36.99 14.35 £51.34 £73,116,169 2011–12 1,910,741 £38.69 3.58 £42.27 £80,767,022
May 2013
Written evidence submitted by National Energy Action
1. Prices
1.1 What factors determine energy prices (wholesale prices, company operating costs, green levies, company profits etc)? What contribution do these factors currently make towards a typical household energy bill and how might this change over time?
1.2 Final domestic energy bills comprise wholesale energy costs, network costs, metering and other supply costs, supplier margins, VAT and the impacts of energy and climate change policies. Whilst there is a degree of fluctuation in the individual components of the bill the cumulative effect results in energy costs are currently at unprecedented levels and with all projections indicating a continued upwards trend.39
1.3 Ofgem publishes estimates of the constituent elements of domestic energy bills on a weekly basis. These estimates detail the proportion of the bill attributable to discrete factors including supplier margins. Dual Fuel Year Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Customer bill £1,215 £1,140 £1,155 £1,330 £1,420 Wholesale costs £710 £520 £510 £625 £620 VAT and other costs £395 £420 £460 £510 £550 Gross margin £110 £200 £180 £195 £250 Operating costs £125 £130 £130 £130 £130 Total indicative net margin for the next 12 months -£20 £75 £50 £65 £120 Rolling net margin -£20 £45 £30 £50 £80
1.4 NEA is not well-placed to speculate on some of the factors leading to rising (or falling energy bills) including the effect of trends in global energy prices. However we would note that facilitating low carbon transition will require major capital expenditure. The efficiency and cost-effectiveness of future design, construction, maintenance, and operation of this new energy system will play a key role in either mitigating or exacerbating fuel poverty levels.
1.5 The scale of the required investment in the Government’s decarbonisation strategy, some £110 billion across the electricity industry over the next decade, is likely to be recovered through electricity bills. The Government asserts in various related analyses that energy bills will either be lower in real terms or lower than they would otherwise be under the current fuel mix. Whilst the Impact Assessment published alongside the Energy Bill suggests that the net impact of Electricity Market Reform (EMR) on domestic electricity prices, relative to the base case(s), would be to reduce the scale of fuel poverty up to 2025, NEA believes the Government has failed to undertake a rigorous and convincing analysis and fully consider the adverse consequences of the Bill. NEA is extremely concerned at the potential imposition of (as yet unquantified) new and additional costs that render one of the keystones of energy policy, affordability, a distant prospect for millions of low-income and vulnerable consumers.
1.6 In addition, through our written and oral evidence to the current Energy Bill Committee, NEA has sought to challenge a number of assumptions used to determine the impact of these policies, in particular, the accessibility of current domestic energy programmes that might reduce a household’s exposure to the costs of the EMR policies. 39 According to DECC’s Energy Statistics; average domestic expenditure on energy has more than doubled since 2000. Since 2004 the price of domestic energy has more than doubled. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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2. To what extent (if at all) should the Government or the regulator intervene in the market to affect the prices consumers (or certain groups of consumers) pay for their energy? Should any changes be made to the Government’s current approach?
2.1 There are two key issues that influence any response to these questions. The first concerns the level of profit made by energy suppliers in the retail energy market; the second concerns the Government’s commitment to ensure that energy costs are affordable. 2.2 Despite the assertion of sceptical media commentators that the market is somehow “rigged” in favour of dominant energy suppliers we note that Ofgem has produced no evidence of any such market manipulation. However it is of crucial importance that the issue of public and media concern be fully addressed and this will best be achieved through forensic scrutiny of the structure and economics of the energy market. We would assume that responsibility in this area would be taken by Ofgem; however we note that the draft work programme for the Regulated Industries Unit incorporates exploration of: the relationship between traded energy markets, wholesale costs, retail bills and supplier profits to bring clarity to the debates on how increased levels of transparency at key points in the supply chain could determine and show whether consumers are paying a fair price.’ NEA believes that such transparency would benefit both consumers and the industry itself. 2.3 NEA would also note that even in a fair and competitive market the Government must adopt different approaches in making energy costs more affordable. In the context of energy prices this would imply extension of the Warm Home Discount to ensure consistent eligibility criteria and legal entitlement for all financially disadvantaged vulnerable households.
3. How effective is Ofgem in ensuring consumers get a fair deal? Are there any areas for improvement? 3.1 In the early years of the competitive retail energy market Ofgem prioritised development of competition and switching over fairness within the market. This approach resulted in a degree of institutional unfairness as suppliers offered preferential terms to “out of area” customers whilst imposing what was effectively a surcharge on those “sticky” customers who remained with the original electricity supplier (this was predominantly an issue in the electricity market). More recently, Ofgem has taken action to eliminate unfair practices in the market through insistence on cost-reflective pricing and other proposals within the Retail Market Reform recommendations.
4. Could it be possible to benchmark energy prices to provide greater certainty about whether consumers are getting a fair deal? If so, how might this be achieved in practice?
4.1 We are not clear what is implied in this question. Prices could be “benchmarked” against other suppliers’ offerings but this would offer no certainty of fairness. Prices could be benchmarked against charges for domestic consumers in comparable EU States but, again, this would provide no conclusive evidence; however, we would note that (excluding taxes) UK domestic electricity prices in 2011 were the fourth highest in the EU 15 whilst gas prices were third lowest.
4.2 Within the retail market there are minimal differentials in charges made by the Big Six energy suppliers to domestic consumers. Domestic energy bills 2013 Supplier Current bill New bill Effective from British Gas £1,260 £1,336 November16 2012 EDF Energy £1,202 £1,332 December 7 2012 E.ON £1,260 £1,370 January 18 2013 Npower £1,244 £1,356 November 26 2012 ScottishPower £1,349 £1,368 December 3 2012 SSE £1,235 £1,354 October 15 2012 Average £1,258 £1,352
4.3 It can be argued that it is inevitable that energy bills will not diverge significantly between suppliers since the entire industry is subject to similar global energy price movements and infrastructure costs. Whilst recognising the merits of this argument we consider the entrenched nature of a market dominated by the Big Six energy suppliers to be unhelpful in encouraging innovation and new entrants to the industry.
5. Could any other measures be put in place to ensure consumers are paying fair prices for energy and to provide consumers with greater confidence in this?
5.1 As indicated above NEA believes that Ofgem’s Retail Market Reform should address a number of issues of “fairness” within the retail market. But, of course, the wider concerns relate to the need to restore public confidence in the integrity of the industry itself. We note that similar concerns about the operation of the non- mains fuel market were largely dismissed in a recent report from the Office for Fair Trading. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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6. Profits 6.1 Many consumers believe that energy company profits are the reason the energy bills have been going up in recent years. Is this perception fair? 6.2 We allude to this issue above in noting that consumer scepticism can only be allayed through independent scrutiny of the operation of the industry. We believe that such scrutiny is in the interests of the industry itself since it is unhealthy and undesirable that companies supplying services crucial to the health and welfare of consumers should be subject to suspicion and frequent antipathy.
7. Why is there so much uncertainty about the level of profits the large, vertically integrated energy companies are making? What could be done to improve clarity? 7.1 NEA believes that the answer is implicit in the question; greater transparency is required. We would draw the Committee’s attention to an analysis published in 2008 which purported to show levels of profits where increases in energy bills bore little resemblance to increases in wholesale charges. The authors claimed that: “Gas and electricity expenditure by household consumers increased very significantly between 2003 and 2006. They spent a total £22.5 billion on these two sources of energy in 2006, £8.2 billion or 58% more than the £14.3 billion they spent three years earlier. Suppliers’ expenditure on the wholesale fuel to meet householders’ needs accounted for only a little more than half of this increase rising by £4.5 billion from £4.4 billion to £8.9 billion over the three years. Increases in other charges such as VAT, network charges including profits from owners of these assets, support for renewables and home energy efficiency accounted for a further £1.4 billion. Consequently consumers’ expenditure rose by £8.2 billion; the costs we have been able to assess increased by £5.9 billion in total and margins or perhaps unaccounted for costs thus rose by £2.3 billion, of which the vast majority appears to be attributable to increases in profits from electricity generation.”
8. How useful are Ofgem’s electricity and gas supply market indicators in monitoring the level of profits made by energy companies? Could they be improved? 8.1 In NEA’s experience these updates are of minimal value. They generalise about energy supplier costs and margins and are more likely to confuse than to illuminate. For example, the table below appears to show that energy suppliers lost a minimum of £20 per household in providing energy services to dual-fuel domestic consumers in 2009. Extrapolated across the customer base this implies that this element of the industry subsidised consumers to the extent of £500 million in that year. This is not credible. Dual Fuel—January 31 Year Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Customer bill £1,215 £1,140 £1,155 £1,330 £1,420 Wholesale costs £710 £520 £510 £625 £620 VAT and other costs £395 £420 £460 £510 £550 Gross margin £110 £200 £180 £195 £250 Operating costs £125 £130 £130 £130 £130 Total indicative net margin for the next 12 months -£20 £75 £50 £65 £120 Rolling net margin -£20 £45 £30 £50 £80
9. How useful are the segmental generation and supply statements that major energy suppliers are required to produce in understanding where companies are making their profits? 9.1 NEA does not access this level of information and cannot comment on their value.
10. Do Ofgem’s supply market indicators and the segmental reports provided by energy suppliers help to increase transparency and public trust in energy companies? Could they be improved to provide greater transparency? 10.1 As indicated above, assertions by energy suppliers that they sell gas and electricity to consumers at or below cost is not credible. Clearly, this can do nothing to promote public trust. However, if an authoritative independent analysis were to confirm the figures it could only improve the relationship between suppliers and consumers.
11. To what extent does the way energy companies communicate profits to the general public influence the public’s perception of these companies? 11.1 NEA does not believe that energy suppliers do communicate information about profits to the general public. Rather information emerges through publication of annual or bi-annual financial statements which are then filtered through media commentary which is itself often hostile. Of course energy suppliers could itemise energy bills to illustrate their claims about the modest returns they achieve on investment—but they will not be believed without the process being subject to a rigorous independent audit. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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12. Fuel Poverty 12.1 Is the Government on track to meet its target of eliminating fuel poverty by 2016 and will reduced Government spending in this area affect their ability to achieve this target? The scale of fuel poverty 12.2 Over the course of autumn and early winter, all of the Big Six energy suppliers increased their charges to domestic consumers with the result that the average household energy bill currently stands at £1,352. Rising energy costs are the major factor in the upward trend in fuel poverty; the table below shows the movement in domestic gas and electricity prices since the low point of the early 2000s. The most recent official statistics indicate that 3.5 million households in England were fuel poor in 2010 and the Government has estimated that 3.9 million households were in fuel poverty in 2012. Number and % of fuel-poor households in England—1996 to 2012 Number of fuel-poor % of fuel-poor Number of vulnerable % of vulnerable households Year households households fuel-poor households in fuel poverty 1996 5,100,000 26.0% 4,000,000 30% 2001 1,722,000 8.1% 1,416,000 9.8% 2003 1,200,000 5.9% 1,000,000 6.6% 2004 1,200,000 5.9% 1,000,000 6.4% 2005 1,500,000 7.2% 1,200,000 7.8% 2006 2,400,000 11.5% 1,900,000 12.8% 2007 2,800,000 13.2% 2,300,000 14.6% 2008 3,300,000 15.6% 2,700,000 17.5% 2009 4,000,000 18.4% 3,200,000 20.7% 2010 3,536,000 16.4% 2,830,000 18.1% 2011 3,500,000 16.4% - - 201240 3,900,000 18.5% - -
12.3 Fuel poverty results from a combination of low household income, inadequate heating and insulation standards and high energy costs. Energy prices are now at unprecedented levels and a combination of increasing global energy costs and national policies such as Electricity Market Reform means that costs will inevitably continue to rise with adverse consequences for financially disadvantaged vulnerable households, The table below illustrates domestic energy price movements over the life of the current UK Fuel Poverty Strategy which was published in 2001. The average domestic fuel bill has increased by 133% over a period when average incomes have increased by 27.4% and the State Retirement Pension has risen by 48.2%. The table below shows the near-relentless increases in domestic gas and electricity prices over the last decade or so. Trends in domestic energy prices in England from 2001 Year Fuel Gas Electricity 2001 £293 £246 2002 £310 £244 2003 £320 £245 2004 £333 £251 2005 £386 £281 2006 £475 £335 2007 £537 £376 2008 £625 £433 2009 £708 £443 2010 £682 £431 2011 £749 £469 2012 £837 £496
Fuel poverty targets 13. Following the introduction of the Warm Homes and Energy Conservation Act 2000 the UK Fuel Poverty Strategy was published. The Strategy followed the requirements of the legislation and committed the Government to the eradication of fuel poverty within a fifteen-year timescale thereby setting a deadline of November 2016. The target was not however unequivocal since the wording of the Act specifies: “a target date for achieving the objective of ensuring that as far as reasonably practicable persons in England or Wales do not live in fuel poverty.” The “reasonably practicable” provision means that there is no absolute duty on Government to eradicate fuel poverty provided it is seen to demonstrate good faith in designing and implementing policies and programmes to address fuel poverty. In fact the UK Fuel Poverty Strategy voluntarily adopted an interim target to eradicated fuel poverty for vulnerable households by 2010; however, as we know, 40 Figures are estimates published in the Annual Report on Fuel Poverty, DECC, 2012. Vulnerable households generally represent 80% of all fuel-poor households. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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that target was missed by a considerable distance and, regrettably, we see no prospect of the 2016 target being achieved either.
Fuel poverty failure and Judicial Review 14. The issue of “good faith” on the part of Government was tested in 2008 when Friends of the Earth and Help the Aged sought Judicial Review on the grounds that Government action on fuel poverty did not represent all that was “reasonably practicable”. The legal challenge followed concerns that the scale of fuel poverty continued to increase despite investment of considerable financial resources over almost a decade and a perceived lack of urgency in the Government response. Ultimately, judgement41 was made in favour of the Government with the court taking the view that: “It [the Government] imported a statutory duty to make those efforts [eradicate fuel poverty]. It did not assume a statutory duty to achieve the desired results, whatever the cost.” 14.1 NEA recognises that the term “reasonably practicable” affords Government legal protection but does not believe that it justifies Government claims that it is adhering to the letter and spirit of the law in relation to the Warm Homes and Energy Conservation Act. There is a world of difference between requiring Government to commit sufficient resources to completely eradicate fuel poverty and requiring Government to maintain or increase financial support for fuel poverty programmes. 14.2 The Comprehensive Spending Review42 in October 2010 announced reductions in funding for Warm Front. Funding would fall (from £345 million in 2010–11) to £110 million in 2011–12 and to £100 million the following year after which the programme would cease. In fact the Government announced in January 2013 that no further applications for Warm Front would be accepted after January 19 2013. This decision marks the first time since 1978 when there will be no Government-funded domestic energy efficiency programme. NEA notes that Defra (the relevant department at the time of the Judicial Review) submitted a note indicating that this would represent a breach of the legal obligation: “the Defendants say (for example) that the Act and Strategy would not (as presently formulated) permit the Government to eliminate Winter Fuel Payments in their entirety or cut Warm Front funding to zero.” 14.3 The Government stated in the Spending Review that: “In determining its spending priorities, the Government has taken into account its responsibilities under… the Warm Homes and Energy Conservation Act 2000. The Government considers the Spending Review to be consistent with its obligations in relation to fuel poverty.” NEA believes these assertions contradict Government evidence during the Judicial Review process and that the termination of Warm Front is a breach of the legal duties contained in the Warm Homes and Energy Conservation Act. to be unfounded and is particularly concerned that the Exchequer is abdicating responsibility for funding fuel poverty programmes and is simply shifting the burden on to energy consumers.
Fuel poverty expenditure 15. The Government has developed a fuel poverty infrastructure that addresses the three main factors that contribute to fuel poverty: — The Winter Fuel Payment and the Cold Weather Payment of the Regulated Social Fund can help pay high winter fuel bills. Overall expenditure on the Winter Fuel Payment will reduce as the qualifying age (female retirement age) rises whilst expenditure on Cold Weather Payments is dependent on the severity of the winter weather. — The Warm Home Discount offers a mandatory reduction of £130 on electricity bills for low-income older households and, on a discretionary basis, for other financially disadvantaged vulnerable households. The total amount to be spent on this scheme is prescribed by Government, delivered through energy suppliers and funded by a levy on energy consumers. — The Energy Company Obligation (ECO) will provide £540 million to fund energy efficiency measures for low-income vulnerable households under the Affordable Warmth and Carbon Saving Communities elements of the Obligation. In addition the Carbon Saving Communities Obligation contains a “rural safeguard” of 15% to ensure that non-urban households are not totally excluded from the scheme. The ECO is also funded through levies on domestic consumers’ bills. Expenditure on fuel poverty programmes 2009/2010 and 201343 Energy Programmes 2009/2010 Expenditure Programmes 2013 Expenditure efficiency Warm Front £370 million Warm Front - terminated January 2013 Carbon Emissions £564 million ECO Affordable £302 million Reduction Target Warmth 41 Case No: CO/3373/2008, Royal Courts of Justice, 23/10/2008. 42 Spending Review 2010, HM Treasury, 2010. 43 Table from The Impact of Fuel Poverty Budgets in England, Association for the Conservation of Energy, 2012. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Expenditure on fuel poverty programmes 2009/2010 and 2013 Energy Programmes 2009/2010 Expenditure Programmes 2013 Expenditure efficiency Communities Energy £101 million ECO Carbon £164 million Saving Programme Saving Communities Obligation Income Winter Fuel Payments44 £2.497 billion Winter Fuel £1.723 billion support Payments Cold Weather Payments £250 million Cold Weather £228 million Payments (estimate) Energy price Voluntary price support £132 million Warm Home £237 million support Discount Total £3.913 billion £2.689 billion
15.1 Despite constant assurances from Ministers that the loss of Warm Front would not compromise fuel poverty targets, because expenditure on heating and insulation schemes to assist fuel-poor households would be greatly increased under the Energy Company Obligation, this has not proven to be the case. We are reshaping the architecture for delivering energy efficiency and ending fuel poverty, on a far greater scale than anything attempted by the previous Government. The right hon. Lady knows that we were not on course to deliver the fuel poverty objectives of the 2016 target to which the previous Government were committed. We are looking at things much more ambitiously. Greg Barker MP, Energy Minister, Draft Electricity and Gas (Carbon Emissions Reduction (Amendment) Order 2010, July 26 2010. 15.2 Despite Government insistence that the new Energy Company Obligation would be a more than adequate replacement for previous schemes it is estimated that the new Energy Company Obligation (and any associated Green Deal measures) might remove between 125,000 and 250,000 households from fuel poverty over the period to 2023. At best this would provide affordable warmth for around 6.4% of current fuel-poor households. We note that Professor Hills’ Review indicated that current policies might, by 2016, have reduced fuel poverty by 10% (not in absolute terms but compared with what it otherwise would have been). NEA believes that the predicted lack of progress in addressing fuel poverty is a consequence of inadequate resources and structures rather than a failure to identify priority fuel-poor households.
16. Has the Hills Review resulted in any changes to fuel poverty policy? How could its findings be used to improve the efficacy of fuel poverty policy? NEA support for the Hills Review 16.1 NEA considered that the Review Team had produced a model of comprehensive and rigorous analysis of the issues associated with fuel poverty including the negative physical, social and psychological effects of unaffordable energy costs. In particular we noted Professor Hills’ conclusion: “We agree that fuel poverty is a distinct—and serious—problem. Fuel poverty is of major concern from three different but related perspectives: for those whose primary concern is poverty and its reduction; for those concerned with health and well-being; and for those concerned with climate change and reduction of carbon emissions.” 16.2 Professor Hills went on to emphasise in his final report that: “Tackling fuel poverty offers a multiple pay-off: better living standards and conditions for people with low incomes, an improved and more energy efficient housing stock, fewer winter deaths and reduced costs for the NHS. This is no doubt what Parliament had in mind when it agreed in 2000, with all-party support, that fuel poverty should be eradicated as far as reasonably practicable within 15 years. That things are moving in the opposite direction—on the projections we present here—is profoundly disappointing” 16.3 Finally, Professor Hills stresses the importance of a well-designed energy efficiency programme that can prioritise assistance to meet the needs of fuel-poor households: “Our analysis also shows the importance of ensuring that policies delivering energy efficiency measures are geared towards the needs of the fuel poor if fuel poverty is to be reduced. Policies that did not focus support on the group of households that face both low incomes and unreasonable energy costs would be less effective in terms of improving the relative position of the fuel poor and would be of only limited help to address the problem as we understand it. It is vital, therefore, for low-income households to be a central focus of energy efficiency policies in the household sector.”
NEA reservations about the Hills Review 17. Professor Hills was also asked to consider the adequacy of the current definition of fuel poverty; however in this area Professor Hills’ recommendations were at odds with the views of virtually all agencies concerned with fuel poverty issues. Professor Hills rightly understood fuel poverty as a problem rooted in low household 44 Expenditure on Winter Fuel Payments reduces as the qualifying age threshold increases. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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income and combined with high energy costs. Professor Hills’ recommendation that low income should be defined in terms of the official poverty line met with general approval. 17.1 However the Review’s recommendation that high energy costs should be understood as costs exceeding the median for all households was subject to near-universal disagreement as a failure to comprehend the concept of affordability in the context of low-income households. 17.2 Not only would the Hills definition significantly reduce the incidence of fuel poverty—without having provided affordable warmth for a single household; it would also result in a static fuel poverty headcount (in overall numbers if not in constituent households). Because of the way household income is calculated (equivalised) It would also significantly alter the characteristics of fuel-poor households with significant reductions in the number of fuel-poor older households and a higher incidence of fuel poverty among families with children. Breakdown of fuel poverty in England 2009—by existing and proposed definitions Single Older person Other multi- couple (no Couple aged Single person Single person aged person Couple with children) under 60 (no with children aged 60 or under 60 households Total children (%) (%) children) (%) (%) over (%) (%) (%) (number)
Current 9.6% 18.5% 7.1% 8.8% 29.9% 19.2% 6.9% 3,964,000 definition Proposed 24.5% 15.1% 8.1% 20.6% 10.3% 13.4% 8.0% 2,695,000 definition
17.3 The Hills proposals would compensate for the fact that there is minimal change in the overall scale of fuel poverty by adopting a “fuel poverty gap” measure of progress (or regress) instead of the current focus on the headcount. The “fuel poverty gap” is defined as the amount (in monetary terms) by which the assessed energy needs of fuel-poor households exceed the threshold for reasonable costs.
The Hills Review and fuel poverty policy 18. NEA argued from the outset that the existing fuel poverty definition was “fit for purpose” and that the Hills Review represented a distraction from the priority task of designing and implementing effective fuel poverty policies and programmes. However we did fully engage with the consultation phases of the Review and with DECC’s subsequent consultation on the conclusions of the Review despite the Department making it clear that they were already minded to accept Professor Hills’ recommendations. 18.1 The consultation seeks views on revisions to fuel poverty policy as a result of the Hills Review but we have seen no indication of any proposed revisions since Professor Hills published his Interim Report in October 2011. In fact, since the announcement of the Call for Evidence in March 2011 a disproportionate amount of time and effort has been committed by fuel poverty campaigners to discussion of complex and abstruse technical issues rather than to policy development and advocacy. 18.2 As indicated above, the distribution of fuel poverty will alter significantly if the Hills recommendations are accepted. The most striking change will affect pensioner households many of whom are the intended beneficiaries of existing fuel poverty programmes—including some that have not yet been officially introduced. Programmes where low-income pensioner households are the priority group for assistance include: — The Warm Home Discount Core Group. — Those eligible for Winter Fuel Payments and Cold Weather Payments. — Those meeting the eligibility criteria for the Affordable Warmth element of the Energy Company Obligation. 18.3 Access to assistance thriugh these programmes is based on a combination of financial disadvantage and/or vulnerability and these do represent a reasonable proxy for fuel poverty. It should be noted that the most accurate proxy was in fact devised in the latter stages of Warm Front when financial disadvantage, vulnerability and moderate to poor energy efficiency standards were all elements of the eligibility criteria.
Using Hills’ recommendations to improve the efficacy of fuel poverty policy 19. As indicated above, NEA has strong reservations about Professor Hills’ narrow understanding of what constitutes “reasonable costs” within the definition of fuel poverty. We are somewhat reassured by the recognition that a revised definition will have limitations in identifying and assisting fuel-poor households. As Professor Hills comments: “In attempting to identify fuel-poor households, it would be naïve to suggest that policies aimed at removing problems faced (in 2009) by 2.7 million households could be dealt with only by treating 2.7 million homes. In practical terms, a wider group will inevitably be targeted, adding of course to the cost of tackling the core problem. However, this is an area where assistance straying over a strict boundary of eligibility should not necessarily be seen as a problem—and can be a virtue. If a household is helped that is in poverty but has costs that are below the threshold, the help given can make an important difference to living standards and conditions. Similarly, if a household is helped that has an income above our threshold, cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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but has high energy costs, that can still make a difference in terms of national energy efficiency and reduction of carbon emissions. 19.1 NEA understands this as acknowledgement that a “fuel poverty test” is impracticable (particularly in the case of Professor Hills’ definition) and that proxies are unavoidable in identifying and assisting fuel-poor households. NEA has consistently advocated a community-based model in delivering comprehensive energy efficiency and fuel poverty services. We believe that a model that provides “something for everyone” albeit based on need represents the best approach in delivering support to all households but with particular emphasis on financially disadvantaged households.
20. To what extent are current fuel poverty policies reaching the right people? Are there any particular groups that are currently not getting the necessary support? And will this change under the move to ECO? 20.1 Over the years, NEA has strongly supported the increased use of a combination of financial disadvantage and vulnerability to prioritise assistance to households at risk of fuel poverty. Consequently we welcome adoption of what is basically eligibility for Cold Weather Payments as a proxy for fuel poverty; entitlement to these payments is restricted to households who are: — In receipt of a means-tested benefit or Tax Credit and below an income threshold and — Additionally vulnerable on grounds of age (older households and families with children) or through living with a disability 20.2 These eligibility criteria are currently applicable to a number of fuel poverty programmes including: Cold Weather Payments, the Warm Home Discount and the Affordable Warmth element of the new Energy Company Obligation. However more than four million households are in theory eligible for support and the limited resources for these latter schemes means that most eligible households are denied access to support. This problem could be resolved through additional funding from Government (both schemes are funded through levies on consumer bills) and through extended data-sharing that facilitated support to these households. It should be noted that similar eligibility criteria applied to the Super Priority Group within the Carbon Emissions Reduction Target and all energy suppliers reported difficulty in meeting targets imposed on them in terms of providing assistance to eligible households. 20.3 Without increased resources and improved systems, including a combination of community-based delivery models and enhanced data-sharing NEA is concerned that suppliers may fail to meet their objectives under the Affordable Warmth programme.
21. What support is available for fuel-poor households living in solid-wall and hard-to-treat properties? Could this be improved? Fuel poverty and hard-to-treat housing 21.1 The difficulties faced by low-income households in hard-to-treat properties are well documented. They suffer detriment from high energy costs as a result of lack of access to mains gas, still the most economical whole-house heating option, or they lack access to cost-effective saving measures such as cavity wall insulation. Whilst hard-to-treat housing is often considered a predominantly rural issue, many urban properties such as blocks of flats will share one or more of these characteristics. However, in terms of fuel poverty, hard-to-treat housing disproportionately affects rural households. Fuel poverty in England 2010 by rurality Number of fuel-poor Total number of % of group in fuel Rurality households households poverty Urban 2,691,000 17,414,000 15.5% Rural—town and fringe 326,000 2,033,000 16.0% Rural—villages, hamlets and 520,000 2,152,000 24.1% isolated dwellings Total 3,536,000 21,600,000 16.4%
More than 38% of dwellings in England possess some form of hard-to-treat characteristic. Clearly not all of these households are classed as fuel poor but all incur significantly higher energy costs as a result of their housing circumstances.
Fuel poverty and access to mains gas 22. There is a strong correlation between lack of access to mains gas and fuel poverty; not only because gas is generally more economical but also because alternative heating fuels can be extremely expensive. The Energy Regulator, Ofgem, offers financial incentives to gas distributors to address fuel poverty through gas network extensions; but this programme will result in only 80,000 additional homes being connected to mains gas over the period 2013–21. 22.1 Research carried out for Consumer Focus found that over half a million households in Britain had access to mains gas but did not use gas for space heating. 35% of these households were fuel poor and 43% cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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were in the lowest three income deciles (England only). The installation of gas heating in these homes would be cost-effective and potentially transform the circumstances of their occupants. Policy should focus on these “low hanging fruit” as a priority.
Solid wall insulation 23. The Government estimates that expenditure on the Energy Company Obligation will total in the region of £1.3 billion per year. This figure has been disputed by the energy suppliers who insist that it will be considerably higher, a view that is also supported by independent research. This issue is of considerable importance since the ECO will be paid for by all energy consumers including those who struggle to pay their energy bills. The Government’s intention is that the majority of ECO expenditure—the Carbon Saving Obligation—should subsidise solid wall insulation for “able-to-pay” households in order that it should comply with the principle of the “Golden Rule” ie the saving on energy costs following energy efficiency work should exceed the cost of repaying the finance arrangement. 23.1 Solid wall insulation can be both expensive and intrusive and lack of consumer engagement will threaten this element of the Green Deal and, by extension, the Government’s carbon reduction ambitions. NEA believes that environmental and social objectives will best be served by allocating this element of the ECO to fund solid wall insulation in dwellings occupied by fuel-poor households. Such an approach will enable this embryonic market to mature and develop, and to benefit from economies of scale, to the extent that it can become an accepted cost-effective measure within the Green Deal. This recommendation was made by the Committee on Climate Change in a report to Parliament in 2011 when discussing the fuel poverty implications of solid wall subsidy: 23.2 “The particular area of concern is the cost of subsidising solid wall insulation under the ECO which under current proposals would be passed through to all consumers, whether beneficiaries or not. If assessment suggests a significant risk of fuel poverty, mitigating measures that could be introduced include more targeting of the fuel poor under the ECO (eg to prioritise solid wall insulation in the 1.9 million fuel poor households that live in solid walled properties”. Fuel poverty in hard to treat housing—England 2010 % of fuel-poor Households Number of households Number of fuel-poor households households Off-gas properties 2,764,500 752,000 27.2% Solid wall properties 6,517,400 1,501,000 23.2% Off-gas and with solid walls 947,100 369,000 39.0%
Renewable heating 24. Ofgem is to consider alternatives to mains gas extensions for fuel-poor households as part of the next electricity distribution price control. It seems likely that renewable heating technologies such as heat pumps will be the focus of any future initiative. The Hills Review was sceptical about the potential for these technologies to deliver significant benefits to low-income households in the short term without significant subsidies; however the Affordable Warmth Obligation is extremely flexible in terms of permitted measures including a range of renewable heating technologies. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Reducing current non-mains fuel costs 25. In 2012, as part of its inquiry into the nature of fuel poverty among households in the private rented sector and those off the mains-gas network, the Energy and Climate Change Committee considered the circumstance of households dependent on non-regulated fuels. The table below shows the significant disadvantage experienced by households dependent on some non-mains fuels; in the case of LPG heating costs are more than twice as expensive as mains gas. Space and water heating costs by fuel type—North of England October 201245 Fuel type Heating system Annual cost House coal Open fire with back boiler £1,227 Electricity Storage heating and radiators £1,314 Natural gas Gas-fired boiler and radiators £1,232 Liquid propane gas LPG-fired boiler and radiators £2,556 Oil kerosene Oil-fired boiler and radiators £1,720
25.1 In 2011, the Office of Fair Trading (OFT) published the results of its inquiry into the operation of off- grid energy markets the key findings of which included: — More than 90% of the variation in oil prices reflect movements in the price of crude oil. — Competition generally works well with no evidence of collusion and indications of robust competition. 25.2 Having found little evidence of market manipulation or profiteering the OFT considered possible solutions to unaffordable costs. The OFT anticipated significant development of the micro-generation market but noted a number of problem areas — not all technologies are suitable for all properties; — the complexity of the technologies makes customers dependent on expert advice; — sales staff tend to specialise in a single technology and may not recommend the optimal solution; and — independent advice and guidance is limited in availability 25.3 Given the continuing uncertainties around micro-generation, the limited potential for mains-gas network extension and the conclusion that the market was open and competitive, constructive recommendations on how to address fuel poverty in this sector are limited to: — Early payment of the Winter Fuel Allowance to enable consumers to purchase fuel in advance and benefit from lower prices at times of reduced demand. — Introduce greater consumer power through collective purchasing arrangements by “oil-buying clubs”. Hard-to-treat housing in England by physical characteristics Number of households % households % of all households Off-gas only 1,826,000 22% 8.5% Solid wall only 5,596,000 68% 26.1% Off-gas and solid wall 774,000 9.0% 3.6% Total 8,196,000 100% 38.3%
26. Will the Government’s proposals to ensure that consumers are on the cheapest tariff have any impact on fuel poverty? 26.1 On October 17 of last year the Prime Minister surprised and confused the House of Commons by telling MPs that his Government would address the issue of increasingly unaffordable energy prices by: “legislating so that energy companies have to give the lowest tariff to their customers”. The statement was ridiculed on the grounds that it would wreck the competitive market without ensuring any benefit to consumers since, presumably, charges for the “lowest tariff” would be adjusted to protect energy supplier margins. Presumably, the Prime Minister was referring to the type of proposals featured in Ofgem’s recent proposals in the Retail Market Review: — Tariff simplification. — Clarity and simplicity of information. — Information on suppliers’ cheapest deals. 26.2 However, whilst the Prime Minister’s comments were clearly not applicable across the entire domestic energy market they could be implemented in the context of fuel-poor households. In commenting on the Market Cheapest Deal46 issue discussed in the Ofgem consultation NEA recommended that rather than collating data 45 Sutherland Comparative Heating Costs, October 2011, based on 3-bedroom semi-detached property. 46 Ofgem discusses development of a system to provide the most “sticky” and vulnerable consumers with personalised information about the estimated cheapest deal for them in the market. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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from all energy suppliers on the basis of their cheapest tariff it would seem eminently more rational to offer what is in effect a universal social tariff to households meeting the pre-defined eligibility criteria. 26.3 Clearly this would have the opposite effect of encouraging engagement of “sticky” customers with the competitive market, but it could deliver significant social benefits in terms of lower energy costs to the most vulnerable and financially disadvantaged households. Data-sharing would still be required but this would now take the form of a simple passport process similar to that employed in the Core Group element of the Warm Home Discount.
27. To what extent do fuel-poor households engage in switching? What are the barriers to greater levels of switching from these groups? 27.1 Analysis of consumer switching behaviour provides limited information on the engagement of fuel- poor households with the competitive market. However research does consider switching activity on the basis of socio-economic factors. The data show significant differences in percentage terms related to socio-economic status; non-switchers are more likely to pay by standard credit or prepayment, to be younger households, to live in rented accommodation, to be rural dwellers and to lack internet access. Consumers who have ever switched energy supplier by socio-economic status 2010 Social grade All households AB C1 C2 D E Gas Yes 41% 49% 41% 37% 35% 32% No 59% 51% 59% 63% 65% 68% Electricity Yes 40% 44% 42% 39% 33% 36% No 60% 56% 58% 61% 67% 64%
27.2 NEA believes that the Retail Market Reform proposed by Ofgem and supportive proposals from the Department of Energy and Climate Change could contribute towards greater engagement in the competiitve market. In response to DECC’s Discussion Document Ensuring a better deal for energy consumers we repeated our view that there was a compelling case for removing the most financially disadvantaged vulnerable households from that market through a universal social, tariff. Our response to this issue is dependent on the final outcome of Ofgem’s Retail Market Review and the eventual decision on the Market Best Deal. In effect, we would envisage some of the most vulnerable and financially disadvantaged households being removed from the competitive market, as beneficiaries of a standard tariff designed to meet their specific financial circumstances. This would build on Ofgem’s previous definition of a social tariff as the lowest tariff offered by an individual supplier to standardise the rate across the market. 27.3 We did recognise that many fuel-poor households would be excluded from any such social tariff but felt that the proposed Retail Market Reform would bring greater clarity and transparency to the market thereby reducing confusion and anxiety and increasing the likelihood of increased switching rates. We also expressed support for collective switching as a potential mechanism to engage and protect low-income households where the intermediary between consumer and suppliers was a trusted agent such as a local authority or high-profile voluntary sector agency/
28. To what extent do fuel-poor households currently take advantage of energy efficiency schemes? Could anything be done to increase uptake? 28.1 NEA recognises that the recent history of energy efficiency schemes would suggest problems with low take-up of heating and insulation programmes aimed specifically at fuel-poor households. These problems were manifest in the significant underspend in the Warm Front budget and in the extent to which energy suppliers struggled to meet their targets on behalf of the Super Priority Group element of the Carbon Emissions Reduction Target.
Warm Front 29. The Comprehensive Spending Review of 2010 reduced expenditure under Warm Front from £350 million in 2010–11 to £110 million in 2011–12 with a further reduction to £100 million in 2012–13. In an effort to optimise use of this limited funding mush more rigorous eligibility criteria were introduced in terms of qualifying benefits and a new minimum energy efficiency criterion was added. The energy efficiency criterion meant that no property at or above the average standard across the housing stock (SAP 55) could benefit despite the fact that this average standard is clearly inadequate to provide affordable warmth. It should be noted that, in 2004 and before the relentless series of energy price increases, SAP 65 was deemed to be the target standard for affordable warmth—a standard that was applied to Warm Front interventions. When added to the fact that Warm Front suffered from minimal promotion of the scheme it is not surprising that take-up was comparatively low. Even subsequent relaxation of the energy efficiency standard late in the second year of the new funding regime could not retrieve the underspend. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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The Super Priority Group 30. Eligibility criteria for the Super Priority Group element of the Carbon Emissions Target were broadly similar to Warm Front in terms of qualifying benefits albeit the former programmes was not tenure-specific (Warm Front was restricted to private sector housing) and no minimum energy efficiency threshold was set. Nevertheless energy suppliers struggled to meet their targets; supplier performance was extremely variable and NEA understands that only one of the six obligated suppliers was ultimately compliant within the timescale (to December 31 2012).
The problem 31. As noted above, Warm Front suffered from the combination of rigorous new eligibility criteria and lack of promotion of the scheme. Energy suppliers insisted that the new eligibility criteria were so demanding that they could not engage with eligible households (despite the fact that one supplier seemingly did). Suppliers also complained that the search costs to reach eligible households were prohibitive, with most resorting to the offer of financial inducements to households who would allow their property to benefit from heating and insulation improvements!
The solution 32. The Pensions Act 2008 was ground-breaking in that it allowed data-sharing between the Department for Work and Pensions for the purpose of automatic payment of the Warm Home Discount to low-income pensioners. It was also made clear that the Government expected households who comprised the Core Group within the Warm Home Discount to benefit from energy efficiency assistance. Since all households in the Core Group for the Warm Home Discount were simultaneously in the Super Priority Group this should have presented energy suppliers with a direct link to a sizeable section of their target audience—clearly this opportunity was not fully exploited. 32.1 NEA has argued for increased data-sharing between the Department for Work and Pensions and energy suppliers to improve identification of and assistance to the most vulnerable and financially disadvantaged households. It should be noted that this group is not a small sub-set of the population since it comprises more than 4 million households. 32.2 However, NEA would concede that there are additional barriers to reaching and supporting vulnerable fuel-poor households, Among these barriers is the delivery mechanism itself—the relationship between energy suppliers and consumers can be fraught and there is a strong case for the involvement of local authorities and other trusted agencies in community-scale delivery of support. NEA has been a consistent advocate of the community-focused approach to fuel poverty where the degree of support matches the degree of need. 32.3 We believe that many different strands of fuel poverty policy can be brought together in a community model including: — Practical heating and insulation improvements. — Energy, money and fuel debt advice. — Assistance in claiming full benefit entitlement. — Community-based collective switching. February 2013
Supplementary written evidence submitted by National Energy Action During the Committee’s oral evidence session of March 12 2013, NEA was asked By Barry Gardiner MP to provide a note clarifying our assertion in a separate document that 45% of fuel-poor households would be unable to benefit from cavity wall insulation under the Energy Company Obligation. The basis of NEA’s statement is set out below. — The official fuel poverty data for 2010 indicated that just over one million fuel-poor households occupied dwellings with uninsulated cavity walls. — The Final Stage Impact Assessment for the Green Deal and Energy Company Obligation assumes that, to 2016,47 320,000 dwellings benefit from cavity wall insulation under the Affordable Warmth Obligation and 312,000 under the Carbon Saving Communities Obligation.48 — Since Energy Company Obligation measures will be installed across Great Britain we have assumed a pro rata distribution in which 85.6% of the work is carried out in England. The inference is that 538,000 installations are carried out in England which would represent a maximum 54% improvement rate on behalf of fuel-poor households. 47 2016 is the date by which the Warm Homes and Energy Conservation Act 2000 specifies that fuel poverty should have been eradicated in England. 48 Eligibility for either of these programmes is used here as a proxy for fuel poverty. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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— Consequently, at least 46% of fuel-poor households would be unable to benefit from cavity wall insulation, the single most cost-effective thermal insulation measure. March 2013
Written evidence submitted by Ovo Energy
About Ovo Energy
Ovo Energy launched three and a half years ago with a credo formed of three pillars: simplicity; transparency; and fairness. We have since grown to become the leading independent energy supplier with around 140,000 customers.
We pride ourselves on our simple, transparent and fair pricing and billing system. We only have two tariffs. We automatically offer every one of our customers the same deal we are offering to our new customers, so everybody pays the same price for their energy. We provide easy to understand bills. Our terms and conditions are crystal marked and our communication is approved by the Campaign for Plain English.
We are looking to grow our company so that we bring simple, transparent and fair energy supply to even more customers across the country.
Executive Summary — We welcome this consultation and the Committee’s intention to help strengthen public confidence and trust in energy companies’ ability to deliver a fair deal to consumers. — We believe that Ofgem must go further In order to ensure a better deal for all consumers and create a level playing field on price. A level playing field would mean that every tariff on offer is reflective of all of its costs. This policy would mean consumers know the roots of the price they are paying for their energy. — Ovo Energy believes that a fair price policy would ensure that energy suppliers are incentivised to maintain their profit margins by finding efficiencies from within their own businesses rather than simply passing the costs on to consumers. As a result consumers will better understand the link between energy prices and profits and would be better able to assess, through facts, whether they are paying a fair price for their energy. — We would like to see action to address the problem of larger suppliers introducing loss leading tariffs to undercut competition. The practice is made possible because larger companies retain “sticky” high-priced customers from whom they take disproportionately large profits. Overcharging one group of customers to subsidise cheaper tariffs for new customers is inherently unfair to consumers. — We believe that providing consumers with complete visibility of the price they are paying will help consumers better understand whether the deal they are getting is genuinely fair or not. We believe advertising energy on a £/month basis confuses consumers and allows suppliers to mask the actual unit price charged. We believe that the average price per energy unit should be displayed in pence/ kWh. Petrol is quoted in pence/litre and not £/month. Motorists have no trouble understanding this. — We welcome the Government’s efforts to ensure consumer protection and fairness in the energy market, but believe tariff reform could have a greater impact on fuel poverty. To achieve this we advocate a Social Tariff which is sold at cost, to households which meet eligibility criteria.
Ovo Energy’s Answers
Prices
To what extent (if at all) should the Government or the regulator intervene in the market to affect the prices consumers (or certain groups of consumers) pay for their energy? How effective is Ofgem in ensuring consumers get a fair deal? Are there any areas for improvement?
We believe that Ofgem must go further In order to ensure a better deal for all consumers and create a level playing field on price. A level playing field would mean that every tariff on offer is reflective of all of its costs and would provide consumers with a fairer deal.
In your recent report on consumer engagement with energy markets, the Energy and Climate Change Committee supported this suggestion and recommended that Ofgem take action, a step we would welcome. We also believe that suppliers should not be allowed to offer deals below the cost base. Creating a level playing field on price and preventing suppliers from selling below that cost will help ensure all consumers, including the majority of consumers who do not actively seek out the best deal, pay a fair price for their energy. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Could it be possible to benchmark energy prices to provide greater certainty about whether consumers are getting a fair deal? If so, how might this be achieved in practice?
We believe that it is more important for consumers to be offered tariffs which are reflective of all of their costs, than for energy prices to be benchmarked, this way consumers will know that they are paying a fair price for their energy.
We believe that providing consumers with complete visibility of the price they are paying will help consumers better understand whether the deal they are getting is genuinely fair or not. We would prefer to see energy sold on a “per unit” basis. We believe advertising energy on a £/month basis perpetuates a sense of confusion for consumers and allows suppliers to mask the actual unit price charged. Displaying the average price per unit in pence/kWh, over the length of the contract term and with discounts and extra charges appropriately factored-in, would provide consumers with complete visibility of the price they will be paying independently of the volume of energy they are estimated to consume and make consumers more likely to see the benefit of reducing consumption. Petrol is quoted in pence/litre and not £/month. Motorists have no trouble understanding this.
Could any other measures be put in place to ensure consumers are paying fair prices for energy and to provide consumers with greater confidence in this?
We have been disappointed by Ofgem’s failure to address the problem of “predatory pricing”. Several of the larger suppliers have admitted to predatory pricing, the introduction of loss leading tariffs to undercut competition. The practice is made possible because larger companies—all descended from state energy suppliers—retain “sticky” high-priced customers from whom they take disproportionately large profits. While Ofgem have retained the option to refer the supply market to the Competition Commission for a market investigation there is no suggestion that such an investigation is forthcoming. We feel that, due to the lack of proposals around this aspect of competition, this investigation should be commissioned. Overcharging one group of customers to subsidise cheaper tariffs for new customers is inherently unfair to consumers.
By undercutting competition predatory pricing and loss leading tariffs also act to prohibit smaller suppliers from taking a greater market share. They will only act as a further barrier to entry and to reduce overall competition within the supply market.
In order to provide consumers with greater confidence in the price they are paying they must also be better able to compare prices and understand the roots of the price they are paying.
Although we welcome Ofgem’s proposal that suppliers introduce a Tariff Comparison Rate (TCR) for each of their tariffs, we believe that for the TCR to be a meaningful and useful tool it should be designed in line with our proposal of an “APR” equivalent for energy suppliers. We have proposed that Ofgem establish an “APR-equivalent” as the basis for comparison between energy suppliers. In the financial services market, “APR” is a standard comparative measure which helps consumers understand, in a simple and clear way, the cost/impact of an otherwise complex financial product. It takes account of variable rates, and other incentive/ penalty charges in order to provide the consumer with a headline point of comparison. This “APR” equivalent would help consumers understand, in a similarly transparent manner, the cost of how they consume energy. s. Such an “Energy APR” would be based on each suppliers’ guaranteed or underlying price per kWh over one year, taking account of all discounts or other tariff-specific features.
Crucially we believe that the TCR must be based on each supplier’s guaranteed or underlying price per kWh over one year, taking account of all discounts or other tariff specific features. Energy tariffs will necessarily remain complex products, just as with financial products, but adopting this approach would provide consumers with an easy to use and understand comparative measure, without constraining suppliers’ ability to innovate. A price that is truly reflective of its costs is a fair price.
Profits
To what extent does the way energy companies communicate profits to the general public influence the public’s perception of these companies?
We understand that energy companies find it challenging to communicate profits clearly to consumers. We believe that consumers would better understand the relationship between energy company profits and energy bills if energy companies charged prices which reflected all of their costs. Such a policy would incentivise energy suppliers to maintain their profit margins by finding efficiencies from within their own businesses rather than simply passing the costs on to consumers. Consumers would therefore better understand the link between energy prices and profits and have greater trust in energy companies’ profits as fair. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Fuel Poverty Will the Government’s proposals to ensure that consumers are on the cheapest tariff have any impact on fuel poverty? We welcome the Government’s efforts to ensure consumer protection and fairness in the energy market, but believe tariff reform could have a greater impact on fuel poverty. To achieve this we advocate a Social Tariff which is sold at cost, to households which meet eligibility criteria. The price, structure and eligibility criteria for this tariff should be set by DECC, in conjunction with other Government departments, and regulated by Ofgem. Energy suppliers would be obliged to ensure that a minimum number of their customers are supplied with this Social Tariff. All suppliers will be obliged to provide this Social Tariff, but the number of customers per supplier will relate to the supplier’s total market share. Energy suppliers will be financially disadvantaged if they fail to meet their Social Tariff obligation. Those suppliers that fail to meet their obligation will be required to pay a penalty fee into a Social Tariff fund. Suppliers that exceed their obligation will be rewarded with “top-up” payments from the penalty fund, should other suppliers fail to meet their obligation (a similar mechanism already operates within the Renewables Obligation). Eligible consumers benefit by having a simple and transparent choice to make between suppliers. Since all tariffs will essentially be the same Social Tariff customers will have a choice that is based upon other factors which do not pertain simply to price. Energy suppliers will be forced to innovate and create other offers/ incentives in order to seek out and attract eligible Social Tariff customers. February 2013
Written evidence submitted by Consumer Focus About Consumer Focus Consumer Focus is a statutory consumer group established by the 2007 Consumers, Estate Agents and Redress Consumer Focus is the statutory consumer champion for England, Wales, Scotland and (for postal consumers) Northern Ireland. We operate across the whole of the economy, persuading businesses, public services and policy makers to put consumers at the heart of what they do. Consumer Focus tackles the issues that matter to consumers, and aims to give people a stronger voice. We don’t just draw attention to problems—we work with consumers and with a range of organisations to champion creative solutions that make a difference to consumers’ lives.
Executive Summary Regarding the central question of prices, different analysts and experts will predict rises or falls in any given part of the utility bill. Consumer Focus believes that consumers will ultimately be facing increasing prices over the next decade and therefore strongly advocates mitigation through providing energy efficiency measures, an area we would like to see greater government ambition. As a nation, we compare poorly to other EU countries, and with a wide range of benefits including health, carbon saving, cost efficiency and better living standards, we think an ambitious energy efficiency scheme is essential. Consumer Focus understands the drivers behind increased costs, and the needs these meet such as reaching carbon targets, social assistance programmes, funding new infrastructure and upgrading our networks. However, while these costs have to be borne by consumers, we question the fairness of them being attached to energy bills, rather than being met through general taxation. The choice of whether to use bills or taxes to fund the decarbonisation of our energy infrastructure matters because it greatly affects the distributional impact of where these costs fall. In simple terms, the poorest households pay proportionately more when measures are added to their utility bills. In the UK, the proportion of income spent on energy decreases as income increases, while the proportion of income spent on direct taxation increases as income increases. Public finances are extremely difficult, but we think that greater consideration must be paid to the least regressive ways of paying for low carbon infrastructure. Moving additional cost burdens from energy customer bills and on to general government expenditure may be politically unwelcome. Therefore if decarbonisation is to be paid for through bills, a further choice for policymakers is whether to apply these levies on a per unit or a per household basis. In the UK, there are examples of both. There are strong arguments for levying environmental and social obligations on a per unit basis rather than a per household basis. This is more consistent with “polluter pays” principles—that those with higher carbon footprints should pay more towards decarbonisation. In general terms the poorest in society tend to use less energy per capita than the richest—so per unit charging is likely to better reflect ability to pay than per household charging will. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Whilst Consumer Focus recognises the nature of additional cost described above, we think there would be greater trust in the market if there was more transparency, as well as effective competition. One such area is the wholesale market, where liquidity remains a concern. We are pleased that the Secretary of State is looking for new backstop powers in the current Energy Bill. But we still hope Ofgem will take the lead in increasing competition in this area, something they have failed to do arguably since the roots of the problem arose in 2004. There is no doubt that the raw cost of energy, and primarily gas, has increased since 2003. However, since the historic gas price peak of 2008, the wholesale gas price, whilst volatile, has decreased significantly. In the period from 2008 to 2011, the pre-tax and investment UK profits of the Big 6 energy companies have increased 36%. Segmented statements have proved to be only a limited success in increasing transparency due to the deficiencies in the statements’ coverage and their timeliness. By far the biggest flaw is the lack of knowledge and detail of where and how energy companies make their profits. The statements capture the UK physical production and supply activities of the Big 6 energy companies; however they do not capture their trading activities. As part of its RMR, Ofgem appointed the accountancy firm BDO to independently review the way that companies were required to provide information. BDO recommended that the companies be required to report on their trading activities; Ofgem has chosen not to take this forward. Moving away from the nature and understanding of energy prices, the reality is that rising prices are going to have a dramatic impact, with the knock on effect being a significant rise in the number of households who will suffer from fuel poverty. The Government is clearly going to miss its 2016 fuel poverty target. Consumer Focus research suggests that on current trends 6.2 million households in England will live in fuel poverty by 2016, compared to the estimated four million households in fuel poverty in 2009—on the current definition. This represents a 47% increase. This is against a backdrop of the total budget likely to reach the fuel poor in England falling from £1.19 billion in 2009 to £879 million in 2013—a reduction of 26%. The decision to end the Warm Front programme in 2013 means that for the first time since 1978 there will be no Government-funded domestic energy efficiency programme for low income consumers. Consumer Focus disagrees with Hill’s proposed new fuel poverty definition, but we wholeheartedly support his recommendation that “The Government—not just DECC but other Departments—should set out a renewed and ambitious strategy for tackling fuel poverty”. We also support Professor Hills’ conclusion that government policy should focus on tackling the serious health and wellbeing impacts of fuel poverty, which his report identified as the heart of the problem. We do not accept that on-going management is acceptable. We remain concerned that the Hills review effectively “froze” fuel poverty policy during the course of the review team’s deliberations. We do not consider government decisions over the past two years consistent with its argument that “getting measurement right” is essential for effective policies. In addition to ending the Warm Front, the government have made decisions on the structure of the Energy Company Obligation (ECO) and Renewable Heat Incentive (RHI) and tripled expenditure under the Levy Control Framework. Yet they have failed to put in place any compensatory measures for low income consumers. All whilst moving forward a major welfare reform programme that fails to consider its impact on fuel poverty. Consumer Focus considers that the government should recognise the current suite of policies—the Green Deal, ECO and the RHI—can only go so far to help low income and fuel poor consumers. We would urge that public funds are made available to fill the considerable gaps.
Prices 1. What factors determine energy prices (wholesale prices, company operating costs, green levies, company profits etc)? What contribution do these factors currently make towards a typical household energy bill and how might this change over time? 1.1 Ofgem estimates49 the following factors contribute to the average current bill: Contribution to Contribution to Contribution to Contribution to average average average average electricity bills electricity bill gas bill gas bill Factor (per cent) (£) (per cent) (£) Wholesale energy, 58% £311 67% £543 supply costs and profit margin Distribution charges 16% £86 16% £130 Transmission charges 4% £21 2% £16 49 Source: “Household energy bills explained” factsheet, published 16 January 2013. http://tinyurl.com/bgsxqdd cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Contribution to Contribution to Contribution to Contribution to average average average average electricity bills electricity bill gas bill gas bill Factor (per cent) (£) (per cent) (£) VAT 5% £27 5% £41 Environmental charges 11% £59 6% £49 Other costs 5% £27 4% £32 Total £531 £811
There is likely to be upward pressure in most of these areas. 1.2 The electricity and gas transmission, and gas distribution price controls covering the period 2013 to 2021 have now been finalised. These will, in aggregate, add around £15 per year to consumer bills by 2021.50 The negotiations for the electricity distribution price controls covering the period 2015 to 2023 are in the early stages and it is too soon to predict the bill impacts. 1.3 VAT should be the most predictable factor as it is in Government’s control. VAT on electricity and gas has been charged at 5% since 1997. Under European VAT law the UK cannot charge lower than 5% however, it could charge higher. The UK has the joint lowest VAT rate on domestic energy supplies in the EU;51 (18 charge at, or above, 20%). We have some anxiety that moves to harmonise the EU internal market could result in pressure on Member States to “normalise” energy VAT rates (eg if the UK were to move towards the EU average VAT rate on energy this would hike consumer bills). 1.4 “Other costs” is a category that includes suppliers’ non-commodity or network controllable costs. One would expect that in “business as usual” circumstances a competitive market would create downward pressure on these. The requirement to roll-out smart metering to every household by 2019 is likely to mean that metering costs increase in the coming decade, although the impact of this on consumer bills may be partially offset, or wholly outweighed, by their effectiveness in driving consumers to reduce or shift demand. 1.5 Environmental charges seem certain to increase in absolute terms as the funding allowed for decarbonising our energy network through the Levy Control Framework (LCF) is due to increase from £2.35 billion in 2013 to £7.6 billion in 2020 (or about £9.8 billion with inflation). This does not necessarily equate to equivalent increases in bills as the net impact is heavily interdependent on the cost of fossil fuels and carbon. In its estimates for Electricity Market Reform (EMR), the Department of Energy and Climate Change (DECC) suggests that while bills may go up in absolute terms by 2020 they will be lower than they otherwise would be if we decarbonised more slowly. 1.6 We would caution against over-reliance on commodity price forecasts when planning policy as such forecasts are frequently, and often significantly, wrong. Modelling for the EMR Bill develops various scenarios for what prices might look like 15–20 years from now. Predictions over that kind of time are subject to very material risk of error. For example, in its 1998 World Energy Outlook the International Energy Agency predicted that European gas prices would remain at the same level until 2010.52 In fact, European gas prices increased by 345% between 1998 and 2010.53 1.7 It is frustrating that debate in this area is often divided into two camps who both claim to definitively know where prices are going and state with confidence that they can only be going in one direction. 1.8 On one side, there is the “peak gas” camp. These advocate that fossil fuel prices are only going to go up, typically pointing to the booming BRIC economies and to the retrenchment of nuclear power in countries like Germany and Japan putting unending pressure on fossil fuel demand. The “peak gas” argument is undermined by the fact that exploitable reserves of fossil fuels continue to increase, not decrease, as technological advances are made. “Islanding” also means that global gas markets are effectively divided into geographically distinct price zones. It does not necessarily follow that increased demand in one region will raise prices in all regions. 1.9 On the other side, there is the “shale gas changes everything” camp. These point to the collapse in gas prices in the US following the commencement of widespread extraction of shale in North America, and suggest that the same could happen here. This is far from certain. We are yet to see significant extraction of shale in Europe and there remain a range of open questions as to the scale of possible production; the timing of this; its public acceptability; and what proportion of the reserves are economically extractable. 1.10 In short, while we recognise that there are arguments to be either “bullish” or “bearish” on future fossil fuel prices we think that significant caution needs to be exerted in predicting future wholesale price trends and 50 “Ofgem Announces Major Investment To Upgrade Britain’s Gas And Electricity Networks,” 17 December 2012. http://tinyurl.com/adwaxdt 51 “VAT Rates Applied in the Member States of the European Union,” European Commission, 14 January 2013. http://tinyurl.com/ 2sj4hc 52 See figure 2.2. “World Energy Outlook: 1998 edition”, International Energy Agency. http://tinyurl.com/bweou75 53 Source: BP Statistical Review of World Energy 2012. Natural gas prices in US$ per million Btu: EU 1998: 2.32, 2010: 8.01. US 1998: 2.08, 2005: 8.79, 2010: 4.39. http://tinyurl.com/9cmvnow cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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in how this is communicated to the public. We would however expect that increased investment in generation technologies with low marginal operating costs would reduce volatility. 1.11 Regardless of trend, consumers are likely to be aided by reducing their exposure to energy costs. Energy efficiency can deliver a range of benefits: reduced carbon emissions; increased disposable income; increased comfort; reduced health problems (for example, Age UK has estimated that the cost to the NHS in England alone arising from cold homes is around £1.36 billion per year54); and jobs55. DECC forecasts that the biggest single deflationary factor affecting consumer bills by 2020 will be products policy, and that this will reduce consumer bills by around £158. With 4.75 million households56 currently living in fuel poverty, and predictions that this may rise to 9.1 million by 201657, it remains imperative that the UK has credible energy efficiency policies if it is to improve affordability.
2. To what extent (if at all) should the Government or the regulator intervene in the market to affect the prices consumers (or certain groups of consumers) pay for their energy? 2.1 There is a question around what role the competitive market can, or indeed should, play in addressing wider social policy issues. Administered pricing for example could lead to significant unintended consequences for competition. However there are a range of policies that could be introduced to better protect vulnerable and low income consumers and address inequality, which we have detailed below. Consideration needs to be given, not just to the current energy market, but also the way in which products, prices and services will evolve with the introduction of smart metering.
3. Should any changes be made to the Government’s current approach? Using the proceeds of carbon taxation 3.1 As one of the four pillars of EMR, the Government has introduced a Carbon Floor Price (“CFP”). This takes the form of a “top-up” tax on the use of fossil fuels to generate electricity. It is intended to create a higher, less volatile penalty price for high carbon generators than the EU Emissions Trading Scheme (EU ETS). Treasury estimates that the CFP will generate around £740 million tax receipts in 2013–14 rising to £1.41 billion in 2015–16.58 3.2 The CFP will increase the wholesale electricity prices and therefore consumer bills. The Treasury estimates that it will increase the average electricity bill by £6 in 2013–14 and by £17 in 2015–16. We think these figures may be more like £10.55 (2013–14) and £20.10 (2015–16).59 It also creates windfall gains for existing low carbon generation, particularly nuclear. 3.3 We have no objection to the principle of carbon taxation; we think there is sound economic logic in trying to cost a currently uncosted externality—climate change—into energy prices. However, the way the CFP is being introduced does not alter the EU ETS emissions cap, but simply creates a unilaterally different price for the UK. It is therefore likely to have the effect of displacing emissions between EU Member States, rather than reducing overall emissions. We think that it would be better to address the problems with the EU ETS by working with our European partners rather than attempting unilateral action. 3.4 While we would prefer to see the CFP scrapped, if it is to remain in place we would like to see its proceeds committed toward an ambitious programme of energy efficiency with a particular focus on consumers in vulnerable positions. We think that this would mitigate consumer exposure to energy bills, create jobs and reduce carbon emissions. We would urge Government to consider the merits of the Energy Bill Revolution (EBR)60 campaign, which is supported by a wide range of consumer groups, charities, NGOs, energy companies and retailers. Research conducted by the EBR suggests that over the next 15 years Government will raise £64 billion in carbon taxes and that if this were recycled to households, it could bring nine out of 10 homes out of fuel poverty, generate 200,000 jobs and in time make every UK home highly energy efficient. 3.5 It should be noted that there is international precedent for Governments committing to utilise carbon tax receipts to tackle poverty. For example, the Australian Government adopted such an approach when introducing a similar tax, with over half the money raised from its carbon price used to assist households.
Consider the consequences of paying for infrastructure through tax rather than bill levies 3.6 The choice of whether to use bills or taxes to fund the decarbonisation of our energy infrastructure matters because it greatly affects the distributional impact of where these costs fall. In simple terms, the poorest households pay proportionately more when measures are added to their utility bills. In the UK, the proportion 54 “The cost of cold”, Age UK, 2012. http://tinyurl.com/byg7od3 55 See, “Jobs, growth and warmer homes: Evaluating the Economic Stimulus of Investing in Energy Efficiency Measures in Fuel Poor Homes”, Consumer Focus, November 2012. http://tinyurl.com/asjgaqx 56 Source: Statistical press release: Fuel poverty, England and the UK 2010, DECC, May 2012. http://tinyurl.com/bs74yeq 57 Estimate of Energy Bill Revolution campaign. http://www.energybillrevolution.org/ 58 Source: HM Treasury estimates, page 144 “Overview of Tax Legislation and Rates”, 23 March 2011. http://tinyurl.com/6zjr4b7 59 Our estimate is based on multiplying HM Treasury’s estimate of tax revenue by the proportion of electricity that is consumed by domestic premises (37 per cent, according to DECC) and then dividing by the number of domestic electricity supply points in Great Britain (26 million, according to Ofgem). 60 http://www.energybillrevolution.org/ cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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of income spent on energy decreases as income increases, while the proportion of income spent on direct taxation increases as income increases. Public finances are extremely difficult, but we think that greater consideration must be paid to the least regressive ways of paying for low carbon infrastructure.
Levying the cost of social and environmental schemes on a per unit basis
3.7 If decarbonisation is to be paid for through bills, a further choice for policymakers is whether to apply these levies on a per unit or a per household basis. In the UK, there are examples of both. For example, the cost of carbon is effectively consolidated in the wholesale price of electricity and therefore charged on a per unit basis. Our discussions with suppliers suggest that the costs of the Carbon Emissions Reduction Target (CERT) were recouped on a per household basis and that this may also be the case with the Energy Company Obligation (ECO).
3.8 There are strong arguments for levying environmental and social obligations on a per unit basis rather than a per household basis. This is more consistent with “polluter pays” principles—that those with higher carbon footprints should pay more towards decarbonisation. In general terms the poorest in society tend to use less energy per capita than the richest—so per unit charging is likely to better reflect ability to pay than per household charging will.
4. How effective is Ofgem in ensuring consumers get a fair deal? Are there any areas for improvement?
4.1 Ofgem has been slow to respond in some areas and there are measures it could take to improve transparency and liquidity in the market. More detail is provided in question 6. They also need to be more proactive with regards to risks and opportunities for future consumers. For example the introduction of smart metering could result in an increase or decline in prepayment costs to serve depending on how rollout is implemented.
5. Could it be possible to benchmark energy prices to provide greater certainty about whether consumers are getting a fair deal? If so, how might this be achieved in practice?
5.1 Yes, this is already being attempted through Ofgem’s weekly gas and electricity supply market indicators report. Please see our answer to question 10.
6. Could any other measures be put in place to ensure consumers are paying fair prices for energy and to provide consumers with greater confidence in this?
6.1 There are significant problems with liquidity in the wholesale electricity market. While spot and prompt markets are relatively heavily traded, the forward market is thinly traded and largely illiquid. Liquid markets are an essential prerequisite for a healthy market and to keep costs down.
6.2 On the retail side, the standard acquisition product is a fixed-term deal. If a prospective entrant cannot hedge their prices across the duration of that term it exposes them to significant risk. They may respond to this risk by either pricing higher than they otherwise would, or simply deciding never to enter the market. On the production side, a credible forward price can signal the value consumers place on security of supply and provide a “bankable” forward cash flow that can be used to facilitate investment; its absence is a major problem. For all stakeholders, liquid heavily traded markets would provide clear signals of the “real” price of energy— and could therefore help gauge whether end user prices are fair. The Government’s proposals for Feed-in Tariffs (FiTs) based on Contracts for Difference will only work effectively if we have a credible, robust (market) reference price.
6.3 Ofgem first acknowledged that liquidity was a problem in its 2008 Energy Supply Probe, although this problem can arguably be traced back to the scrapping of the self supply licence condition on vertical integrated companies in 2004. We recognise how thorny the issue is and Ofgem’s desire to try and work with the market in finding a solution, but it desperately needs to get on with this. We note that the Government intends to take backstop powers in the 2013 Energy Act that would allow it to impose a solution around liquidity if Ofgem fails to do so. Noting that Ofgem has made little progress despite five years of trying, we would encourage the Government to set a firm deadline to use these powers. We think that the imposition of a deadline may concentrate Ofgem and the industry on the need for progress—and provide reassurance to consumers that something will change if they do not.
6.4 In other answers, we suggest a range of improvements to retail margin reporting and to information gathering. We do not replicate them here. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Profits 7. Many consumers believe that energy company profits are the reason the energy bills have been going up in recent years. Is this perception fair? 7.1 There are multiple factors to bill increases; profit is one. The relative influence of these factors changes. 7.2 There is common agreement that at the back end of the last decade the principal driver behind increased energy bills was increases in the underlying cost of fossil fuels, specifically gas. The cost of gas is particularly important as it is the biggest single input fuel for power generation in the UK and tends to set the marginal (ie market) price of electricity. As such, movements in UK gas markets and electricity markets tend to be highly correlated. 7.3 The period from approximately 2003 to 2008 saw dramatic inflation in the price of gas, and consequently electricity. Annex 2 shows these trends. Given that the biggest single component of a consumer’s energy bill is the energy itself, this had a severely inflationary effect on bills. The current average dual fuel energy bill in mainland Great Britain for customers paying quarterly by cash or cheque has roughly doubled in the last seven years (today: £1,355, 1 January 2006: £690). 7.4 Wholesale prices have fallen significantly since the market peaked in 2008, although they remain volatile. Annex 3 shows our modelling of wholesale and retail price trends since 2007. However, we are seeing inflation in other supplier costs. There is some evidence of declining competitive intensity in the UK energy market. 7.5 The pre-tax and investment UK profits of the Big 6 energy companies increased by 36% between 2008 and 2011, from £6.67 billion to £9.09 billion—the majority of these profits are from their production and trading businesses.61 7.6 Ofgem has acknowledged that it has “found some evidence that customer energy bills respond more rapidly to rising supplier costs compared with falling costs”.62 Its weekly reporting of estimated average supplier margin on a customer taking dual fuel at average consumption levels suggests that these have steadily increased over time, with an approximate £100 “swing” from ~£15 loss to ~£85 profit between February 2009 and February 2013. This trend appears likely to continue, with it currently forecasting “that for the forward looking 12 month period from February 2013, up to and including January 2014, the total indicative net margin will be approximately £115 per customer”.63 7.7 Analysis conducted by the IPPR has also suggested declining competitive intensity in the energy market. Its “True Cost of Energy” report found that “contrary to what we would expect from a competitive market, operational costs per customer account across suppliers have diverged since 2007: that is, the gap between the most and least efficient provider in terms of operational costs has gotten wider. [...] Taking a moderate view of the effect of increased competition on household energy prices, we estimate average potential savings of £70 per year by 2020. This is equivalent to the costs to consumers of the electricity market reform, the carbon price floor, the feed-in tariff (FIT), the warm home discount and most of the renewables obligation combined”.64 7.8 The contribution of environmental and social obligations to consumer costs, while a comparatively small fraction of the end bill, is escalating and was repeatedly used to justify bill increases by major suppliers during the autumn 2012 price rises. Discussions with suppliers suggest that they are largely attributing recent price rises to increases in CERT/CESP compliance costs during the final year of that scheme. However, the absence of any requirement on suppliers to report those costs makes the scale of any such inflation almost impossible to prove. We believe inflation in the last year on CERT/CESP may also have been aggravated by many of the large suppliers leaving it late in complying with their obligations. 7.9 So far, we have simply referred to supplier margin—any inflation or deflation in networks and production margins will also impact end consumers. 7.10 Finally, it is worth noting that the scale of the investment required as a result of EMR is likely to mean that absolute sector profits would materially escalate even if relative profitability were to remain unchanged (eg the same return on investment applied to a much larger asset base would result in much larger profits). We suspect this is likely to create communication problems as policymakers try to simultaneously reassure investors that we remain committed to funding infrastructure investment, while reassuring consumers that they are getting a fair deal.
8. How useful are the segmental generation and supply statements that major energy suppliers are required to produce in understanding where companies are making their profits? 8.1 We welcome the underlying intent to bring greater transparency to the revenues and activities of the major suppliers. But we believe they are of limited usefulness because of deficiencies in the statements’ coverage and timeliness. 61 Source: Consumer Focus analysis of their financial statements. http://tinyurl.com/ccfgax4 62 “Do energy bills respond faster to rising costs than falling costs?” Ofgem, March 2011. http://tinyurl.com/cth89rv 63 “Electricity and Gas market supply indicators, 6 February 2013” Ofgem. http://tinyurl.com/bzboqxh 64 “The true cost of energy,” IPPR, April 2012. http://tinyurl.com/al3x76s cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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8.2 The statements capture the UK physical production and supply activities of the Big 6 energy companies, however they do not capture their trading activities. As Ofgem highlights, “some companies use tolling agreements to organise and report on the relationship between their generation and trading businesses. In this case, the generation business receives capability or capacity payments for the generation assets from the trading arm of the business. The trading arm is responsible for fuel procurement, electricity sales, and operating decisions, and receives the earnings relating to these activities”.65 This means that the capacity value of generation is captured in their generation accounts but that the value of the energy they actually generate—the difference between input costs and output revenues—is missing. This is likely to have the effect of artificially deflating the revenues and profits of generation activities in several companies’ segmental statements. 8.3 As part of its RMR, Ofgem appointed the accountancy firm BDO to independently review the way that companies were required to provide information. BDO highlighted that “trading entities represent a ‘missing link’ between the generation segment and the WACOE/WACOG shown in the supply segments” and that “rigid hedging policies imposing volume and timing requirements on generation and supply businesses may move the potential for profit around the group: for example requiring generation to hedge earlier than supply. If there are any expected shapes to pricing and demand curves, these could be used to leave an expected profit or loss in a trading arm, which is not currently reported in the CSS”.66 BDO recommended that the companies be required to report on their trading activities; Ofgem has chosen not to take this forward. 8.4 The timeliness and accessibility of the statements is a lesser, but still significant issue. Licensees are obliged to produce them within six months of their financial year end (although most listed companies typically report results to the stock market within two months of their financial year end). Five of the Big 6 have calendar year financial years (SSE’s runs from April to March). There is a further period after the last firm has published before Ofgem analyses and reports on its findings. At the time of writing (February 2013) the most recent year for which it has published analysis is 2010. There is a risk that the statements may be so dated by the time they are subject to public scrutiny that they add little value. The analysis Ofgem has produced on these statements, once published, is very good and has helped us to improve our understanding of the way that the companies operate their businesses. However, the statements are very hard to digest for a non-technical audience. Regardless of whether it wants the statements to act as a tool to reassure the public that the market is competitive, or as a diagnostic tool to evidence and act on any concerns that it is not, it would be useful if Ofgem could provide plain English analysis of their key findings in a prompt fashion. 8.5 In any event, allocation of costs in the statements is always likely to be imprecise depending on the assumptions used and this brings with it some risk of abuse. It should be noted that cynicism on the veracity of the transfer pricing claims made by major vertically integrated companies is not constrained to consumer groups. In recent evidence before the ECCC one small supplier stated that “regardless of what I hear about energy companies losing money year after year, I just do not believe it. I do not know at what price EDF—I do not want to pick one company out—are transferring energy from their wholesale units to their retail units in order to recognise a loss, but if you shift that by 1% or 2% you can have a huge profit in your retail division”.67 8.6 It should also be noted that it is hard to reconcile the statements with Ofgem’s separate monitoring of supply market indicators. For example, the statements suggest that in 2010 three of the big 6 made profits on their electricity supply business while three made losses, with an aggregate margin of the six businesses of 0.3%—roughly break-even. However, its supply market indicators reports suggest that electricity supply was consistently profitable throughout 2010 at about a £30 margin on an approximately £500 average annual bill, inferring a supply margin around 6%. Although the supply market indicators are based on a “typical” standard tariff bill at average consumption levels rather than all bills, the majority of consumers remain on standard tariffs. To get from a ~6% margin across the majority of consumers to a 0.3% margin across all consumers might imply predatory pricing; that market leading deals are being sold at a very heavy loss. Alternately, it might imply that either the statements and/or the supply market indicators provide a false perspective of supplier profitability.
9. Do Ofgem’s supply market indicators and the segmental reports provided by energy suppliers help to increase transparency and public trust in energy companies? Could they be improved to provide greater transparency? 9.1 We do not think the statements help transparency and trust for the reasons given in the previous answer. We think that these problems should be tackled or the statements should be scrapped—currently suppliers incur the cost (which consumers foot) of producing them, but there is limited evidence of anyone finding them useful. 9.2 We think the weekly supply market indicators are very useful. They have significant use as a diagnostic tool in order to understand what’s driving bills. This can really help consumers, both by allowing consumer groups to bring pressure to bear on suppliers to keep price rises to a minimum and by allowing individual consumers to gauge whether they are getting a raw deal, when prices change. They also have broader use as a 65 Source: paragraph 4, “Financial information reporting: 2010 results”, Ofgem, January 2012. http://tinyurl.com/a4l7wan 66 Source: “Ofgem segmental statements review”, BDO LLP, January 2012. http://tinyurl.com/bhndfbh 67 Stephen Fitzpatrick, Managing Director of Ovo Energy, Q48 during 4 September 2012 evidence session. http://tinyurl.com/ a7avgxy cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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diagnostic tool in illustrating where the balances of costs lie, and the relative level of competitive intensity— and therefore which areas policy should prioritise. 9.3 Although the supply market indicators contribute greatly to transparency, it should be noted that trust is not always a by-product of transparency—ie it is possible it may simply move the debate from “I think I’m being ripped off” to “I know I’m being ripped off”. Without clarity on supplier costs and margins we think it is unlikely that we could ever get to a position of either reassuring consumers that margins are justified (if they are) or tackling the problems that are causing them to be inflated (if they are not). We doubt energy bills would have had as high a media profile as they have had in the last two years without these publications and, while the resulting publicity has often been negative, we believe that it has created impetus to reform the industry in the interests of consumers. 9.4 Crucially, the supply market indicator reports are useful as a contemporary estimate of margin, unlike the segmental reports. 9.5 We recognise that Ofgem faces a tricky balancing act between simplicity and comprehensiveness for these reports. In areas the costs are bundled—for example, its “other costs” category includes regulated costs (such as network charges), competitive costs (such as metering), and a number of social and environmental obligations straddling both production (ie Renewables Obligation, small scale FiTs) and demand reduction (CERT, CESP). These areas will all have different cost drivers, and some will be in the ambit of regulation (ie network costs) while others are principally governed by Government (ie social and environmental schemes). We recognise that fully unbundling these costs is likely to create quite a “messy” message with a proliferation of line items; it is understandable that Ofgem would not want to do this with its weekly report. But we think there may be value in exploring whether there is any way to get a periodic breakdown of these cost drivers at a more detailed level into the public domain. Might it be possible for Ofgem to publish the underlying spreadsheets on its website so that analysts can drill-down into the data within each category? This may help scrutiny and public understanding. For example, recent deliberative consumer research carried out as part of our “Who Pays?”68 project suggested both a lack of awareness that social and environmental programmes are funded through energy bills and a degree of surprise, once presented with the figures, of how small a proportion of the bill they contribute. 9.6 When Ofgem initially started publishing its supply market indicators (at the time, on a quarterly basis) the supplier trade association (the Energy Retail Association—a predecessor of Energy UK) responded by commissioning and publishing its own quarterly report, habitually showing a much more gloomy picture of retail margins. For example, in December 2009 there was a £72 difference between the two organisation’s estimates of dual fuel net margins. The ability of the two to come up with such different pictures is symptomatic of the difficulty in establishing the true costs of the major suppliers. 9.7 Cost margin forecasting has been hampered by a lack of reporting requirements on suppliers. For example, there may have been a significant increase in the costs associated with the CERT scheme in its final year—this was alluded to in a number of press releases surrounding price rises, has come up in a number of our bilateral meetings with suppliers and has also been mentioned in previous evidence to the ECCC.69 But evidence of these costs currently remains anecdotal as there is no requirement on suppliers to disclose their costs. CERT’s successor scheme, the ECO, will include such an obligation—we think this is prudent and it should help with public accountability. As a general principle, we would encourage Government to require suppliers to disclose the costs of all (material) new schemes that are delivered on its behalf—consumers have a right to know what they are paying for. 9.8 The current Energy Bill to deliver EMR will require a central body to calculate and attribute supplier payments in relation to contracts for difference and a capacity mechanism. We would suggest it would be prudent for this body to provide publicly-available information setting out what these work out at on a per household and/or per unit level on a periodic basis. This should mitigate the possibility that the scale of these payments becomes a disputed item at the time of future supplier price movements. 9.9 We would also highlight that Ofgem has access to some tools that could allow it to establish supplier costs with greater certainty that it does not use. For example, Article 40 of the electricity directive70 implementing the EU 3rd Package, “Record keeping”, sets out that: “1. Member States shall require supply undertakings to keep at the disposal of the national authorities, including the national regulatory authority, the national competition authorities and the Commission, for the fulfilment of their tasks, for at least five years, the relevant data relating to all transactions in electricity supply contracts and electricity derivatives with wholesale customers and transmission system operators. 2. The data shall include details on the characteristics of the relevant transactions such as duration, delivery and settlement rules, the quantity, the dates and times of execution and the transaction 68 http://www.consumerfocus.org.uk/publications/who-pays 69 For example, Q78 on 4 September 2012, Phil Bentley (Managing Director, British Gas) “A year ago, an insulation job was costing us £280. This year it is costing us £460”. http://tinyurl.com/a7avgxy 70 “DIRECTIVE 2009/72/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 13 July 2009 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC.” http://tinyurl.com/yg7aecc cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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prices and means of identifying the wholesale customer concerned, as well as specified details of all unsettled electricity supply contracts and electricity derivatives. 3. The regulatory authority may decide to make available to market participants elements of that information provided that commercially sensitive information on individual market players or individual transactions is not released. This paragraph shall not apply to information about financial instruments which fall within the scope of Directive 2004/39/EC. [...continues...]” 9.10 There is an equivalent provision (Article 44) in the gas directive.71 Both have applied in the UK since March 2011. On face value these provisions appear to give Ofgem considerable ability to force suppliers to disclose their actual traded cost of energy. It is possible that were it to act on this it might be able to defuse the seemingly unending argument as to whether wholesale price movements justify retail price changes. 9.11 The European Regulation on Wholesale Energy Markets Integrity and Transparency (“REMIT”) is currently being introduced into the UK and may give Ofgem further powers to monitor wholesale markets (and therefore to verify suppliers’ wholesale costs).72
10. To what extent does the way energy companies communicate profits to the general public influence the public’s perception of these companies? 10.1 Suppliers are becoming better at communicating the underlying cost drivers affecting their businesses, although there remains room for improvement.
The use of percentage figures without appropriate context 10.2 Consumer familiarity with the components making up their bill is low. This therefore creates a risk that attributing a percentage figure to changing components within it without reference to their absolute cost can create, rather than remove, confusion. 10.3 For example, in its announcement73 of price rises on 12 October 2012, npower stated that: “Q Why are prices going up? A There are three main reasons why customers’ energy bills are rising, which are: Implementing government schemes such as CERT/CESP/ECO. Costs for this area will be approximately double in 2013 when compared to 2011. The cost of delivering energy to customers’ homes which has increased by 10% since 2011. Higher average wholesale energy prices which have increased by approximately 5% since last winter. The environmental portion of the bill (driven by the Renewables Obligation) has also increased by 25%.” 10.4 These figures were not given in £s. Very few consumers will know what they paid for CERT and CESP in 2011, so a statement that these costs will have doubled by 2013 is fairly meaningless. Likewise, the use of “double” in one bullet and “5%” in another might imply—without context—that the former is having 20 times the impact of the latter. Given the relative contribution of these two components to the bill, the impact is actually likely to be very much closer than this. 10.5 We would highlight that some suppliers are communicating better than others. For example, in its most recent price rise announcement,74 British Gas gave an illustrative breakdown of the components of a typical consumer bill (in%) accompanied by an explanation of the changed contribution (in pounds) of most of the factors that were driving its price rise. We think this is good practice and would like to see this more commonly adopted. 10.6 We recognise that this issue does not simply affect suppliers and that consumer groups do not put £- per-contributing-factor figures in their press releases. This reflects a general absence of availability of underlying data that would allow consumer groups to do so. While network charges are publicly disclosed, the costs of schemes such as CERT/CESP are not. Likewise, while we can track wholesale price movements we do not know the individual hedging strategies of the suppliers.
Simultaneously blaming and taking credit for Government schemes 10.7 Looking at the recent round of price rises, two very common themes stick out: attributing much of the blame for price rises on the cost of Government schemes; and pointing out that the supplier is making great strides to help consumers by offering them free or subsidised insulation. It is not always made clear that the latter is paid for by the former. 71 “DIRECTIVE 2009/73/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC” http://tinyurl.com/72g5a7j 72 For further detail see the Ofgem website. http://tinyurl.com/bzq2chl 73 “npower announces changes to gas and electricity prices”, 12 October 2012. http://tinyurl.com/bcref8k 74 “British Gas pricing announcement”, 12 October 2012 http://tinyurl.com/aqdqgpn cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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10.8 For example, a recent Energy UK press release75 stated that (emphasis added by us): “We utterly refute these allegations from Which?. Rebuilding trust with customers is a priority and since the energy summit last year, suppliers have already contacted four million priority customers to offer help with insulation, and over 10 million customers to explain the benefits of paying by Direct Debit, increased the debt threshold for switching supplier if you have a prepayment meter to £500, and reduced the number of different energy deals available to a handful of tariffs each plus a few special ones for particular interest groups. Ofgem have been conducting a full review into the retail market and we await its conclusions which we expect to be published shortly. Energy companies are also working hard to help society’s poorest stay warm by spending over £275 million this year, helping two million people in a variety of ways including free insulation. Britain may have the cheapest gas and fourth-cheapest electricity prices in western Europe, but wholesale energy prices have been rising and now only represent half of a standard energy bill. The rest is for the obligations that energy companies have to meet to provide social, energy efficiency and environmental benefits. Insulation may not be the hottest topic of conversation, but it is the key to keeping your bills as low as possible. If you think you could benefit, call your energy company for advice.” 10.9 The statement that half of an energy bill goes towards providing social, energy efficiency and environmental obligations is wholly untrue and very misleading. This press release could also be read as implying that the “free” insulation is an act of corporate responsibility paid for by the suppliers to try and help consumers mitigate the effects of paying for these obligations—when actually it is paid for by consumers themselves, through some of those obligations.
Inclusion or exclusion of VAT from figures used for international comparison 10.10 Suppliers frequently point to the prices paid by consumers in the UK compared with those paid elsewhere in the EU to suggest that these strongly indicate that we have a competitive market—indeed, supplier witnesses have previously made this point to the ECCC. 10.11 As highlighted in our answer to question 1, the UK applies an abnormally low VAT rate to energy. This means that the UK’s position in international league tables can vary considerably depending on whether you choose to use tax-inclusive or tax-exclusive figures. We think that tax-exclusive is likely to give a much fairer representation of our international standing because tax rates are a function of fiscal policy rather than market efficiency—or to put it another way, hiking or reducing the VAT rate by 5% would have a commensurate knock-on effect on consumer bills but would not mean the UK market had suddenly become 5% more or less competitive/efficient. 10.12 The Eurostat league table for household energy prices for 2012 excluding tax are included in Annex 1 to our submission. For ease of reference these show that UK domestic consumers paid a significantly above average electricity price of 16c/KWh (EU 27 average: 13.2c/KWh) and a slightly above average gas price of €13.816 per gigajoule (EU 27 average: €13.63 per gigajoule).
Fuel Poverty 11. Is the Government on track to meet its target of eliminating fuel poverty by 2016 and will reduced Government spending in this area affect their ability to achieve this target? Government progress towards the 2016 target 11.1 The Government is clearly going to miss its 2016 fuel poverty target. Verco research for the EBR, which Consumer Focus part funded (Energy Bill Revolution campaign report, 2011), suggests that on current trends 6.2 million households in England will live in fuel poverty by 2016, compared to an estimated four million households in fuel poverty in 2009. This represents a 47% increase. Figures quoted are based on the current fuel poverty definition. 11.2 The number of households in fuel poverty under the Government’s proposed new fuel poverty definition, which is based on Professor Hills’ recommended approach, is less dramatic. This suggests that 2.9 million households in England will live in fuel poverty by 2016. This compares with an estimated 2.7 million households in fuel poverty in 2009 (Hills J, 2012, Getting the measure of fuel poverty). This incidentally illustrates one of our main criticisms with the proposed new definition—the “Low Income High Costs” (LIHC) indicator—see our answer to question 14. 11.3 The Government also proposes to use a new “fuel poverty gap” indicator for assessing progress. While based on the flawed “LIHC” measure, the indicator is more responsive to price changes and policy interventions. This indicator shows a dramatic growth between 2009 and 2016—from £1.1 billion to £1.7 billion (Hills, 2012). The figure would have been even higher—£1.9 billion—if the Government did not have any fuel poverty policies in place (eg ECO, Warm Home Discount (WHD) and Warm Front). Nevertheless, it still represents a substantial increase—55%—in the scale of the problem. A gap indicator based on a more appropriate fuel poverty indicator, as we recommend, would suggest that the scale of the challenge facing the Government is even greater. 75 “Energy UK replies to Which?’s open letter,” 15 October 2012. http://tinyurl.com/arhb45y cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Government expenditure on fuel poverty programmes
11.4 Research conducted for the EBR (ACE, 2012, The impact on the fuel poor of the reduction in fuel poverty budgets in England) found that the total budget likely to reach the fuel poor in England falls from £1.19 billion in 2009 to £879 billion in 2013—a reduction of 26%. This includes the WHD which the Government often highlights in its defence of cuts elsewhere. The fall in energy efficiency budget reaching the fuel poor is even more dramatic—from £376 million in 2009 to £209 million in 2013—a reduction of 44%. This is despite the fact that energy efficiency measures represent the long term sustainable solution to fuel poverty, as recognised by Government and fuel poverty advocates alike.
11.5 Consumer Focus, in common with the Government’s Fuel Poverty Advisory Group (FPAG), National Energy Action and many others, has expressed considerable concern at the Government’s cut in funds, particularly energy efficiency funds, for fuel poor households. The decision to end the Warm Front programme in 2013 means that for the first time since 1978 there will be no Government-funded domestic energy efficiency programme for low income consumers. This is in marked contrast to the situation in the devolved administrations who are not only maintaining public funding but in some cases increasing it. The Scottish Government, for example, has committed around £65m pa for the next three years to energy efficiency programmes for fuel poor households (Scottish Government, 2012, National retrofit programme). This is equivalent to around £605 million pa expenditure in England, allowing for the difference in population size. The Scottish Government is currently considering how best to integrate its publicly-funded programmes with Green Deal and the ECO.
11.6 Consumer Focus therefore wholeheartedly agrees with the conclusion of FPAG that “the withdrawal of all taxpayer funding for energy efficiency assistance to low income households, while the number of fuel poor households continues to rise, calls into question whether the Government is fulfilling its obligation to do all that is ‘reasonably practicable’ to eradicate fuel poverty by 2016 as required by the Warm Homes and Conservation Act 2000” (FPAG, 2012, Tenth annual report 2011–12).
11.7 The projected rise in fuel poverty is driven primarily by rising energy prices over the medium term. The principal driver is rising wholesale energy prices, which is largely outside Government control. However, Government energy policies, primarily paid for by energy consumers, are undoubtedly exacerbating the fuel poverty problem. For example, the current Energy Bill will result in a tripling of expenditure under the LCF— from £2.35 billion in 2012/13 to £7.6 billion in 2020–21.76 With concerted political will, Government could take action to reduce consumers’ exposure to high energy bills, particularly if it put in place a scaled up energy efficiency programme that complements Green Deal and ECO and is focused on the fuel poor.
11.8 The Energy Bill Revolution campaign report, referred to above, shows that if the Government were to invest the proceeds it is forecast to receive from ETS auctions and the CFP in a substantial energy efficiency programme targeted at the homes of the fuel poor, nine out of 10 fuel poor households (current definition) would be removed from fuel poverty. The modelling carried out for this projection only considered measures for individual homes and did not investigate the potential impact of combined heat and power and district heating. Nor did it consider potential complementary income and fuel price measures.
11.9 The retrofit programme advocated by the EBR is based on the concept of “fuel poverty proofing” homes—that is improving the energy efficiency standards of homes to those of homes built today, where practical. It proposes investing £4 billion a year (the estimated average annual revenue between 2013 and 2027 accrued from carbon taxes) until 2027 on the programme. This entails spending an average of £6,500 per home on 600,000 homes each year. Consumer Focus reluctantly accepts that due to policy failure by successive governments it no longer feasible to eliminate fuel poverty by 2016. We therefore consider new legislation is required to establish a new legal target date. However, we do not agree with DECC that “because the underlying problem of fuel poverty is a chronic, structural one government should engage in an ‘ongoing effort to mitigate’ rather than eliminate the problem.” (DECC, 2012, Fuel poverty: changing the framework for measurement).
11.10 Research commissioned by Consumer Focus (Cambridge Econometrics and Verco, 2012, Jobs, growth and warmer homes) suggests that the energy efficiency programme advocated by the EBR would generate greater macroeconomic benefits—more jobs and greater growth—than the same injection of spend through other government spending programmes or cuts in VAT or fuel duty. Even if only a third of the revenues expected from carbon taxes are spent on improving fuel poor homes, this would still remove 75% of households from fuel poverty (the remaining homes require more expensive energy efficiency packages to completely remove occupants from fuel poverty).
11.11 In conclusion, while Consumer Focus disagrees with Hill’s proposed new fuel poverty definition, we wholeheartedly support his recommendation that “The Government—not just DECC but other Departments— should set out a renewed and ambitious strategy for tackling fuel poverty”. Increased resources for programmes to tackle the problem—however sourced—must form a central element of the new strategy. 76 The LCF is an agreement between DECC and Treasury about the amount of expenditure that can be raised from energy consumers’ bills to fund Government energy policies. The Warm Home Discount, Feed in Tariff, Renewables Obligation, contracts for difference and capacity market come under the LCF. ECO, CERT, Emissions Trading Scheme and Carbon Floor Price do not. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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11.12 We also believe that there are opportunities to deliver existing programmes more efficiently and cost effectively. For example by extending data matching and the linking up of smart meter rollout with fuel poverty and energy efficiency schemes at a national and local level.
12. Has the Hills Review resulted in any changes to fuel poverty policy? How could its findings be used to improve the efficacy of fuel poverty policy? 12.1 Consumer Focus engaged extensively with the Hills fuel poverty review in recognition of its implications for low income consumers, Government fuel poverty policy and wider energy and welfare policies. We consider the Hills review made a useful contribution to understanding fuel poverty by: — reasserting the importance of fuel poverty as a serious and urgent problem that it is distinct from general poverty, in part because of the serious physical and mental health impacts of cold homes and high fuel bills; — confirming the central role of capital investment in energy efficiency as the solution to fuel poverty and of its alignment with environmental goals; and — redefining “low income” such that the definition is now consistent with other poverty definitions (by excluding housing costs and taking household size into account when measuring income) and recognises the logic of excluding fuel costs. 12.2 However, we had serious concerns about Hill’s proposed definition of high energy costs—a key element of his proposed new definition. We considered his definition of high energy costs failed to reflect fuel affordability and in effect made “it almost impossible to literally eradicate fuel poverty” (p31 of DECC consultation, Fuel poverty: changing the framework for measurement). We therefore did not agree with the intention of Government to change the definition of fuel poverty unless it agreed to modify the complex and currently unacceptable LIHC formula. Consumer Focus commissioned in-depth research that set out the failings of the LIHC indicator but also set out proposals for how it could be improved (ACE, CSE & Richard Moore, 2012, Improving the Hills approach to measuring fuel poverty). 12.3 We also made the following comments in our response to the DECC consultation: — The existing definition has an important political advantage: fuel poverty eradication is mandated through a Statutory Obligation and is achievable on this indicator with sufficient political will and resources. The LIHC indicator, as proposed, makes “fuel poverty” impossible to eradicate or even show substantial progress on reducing its extent—an inevitable consequence of using the median of total energy costs as the threshold for “reasonable costs”. — We have long argued the need for housing costs to be deducted from income and for income measurement to take account of household size (equivalisation) in the calculation of fuel poverty. — We support Hills’ proposal to not include disability benefits when calculating income and are disappointed that the Government did not intend to accept it. — We reluctantly accept that due to policy failure by successive Governments new legislation is required to establish a new legal target date. If the Government accepts our proposed improvements to the Hills definition, then it becomes possible to retain a headline target based on the number of households in fuel poverty (the “headcount” measure). — Alternatively, the Government could set a new date for the elimination of fuel poverty by using an improved version of the existing 10% definition (“after housing costs”, equivalised measure of income; inclusion of income threshold). — However, if the Government does not adopt either a modified Hills definition or an improved 10% definition, then it should frame a target in the following ways: — homes are improved such that by a specified date no low income household should live in a home that falls below EPC D standard; — homes are improved such that by the same date a specified proportion of low income households should live in homes that reach a standard of at least EPC; and — no low income household should have a fuel poverty gap that is more than, say, 10% above the median by a specified date. 12.4 We supported Hills’ conclusion that government policy should focus on tackling the serious health and wellbeing impacts of fuel poverty which his report identified as the heart of the problem. We do not accept that on-going management is acceptable. No one should live in an inefficient home that cannot be kept warm and powered affordably. 12.5 We were concerned that the Hills review effectively “froze” fuel poverty policy during the course of the review team’s deliberations. We do not consider Government decisions over the past two years consistent with its argument that “getting measurement right” is essential for effective policies. For example, the Government cut the Warm Front budget by two thirds in 2010, decided to end Warm Front altogether in 2013 and not replace it. It also made decisions on the structure of the ECO and Renewable Heat Incentive (RHI), it cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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tripled expenditure under the LCF without putting in place any compensatory measures for low income consumers and put in place a major welfare reform programme without considering its impact on fuel poverty. 12.6 The DECC consultation suggests adopting, as one option, an indicator based on the number of “low income households in EPC E, F or G rated properties”. We consider such an indicator has much merit and would enable tracking of progress, including the impact of local projects and programmes. However, the Government could easily have adopted such an indicator several years ago irrespective of the Hills review. 12.7 In conclusion, we consider the Government used the Hills review as a pretext for not taking forward fuel poverty policy while at the same time making severe cuts to fuel poverty resources. The Hills definition of fuel poverty will not help improve the efficacy of fuel poverty policy, unless it is reformed to reflect affordability of energy bills. However, its recommendation for a cross-departmental fuel poverty strategy and its emphasis on capital investment in energy efficiency measures in the homes of fuel poor are welcome.
13. To what extent are current fuel poverty policies reaching the right people? Are there any particular groups that are currently not getting the necessary support? And will this change under the move to ECO? 13.1 Fuel poverty policies face a tension between achieving high targeting efficiency (the extent to which policies “hit” the fuel poor) and coverage (the number of fuel poor households helped). There is an inverse relationship between targeting efficiency and coverage due to the difficulty of making sure policies precisely hit the fuel poor. The more generous the programme, the larger the number of fuel poor households helped but the lower the proportion of fuel poor households helped. For example, when the Government changed the Warm Front eligibility criteria in 2010 to reflect the two thirds cut in the annual Warm Front budget, it improved its “hit-rate” considerably—from around 50 to 77%. However, the number of households receiving help reduced from 330,000pa in 2009–10 to a predicted 100,000 in 2011–12 and 100,000 in 2012–13 (of whom 144,000 were estimated to be fuel poor). This represented only 3.6% of all private sector fuel poor households in England. In practice, Warm Front coverage was even worse—only 65–80,000 households received Warm Front measures over the final two years of the programme. Consumer Focus considered this was due to poor promotion of the scheme by DECC and the confusion arising from the change in eligibility criteria in 2011. 13.2 The Hills review comments on the extent to which fuel poverty policies can expect to achieve high levels of targeting efficiency. “In practical terms, a wider group (than fuel poor households) will inevitably be targeted (by fuel poverty policies), adding of course to the cost of tackling the core problem. However, this is an area where assistance straying over a strict boundary of eligibility should not necessarily be seen as a problem—and can be a virtue. If a household is helped that is in poverty but has costs that are below the (proposed energy costs) threshold, the help given can make an important difference to living standards and conditions. Similarly, if a household is helped that has an income above our (low income) threshold, but has high energy costs, that can still make a difference in terms of national energy efficiency and reduction of carbon emissions.” 13.3 Of greater concern than the extent to which non-fuel poor (but low income) are households helped by policies is the extent to which fuel poor households are not helped. The Government estimates that ECO will only remove between 125,000 and 250,000 households from fuel poverty by 2022—around 6.4% of current fuel poor households. This again illustrates the inadequacy of current programmes for tackling the scale of the fuel poverty problem. 13.4 The eligibility criteria for the Affordable Warmth element of ECO are very similar to those for Warm Front and the Super Priority Group of CERT, although the latter also includes social housing tenants. They cover private sector households eligible for Cold Weather Payments plus (unlike Warm Front) households in receipt of Child Tax Credit and with an income below a certain income threshold, currently £15,860. In this respect groups helped by Affordable Warmth are similar to groups helped by Warm Front. 13.5 However, Consumer Focus is concerned that some groups of households will be worse off under ECO. ECO Affordable Warmth is designed to encourage suppliers to provide a minimum package of measures at lowest cost. This will primarily consist of loft and cavity wall insulation and gas boiler replacements. The latter is encouraged by a new heating costs reduction target and is unique to the Affordable Warmth element of ECO. Suppliers are therefore likely to focus activity on large concentrations of eligible households who live in properties suitable for these low cost measures. Under Warm Front, households without gas are entitled to a larger grant (£6,500, compared to £3,500) than those with gas, in recognition of the additional costs of providing suitable heating measures. Warm Front also included “hard to reach” and “hard to treat” targets. There is no equivalent requirement under Affordable Warmth. We are therefore concerned that rural households living in difficult to treat homes will lose out under ECO. 13.6 ECO also includes a Carbon Saving Communities Obligation (CSCO) element, estimated to equate to an annual expenditure of £190 million. 15% of this element must be targeted at households in rural areas. CSCO is similar to the current CESP programme in that help is targeted at low income areas—the 15% most deprived areas as defined by the Index of Multiple Deprivation (CESP set a 10% requirement). CSCO is likely to represent an improvement on CESP in that it does not entail the same complex scoring system, there is more flexibility over the boundaries of areas helped and the rural safeguard will mean more rural households will benefit. However, unlike Affordable Warmth, there is no heating cost reduction target to accompany the CSCO carbon targets. Thus, suppliers are unlikely to provide heating measures to households in CSCO areas. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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14. What support is available for fuel poor households living in solid-wall and hard-to-treat properties? Could this be improved? 14.1 The Affordable Warmth element of ECO is not designed to provide solid wall insulation (SWI) in the homes of low income consumers. It is therefore worth reviewing the extent to which the other elements of ECO might help. 14.2 A key objective of the Carbon Saving Obligation (CSO) element of ECO is to “kick-start” the solid wall insulation industry. The CSO requires suppliers to install insulation in solid wall (and difficult to fill cavity) homes. It can install other measures as well but only as part of packages that include SWI or insulation suitable for difficult to fill cavities. The scoring of carbon points assigned to SWI assumes ECO will not cover the full cost of SWI, with additional funds envisaged to come from Green Deal finance, consumers’ own funds or funds levered in by social housing providers and local authorities. The Government recognises that fuel poor households are not likely to use Green Deal finance in that they cannot make the savings required to meet the golden rule due to under-consumption of fuel relative to need. However, social housing providers may be able to lever in funds to match ECO funding for SWI. 14.3 ECO may therefore provide some help to a limited number of fuel poor social housing tenants in solid wall homes. However, it is unlikely to provide much help to fuel poor private sector households in solid wall homes, given that these households are unlikely to access Green Deal finance. Some local authorities may be able to provide limited help to such households but we suspect the number helped will be very small given the dramatic cuts in resources allocated to local authorities. Our report “Scaling the solid wall” (ACE, 2011) gives more details of the barriers facing the SWI industry and the likely lack of provision for many low income consumers. 14.4 Consumer Focus considers the RHI could potentially provide heating measures suitable for low income consumers living in off-gas areas, perhaps in conjunction with insulation measures provided under CSCO. However, this will require a mechanism by which future RHI revenue streams are capitalised to provide the up-front costs of (expensive) renewable heating systems. Low income consumers will not be able to pay these costs out of their own limited or zero capital. We would therefore urge the Government to encourage greater integration of ECO and RHI so that low income consumers in off-gas areas can benefit from affordable warmth. Alternatively, the Government should follow the Scottish example in which public funds are used to provide expensive measures such as renewable heating or part SWI costs, while CERT (ECO in future) funds low cost insulation or part SWI costs. 14.5 Consumer Focus considers the Government should recognise that Green Deal, ECO and the RHI can only go so far in the extent to which they can help low income and fuel poor consumers in hard to treat homes. We consider public funds are required to fill gaps, as well as help stimulate a flourishing energy efficiency market—a key objective of Government policy. We are currently leading an EBR working group that will set out options for delivering a scaled up energy efficiency programme funded by carbon taxes. The group includes representatives from installers, fuel companies, managing agents, EST, Warm Zones, NEA and others and will look at how additional funds could fill the gaps left by Green Deal, ECO and RHI. The group hopes to complete its work in late spring. We would be happy to send our conclusions to the Committee when ready.
15. Will the Government’s proposals to ensure that consumers are on the cheapest tariff have any impact on fuel poverty? 15.1 Consumer Focus supports the broader RMR package including plans for a cap on tariff numbers, transferring consumers off uncompetitive “dead” tariffs and clearer supplier communications. However, there is a very real risk that the tariff cap could have unintended consequences and lead to a general levelling up of prices. Ofgem must closely monitor the impact of its package to ensure that it is delivering clear consumer benefits. 15.2 The Government proposals do not require consumers to be switched to the cheapest (standard) tariff unless they are on an uncompetitive dead tariff or their current tariff falls outside the suppliers’ tariff cap. However, we suspect that many fuel poor consumers will be on their supplier’s existing standard evergreen tariff and thus will not be automatically switched onto a new tariff under the proposals. In addition to Ofgem’s RMR package, we think the Government should explore whether further support for fuel poor consumers is required. Consumer Focus, together with other FPAG members, is looking at alternative tariff options to see which would deliver the most benefits to this group of consumers. 15.3 Proposals also need to be evaluated in the light of wider market developments such as smart metering and the possible introduction of tariffs which encourage load shifting and energy reduction. DECC has committed to carry out a distributional impact assessment to fully understand the potential impact of rollout on different consumer segments. However this has not been delivered. The Annual Progress Report for smart metering should report on the contribution rollout makes to meeting fuel poverty targets. The National Audit Office report for example, suggested that low income customers may be less likely to engage in the market to be able to access the cheaper deals which smart will facilitate. This could result in the costs and benefits being unevenly distributed.77 77 National Audit Office report—Preparations for the roll-out of smart meters (June 2011) http://bit.ly/uVXXvM cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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16. To what extent do fuel-poor households engage in switching? What are the barriers to greater levels of switching from these groups? 16.1 Our omnibus research (March-July 2012) found that consumers in social economic groups C2DE were less likely to have successfully switched supplier compared to those in the AB group (13% versus 16%). Consumers paying by cash or cheque were least likely to have switched successfully compared to those paying by Direct Debit or prepayment meter (PPM) (10% versus 16% versus 15% respectively). 16.2 There are a number of key barriers to switching. Depending on the payment method used, there may be a lack of alternative or better value options. Consumers on low incomes may be unable or unwilling to risk switching to paying by the (normally) cheaper Direct Debit payment method. Consumer Focus previously found that only 3.2% and 38% of the 283 tariffs released between January 2009 and February 2012 were available to consumers paying by PPM or cash/cheque respectively. All of these tariffs were available to consumers paying by Direct Debit.78 16.3 There is not significant price competition for PPM users. A medium user paying by PPM, living in London and currently supplied by British Gas for gas and EDF Energy for electricity could save a maximum of £104 a year switching to a new supplier (Spark Energy). If a consumer wanted to keep their WHD by sticking with a supplier required to provide the discount then the savings available would drop to an average of £46 (price comparison carried out on Uswitch on 21.01.13). 16.4 Being in debt with a supplier is another barrier. There is a process for switching supplier if using a PPM while in debt up to £500. However, the existing process requires the consumer to be very proactive about the process to ensure their switch goes through. Given the available savings, which currently average £46 for a consumer wanting to stay with a big six supplier in order to retain their WHD, many may chose not to bother. 16.5 Lack of awareness that they are able to switch supplier could be another reason. Some fuel poor consumers live in the private rented sector and may have been incorrectly told by their landlord that they are not allowed to switch supplier. Recent omnibus research for Consumer Focus found that 4% of private tenants were (incorrectly) prevented by their rental contract from switching supplier. 16.6 Lack of interoperability during the Foundation stage of smart meter rollout (now-end 2014), may also introduce new barriers to switching, particularly for those using a prepayment meter. Ofgem and DECC have introduced new measures to try and address problems but we are sceptical that these will resolve all the issues.
17. To what extent do fuel-poor households currently take advantage of energy efficiency schemes? Could anything be done to increase uptake? Warm Front 17.1 Consumer Focus was very disappointed at the considerable under-spend of the Warm Front budget in the final two years of the scheme. This represented a complete reversal of the situation before the budget was cut in 2011 and eligibility criteria restricted to reflect the reduced budget. In previous years, Warm Front was substantially over-subscribed, requiring the managing agent to exercise stringent control over the flow of work. Consumer Focus sits on the Warm Front Advisory Board. In both years we expressed concern at the reduced flow of work shown by monitoring returns and urged the Government to develop a communications strategy, including the involvement of third sector agencies, to increase take-up. 17.2 In the absence of this strategy, Consumer Focus in partnership with Citizens Advice, Age UK and National Children’s Bureau, carried out an intensive publicity campaign to promote Warm Front. This included providing information on the screens in GP surgeries, an extensive media campaign in local and national media and work with MPs to back our take-up activities. Our second promotional campaign coincided with the slight widening of eligibility criteria DECC implemented in September 2012. The rate of Warm Front inquiries increased 10 fold while the rate of successful installations increased two to three times after our push. It is difficult to identify the extent to which increased activity was due to our promotional activity or whether it was due to the widening of eligibility criteria. The managing agent has reported informally that our work was by far the most important factor, while DECC advised us against carrying out a second push in December 2012 due to their re-allocation of £25 million of Warm Front funds to the new local authority fuel poverty fund. 17.3 We understand DECC intends to carry out an evaluation of the factors that contributed to increased activity at the end of the Warm Front period which we hope will be of value to this committee. However, we consider our work demonstrates that a proper communications strategy, backed up with community outreach using third sector organisations, is essential for ensuring full take-up of help by low income households.
Super Priority Group CERT and CESP 17.4 Consumer Focus notes that a number of suppliers struggled to meet their Super Priority Group (SPG) and CESP targets and it is possible that some face possible sanctions due to under-performance. Ofgem’s review of the fourth year of CERT suggested that while average supplier performance on the SPG target ran at 30%, individual company performance ranged from 10% to 62%. In broad terms, suppliers that took 78 http://tinyurl.com/cokffqb cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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concerted action early on the programme, often through close collaboration with local authorities and third sector bodies, performed much better than those that started “late in the day”. The latter group of suppliers resorted to increasingly desperate lengths to meet their targets, including the offering of “finders” fees’ and substantial bill discounts to SPG consumers agreeing to have free insulation installed. 17.5 Suppliers have claimed that the increased costs associated with delivering CERT towards the end of the programme contributed to the rise in energy tariffs that all of the “big 6” implemented towards the end of 2012. Consumer Focus is sceptical about the extent to which these claims are justified, particularly given that much of the carbon savings secured at the beginning of the CERT period was very cheap when suppliers were still allowed to install CFLs. Part of the problem lies in the lack of transparency over CERT costs. We therefore welcome the Government’s intention to allow Ofgem to monitor ECO costs. 17.6 However, Consumer Focus recognises that a considerable amount of money was wasted by suppliers on finding and identifying SPG consumers—money that would have been better spent on installing measures in low income consumers’ homes. SPG eligibility criteria are related to complex benefit rules and suppliers do not have access to these records. Mid-way through CERT, it was estimated that suppliers spent an average of £120 per SPG consumer on finding this group—a figure that no doubt would have increased for some suppliers at the end of the CERT period. By contrast, we note that the data matching procedure used between DWP and suppliers for providing the WHD to the core group of WHD-eligible consumers was estimated to cost only £4 per consumer. 17.7 Consumer Focus therefore considers there is a strong case for extending the data matching procedure used for the WHD to all consumers eligible for Affordable Warmth, particularly given that suppliers now have sole responsibility for delivering help to low income consumers. We recognise that this will require a change in primary legislation to allow inclusion of non-pensioner groups, similar to the provisions for pensioners in the 2008 Pensions Act. Consumer Focus is about to carry out research, including an investigation of the legal implications, of an extension of data matching procedures. We also welcome the recommendation of the Green Deal hard to reach panel, chaired by Laura Sands MP, to extend data matching procedures to help ensure that hard to reach households receive help. 17.8 Consumer Focus also considers that the injection of public funds, as proposed by the EBR, would allow a broadening of eligibility criteria for households helped under Affordable Warmth or under a parallel programme that complements it (for example, through local authority programmes). This would reduce targeting efficiency but increase coverage considerably. It would also make it much more feasible to use area approaches for delivering programmes, since a much higher proportion of residents in designated areas would be likely to meet the eligibility criteria. Potentially it may no longer be necessary to means test residents helped under area programmes (as is the case with CESP and CSCO in urban areas), thus reducing administration costs considerably. The Scottish Government’s National Retrofit Programme now relies extensively on an area approach in recognition of its many benefits. 17.9 Area approaches that use door knocking and extensive community outreach, coupled with scaled up installation programmes, have many benefits. They ensure that the hardest to reach are reached, they encourage take-up through “word of mouth” communication of the benefits, they facilitate involvement from local third sector bodies and they realise considerable cost efficiencies through concentrated delivery of measures. Consumer Focus Scotland commissioned research that highlighted the benefits of area approaches which helped influence the Scottish Government to shift resources towards this approach (Consumer Focus Scotland, 2010, Energising Communities: Learning from Area-Based Energy Efficiency Projects in Scotland). However, we consider it important that a non-area specific referral system is also put in place to ensure priority households at the “back of the area queue” or who do not live in designated areas receive help.
Smart meter rollout—Extra Help Scheme 17.10 Smart meter roll-out also provides an opportunity to improve the delivery of existing fuel poverty programmes and access hard to reach groups. A package of assistance could be developed for low income and vulnerable consumers which is delivered alongside the installation of a smart meter—either by the supplier, a third party carrying out complementary activity, or the Central Delivery Body. Such a scheme could use existing resources more efficiently and cost effectively to help those in need. 17.11 This might include energy efficiency products and services, which are currently offered as part of the proposed new Energy Company Obligation, and debt advice, benefits maximisation checks or social tariffs which suppliers already offer. For example, Groundwork has been working with Southern Water to deliver energy and water audits, benefits entitlement checks and install small measures (eg water efficiency measures) as part of its water metering programme.79 17.12 Consumer Focus research found strong public support for some kind of extra help scheme, with 81% of people thinking it is a good idea for those who are eligible.80 February 2013 79 http://bit.ly/e4k2Sd 80 Face-to-face survey carried out by GfK NOP on behalf of Consumer Focus. GfK spoke to 1460 UK bill payers between 29 March–3 April 2012. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Annex 1
COMPARISON OF UK AND EU DOMESTIC ENERGY PRICES, EXCLUDING VAT, IN 2012
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Annex 2 UK ENERGY PRICE TRENDS SINCE 1987 Source: House of Commons library note “Energy Prices Standard Note: SN/SG/4153”, 16 January 2013 http://tinyurl.com/az9dccy cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Annex 3
WHOLESALE/RETAIL PRICE TRENDS IN ELECTRICITY AND GAS, 2007 TO PRESENT
Written evidence submitted by the Department of Energy and Climate Change
1. DECC welcomes the ECC Committee’s inquiry into energy prices, profits and poverty and the opportunity to submit evidence. DECC also looks forward to the Committee’s findings.
2. The government cannot control volatile world energy prices but can still help people get their bills down. The easiest ways to get energy bills down quickly are to get people paying the lowest possible tariffs and to reduce the amount of energy that is wasted.
3. The Government has proposed a range of measures on the retail markets for inclusion in the Energy Bill which will ensure that all households will be able get the best deal for their gas and electricity as soon as possible. The proposals will ensure that energy companies place consumers on the cheapest tariff that meets their preferences and have clear personalised information to help them shop around more easily for the best deals across the market.
4. The Government is making sure there is support for the most vulnerable households with their energy bills. Our policies are helping consumers to use energy more efficiently by providing free or discounted insulation for their home and helping the most vulnerable with their bills.
5. Through the Warm Home Discount Scheme, we expect two million households to receive support in 2012–13. This includes well over one million of the poorest pensioners who have already received an automatic discount of £130 off their electricity bill.
6. Green Deal and the Energy Company Obligation (ECO) will help consumers lower their bills by making their homes more energy efficient. Since its launch on 28 January, hundreds of Green Deal Assessments have been carried out.
7. Through ECO the Government is requiring energy companies to provide an estimated £1.3 billion a year of support for energy efficiency in our homes which includes some £540 million to fund energy saving improvements in around 230,000 low income vulnerable households per year.
8. Investing now in building a diverse, low carbon and efficient energy mix will protect consumers from long term international fuel price volatility resulting in more stable and lower bills than they would have been in the absence of these policies. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Prices What factors determine energy prices (wholesale prices, company operating costs, green levies, company profits etc)? What contribution do these factors currently make towards a typical household energy bill and how might this change over time?
9. Energy prices are determined by wholesale energy costs, transmission, distribution and metering costs, energy and climate change policy costs and other supplier costs and margins. In the publication “Assessment of the impact of energy and climate change policies on prices and bills: November 2011” DECC has estimated the breakdown of these costs.81 DECC estimates that wholesale energy costs made up around 51% and 43% of the average household gas and electricity bill in 2011 (not including the cost of carbon). 10. Energy and climate change policies (including the cost of carbon in electricity generation) are estimated to have represented, on average, 4% of household gas bills, 10% of household electricity bills, and 7% of household energy (gas plus electricity) bills in 2011. Once savings from energy efficiency policies and the receipt by eligible households of a Warm Home Discount rebate are accounted for, energy and climate change policies are estimated to have added only around 2%, on average, to household energy bills in 2011, compared to a bill without policies in place. DECC’s report on the impacts of policies on energy prices and bills is being updated to reflect recent developments—including the Levy Control Framework—to ensure we present up-to- date analysis. The report will be published shortly. 11. Transmission, distribution and metering costs (19% for both fuels), other supplier costs and margins (21% for gas and 23% for electricity) and a 5% VAT rate were the other main components of household energy bills.
How might these change over time? 12. Wholesale gas and electricity prices can be volatile and are driven by international demand and supply which can vary significantly over time. Reducing the impact of this volatility on energy bills is one of the reasons the Government is working to develop a more balanced energy portfolio to shield UK homes and businesses. Investing now in building a diverse, low carbon and efficient energy mix will protect consumers from long term international fuel price volatility resulting in more stable and lower bills than they would have been in the absence of these policies. 13. There is upward pressure on transmission and distribution costs as around £35 billion82 of investment is required over this decade to reinforce the network, replacing aging infrastructure and supporting the drive to a low carbon economy 14. The impact of policies on household electricity prices is expected to rise to 2020, while the impact of policies on gas prices is expected to remaining broadly the same. The implementation of energy efficiency policies is expected to more than offset the increased cost to households for investment needed to deliver a low carbon future.
15. Though expected rises in fossil fuel prices and transmission and distribution costs mean that energy bills are likely to rise with or without policies, expected savings through energy efficiency and the Warm Home Discount mean that household bills, on average, will not rise as much as they would have in the absence of polices.
16. Supply company costs and margins may change overtime as direct and indirect costs change and as market share changes. Government and Ofgem are taking action to bring about greater competition in the energy market to put downward pressure on this element of the bill.
To what extent (if at all) should the Government or the regulator intervene in the market to affect the prices consumers (or certain groups of consumers) pay for their energy? Should any changes be made to the Government’s current approach?
17. Government intervention, such as through price regulation, is needed where competitive markets cannot deliver the best outcome for consumers, often in natural monopoly situations. This is not the present position in UK retail energy markets. The latest figures show UK prices including tax for medium domestic gas and electricity consumers, were the lowest and fourth lowest in the EU 15 respectively.83 18. The Government strongly encourage UK consumers to shop around for the best deal, including through collective switching arrangements, as this will help control costs and competition keeps UK prices as low as possible. 81 https://www.gov.uk/policy-impacts-on-prices-and-bills 82 Ofgem’s Project Discovery 2009, http://www.ofgem.gov.uk/Markets/WhlMkts/monitoring-energy-security/Discovery/Pages/ ProjectDiscovery.aspx 83 https://www.gov.uk/government/statistical-data-sets/comparisons-of-industrial-and-domestic-energy-prices-quarterly-figures Latest figures for January–June 2012 cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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19. The Government has introduced amendments to the Energy Bill that will enable Government to: (a) Cap the number of tariffs that suppliers may offer; (b) Require suppliers to move customers on poor value dead tariffs to better value tariffs; (c) Require suppliers to inform their customers of the savings they can make by moving to the cheapest tariff; (d) Introduce a tariff comparison tool. 20. These proposals are designed to ensure that the majority of consumers who do not currently engage in the market are on the cheapest tariff that meets their preferences, while making it easier to compare tariffs and shop around for even better deals across the market. 21. Government is also supporting the development of collective purchasing/switching schemes which make it easier for consumers to group together and use market power to negotiate lower energy bills. We have awarded £5 million of support to 31 successful local authority or third sector schemes through the Cheaper Energy Together competition. 22. Artificially reducing retail prices would be unsustainable, reduce the margin suppliers may make to a level that would discourage investment in the new infrastructure we require and put at risk energy security of supply and our climate change objectives. 23. Whilst the Government considers that regulatory intervention on prices would be unhelpful, Government does recognise the importance of helping vulnerable consumers with their energy bills and requires that additional support be made available through the Warm Home Discount Scheme, which supports around two million households each scheme year, including around 1m of the poorest pensioners. In addition, the Department of Work and Pensions automatic Cold Weather Payments, worth £25 a week, are targeted at the elderly, disabled and those with young children. As of 29 January 2013, 5,115,500 payments with a value of £127,887,500 had been paid this winter. DWP also offer automatic annual Winter Fuel Payments to over nine million pensioners.
How effective is Ofgem in ensuring consumers get a fair deal? Are there any areas for improvement? 24. Ofgem is a tough, independent regulator which has shown that it is prepared to take strong enforcement action when necessary and respond to consumer concerns about behaviour in the energy sector. 25. Between April 2011 and March 2012, it fined companies more than £19 million for licence breaches or anti-competitive behaviour. 26. It has carried out detailed investigations into the energy retail market and introduced reforms to address the shortcomings it discovered. Its 2008 energy market probe led to new licence conditions which enhanced consumer protection by improving sales and marketing conduct and banning unfair price discrimination. 27. Following its recent Retail Market Review Ofgem has proposed measures to make it easier for consumers to identify the best tariff across the market. It has proposed banning poor value dead tariffs, restricting the number of tariffs for gas and electricity suppliers may offer to four core tariffs, simplifying bills and requiring personal estimates on bills of the savings consumers can make by moving to the cheapest tariff the supplier offers. 28. Ofgem is also taking forward reform proposals for the wholesale energy market, and have stated a firm preference for intervention to improve liquidity. Greater liquidity should lead to a more competitive and transparent market, increasing customer confidence. The Government supports Ofgem’s objectives, and is keen to see swift and appropriate action. Given the importance of liquidity to competition and the Electricity Market Reform programme the Government is seeking backstop powers in the Energy Bill to enable it to act should industry actions and Ofgem’s reforms not deliver the necessary improvements. 29. Ofgem is also continuing its analysis following the serious allegations of manipulation of trading made by a whistleblower in November. This includes close cooperation with the Financial Services Authority. Ofgem and FSA continue to progress these matters with the necessary priority and consistent with proper examination of the issues. 30. This Government reviewed the role of Ofgem soon after taking power. The review took on board a wide range of views and concluded that the regulatory framework has provided good value to consumers and attracted significant investment. The review identified a need for greater role clarity between Ofgem and the Government and recommended that the Government should establish a new statutory Strategy and Policy Statement. The Energy Bill provides powers for the Secretary of State to designate this statement which will provide greater clarity and certainty about the respective roles of Ofgem and Government and set out the strategic context for Ofgem’s role as the independent regulator. This will lead to better alignment and coherence between policy and regulation. Ofgem will also be required to set out annually how it plans to deliver its contributions to the goals set out in the statement and how it will monitor progress. 31. The Government has also strengthened Ofgem’s hand by making it harder for energy companies to block licence changes and we are strengthening Ofgem’s powers further by giving it a new power in the Energy Bill cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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to compel energy businesses to provide redress to consumers who have suffered detriment because of a breach of a licence condition or relevant regulatory requirement. The introduction of this new power shows that the Government will not hesitate to take action where we identify a gap in Ofgem’s powers.
Could it be possible to benchmark energy prices to provide greater certainty about whether consumers are getting a fair deal? If so, how might this be achieved in practice? 32. As set out in the answer to the first question of this inquiry, retail energy prices are determined by a number of different factors including wholesale energy costs, transmission, distribution and metering costs, energy and climate change policy costs and other supplier costs and margins. These prices can move in different directions. For example wholesale costs are volatile and prices can fluctuate upwards as well as downwards. 33. Whilst wholesale energy costs make up the largest part of the bill (approximately 51% and 43% of the average household gas and electricity bill in 2011), the relationship between wholesale prices and retail prices depends on a number of complex factors including the electricity generation mix and suppliers’ energy purchasing, hedging and pricing strategies. Therefore there is no one suitable benchmark against which retail prices can be measured against. 34. Ofgem produces weekly electricity and gas supply market indicators84 which includes a rolling average net margin on supplying a typical standard tariff, dual fuel customer. Ofgem assumes an 18 month hedging strategy to estimate supplier wholesale costs which is indicative of suppliers’ costs. This serves as a useful tracker of average bills and the movement of wholesale costs and supplier margins over time. 35. Domestic energy prices can also be compared to other European countries. This shows that UK prices including tax for medium domestic gas and electricity consumers were the lowest and fourth lowest in the EU 15 respectively.
Could any other measures be put in place to ensure consumers are paying fair prices for energy and to provide consumers with greater confidence in this? 36. The Government has introduced amendments to the Energy Bill that will allow Government to ensure that consumers are on the cheapest tariff that meets their preferences—ie their method of payment, whether they have opted for a standard variable rate tariff or fixed price fixed term product or a green tariff—and have clear personalised estimates of the savings they can make by moving to their supplier’s cheapest tariff. 37. Our proposed amendments include powers to: (a) Cap the number of tariffs that suppliers may offer. This will end the proliferation of tariffs that has taken place over the last few years and make it easier for consumers to compare tariffs across the market. (b) Prohibit poor value “dead” tariffs. Where customers on a “dead” legacy deal are paying a higher price than their supplier’s cheapest standard tariff, they will be switched to the cheaper rate. (c) Require suppliers to provide, on relevant customer communications (such as bills and annual statements), personalised estimates of the savings to be made from moving to the supplier’s cheapest tariff for their current payment method and by moving to the supplier’s cheapest tariff overall. (d) Require suppliers to use a tariff comparison tool that will allow for comparison of different tariffs on a like for like basis in the way that the APR allows comparison of financial products. 38. These measures, which build on Ofgem’s Retail Market Review proposals, will significantly reduce complexity and enhance transparency for energy consumers, giving them greater confidence that they are not paying more than they need to for their energy. 39. Government is also providing support to collective purchasing and switching schemes through its £5m Cheaper Energy Together fund, which can help consumers to get a better deal on their energy. As an example, the Which? “Big Switch” run last year estimated saving around 37,000 participants an average of £223 per year.
Profits Many consumers believe that energy company profits are the reason the energy bills have been going up in recent years. Is this perception fair? 40. DECC estimates that other supplier costs and margins, which includes margins earned as well as operating costs, made up around 21% and 23% of the average household gas and electricity bill in 2011, while wholesale energy costs made up around 51% for gas and 43% for electricity and transmission, distribution and metering costs made up 19% for both fuels. 41. Over the period 2010–12, DECC estimates that wholesale energy costs have contributed to at least 60% of the increase in total household dual fuel bills over the same period.85 The remainder of the increase was 84 http://www.ofgem.gov.uk/Markets/RetMkts/rmr/smr/Pages/indicators.aspx 85 Based on Ofgem’s standard consumption assumptions of 16.5MWh gas and 3.3MWh electricity per year cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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driven by other factors: increases in transmission and distribution costs, supplier operating costs and margins which are estimated to have accounted for around 25% of the increase and the costs of energy and climate change policies around 15% of the increase. Rising wholesale energy costs and the need to replace ageing gas and electricity transmission and distribution infrastructure have been the primary drivers of retail energy price rises in recent years, rather than margins made by energy suppliers. 42. Ofgem analysis shows margins in energy supply have generally been low since 2005 and the average energy supply net margin for 2005–10 was around 1.6%,86 although they have increased more recently. This is despite the public perception of profiteering in the domestic energy supply market. 43. Supplier margins over time are linked to the movement of wholesale prices. Ofgem’s latest estimate of the rolling average net margin for suppliers on a typical dual fuel bill in January of £1,420 is £80.87 This equates to a net margin of 5.6%. 44. Data from the company 2011 Segmental Reports show that the average domestic supply margin for the large energy suppliers was as follows: Electricity 1.1% Gas 2.8% Duel Fuel 2.0%
Why is there so much uncertainty about the level of profits the large, vertically integrated energy companies are making? What could be done to improve clarity? 45. Since 2009 Ofgem has required large vertically integrated energy companies to produce Consolidated Segmental Statements, which present the profitability of generation and different supply activities separately. The purpose of this is to provide greater transparency for consumers on the margins energy suppliers are making in different parts of their business. Differences in company structures of the large energy suppliers make comparison across these statements complicated. As part of its Retail Market Review, Ofgem has carried out work to improve the reporting transparency. 46. Ofgem appointed the accountancy firm BDO to review the way that companies report information about the profitability of different parts of their vertically integrated businesses. The review found that the methodologies used by energy were “broadly fair and appropriate”88 but made some recommendations for improvement. 47. As a result in January 2012, Ofgem identified a number of changes to the way that supplier companies could improve the transparency of reporting including: (a) Standardising how the companies account for generation fuel costs to improve the comparability of the information they provide; (b) Seeking to ensure that companies use the same accounting standards and methodologies when producing their profit measures; (c) Proposing a checklist of functions to increase transparency on which ones are reported. 48. In August 2012 Ofgem changed the license condition that sets out the information large energy suppliers must prepare in their Segmental Statements to make it a requirement for energy suppliers to reconcile revenues with profits and to describe how Feed-in Tariff costs and Renewable Obligation costs are allocated.
How useful are Ofgem’s electricity and gas supply market indicators in monitoring the level of profits made by energy companies? Could they be improved? 49. Ofgem’s electricity and gas supply market indicators are useful in helping to understand movements in prices and the relationship to margins suppliers earn through supplying consumers. 50. DECC use the indicators along with other sources such as DECC’s Energy Price Statistics to monitor the retail energy supply market. They are updated weekly so can be used as an indicator before official figures are available such as DECC’s retail price statistics89 or the companies’ Segmental Statements, which are published annually and with a lag. 51. There are some limitations to their use because they are based on assumptions Ofgem must make, such as the average hedging strategies to estimate wholesale energy costs. Ofgem’s methodology is available online.90 In addition the indicators relate to the whole domestic retail market rather than a particular supplier. 52. In terms of improvements, further guidance in helping consumers understand the market indicators could help those whose who do not have a detailed understanding of the energy market. 86 Paragraph 37, Supplementary Appendices to the Retail Market Review, Ofgem, March 2011 http://www.ofgem.gov.uk/Markets/RetMkts/rmr/Documents1/RMR_Appendices.pdf 87 http://www.ofgem.gov.uk/Markets/RetMkts/rmr/smr/Pages/indicators.aspx 88 http://www.ofgem.gov.uk/Pages/MoreInformation.aspx?docid=79&refer=Markets/RetMkts/rmr 89 https://www.gov.uk/government/organisations/department-of-energy-climate-change/series/energy-price-statistics 90 http://www.ofgem.gov.uk/Markets/RetMkts/rmr/smr/Documents1/SMR_METHODOLOGY.pdf cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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How useful are the segmental generation and supply statements that major energy suppliers are required to produce in understanding where companies are making their profits? 53. The segmental generation and supply statements that the major energy suppliers are required to produce are useful in helping to understand in what parts of their business suppliers are making their profits. They also enable comparison between the large energy suppliers since they report in a broadly consistent way. 54. As set out above, Ofgem has made a number of improvements to the Segmental Statements since they were first published in order to increase transparency and comparability across companies. The Government supports these improvements and Ofgem’s plans to carry out independent scrutiny of the first year of the statements where changes have been applied. 55. Future steps to improve the statements may be to show how the latest set of statements compares with previous statements ie how they change over time.
Do Ofgem’s supply market indicators and the segmental reports provided by energy suppliers help to increase transparency and public trust in energy companies? Could they be improved to provide greater transparency? 56. Ofgem’s supply market indicators and the segmental reports provided by energy suppliers do improve transparency in the energy supply market. The indicators provide useful information on the movements in wholesale costs, prices and supply margins over time across the market. The segmental statements provide information on the margins earned by individual large vertically integrated suppliers. 57. In order to be useful to a wider audience, including those who do not have a detailed understanding of the energy market, further guidance could be provided to explain how the energy market works and, on the segmental statements specifically, an explanation of the key accountancy terms and concepts involved.
To what extent does the way energy companies communicate profits to the general public influence the public’s perception of these companies? 58. Ofgem’s research has found the public’s view of the energy market to be “overwhelmingly negative”. Energy companies are thought to make excessive profits, and be quick to pass on increases in wholesale prices, but not decreases. Media coverage is a strong driver in forming these perceptions.91 This highlights the importance of the media providing accurate coverage of profits earned by energy companies across their businesses including the retail business. 59. When Ofgem tested their proposed Standard of Conduct on how suppliers should interact with consumers, the over-arching principle of “transparency” was welcomed. Key elements included “Clearly communicating the level of profit and where it goes” and “Explaining how their retail prices move in relation to wholesale prices”.92 60. Perceptions of profits are likely to drive consumer distrust of energy companies. DECC’s research finds that only half (50%) of customers trust their energy provider to give customers a fair deal, and 45% do not trust them to do so.93 61. The Government supports Ofgem’s existing work in increasing the transparency of margins made in the retail market by energy suppliers.
Fuel Poverty Is the Government on track to meet its target of eliminating fuel poverty by 2016 and will reduced Government spending in this area affect their ability to achieve this target? 62. The Government is committed to meeting its target of ensuring that no household is in fuel poverty in England so far as reasonably practicable by 2016. We are committed to helping people, especially low income vulnerable households, heat their homes more easily. 63. The latest fuel poverty figures showed that fuel poverty actually fell between 2009 and 2010, from 5.25 million households in the UK to 4.75 million. However, fuel poverty remains a huge challenge and the same figures suggest an increase, under the current definition, can be expected in 2011 and 2012. 64. One of the main conclusions of the independent Hills Review commissioned in 2011 was that fuel poverty is not being measured in the right way. The Government is committed to taking forward many of the recommendations of the Hills Review and will publish a new fuel poverty strategy for England—the first since 2001—later in 2013 to ensure that resources are being used as effectively as possible. 65. Not every low income household is fuel poor. DECC is therefore also committed to considering the distributional impact of its energy and climate change policy package. A policy such as the Warm Home 91 Ofgem RMR research, Insight Exchange, Consumer research and collaborative engagement on the proposed Standards of Conduct—Domestic Customers, October 2012. 92 Ibid 93 DECC Public Attitudes Tracker, wave 1. 2121 consumers interviewed face-to-face, 21–25 March 2012 cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Discount is a response not only to fuel poverty, but also to the impact that rising prices can have on all low income households, not just those living in energy inefficient homes.
66. This Government has a range of policies to address the contributing factors of fuel poverty, including the Green Deal Energy Company Obligation, Warm Home Discount, Winter Fuel Payments and Cold Weather Payments. But it is recognised that improving the thermal efficiency of Britain’s housing stock is key in addressing this issue on a sustainable basis.
67. The new Green Deal and Energy Company Obligation will be our flagship policy for improving the energy efficiency of the nation’s housing stock.
68. ECO is expected to be a more effective policy than those policies (including Warm Front) which it effectively replaces. Fuel poverty expenditure on efficiency measures and direct bill support for low income households will increase over the course of this Spending Review period. What is more, we expect ECO to deliver more energy efficiency improvements per £ spent than previous schemes.94
69. The new fuel poverty strategy, that we will publish this year, will give us the opportunity to look again at our existing policies in order to understand how effectively they are supporting the fuel poor. This will help to ensure that we are using our resources in the most effective way.
Has the Hills Review resulted in any changes to fuel poverty policy? How could its findings be used to improve the efficacy of fuel poverty policy?
70. The Hills Review has provided considerable insight into the problem of fuel poverty, in particular how best to measure fuel poverty and how to identify priorities for assistance. At the heart of the recommendations made by the Review is a call for a new definition of fuel poverty. This focuses attention on what makes fuel poverty a distinct issue: the overlap of having both a low income and higher than typical energy costs. The Government has consulted changing the fuel poverty measurement framework and will be publishing a response to the consultation soon.
71. As well as framing the issue of fuel poverty in a new way, the Review touched on the challenge of targeting fuel poverty policies at those who most need help. The new measurement framework, which includes a measure known as the fuel poverty gap, will allow us to understand in much more detail who is fuel poor and the particular characteristics of those who are worst off. In turn, we hope to be able to design even more effective policy responses.
72. Moving to a new framework provides an opportunity to reappraise our existing policies to see how well they are targeted towards those households we are most concerned about. This is something we will examine further in our forthcoming fuel poverty strategy.
To what extent are current fuel poverty policies reaching the right people? Are there any particular groups that are currently not getting the necessary support? And will this change under the move to ECO?
73. This is an issue we will look at in more detail in our forthcoming strategy. The eligibility criteria for existing policies are designed to reach those we most want to help in the best way possible. For example, the eligibility criteria for ECO Affordable Warmth include private tenure households in receipt of particular means tested benefits and tax credits under an income threshold. The effect is to focus assistance where fuel poverty rates are worst. We have removed the SAP threshold that was part of the Warm Front eligibility criteria and which acted as a barrier for people wishing to access the scheme.
74. In addition around £190 million worth of support per annum will be delivered to those living in low income areas through the Carbon Saving Communities obligation (CSCo). This should support a further 100,000 households in low income areas each scheme year. Those living in social housing are likely to be a major beneficiary of this obligation given the economies of scale that can be achieved by working with Local Authorities and other community-led schemes. As poverty is more dispersed in rural areas, a sub-target has been included in the ECO Carbon Saving Communities obligation to ensure that 15% of support is delivered to low income, rural properties, more likely to be off the gas grid.
75. The Warm Home Discount scheme, which provides a rebate off energy bills, supports around two million households each scheme year, including over one million of the poorest pensioners. This policy is very successfully targeted at low income households, helping in this way to address not only fuel poverty but also the broader question of the distributional impact of our energy and climate change policy package.
76. In addition the DWP automatic Cold Weather Payments are also targeted at the elderly, disabled and those with young children. DWP also offers automatic annual Winter Fuel Payments to pensioners 94 In 2009–10 the Warm Front scheme delivered some 80,000 main heating or insulation measures for a cost of £366 million. We expect the Affordable Warmth element of ECO to deliver 130,000 such measures for a cost of £350 million. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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What support is available for fuel poor households living in solid-wall and hard-to-treat properties? Could this be improved? 77. Solid wall and hard to treat cavity wall insulation are both eligible measures under the ECO Affordable Warmth obligation. We recognise that energy suppliers will seek to meet their ECO obligations in the most cost-effective way and this is likely to mean focusing on basic insulation and boiler repairs/replacements. 78. It is more likely that solid wall insulation, for example, will be delivered on a larger scale under the Carbon Saving Obligation and Carbon Saving Communities obligation, particularly in social tenure properties which provide economies of scale. 79. In terms of overall targeting, 40% of ECO is specifically targeted at low income households through the Affordable Warmth and Carbon Saving Communities obligations, but we expect around 50% overall of ECO to be offered to low income households. 80. Part of the purpose of developing a new fuel poverty strategy is to see how our concern for those in the deepest fuel poverty—which may include those leaving in solid-walled homes in off-grid areas—is matched by our ability to target policies on those households and the costs of doing so.
Will the Government’s proposals to ensure that consumers are on the cheapest tariff have any impact on fuel poverty? 81. The proposals will help the majority of consumers, including the fuel poor. Ofgem’s findings show that the proportion of those consumers who claim they have never switched is 10% higher amongst consumers in social grades D and E than the average. Significant savings can be made through switching—for example, those customers who have never switched and pay by standard credit could save up to £200 a year by switching supplier and paying by direct debit. 82. The Government’s proposals are designed to help the unengaged consumer onto the cheapest tariff and empower them to shop around across the market to seek out even better deals.
To what extent do fuel-poor households engage in switching? What are the barriers to greater levels of switching from these groups? 83. Research suggests that vulnerable consumers95 are less likely to switch energy supplier than consumers generally. Overall, 14% of consumers switched electricity supplier in the last year, according to Ofgem’s tracking survey.96 Ofgem’s findings show that the proportion of those consumers who claim they have never switched is 10% higher amongst consumers in social grades D and E than the average. Those who have never switched are more likely to belong to the least affluent social groups, live in rented accommodation and rural areas, pay by pre-payment meter or standard credit and lack internet access. 84. DECC’s tracking survey also finds that those in lower social grades are more likely never to have switched supplier (49% of DEs and 34% of ABs). Social renters (48%) and private renters (55%) are also much more likely than owner-occupiers (35%) never to have switched. 85. Vulnerable consumers are also less likely to have switched tariff or payment method with their existing supplier—5% of pre-payment gas customers switched one of these in the last year, compared to 14% of direct debit customers.97 86. The Government’s proposals to legislate in the Energy Bill on tariffs are designed to ensure that the majority of consumers who do not currently engage in the market are on the cheapest tariff that meets their preferences, while making it easier to compare tariffs and shop around for even better deals across the market. 87. In addition, the Government is supporting the development of collective switching and purchasing schemes, which are an innovative way for consumers to group together and use market power to negotiate lower energy bills. We have awarded £5 million of support for the most innovative local authority or third sector schemes through the Cheaper Energy Together competition. The aim is to support a variety of schemes to test how best to engage customers in the energy market, and particularly how these can help vulnerable and low income customers. 88. These policies are designed to overcome a number of barriers that research has shown consumers face when considering switching. These include a lack of awareness of the possibility of switching, lack of access to information perhaps through not being online, uncertainty about savings that could be achieved through switching and complexity of tariffs. Reluctance or being unable to switch from a pre-payment meter is another barrier to switching for some vulnerable consumers. 95 Available data does not enable specific identification of the fuel-poor—instead we have used available measures of vulnerability including those in the lowest social grades (DE), on low incomes and using PPM. 96 Ofgem Customer Engagement Tracker 2012, 1956 consumers interviewed face-to-face, 2–13 March 2012. Figures for gas switching are broadly in line with those for electricity. 97 Ofgem Customer Engagement Tracker 2012 cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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To what extent do fuel-poor households current take advantage of energy efficiency schemes? Could anything be done to increase uptake? 89. The Warm Front scheme has assisted 2.3 million homes vulnerable to fuel poverty across England since it was introduced in 2000. Alongside this, the GB wide CERT SPG and CESP obligations have provided targeted energy efficiency support to low income vulnerable households. 90. The Hills Fuel Poverty Review showed conclusively that what matters most in terms of fuel poverty is how money is spent, with energy efficiency schemes targeted on low income households being the most effective at reducing fuel poverty over the longer-term. This is why we have designed the ECO such that a minimum of 40% of the total support will be targeted specifically at low income households through the ECO Affordable Warmth and Carbon Saving Communities obligation, with the expectation that over 50% of ECO as a whole will benefit low income households. 91. The type of support offered through ECO, including boiler repairs and replacements, should act as a trigger for households to actively come forward and apply for assistance through the scheme. 92. Given that ECO works alongside the Green Deal, it is able to take advantage of the Green Deal infrastructure to facilitate delivery. We have set up a referral mechanism at the Energy Saving Advice Service (ESAS), the government funded call centre for DECC’s customer facing policies. The operators will ask customers a series of questions about their personal circumstances and if they may be eligible for support under ECO Affordable Warmth. With the customer’s consent, ESAS will then verify their benefit status with the Department for Work & Pensions before referring eligible customers on to a supplier to receive heating and/or energy efficiency measures. This ECO Affordable Warmth referral mechanism is operational and a dedicated Affordable Warmth team is currently in place to increase the number of calls that can be taken and to ensure these customers are treated with care. 93. We are also engaging with our key stakeholders such as Citizens’ Advice Bureau and Consumer Focus to ask them to promote the ECO offer to their customers to increase awareness. February 2013
Written evidence submitted by British Gas Executive Summary 1. As the Energy and Climate Change Committee notes in its terms of reference for this inquiry, the UK’s energy system will need to undergo significant change in the coming years in order to meet the double challenge of delivering security of supply, whilst decarbonising the economy. This is achievable, but will require significant investment at a time when household budgets are stretched, and when rising energy bills could put increasing numbers of people at risk of fuel poverty. Consumers will need to understand these challenges, support the effort that will be needed to meet them, and have confidence that the contribution they are being asked to make is fair. 2. British Gas therefore welcomes the Energy and Climate Change Committee’s inquiry into Energy Profits, Prices and Poverty, which we believe is timely, and we are pleased to respond. 3. In that context, British Gas accepts that more needs to be done to educate consumers about the need to invest in Britain’s long-term energy future; to better explain the components of their energy bills and the upward pressures on prices; to provide advice and support on reducing bills; and to give assurances that the competitive and liberalised energy sector in the UK is delivering as fairly and cost-effectively as possible. Particular consideration also needs to be given to protecting the most vulnerable households from the full impact of rising unit costs. We believe that Government and industry have a shared responsibility for engaging with consumers on these issues. 4. An energy bill can be grouped into six distinct components: wholesale commodity costs; delivery; taxes; environmental and social policies; operating costs; and profit. Suppliers, including British Gas, fully control only two of these components: operating costs and profit. We have been working hard to reduce our operating costs over recent years in order to protect customers from the full impact of rising prices. We are on track with our publicly announced programme to remove a further £300 million of operating costs from our business over 2012 and 2013. 5. British Gas retail profit margins have averaged 5% over the last five years. We believe this is an appropriate return for our shareholders in light of the capital risk our business carries, and given the requirement of our parent company to make significant investments to deliver UK security of supply, decarbonise our economy, and to remain a substantial employer, with over 30,000 jobs in the UK. 6. British Gas is the UK’s leading supplier of energy and energy services, supplying half of UK homes with electricity or gas. We install more energy efficiency, decentralised energy systems and smart meters, and provide more support for vulnerable customers than any other supplier. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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7. Last year Centrica plc invested almost double our earnings in securing energy supplies, including giving the go-ahead for the £1.4 billion Cygnus gas field which will meet the needs of around 1.5 million homes over the next 15 years and initially create 4,000 jobs. We also produced first power from our Lincs wind farm and were granted consent for our Race Bank wind farm. Together these projects could provide enough electricity for 650,000 homes. We also have commitments to secure gas for the UK totalling more than £50 billion. Centrica can only make these commitments if we are profitable. We are also one of the highest payers of UK tax in the FTSE 100. 8. British Gas recognises there is legitimate interest in the profits we make. We also understand that in order to build consumer trust, we have a responsibility to communicate our pricing decisions and our profits in a transparent and open way, and through communication channels that help consumers to easily understand how and where profits are made. We give clear information about our profits in our annual report and accounts information and on our customer communications, including bills. We also submit segmental accounts to Ofgem each year in line with the obligations on the financial reporting of large suppliers, showing how much profit has been earned and where it was made. 9. We believe that profit transparency across the industry is improving significantly but accept there remains consumer uncertainty about energy company profits. Ofgem’s supply market indicators (SMI) and segmental reports could make a valuable contribution to helping consumers understand retail margins. However, we believe that erroneous assumptions in Ofgem’s supply market indicators methodology materially overstate reported margins by around £35–£75, and that trust in the energy sector is being undermined as a result. We welcome that Ofgem have agreed to review these assumptions and believe that in light of the continued press coverage the reports receive that this review is now urgent. 10. Other components of the energy bill have increased in recent years, and we expect this trend to continue. Competition for global gas is increasing as UK resources deplete, creating an upward pressure on wholesale gas prices, and feeding through to UK power prices. Network delivery charges, principally from National Grid, are forecast to rise as the UK’s gas and power grids are renewed and made fit-for-purpose for a changing infrastructure landscape. 11. Government social and environmental obligations are also creating an upward pressure on unit energy costs. We fully support these obligations and have mobilised quickly on both ECO and the Green Deal. Energy efficiency is the key mitigator against rising unit costs, helping to keep actual bills lower, and it is right that the most vulnerable continue to be helped through the supplier-funded and distributed Warm Homes Discount (WHD). British Gas has the widest eligibility criteria for the WHD, with no cap, and as a result will help 520,000 vulnerable customers this winter with a £130 WHD payment on their electricity bill. 12. Nevertheless, given these obligations ultimately feed through to consumer bills it is crucial that these programmes are delivered as cost-effectively as possible. In that context, we have concerns about the near term impact of ECO on bills and believe an early review should be undertaken and steps should be taken to minimise that impact as far as possible. This should include a renewed focus on data sharing as a contributor to cost- effective targeting of available support on vulnerable customers. 13. British Gas would also support removing the exemption from ECO currently enjoyed by small suppliers which we estimate will give these companies a cost advantage of around £62 in 2013. We consider this to be a material distortion to competition and, by giving an illusion that large suppliers are charging a premium price, creates a negative impact on consumer trust. 14. Smart meter and smart grids can bring significant benefits to both the UK energy industry and consumers, and we are strongly behind the smart meter roll-out. British Gas has led the industry in our mobilisation for the deployment of smart meters, and has already installed over 800,000 meters in UK homes and businesses, around 75% of all those installed. 15. Smart meters mean that, for the first time, customers receive accurate bills, significantly improving customer service, and they can easily understand what energy they are using and what it costs. This offers a route to meaningful consumption savings, and particularly if smart meters are accompanied by a package of tailored advice and support. We believe power consumption savings of up to around 5% are achievable and that higher political priority should be given to the smart roll-out to reduce the industry risk around the successful national deployment by 2019. 16. Whilst accepting a role for Government interventions in the energy retail market to deliver energy efficiency and to provide direct financial support for vulnerable households, we believe that the liberalised and competitive energy retail market in the UK has delivered for consumers. 17. The UK enjoys some of the lowest unit energy costs in the EU15, and customers have benefited from significant innovation including a wide and varied range of products and services which has provided consumers with value and choice. These include fixed or variable price tariffs, green energy and electric vehicle charging tariffs, energy services packages and a wide range of incentive and affinity deals. 18. British Gas has worked hard to give our customers better tariff transparency and simplicity. As an example, we have reviewed our customers’ bills and annual statements to make them easier to understand, and cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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we are introducing a personalised, proactive six-monthly comparison of what customers are paying and what they would save by switching to our other tariffs. 19. Notwithstanding these and other initiatives, we understand that Ofgem needs to maintain its scrutiny of the energy market as a whole to ensure a fair deal for customers. In general, therefore, we agree with the principles and objectives that underline their Retail Market Review (RMR), such as the need to increase tariff simplicity and transparency, and to ensure full compliance with both the letter and spirit of the 2008 Probe remedies. 20. We also support many of Ofgem’s RMR proposals, and have already implemented many of them, including simplifying our tariff structure and range, closing “dead” tariffs, and providing personalised notices of savings that can be made from switching tariffs. We continue to believe that up to six tariffs should be allowed in order to maximise innovation and choice, but welcome Ofgem’s recognition that some flexibility within a four tariff cap should be allowed to provide a balance between simplicity and enabling innovation and reasonable consumer choice. 21. We welcome a continuing focus on tackling fuel poverty as a key strand of Government energy policy. Whilst recognising the savings that can be made from switching, including crucially, intra-company switching, we believe support for fuel-poor customers should be looked at more holistically. Most importantly, the role that energy efficiency can play should be recognised and promoted, as well as the additional support offered by large energy companies through the Warm Homes Discount (WHD). It is critical that vulnerable customers understand that they may lose their eligibility to WHD payments if they move to a small supplier. 22. Whilst Government spend on eliminating fuel poverty has reduced, the new ECO programme will provide increased supplier funding from this year. Together with the new availability of Green Deals, the supplier Warm Homes Discount, and the on-going Winter Fuel Payment, and in light of the reduced target fuel poverty population as a result of changes to the definition of fuel poverty following the Hills review, we believe a significant impact can still be made on reducing fuel poverty. 23. British Gas believes collective switching, often in collaboration with local communities, has the potential to benefit currently hard-to-reach groups such as off-grid and vulnerable customers. We are extending our activity in this area. 24. Government could make a bigger contribution to tackling fuel poverty through better targeting of Winter Fuel Payments. We note that if the £2.1 billion spent on this programme in 2011–12 was redistributed to the estimated five million homes that are considered to be in fuel poverty, it would represent £420 per household, making a measurable impact on energy bills and therefore fuel poverty. Targeting would also enable the Winter Fuel Payment to be paid to groups other than pensioners who may be in fuel poverty including single parent families, the terminally ill and those suffering from long term illnesses. 25. We recognise that those most in need of fuel poverty measures are often those least likely to seek it. British Gas would therefore support a wider route towards eligibility for ECO for vulnerable households. In particular, we believe trusted partners such as the NHS or charities should be able to refer customers deserving of support, whether or not they are eligible through the benefits route. 26. We believe that there is a particular concern around reaching vulnerable customers living in private rented accommodation. British Gas and Shelter, the housing charity, recently announced a major five-year partnership with the aim of helping one million British households in the private rented sector improve the standard of their homes. 27. We believe that the legal minimum energy efficiency standard for homes rented from a landlord that is being implemented from April 2018 should be brought forward, and that this standard should also extend to those living in houses in multiple occupation. In that context, we are supportive of the “Houses in Multiple Occupation Bill 2012” private members bill currently being taken through Parliament by Alan Whitehead MP and believe the Bill will make a significant contribution to improving standards in the sector. We also believe that consideration should be given to disallowing or limiting housing benefit payments paid direct to landlords when a property does not meet the legal energy efficiency standard.
Question 1. What factors determine energy prices (wholesale prices, company operating costs, green levies, company profits etc)? What contribution do these factors currently make towards a typical household energy bill and how might this change over time? 1.1 The energy bill can be grouped into six distinct components: wholesale commodity costs; delivery to the home; taxes; environmental and social policies; operating costs; and profit. The lightbulbs below, which have been audited by PWC, show the contribution each of these components has made to the average British Gas dual fuel bill in 2007 and 2011. We will be happy to provide an audited 2012 lightbulb following Centrica’s preliminary results announcement on 27 February 2013. 1.2 The average British Gas dual fuel energy bill has risen by £192 from 2007 to 2011. Weather adjusted, this equates to around 4% per annum over the period, broadly in line with inflation. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Figure 1 AVERAGE BRITISH GAS DUAL FUEL BILL—2007 VS. 2011
1.3 We have the following comments to make on the individual segments:
Wholesale Commodity Costs 1.4 We believe that gas will continue to play a major role in the UK energy mix. Shale gas and LNG are transforming the international energy landscape, and the sources of UK gas are changing. North Sea reserves are declining and becoming increasingly expensive to develop, and there is increasing reliance on imported pipeline gas and LNG. This leaves the UK increasingly exposed to global gas prices. 1.5 At the same time, global demand for gas is rising, as a result of both growth, particularly in Asia, and a move away from nuclear in some countries following events in Fukushima in 2011. As the UK has become increasingly reliant on international energy markets to secure gas supplies, this has brought volatility and uncertainty about price and availability. 1.6 It should be noted that gas fired power generation currently makes up roughly a third of UK installed capacity and typically generates around 40% of UK power. Rising wholesale gas prices, therefore, also have an impact on UK power prices. 1.7 The wholesale cost of energy is the largest segment of the bill, and has risen by around 25% over the five year period. British Gas purchases around 20% of the power it needs for its customers from our upstream Centrica Energy generation business and a similar proportion of gas from Centrica Energy’s gas assets. The price paid by British Gas, the ‘transfer price’, is always based on market rates.
Delivery to the Home 1.8 National Grid costs for delivering energy have increased by 18% over the five year period, largely necessitated by the need to fund upgrades to the UK gas grid. National Grid have announced a further £24bn investment programme in the UK’s energy networks to 2021, which is expected to add around £12 to annual dual fuel energy bills for each of the next eight years. 1.9 This money will be used to replace gas mains, and progressively to ensure that the electricity grid becomes more flexible. This will be necessary in order to balance increasing supply from less predictable renewable energy sources such as offshore and onshore wind, and that of more reliable supplies including new nuclear power, with intermittent supply from gas fired power stations and clean coal technology, if and when this becomes viable on a large scale. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Taxes 1.10 In 2011, Centrica’s tax charge was £891m, of which nearly £800m related to UK tax. Analyst consensus forecasts suggest Centrica’s total tax charge for 2012 will be over £1bn. Centrica is one of the highest payers of UK tax in the FTSE 100.
Environmental and Social Policies 1.11 British Gas supports Government’s focus on putting in place policies that will reduce energy bills for domestic and business consumers and cut carbon emissions. We believe that these policies will, in time, be key mitigating factors against rising unit costs and potentially higher consumer bills. 1.12 British Gas is strongly supportive of the Green Deal and Energy Company Obligation (ECO) programmes, and we spend more than anyone else to support vulnerable customers. We have the widest eligibility criteria for the Warm Home Discount (WHD), and no cap on applications, ensuring that more than half a million vulnerable customers will receive a rebate of £130 on their electricity bill this winter. 1.13 However, the transition to a low-carbon economy has cost implications for customers in the near-term as these Government policies feed through to consumer energy bills. In a period of intense pressure on household budgets we believe an honest and transparent debate is important to secure consumer support. 1.14 Given the importance of affordability, particularly in the current economic climate, it is imperative that Government social and environmental policies are delivered as cost-effectively as possible. In that context we have concerns at the short-term impact of ECO on consumer bills, unless the programme is structured to minimise the cost and maximise the benefits. 1.15 ECO is a radical change and will oblige suppliers to deliver high-cost energy efficiency improvements, such as solid wall insulation, rather than low-cost improvements, like loft or straightforward cavity wall insulation. We question whether Government may have underestimated the impact this will have on the costs of delivering ECO. Whilst DECC have stated that the scheme will cost approximately £1.3bn per annum, other independent analysts suggest the costs could be much higher. A recent report by the consultancy firm NERA suggested that the cost to consumers could be as much as £2.5bn per annum. 1.16 The cost of ECO and other environmental obligations will feed through into higher consumer bills unless there is a step-change in the energy efficiency culture in the UK. We estimate that between 2011 and 2013 alone, there will be a gross increase of £40 on the average dual fuel bill (of which £24 is from ECO), taking total environmental costs to around £120 or 9% of the bill. Those directly benefiting from ECO and Green Deal help should see a net decrease in their energy bills. 1.17 Given both the uncertainty and the impact ECO will have on consumer bills, British Gas believes there should be an early review of the scheme within six months, and action taken if necessary to keep costs for consumers down. In the nearer-term we would like to see better data sharing with Government departments, both central and local, to help us identify those most in need of help, and an extension of the eligibility criteria to include more vulnerable customers and more homes. The Affordable Warmth element should be broadened to allow all aged and inefficient boilers to be replaced, rather than be confined to replacement of broken boilers. We believe these measures would help to improve the cost-effectiveness of the programme and therefore reduce the overall bill impact. 1.18 We believe that the established ECO brokerage mechanism allows the removal of the exemption small suppliers currently enjoy from the ECO Obligation, as it will allow all suppliers to purchase carbon at a comparable rate. We estimate that a continuing ECO exemption will give small suppliers a cost-advantage of around £62 in 2013. We consider this to be a material distortion to competition and, by giving an illusion that large suppliers are charging a premium price, creates a negative impact on consumer trust.
Operating Costs 1.19 British Gas operating costs are one of two components in the consumer energy bill that we fully control. We have been working hard to reduce our operating costs over recent years in order to protect customers from the full impact of rising prices. We are on track with our publicly announced programme to remove a further £300m of operating costs from our business over 2012 and 2013. 1.20 At the same time, British Gas has significantly improved its customer service, and we have seen our customer Net Promoter Score (NPS) rise from -37 to +50 from 2006 to 2012. In 2012, we received a maximum 5 star ratings from Which? for our payment policies, billing, and complaints handling, and 5 stars from Consumer Focus for our customer service.
Profit 1.21 British Gas Residential profit margin (after tax) has averaged 5% over the past 5 years, comparable to the main high street retailers and lower than the leading telecoms companies. We believe this is an appropriate return for our shareholders in light of the capital risk our business carries. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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1.22 Retail margins across the sector are lower than in other sectors. Average retail energy margins as reported in large suppliers 2011 segmental statements were 2.8%. Higher margins from individual suppliers reflect in part a lower cost to serve, and better customer service creating more loyal customers. 1.23 Centrica profits fund investments in UK energy infrastructure, helping to secure future energy supplies and thousands of jobs. Centrica has invested £1.80 for every £1 earned in profit over the last 5 years: between 2007 and 2011, Centrica invested over £9bn in new sources of gas and power for our customers. 1.24 Last year we invested almost double our post-tax earnings in securing Britain’s future energy supplies. We also gave the go-ahead for the £1.4bn Cygnus development, the largest gas discovery in the Southern North Sea for 25 years, which will account for around 5% of the UK’s total gas production over the next 15 years, and meet the needs of nearly 1.5m homes, whilst initially creating 4,000 UK jobs. We have commitments to secure gas and power for the UK totalling more than £50bn. 1.25 We also produced the first electricity from the Lincs wind farm and were granted consent for our Race Bank wind farm. Together, these projects could provide enough electricity for 650,000 homes. 1.26 Our profits also allow us to invest in our people. We are one of the largest employers in the UK with around 33,000 staff here. Through our on-going investments we have created a significant number of jobs. We spend around £20m every year on our six award winning training academies. There are currently more than 200 apprentices training with British Gas as boiler and heating engineers and we have trained more than 5,000 apprentice engineers. We expect to make further jobs announcements very shortly. 1.27 Our dividends payments benefit more than 700,000 small shareholders and, through our large shareholders—many of them pension funds—those payments also feed through into the retirement savings of millions of people.
Question 2. To what extent (if at all) should the Government or the regulator intervene in the market to affect the prices consumers (or certain groups of consumers) pay for their energy? Should any changes be made to the Government’s current approach? 2.1 We consider that within the frameworks set by Government and the regulator the market is operating effectively and delivering value for consumers. 2.2 The UK continues to have one of the most competitive energy markets in Europe, with one of the highest switching rates in Europe, and greater than in other comparable markets such as telecommunications and bank accounts. In the six months to June 2010, post-tax, UK households enjoyed the fourth lowest electricity prices of the EU15 and the lowest for gas, although consumption—particularly of gas—tends to be higher, which underlines the importance of energy efficiency. In addition to lower prices in the UK market, consumers have also benefited from the innovation and improvements in customer service that competition delivers. 2.3 Ofgem has confirmed it is confident that energy suppliers are pricing independently and that there is no evidence of cartel activity. There have been 17 different inquiries into the UK market since 2001—none of which have found any evidence of anti-competitive behaviour. 2.4 The existence of six major competitors compares favourably with many other markets (for example fixed and mobile telecommunications, supermarkets, pay television and high street banking, etc.). New suppliers have come into the market since privatisation, at an increasing pace in recent years, and there are now 17 gas and electricity suppliers in the market. Their combined market share has doubled in the last year. 2.5 Industry churn levels are also high compared to other industries. British Gas now has around nine million gas customers. Of these, 81% have either previously switched gas supplier or moved house. Many customers have exercised further choice by adding electricity, paying by an alternative method or choosing a cheaper tariff. On that basis, together, 91% of our gas customers have taken some action. 2.6 British Gas has seen levels of customer switching away from the company fall in recent years—from around 25% in 2007 to around 8% currently. This is primarily as a result of much improved customer service between 2007 and 2009. At the same time, levels of intra-British Gas switching have risen, from virtually zero in 2007 to around 25% currently. Much of that action is recent, with 25% of our customers having changed their tariff, payment type, or both in the 12 months ending July 2012. This reflects our “Best Deal for You” communications campaign and shows that our customers understand that switching tariffs or payment types whilst remaining with the same supplier is an effective way to save money. It also shows that we are making it easy for them to do so. 2.7 We note that there are 11 independent switching sites and that many media outlets routinely carry information on the best energy deals available. British Gas is continuing to work with Ofgem to make comparisons between energy companies easier, and we are extending our community activity in this area through engaging in collective switching, but not through reverse auctions which we consider to be unfair to existing customers. As an example, British Gas recently won two of the three categories in the UK Together and uSwitch collective switching process (the quarterly cash or cheque (QCC) and the pay as you go (PAYG) categories). cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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2.8 The industry has delivered significant improvements in liquidity and Centrica is now committed to trading at least 30% of its generation in the day-ahead auction. This will help to provide an effective route to market for all generators. 2.9 In addition to lower prices, consumers have also benefited from the innovation and improvements in customer service that competition delivers. British Gas has invested significantly in improving its customer service. This includes modernising our billing systems, stepping up its provision of energy efficiency help, and transforming its digital self-serve capability. Over one-third of our customers are now online, and 650,000 interact through mobile devices. We have also invested in improving training for our call centre and customer facing staff. This has seen a dramatic improvement in customer satisfaction levels. Industry-wide, Ofgem’s data shows that 77% of consumers say they are happy with their current energy supplier, which suggests that in many cases a lack of switching may reflect customer satisfaction rather than disengagement from the market. 2.10 Since market liberalisation, energy suppliers have also innovated by developing a wide and varied range of products and services which has provided consumers with value and choice. British Gas offers fixed or variable prices, green energy and electric vehicle charging tariffs, energy services packages and a wide range of incentive and affinity deals. Customers have different needs and wants, and the expansion in product offerings has contributed to consumer welfare by giving customers choices in the way they receive and pay for their energy that did not exist prior to liberalisation. 2.11 In recent years, suppliers have also responded to consumer demand for greater certainty by offering a range of fixed or capped price tariffs and British Gas now has 1.8m customer accounts on fixed rate tariffs that are protected from price increases. Recognising the consumer demand for a form of tracker tariff, British Gas has also introduced “fix and fall” tariffs. These cap rates for a set time, giving consumers comfort that their tariff will not rise, and fall in line with any falls in our standard tariffs over the same period. We currently have a further 1.5m customer accounts on fix and fall tariffs. 2.12 However, we accept a role for Government in intervening to ensure that net prices paid by vulnerable consumers are relatively lower, through driving energy efficiency and via the Warm Homes Discount. British Gas is helping 520,000 people this winter with a £130 Warm Home Discount payment on their electricity bill. 2.13 Around £1 in every £4 spent heating British homes is wasted due to poor insulation and we support continued focus on this area. It should be recognised that energy efficiency is already lowering consumption and mitigating the impact of rising unit costs. In 2010 the Centre for Economic and Business Research (CEBR) gathered 74 million British Gas meter readings, and carried out a detailed analysis of a sample of four million— the largest ever independent analysis. It found that our customers cut consumption by an average 22% (£322 a year), with savings of up to 44% for those who installed more than one energy efficiency measure. The largest impacts on natural gas consumption come from insulating cavity walls (18.3% cut); installing an A- rated energy efficient boiler (18.0%) and by insulating lofts (13.8% cut). 2.14 Weather adjusted, the average British Gas dual fuel bill has risen by 4% per annum from 2006–2011, broadly in line with inflation. We believe our customers have the potential to save over £3 billion over the next five years if they invest in energy efficiency measures.
Question 3. How effective is Ofgem in ensuring consumers get a fair deal? Are there any areas for improvement? 3.1 British Gas recognises that at this time of rising commodity prices against a challenging economic backdrop there is a clear need to improve consumer trust and confidence in the energy sector. 3.2 We accept that the energy industry has not always done as much as it could to improve consumer trust, and that tariffs in particular have been both complicated, and delivered in a framework that has not always been transparent or easy to navigate. Energy prices remain contentious and consumers do not always have confidence that they are getting a fair deal from energy suppliers. The reasons for rising unit energy costs have not always been clarified. 3.3 As a result, British Gas has taken the lead in introducing a number of significant changes to bring transparency, simplicity and comparability to the tariff market: — we’ve introduced a single unit rate and fixed standing charge tariff structure to make it easier for customers to understand and compare British Gas tariffs with those of other suppliers; — we have given our customers an online tool, showing the costs, benefits and fees associated with each tariff, and are building on this work by introducing on our bills a personalised, proactive six- monthly comparison of what they are paying and what they would save by switching to our other tariffs. Our pay as you go customers will receive their comparison on their annual statement; — we have written to all our customers checking they were on the most appropriate tariff and promoting free energy efficiency; — we have reviewed customers’ bills and annual statements to make them easier to understand. We have placed a breakdown of costs on the energy bill, so that customers can better understand the components that make up the bill, and conducted a national advertising campaign addressing why prices were rising; and cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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— we are working with Energy UK to develop an external cost tracker to help customers understand the drivers of price changes. 3.4 Notwithstanding these initiatives, we understand that Ofgem needs to maintain its scrutiny of the energy market as a whole to ensure a fair deal for customers. In general, therefore, we agree with the principles and objectives that underline their Retail Market Review (RMR), such as the need to increase tariff simplicity and transparency, and to ensure full compliance with both the letter and spirit of the 2008 Probe remedies. British Gas has made every effort to implement Ofgem’s 2008 probe remedies as we have sought to deliver our own programme of reform. We agree with Ofgem that performance has been patchy across the sector as a whole and support a consistent application of regulations by all suppliers to benefit consumers. 3.5 British Gas also supports many of Ofgem’s RMR proposals, and has already implemented many of them, including simplifying our tariff structure and range, closing “dead” tariffs, and providing personalised notices of savings that can be made from switching tariffs. 3.6 As part of the RMR, Ofgem are proposing a four tariff cap for suppliers. Whilst we continue to believe that up to six tariffs should be allowed in order to maximise innovation and choice, we welcome Ofgem’s recognition that some flexibility within a four tariff cap should be allowed to provide a balance between simplicity and enabling innovation and reasonable consumer choice. In particular we support Ofgem’s emerging view that that greater flexibility in the use of cost-reflective discounts and surcharges to supplement core tariffs should be allowed. If this movement is confirmed, it will allow British Gas to continue to offer discounts such as online and dual fuel, and will allow us to restructure our green tariffs. It would also allow the development of offers which meet future customer needs, and allow space to bring emerging technologies, for example our Remote Heating Controls, to a larger market. 3.7 We are also pleased that customers with smart meters will apparently be allowed greater flexibility through an ability to choose from four time-of-use tariffs as well as four ‘dumb’ tariffs. Our view remains that smart tariffs should be exempt from tariff reform proposals to allow maximum innovation in this emerging segment. 3.8 British Gas believes that there are three changes Ofgem should introduce that would improve tariff comparability considerably. 3.9 Firstly, we believe Ofgem should require all suppliers to adopt tariff pricing structures that are based on a “standing charge” and “single unit rate” format (ie removing complex multiple unit-rate structures). This proposal will deliver consistency in tariff structures, significantly improving comparability, when considered in conjunction with Ofgem’s proposed single Tariff Comparison Rate. It will also allow suppliers to offer a range of standing charges to customers, important given lower consuming customers will tend to prefer a relatively low levels of standing charges. 3.10 Secondly, Ofgem should standardise the way in which suppliers offer discounts to customers on tariffs, for example, as a simple percentage, or a fixed annual £ discount per customer. While this would enable customers to easily compare discounts available on tariffs, it would also give suppliers the flexibility to offer discounts tailored to the needs of customers, for example, offering a discount if customers favour paperless billing, or if customers are supplied with both fuels. This would also further enhance the comparability improvements delivered by all suppliers moving to a standing charge and single unit rate tariff structure. 3.11 Thirdly, we believe additional information measures similar to those already suggested by Ofgem would improve comparability considerably. We would fully support a requirement for suppliers to express all tariffs in a standardised (mandatory) comparator metric, such as a simple £ per year value for low, average and high levels of consumption. We would also support a version of the proposed tariff information label (that describes all non-price elements of tariffs in a standardised way). 3.12 We believe these measures would deliver real and targeted benefits to consumers. 3.13 We note that Ofgem have proposed to trial a “Market Cheapest Deal” initiative, which would see suppliers giving consumers information about the cheapest competitor deals in the market on their energy bill, based on both the customer’s personal circumstances (eg on/offline, payment method, fixed term/evergreen contract) and their actual consumption. 3.14 Whilst supporting Ofgem’s objectives to ensure consumers can easily access the best deal for them, British Gas has a number of concerns with this proposal. We believe that in practice it would be difficult to ensure up-to-date information was given in light of the time needed to process, generate and post statements to customers. Information may be particularly misleading for vulnerable customers currently in receipt of the Warm Homes Discount (WHD) who may be encouraged to switch to small suppliers who are exempt from giving the WHD, meaning they would lose out on winter payments that are currently worth £130 per annum. It is not clear how the benefits of fixed-term deals would be clarified, given their potential to offer the cheapest deal over the medium to long term, but at a small premium to current standard tariffs. 3.15 Furthermore, this initiative would be operationally extremely complex. Supplier capability would need to be built to calculate an accurate Market Cheapest Deal message for each customer as it would require suppliers to extract and transfer information on every customer’s consumption, demand profile (eg Economy 7 cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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customers), payment type, meter type, online/offline preference and contract type. Building this capability would take a significant amount of time and would be at a very high cost. 3.16 Given the unprecedented intervention this initiative would represent in the operation of the retail market, we strongly believe a comprehensive impact assessment should be undertaken before this initiative is taken forward.
Question 4. Could it be possible to benchmark energy prices to provide greater certainty about whether consumers are getting a fair deal? If so, how might this be achieved in practice? 4.1 Effective competition is the best way of ensuring that customers get a “fair deal”, and we believe the UK fundamentally delivers for customers. However, when considering a “fair deal” the focus is often on price, but product range and quality of service are also key considerations. To benchmark prices alone ignores other important factors. 4.2 Concerns over whether consumers were getting a fair deal were one of the primary triggers for Ofgem’s Retail Market Review. We note, however, that Ofgem concluded that profit margins were at low levels, there was no evidence of any anti-competitive behaviour, and no evidence of prices rising more quickly than they fall in response to underlying movements in wholesale prices. 4.3 British Gas has introduced a range of initiatives to help our customers compare their current tariff to those available elsewhere in the market. In March 2012 we introduced a tariff comparison metric; in June 2012 we introduced a simplified tariff structure with just two tariff types; and in February 2013 we launched our personalised tariff check for residential customers. This gives British Gas customers an energy account check- up every six months, based on actual energy consumption. Customers will be told if and how much money they could save by moving to a different British Gas deal. 4.4 In addition, since last October, British Gas has introduced new functionality for our customers allowing them to easily access information about their own energy usage. This data, which was developed as part of the BIS Midata initiative, includes customer meter number, tariff name, contract details, energy used, forecast energy usage and payment method. It allows customers to monitor their energy consumption, and easily check whether there is a better deal for them.
Question 5. Could any other measures be put in place to ensure consumers are paying fair prices for energy and to provide consumers with greater confidence in this? 5.1 We believe that greater efforts need to be made by Government, Ofgem and the industry to inform customers about the drivers of rising unit costs of energy, and what can be done to mitigate this. This would support vital initiatives such as the Green Deal and ECO, and help to give customers confidence that supplier profits are fair. 5.2 Smart meters hold one key to rebuilding consumer confidence with the industry, and will enable consumers to see exactly how much energy they are using, and at what price. British Gas has led the industry in our mobilisation for the deployment of smart meters, and has already installed over 800,000 meters in UK homes and businesses, around 75% of all those installed. 5.3 We believe smart meters and smart grids have the potential to bring significant benefits to both the UK energy industry and consumers, and we are strongly behind the smart meter roll-out. British Gas has led the way in helping consumers understand the benefits of smart meters, and our British Gas smart customers have been overwhelmingly positive about their experiences. A recent report for British Gas by Oxford Economics calculated that Britain will be nearly £14bn better off due to the introduction of smart meters. 5.4 Smart meters mean that, for the first time, customers can easily understand what energy they are using and what it costs. This offers a route to meaningful consumption savings—a key long-term mitigation for rising unit energy prices, and particularly if smart meters are accompanied by a package of tailored advice and support. These savings are based on average power consumption reduction of 3%, rising to 5%, per household. We are confident that these levels of reduction will be delivered as we launch our enhanced in-home display, personalised smart energy reports and customised energy efficiency advice. Furthermore, recent trials of time- of-use tariffs have shown customers can reduce their peak demand by around 14.3% and their overall consumption by 4.8%. Customer service also improves as all bills are accurate. British Gas smart meter customer complaints are half those from customers with a standard meter. 5.5 Progress in smart meter delivery, however, has stalled as a result of two key challenges—programme complexity, and the failure of other suppliers to deploy in a meaningful way in the Foundation stage. Furthermore, consumer engagement has not, to date, been deep enough. We believe higher political priority should be given to the smart roll-out to reduce the industry risk around the successful national deployment by 2019. 5.6 British Gas also believes that small supplier exemptions to Government programmes, including ECO, are a large and growing material distortion to competition in the retail energy market. We estimate that exemptions currently confer a benefit of around £73 per annum per dual fuel customers, distorting the market and undermining trust in the energy sector by giving the impression that large suppliers are profiteering. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Furthermore, given small suppliers are exempt from offering the Warm Homes Discount to their customers, it is possible for a vulnerable customer to switch away from a supplier offering this payment, leaving the customer worse off as a result. 5.7 The creation of the ECO brokerage mechanism provides an opportunity for all suppliers to cost- effectively meet their ECO obligation, and we believe the exemption from this programme currently given to small suppliers should now be removed.
Question 6. Many consumers believe that energy company profits are the reason the energy bills have been going up in recent years. Is this perception fair? 6.1 As outlined in our response to Q1, the British Gas Residential profit margin (after tax) has averaged 5% over the past five years, comparable to the main high street retailers and lower than the leading telecoms companies. 6.2 We do not, therefore, consider a perception that energy company profits are the reason energy bills have risen in recent years to be fair, and expand on our views on this in our response to Q8. Prices have risen due to increases in commodity costs, increases in transportation & distribution, and increases in the cost of various government policies.
Question 7. To what extent does the way energy companies communicate profits to the general public influence the public’s perception of these companies? 7.1 Centrica’s profits and business activities have a significant positive impact on the UK economy through investment and job creation. We are one of the largest employers in the UK with around 33,000 staff. Our dividend payments benefit more than 700,000 small shareholders and, through our large shareholders, many of them pension funds, also feed through into the retirement savings of millions of people. Our profits also fund investments. Over the past five years, Centrica has invested £1.80 for every £1 of profit made. 7.2 We recognise there is legitimate interest in both the profits we make, and the taxes we pay. We also understand that in order to build consumer trust, we have a responsibility to communicate our profits in a transparent and open way, and through communication channels that help consumers to easily understand how and where profits are made. 7.3 We give clear information about our profits in our annual report and accounts information and seek ways to socialise this information in an easily understood way. In particular, we have developed a lightbulb graphic (see our response to Q1) which we are using widely in our communications with external audiences, and show customers the make-up of their bill in our customer communications, including energy bills. We also submit segmental accounts to Ofgem each year in line with the obligations on the financial reporting of large suppliers, showing how much profit has been earned and where it was made. 7.4 British Gas is supportive of Government social and environmental programmes including ECO and the Warm Homes Discount that are ultimately paid through energy bills, and believe that Government has a shared responsibility in helping consumers understand both the drivers of rising unit prices, and how the impact on bills can be mitigated through energy efficiency and demand reduction measures, and behavioural change.
Question 8. Why is there so much uncertainty about the level of profits the large, vertically integrated energy companies are making? What could be done to improve clarity? 8.1 Centrica prides itself on being the most transparent energy supplier and we have provided full disclosure of profits and costs, both upstream and downstream, in our audited accounts since privatisation. We have also ensured that the segmental accounts for the retail business which we supply to Ofgem are reconciled to our Group Annual Reports. 8.2 We believe that profit transparency across the industry is improving significantly through a combination of the segmental statements and improved transparency by all suppliers. 8.3 We accept, however, that there is consumer uncertainty about energy company profits and believe that this is driven by a number of key factors: — a lack of understanding about the drivers of rising unit costs which feeds a perception of profiteering as bills rise; — a lack of understanding that energy companies make profits across their group (including upstream and midstream activities) and that reported profits include those from overseas activities; — a failure to differentiate between pre-tax and post-tax profit levels, particularly on upstream oil and gas production that can be taxed as high as 81%; — a failure to recognise that downstream UK operating profits come from a large customer base; — that small suppliers are exempt from many Government obligations and as a result are able to offer lower tariffs than large suppliers, driving perceptions of profiteering; and — media coverage and political commentary that sometimes sensationalises energy company profit levels. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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8.4 Energy retailers provide a valuable service for their customers by forward hedging much of their wholesale energy purchases, smoothing the impact of wholesale price volatility for customers and reducing price shocks. Significant collateral is required to trade forward in commodity markets, in order to give our counterparties confidence that we will be in a position to satisfy our future obligations. We estimate that if British Gas was a standalone business with no credit rating, we would require around £3-£4bn capital in capital to support our forward hedging strategy. The strong credit rating and vertical integration strategy operated by us and our competitors, significantly reduces this capital requirement to the benefit of our customers.
Question 9. Do Ofgem’s supply market indicators and the segmental reports provided by energy suppliers help to increase transparency and public trust in energy companies? Could they be improved to provide greater transparency? 9.1 We believe Ofgem’s supply market indicators (SMI) and segmental reports can make a valuable contribution to helping consumers understand retail margins. However, we believe that erroneous assumptions in Ofgem’s supply market indicators methodology materially overstate reported margins, and that trust in the energy sector is being undermined as a result. These are highlighted by the difference between the estimates produced by the SMI and the audited financial returns published in the regulatory segmental statements submitted to Ofgem each year. 9.2 These erroneous assumptions include: — an overstating of consumption values. Ofgem assumes customers use 16,900kWh gas and 4,000kWh electricity per annum, when average consumption is around 14,000–15,000kWh gas and 3,300kWh electricity per annum; — an assumption that all customers are on a “standard” tariff. Many customers will be on discounted tariffs (for example online); — a failure to reflect that suppliers price over the long-term, and do not recover margin day-to-day. We believe that a 12 month historic rolling average measure would be more accurate; — a tendency to underestimate future non-commodity costs, requiring historic margin estimates to be revised downwards once actual information is available; and — in calculating the cost of an 18 month hedging strategy, a failure to value the yet-to-be-bought energy at forward prices. 9.3 We estimate that adjusting Ofgem’s methodology to use more accurate consumption values, and accounting for customers on discounted tariffs, would reduce reported margins by £35-£75 at various points in the year. We welcome that Ofgem have agreed to review these assumptions and believe that in light of the continued press coverage the reports receive that this review is now urgent. 9.4 Although no methodology is perfect, we believe the majority of the segmented statements give a reasonable reflection of downstream profitability. We note that BDO’s analysis of the transfer arrangements for all of the major suppliers suggested that all methods employed gave true and fair values, despite taking very different approaches. We believe that some of our competitors could still go further in the transparency of their disclosures. 9.5 Trust in these segmented statements would be improved if they were used more regularly by Ofgem and Government. Suppliers were requested to release these statements, which were then independently audited by BDO. However, they are used very infrequently by politicians and regulators in discussions around industry profitability.
Question 10. How useful are Ofgem’s electricity and gas supply market indicators in monitoring the level of profits made by energy companies? Could they be improved? 10.1 Given the inaccuracies outlined in our response to Q9, we do not believe that Ofgem’s supply market indicators can be relied upon to give an accurate view of energy company profit levels. Until the methodology is corrected, we believe more emphasis should instead be placed on the segmental statements.
Question 11. Is the Government on track to meet its target of eliminating fuel poverty by 2016 and will reduced Government spending in this area affect their ability to achieve this target? 11.1 The Government is not on track to meet its target of eliminating fuel poverty, but has recognised this. 11.2 The outcome of the Hills review has been to redefine how fuel poverty is identified by proposing a new model based on a combination of income, energy prices, and energy efficiency. This new approach will help to prioritise low energy efficient households, for example those which are poorly insulated and with higher than average costs to heat the home. By addressing these properties, more people will move out of fuel poverty once the energy efficiency rating of their home is improved. 11.3 Whilst Government spend on eliminating fuel poverty has reduced, the new ECO programme will provide increased supplier funding from this year. Together with the new availability of Green Deals, the supplier Warm Homes Discount, and the on-going Winter Fuel Payment and in light of the reduced target fuel cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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poverty population as a result of changes to the definition of fuel poverty, we believe a significant impact can still be made on reducing fuel poverty. 11.4 We would support more appropriate targeting of support and our further thoughts in this area are outline in our response to Q12.
Question 12. Has the Hills Review resulted in any changes to fuel poverty policy? How could its findings be used to improve the efficacy of fuel poverty policy? 12.1 Government has consulted on their proposal to transition to the new fuel poverty criteria of Low Income and High Costs model and implement the Hills recommendations. We are expecting DECC to consult further with stakeholders on how new policies and strategy will now be developed. 12.2 In the meantime, we note the support available to vulnerable customers via the ECO programme, the supplier Warm Homes Discount, and the Winter Fuel Payment. 12.3 As outlined in our response to Q1, British Gas has some concerns about the cost-effectiveness of the ECO programme. We believe consideration should be given to extending the eligibility criteria for the Affordable Warmth sub-target so that more vulnerable customers can be supported. We remain concerned that, as currently specified, this particular sub-target is not deliverable, and that the costs of trying to deliver to a narrow range of consumers will be high. In that context we support an early review of the ECO programme within six months and steps subsequently taken to limit the impact of delivery on consumer bills. 12.4 Furthermore we believe that Ofgem as the administrator of the ECO programme has a role to play in supporting the cost-effective delivery of the Affordable Warmth sub-target by allowing the replacement of all inefficient boilers (C rated or older) prior to breakdown. This will prevent vulnerable households being left without heating for any lengthy period and, through reducing the scarcity value of eligible boilers, reduce the overall costs of the scheme. 12.5 British Gas also believes that the Government’s Winter Fuel Payments could be better targeted and that this could have a significant impact on fuel poverty. If the £2.1 billion spent on this programme in 2011/2012 was redistributed to the estimated five million homes that are considered to be in fuel poverty, it would represent £420 per household, making a measurable impact on energy bills and therefore fuel poverty. Targeting would also enable the Winter Fuel Payment to be paid to groups other than pensioners who may be in fuel poverty including single parent families, the terminally ill and those suffering from long term illnesses. 12.6 We would welcome a renewed focus on data sharing as a contributor to cost-effective targeting of available support on vulnerable customers. The current method of targeting vulnerable households is inefficient and costly. A DWP mailing in 2011 offering free insulation to over four million Super Priority Group customers achieved a conversion rate of just 0.1%. Moving forward we believe there is an opportunity to better use central and local Government data to target those households most in need. With the proper controls and customer consent, we also recommend giving consideration to referring customers from the health sector who are disabled, terminally ill, or at risk.
Question 13. To what extent are current fuel poverty policies reaching the right people? Are there any particular groups that are currently not getting the necessary support? And will this change under the move to ECO? 13.1 We recognise that those most in need of fuel poverty measures are often those least likely to seek it. This is mainly through a lack of awareness that help is available, or an inability to apply for help through the right channels. Some fail to claim the benefits they are entitled to and as a result are not targeted for support. We do not believe there is yet enough awareness or information available about ECO eligibility and how people can go about applying. 13.2 We therefore believe there should be a wider route towards eligibility for ECO for vulnerable households. Trusted partners such as the NHS or charities should be able to refer customers deserving of support whether or not they are eligible through the benefits route. The route to eligibility should be light touch. 13.3 British Gas is currently involved in a number of initiatives that should facilitate better engagement with health professionals around the benefits of energy efficiency and the support available. We fund 14 debt centres across the country who work with a broad range of local stakeholders, including local GPs, and who offer holistic support to vulnerable households. 13.4 We are also involved in a pilot scheme with South Tyneside NHS which is looking to integrate fuel poverty assessments into more holistic health visitor assessments. By working with professionals who will be entering vulnerable homes, we believe a fast route to support can be identified and we see merit in rolling out this pilot nationwide. 13.5 British Gas is also involved in a project in partnership with DECC, NEA, the Department of Health, and the Health Protection Agency which is assessing the impact of cold homes on excess winter deaths, and the call for investment in housing to reduce the health impacts of cold homes. We believe this will be important in providing a fact base for engaging with health professionals and helping them understand both the impact cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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cold homes can have on health, and the role of the energy sector in supporting local action to address cold homes.
Question 14. What support is available for fuel poor households living in solid-wall and hard-to-treat properties? Could this be improved? 14.1 ECO provides specific support for fuel-poor households living in solid-wall and hard-to-treat properties. However, the current ECO rules mean that hard-to-treat and especially solid wall properties are the least cost- effective option for suppliers to meet their Affordable Warmth targets. An uplift for solid wall insulation would help to reduce these households’ energy bills. 14.2 Suppliers also provide additional support to all fuel poor households through their own Warm Homes Discount scheme.
Question 15. Will the Government’s proposals to ensure that consumers are on the cheapest tariff have any impact on fuel poverty? 15.1 The Government’s proposals, as set out in the “Ensuring a Better Deal for Customers” document are consistent with Ofgem’s RMR proposals and will increase simplicity and transparency in the energy sector. In particular: — customers will be told by their supplier how much they can personally save by switching to other tariffs offered by their supplier; — tariffs will be expressed in a simple “tariff comparison rate”, allowing them to compare different tariffs at a glance; — tariffs themselves will be much simpler and easy to compare, as they will be structured as a simple standing charge and single unit rate; and — the range of tariffs available will be much reduced, with suppliers being limited to just four core tariffs—and poor value tariffs that are no longer open to new customers will be closed. 15.2 All of these proposals will make it much easier for those customers who are struggling to pay their energy bills to identify whether they can save by switching tariff or payment type (eg by switching to cheaper payment methods). 15.3 In implementing these proposals, however, Government must ensure that the drive for simplicity and transparency is balanced with innovation and customer engagement. 15.4 British Gas has already embraced the spirit of the Government reforms, announcing recently that we will be sending energy account “Tariff Checks” to our customers every six months. This is a personalised half- yearly review for each customer, using their actual energy consumption, which shows customers whether they can save money by moving to a different British Gas deal. 15.5 While this will help to reduce the bills of many consumers, we continue to believe that the most effective way in which the energy bills of the fuel poor can be reduced is through improvements in energy efficiency. Therefore, as well as making sure customers are aware of other British Gas deals that could reduce their bills, we will be flagging to customers other ways to save, including insulation and energy efficiency measures, and ways of monitoring and comparing energy consumption such as our EnergySmart proposition with free electricity monitor.
Question 16. To what extent do fuel-poor households engage in switching? What are the barriers to greater levels of switching from these groups? 16.1 Whilst recognising the savings that can be made from switching, including crucially, intra-company switching, we believe support for fuel-poor customers should be looked at more holistically. Most importantly, the role that energy efficiency can play should be recognised and promoted as well as the additional support offered by large energy companies through the Warm Homes Discount (WHD). It is crucial that vulnerable customers understand that they may lose their eligibility to WHD payments if they move to a small supplier. 16.2 British Gas believes that, properly structured, collective switching, often in collaboration with local communities, has the potential to benefit currently hard-to-reach groups such as off-grid and vulnerable customers. A new model for collective switching should: — seek to engage currently non-engaged customers; — not add to market complexity by increasing the number of tariffs on offer; — not establish exclusive deals for customers taking part; — not add complexity and cost to the market; and — blend energy efficiency and tariffs. 16.3 We note that switching driven by Field Sales has not always resulted in good-quality switching, and in recognition of this, British Gas was one of the leaders in withdrawing from this sales channel. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Question 17. To what extent do fuel-poor households current take advantage of energy efficiency schemes? Could anything be done to increase uptake?
17.1 British Gas delivered over 22 million energy efficiency measures to vulnerable households through our CERT and CESP programmes, including over one million insulation measures. We believe, however, that more can be done, and that the ECO scheme will be a crucial delivery vehicle. We have outlined changes we believe should be made to the ECO scheme in our response to Q12 and Q13.
17.2 We believe that there is a particular concern around reaching vulnerable customers living in private rented accommodation. British Gas and Shelter, the housing charity, recently announced a major five-year partnership with the aim of helping one million British households in the private rented sector improve the standard of their homes. With more than 3.6 million homes in the private rented sector, and rising, the chief concern of our partnership is to improve the 37% that do not meet the Decent Homes Standard.
17.3 In order to address this, British Gas and Shelter have jointly set out a three point-plan to improve standards in the private rented sector, which includes: — a joint commitment to improve the standard of one million homes in the private rented sector over the next five years; — helping private landlords meet the statutory minimum standard for private rented homes; and — policy recommendations to raise standards in the private rented sector.
17.4 We also believe that the legal minimum energy efficiency standard for homes rented from a landlord that is being implemented from April 2018 should be brought forward, and that this standard should also extend to houses in multiple occupation.
17.5 In this context, British Gas is supportive of the “Houses in Multiple Occupation Bill 2012” private members bill currently being taken through Parliament by Alan Whitehead MP and believes that by allowing all tenants to access information about the energy consumption of their home and to benefit from the right to have a more energy efficient home, the Bill will make a significant contribution to improving standards in the sector.
17.6 We also believe that consideration should be given to disallowing or limiting housing benefit payments paid directly to landlords when a property does not meet the legal energy efficiency standard. February 2013
Supplementary written evidence submitted by British Gas
BRITISH GAS COMMITMENTS MADE IN ORAL EVIDENCE
Question from John Robertson MP
Q85 John Robertson: You obviously have too many shares. What about you gentlemen?
Ian Peters: I would have to come back with the precise number. We have 700,000 small shareholders, which is a legacy of privatisation.
Q86 John Robertson: Does this include all parts of the industry? I don’t know how you are going to do it if you are including part of your international wings.
Ian Peters: I suggest it does not give you the figures from Centrica in this context, because the dividends come from Centrica. Last year we reported £2.7 billion profit, of that, on the tax point, we paid £1.1 billion of tax, £773 million of that—
Q87 John Robertson: Don’t worry about the tax, my colleagues will come back to that later. I am sure they have some nice questions for you. What I am trying to say, the same point I made to your colleagues, is that the shareholders get all the benefits from the whole company and yet the general public are basically getting screwed into the ground because everybody always talks about retail.
Ian Peters: I was going to give you all the numbers, Mr Robertson. Of that £2.7 billion, around £600 million, less than 25%, comes from residential energy supply, the rest of it comes from our operations in North America. Our upstream business, which again is a focus of some questioning, last year made £1.23 billion. That is pre-tax 17%; post-tax it is 13%. Given the billions of pounds we invest in generating that, the return on that capital is in high single digits. So I think that is a fair return for all of that. These need to be looked at in the aggregate on a post-tax basis. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Q88 John Robertson: Do you know how much you get from Government to help you with that? Ian Peters: Virtually nothing.
Q89 John Robertson: They don’t give you anything? Ian Peters: Virtually nothing. I will have to come with precise amounts.
Centrica response: Centrica does not receive specific Government help to underpin our investments, other than (for example) capital allowances which are available to any business investing in this country. Once those investments are operational, UK tax will be payable on any profits.
Question from Alan Whitehead MP Q90 Dr Whitehead: So what proportion of what you might call pre hoc trading really occurs over the counter and what proportion really occurs in terms of what you might call competitive trades informed by transparency of those forward markets at the point in which you are undertaking your initial trades? Is it fair to say that there is very little relation between what you are yourself generating and what you are yourself purchasing at that point? Ian Peters: As I say, our own purchases from our upstream division is 10% in electricity and 6% in gas. I have no problem disclosing the splits but I do not have them with me in terms of over-the-counter. Dr Whitehead: It would be very helpful if that could be sent to us in writing. Ian Peters: I would have to come back to you, because I don’t run the upstream division.
Centrica response: All of our power trades are based on market prices, regardless of whether they are internal trades or external, or whether they are executed on exchanges or OTC. Our power sales (selling our generation into the wholesale market) and our power purchases (buying power for our customers) are executed through separate trading books, and decisions in relation to each book are made independently of each other. Each book follows its own hedging strategy and this is the main driver of the trading activity for each book. Our power trading activity is organised along two different timeframes: — Up to the day-ahead stage, our generation and supply businesses hedge their positions independently. Each business is required to execute its hedging strategy by entering into transactions with market counterparties at the best possible price. Our different businesses are allowed to trade with each other, but in practice this is relatively rare. For example in 2012, British Gas only bought 4.5 TWh from Centrica Energy, representing 10% of the power supplied to end-consumers; British Gas bought the remaining 90% from the open market. Any internal trade between our production and supply businesses is executed at market prices. The valuation of these internal trades is verified annually by our external auditors PWC. — At the day-ahead stage, our trading desk aggregates any un-hedged positions from our generation and supply businesses and manages the net position in the market. This can lead to internal trades between our different businesses, but in practice the volumes involved are very small. For example in 2012 the net transfers between our generation and supply businesses only amounted to 0.23TWh, representing 0.5% of the volumes we supplied to end-consumers.
Question from Barry Gardiner MP Q91 Barry Gardiner: Mr Peters, there are areas of accounting estimates, aren’t there, and they can distort the presentation of figures can’t they? Ian Peters: Are you talking about allocations of overheads here? Barry Gardiner: No, I wasn’t, although it is a perfectly reasonable one and I did mention that earlier, but with you I was looking more at the depreciation on asset values. Centrica has a disclosure that, “Generation EBIT earnings before interest and tax excludes depreciation of fair value uplifts to property, plant and equipment relating to the strategic investment in British Energy”. Do you think that that is fair and transparent? Ian Peters: It is very hard for me to comment on the specifics because I wasn’t a party to those conversations, and if there is anything I want to come back to you on— Barry Gardiner: So you are going to have to write to us as well then, I take it? Ian Peters: Yes, I suspect— cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Q92 Barry Gardiner: But you take my point about accounting estimates and depreciation of fair value on assets? Ian Peters: I do. As a slightly broader point, we have not changed our methodologies for two years, and Ofgem and BDO recognise the consistency of that. I would surmise that the British Energy—
Q93 Barry Gardiner: Have not changed it in two years? That is not an awful lot of time, is it? Ian Peters: We have only been going since 2010, but this is the point about consistency and the way the segmental accounts are put together. As I say, there are no black holes. Depreciation, to an extent, is clearly a judgment call. The investment in British Energy was conditional upon the valuation around the new nuclear build, so I suspect that is what is behind it but I will have to write to the Committee and confirm.
Centrica response: The Committee raised a question whether the presentation of the Generation EBIT earnings before interest and tax excluding depreciation of fair value uplifts to property, plant and equipment relating to the strategic investment in British Energy was fair and transparent. We feel that this presentation is both a fair and transparent. The adjustment is made by the Group to provide useful information on the underlying business performance of our generation business. As the accounting for the depreciation of the fair value uplifts bears little relationship to current market conditions, operational performance or underlying cash generation. We clearly identify and disclose the quantum of the adjustment, so our stakeholders can view and understand the generation result both including and excluding the adjustment. We also include a detailed explanation of why we are making the adjustment (see below). “The Directors of Centrica believe that reporting adjusted profit and adjusted earnings per share measures provides additional useful information on business performance and underlying trends. They have determined that for Strategic investments (including British Energy) it is important to separately identify the earnings impact of increased depreciation arising from the acquisition-date fair value uplifts made to Property, Plant & Equipment (PP&E) over their useful lives. As a result of the nature of fair value assessments in the energy industry, the value attributed to strategic assets is a subjective judgement based on a wide range of complex variables at a point in time. The subsequent depreciation of the fair value uplifts bears little relationship to current market conditions, operational performance or underlying cash generation. Management therefore reports and monitors the operational performance of Strategic Investments before the impact of depreciation on fair value uplifts to PP&E. The segmental results are presented on a consistent basis, as mandated by IFRS 8.”
Question from Barry Gardiner MP Q94 Barry Gardiner: Can I ask all of you as well how often you have check listed, in relation to trading activities, the “another part of business” box? Neil Clitheroe: We check listed it I think on the 2011. We show that the activity is done within our energy management business and that is notated at the bottom very clearly, and we actually show where the P&L impact of that activity is within our retail and generation business. It is very clear on the last page of our segmentals where the responsibility and then where the profit and loss impact is for those activities. Ian Peters: To the best of my knowledge we have never done it, but I will come back and confirm that when— Q95 Barry Gardiner: You never ticked the “another part of business” box? Ian Peters: To the best of my knowledge, but I will come back and confirm that when I write back on depreciation.
Centrica response: We have always excluded our propriety trading activities from our segmental statements. All of our ticks in the “Another part of the business” section of the Ofgem Segmental Statements business functions checklist relate to our propriety trading activities. Our proprietary trading activities are excluded from the Segmental Statements to transparently reflect the results of our supply businesses on a standalone basis.
Power Trading Questions 1. What percentage of your total electricity trades are over-the-counter (OTC) versus trades on the wholesale exchange? In the first four months of 2013, we executed 4% of our power trades on regulated exchanges (N2EX and APX), and 96% over-the-counter (OTC), as measured by traded volume, in the GB market. The exchange cleared volumes are split between the financial futures market and the physical spot auction, which clears day- ahead physical power volumes each day. The vast majority of our OTC trades are executed through specialised brokers over the Trayport platform. There is total transparency over the trading activity done over Trayport. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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The platform continuously displays current bids and offers and the detail of completed trades is made available to all market participants in real time in anonymised form.
2. What are your criteria for trading OTC versus on the wholesale exchange? The key factors we take into account in deciding whether to trade OTC or on an exchange are market liquidity, the availability of bilateral credit agreements and management of the company’s credit exposure. Trading forward contracts on exchanges tends to be costly (relative to the alternative of bilateral credit agreements) due to the requirement to provide cash covering the full mark-to-market valuation of the contracts on a daily basis. This is one of the reasons why we do most of our forward trades OTC. Centrica also benefits from a high credit rating, which enables us to have lines of credit with our major counterparts and helps us limit the costs we face from OTC trading. We keep under continuous review our choices of platform for our trading activities. One of the regulatory factors we take into consideration is developments in European financial regulation. Under the European Market Infrastructure Regulation (EMIR) energy companies that exceed a prescribed threshold level of OTC derivative trades may be required to undertake mandatory central clearing of trades. This could significantly increase the cash and collateral requirements that some energy companies face through their trading activities. It may also lead to more energy trading activity to move to exchanges over time.
3. What is the average difference in price for your OTC versus wholesale exchange trades? Prices tend to be aligned between the OTC market and exchanges. There is total transparency over trading prices in the market, so any price differential between exchanges and the OTC market is quickly identified and arbitraged away by market participants. Therefore, where markets are liquid, the price differentials should only reflect the different transaction costs of trading OTC versus exchange. The price difference between futures contracts and OTC physical products is usually around 5p/MWh or 10p/MWh to account for the additional costs of clearing and exchange fees.
4. Does your company deal in long-term contracts? Who has access to the information contained in the contracts? We enter into 3 types of contracts, OTC, exchange-based and bilateral contracts. We trade standardised OTC forward contracts in the wholesale market up to 3 years ahead of delivery. We will trade equivalent contracts (futures) through exchanges, although contract terms will tend to be less than 3 years on exchanges. We provide information on the fair value of these contracts in our financial statements in accordance with international accounting standards (IAS 39). We are also preparing to report the details of these trades to ACER under the Regulation on Energy Market Transparency and Integrity (REMIT). Implementation of transaction reporting under REMIT stretches into 2014 and potentially beyond. We also have a range of bilateral contracts, including contracts with other large generators as well as power purchase agreements (PPAs) with a number of independent renewable generators. We have, for instance, a contract with Drax for 300 MW of baseload power, running until 2015. The price is set with reference to international coal prices and agreed fixed clean dark spreads. The purpose of this contract is to reduce Centrica’s exposure to the gas price in GB. We published this information on our website when we concluded the contract in 2009. Our renewable PPAs are typically complex contracts that provide independent generators with a number of essential services (including the management of balancing risks and the monetisation of Renewables Obligation Certificates and Levy Exemption Certificates). These contracts are tailored to the needs of each generator and the terms are commercially sensitive. We are currently working with DECC to develop contract templates and a voluntary code of conduct to increase transparency and streamline the contracting process in the PPAs market. While we may sometimes publish details of the contracts we conclude (as in the case of Drax), Centrica, like other market counterparties, will generally treat key transaction details, such as price, as commercially sensitive and confidential and as such that information is known only to counterparties to the contract.
Gas Questions 1. What information do you use for making trades (market information)? Our trading decisions are made upon a balanced and thorough consideration and understanding of supply and demand fundamentals. The information used is publicly available through the various Grid operators in Europe, and includes flow and flow nomination data, demand forecasts, storage inventories, and production forecasts. Other information includes other market/industry relevant news data from sources such as Bloomberg, Reuters and various other news agencies. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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2. What analytical tools do you use (market models)? What data do you use for these models? How frequent is the data (quarterly, monthly, weekly, daily)? We track available fundamental data in the UK and on the continent to build up a picture of supply and demand. Data is captured from different electricity and gas transmission system operators (TSOs) and websites and uploaded into databases and spreadsheets for analysis. We model many aspects of the market to inform our trading activities. The models we use include: — Demand forecasting models For demand forecasts we use proprietary models to model demand as a function of temperature and wind. Models are updated at least daily but normally twice a day. Weather data comes from weather data vendors via email/website/ftp site. National Grid provides hourly updates of demand through their website and Gemini. — Supply models For supply modelling we track and store historic flows and forecast flows based on price relationships, costs and outages. We collect data from different TSO websites (all publicly available) daily or intra-daily where available. For the UK real time flow data is available via the National Grid website. National Grid also provide the detail of nominations for supply (and demand) intra- day. On the continent real time data is usually not published but intraday flows are sometimes available (hourly flows) and most flows are published at D+1. Nominations are usually available from TSO’s on a daily basis. Outage data for UK and the continent comes from the different REMIT sites that we cover and TSO websites/Bloomberg/Reuters/Energy publications. — Oil-linked contract price model Our oil linked contract price model is based on oil/oil product prices. It compares those prices against views from consultants and other published prices (from company accounts). The model uses live prices on a Bloomberg terminal. — Stack models We use supply, demand and cost data to put together stack models (showing marginal dispatch costs) to find the marginal costs of supply for different energy commodities.
3. Where do you get this data? We get weather data from various different vendors to which we subscribe. Supply and demand data comes from publicly available sources. Most TSOs now publish supply and demand data on their websites. Outage data is publicly available on REMIT websites. For price data, data comes from broker screens (Trayport) and is captured and stored in a database. Price data is also received via Bloomberg/Reuters/Publications (Argus/ Heren). These are all paid-for services.
4. What price information do you use for trading? Where do you get it? All data described on gas questions 2 and 3 is used for trading purposes. Sources are as set out in gas question 3.
5. How do you calculate your forecast pricing? What sources of data, analytical tools and information do you use to forecast prices? Our trading business does not forecast prices. We do however develop a view on the movement in forward prices of energy commodities, through an assessment of how we think prices will move in relation to each other (between different fuel types, between different time periods and between different locations). We use a suite of in-house models to assess market fundamentals—see our answer to gas question 2.
6. How much of your trading is on the wholesale exchange versus over the counter? What price references/ benchmarks to you use for over the counter trades? What price references/benchmarks to you use for wholesale exchange trades? What is the average price spread between your OTC versus wholesale exchange trades? In the first 4 months of 2013 we executed 23% of our gas trades on exchanges, and 77% over-the-counter. We rely on the bids and offers displayed by exchanges and brokers, and the prices reported by price reporting agencies such as Argus, Heren and Platts. Prices tend to be aligned between the OTC market and exchanges. There is total transparency over trading prices in the market, so any price differential between exchanges and the OTC market is quickly identified and arbitraged away by market participants. Therefore, where markets are liquid, the price differentials should only reflect the different transaction costs of trading OTC versus exchange. The price difference between gas futures and OTC physical gas products is usually around 0.025p/therm to account for the additional costs of clearing and exchange fees. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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7. Do you have access to any information from your upstream division? Yes. Once a month Centrica Energy Midstream receives, from Centrica Energy Upstream, forward monthly production data for the rest of the current year and the following two years. This data is broken down by field and is volumetric in nature and subject to change without notice. On a daily basis CE Midstream get the delivery nomination for the expected production for the next day, and get regular updates of within day production volumes to allow for daily balancing within National Grids gas system. This information is sent to Centrica Energy Midstream’s Operations department for balancing purposes. See gas question 13 below on how Centrica Energy’s REMIT disclosures to the market, in respect of inside information, are made.
8. What continental market factors do you track? How do they influence your UK trades? Is there information on the continental market to which you do not have access which would advantage you? If so what information (such as storage levels)? As the gas markets in North-Western Europe are relatively well interconnected through various pipeline infrastructure and LNG, we track the same market information in Continental Europe as we do in the UK. This includes demand forecasting, production and cross border flows and storage inventories. The EU has made significant efforts and advances over the last few years to make more such data publicly available, and although data is not easily publicly available to the same extent as in the UK, the situation is improving. It is also worth pointing out that the situation is naturally more complex in Continental Europe as the data is handled by more than one Grid Operator.
9. What sort of trading platform do you use? The vast majority of our trades are executed through electronic screen based platforms. The primary system used is Trayport, an electronic tool that allows brokers and exchanges to list bilateral, OTC cleared and exchange cleared markets. Trading also takes place on the electronic platforms of the various exchanges on which we are active (eg Intercontinental Exchange (ICE), APX, EPEX etc.).
10. What percentage of your total gas trades are over-the-counter (OTC) versus trades on the wholesale exchange? See our answer to gas question 6.
11. What are your criteria for trading OTC versus on the wholesale exchange? See our response to power question 2. The same considerations apply in gas as in electricity.
12. What is the average difference in price for your OTC versus wholesale exchange trades? See our answer to power question 3.
13. What announcements have you made in accordance to REMIT? Where is it posted? If you trade gas outside of the UK within the EU, where do you post announcements for other EU markets? Centrica plc makes disclosures pursuant to REMIT on its corporate website, which can be found at: http://www.centrica.com/index.asp?pageid=1131 The obligation under REMIT to disclose inside information to the market applies to a market participant that possesses inside information in respect of business or facilities which that market participant, or its parent undertaking or related undertaking, owns or controls or for whose operational matters that market participant or undertaking is responsible. Inside information for the purposes of REMIT is information that is: precise; has not been made public; relates, directly or indirectly, to one or more wholesale energy products; and which, if it were to be made public, would be likely to significantly affect the prices of wholesale energy products. Accordingly, in the light of this obligation, we consider that the only upstream facility in respect of which we may obtain information that has the characteristics of inside information is South Morecambe. We do not consider that any of our other upstream facilities would be material for the purposes of our REMIT analysis. Our REMIT analysis is kept under review to ensure that it accurately reflects our business and in any event to reflect any changes in law
14. What access to market information do your traders have about any other division of your company? Do they have access to storage levels, upstream information if applicable (geological data), or daily production/ consumption data? Storage holders at the Rough gas storage facility have access to a variety of information on a daily basis [stock level, withdrawal rate, injection rate] that relates to their use of the facility. Each storage holder can only see their own data. Centrica Energy as a holder of storage rights has access to this information in the same way as other storage holders. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Centrica and Centrica Storage Limited (CSL) continue to be governed by Undertakings in relation to the operation of the Rough storage facility (and the Easington processing terminal). Among other measures, the Undertakings require that CSL is to be legally, financially and physically separate from the rest of Centrica and that no commercially sensitive information arising from the operation of Rough is passed directly or indirectly to any business of either Centrica plc or other member of the Centrica group that carries on shipping, trading, supply, storage and asset operations. Centrica Storage Limited also gives out information relating to the whole Rough facility, and this is available to all storage holders via CSL’s website. CSL also separately publish REMIT information on their website (https://storitnew.centrica-sl.co.uk/STORIT/publicLogon.do). For upstream information, see gas question 7. For daily production/consumption data, we include that in the information we discuss in gas questions 1 and 2.
15. Does your company deal in long-term contracts? Who has access to the information contained in the contracts? We have a number of long-term gas contracts, most of which are indexed on gas prices. Some are indexed on other commodities prices and foreign exchange rates. We also have long-term contracts for transmission capacity, LNG capacity and storage. We publish the aggregated value of these contracts in our financial statements. We often announce on our website major long-term contracts into which we enter. For example in December 2011 we announced a £13 billion 10 year gas supply deal with Statoil ASA. This was an agreement for the supply of 50 billion cubic metres (bcm) of gas to the UK. The 10 year, NBP-linked gas supply contract begins in 2015 and secures sufficient gas to meet around five% of total UK annual demand, enough for 3.5 million homes. The link to the press release is here: http://www.centrica.com/index.asp?pageid=1041&newsid=2275. While we may publish details of the contracts we conclude (as in the case of the Statoil deal), Centrica, like other market counterparties, will generally treat key transaction details, such as price, as commercially sensitive and confidential and as such that information is known only to counterparties to the contract.
Downstream Questions 1. How many of such “immobile” customers do you have? At the opening of the retail gas market to competition in 1997, all 19 million gas consumers—by definition— were on a standard variable, gas only tariff with British Gas. We now have 9 million gas customers. Of these, 81% have previously either switched gas supplier or moved house. Moreover, many customers have exercised further choice by adding electricity, paying by an alternative method or choosing a cheaper tariff. On that basis, together, 91% of our gas customers today have taken some action. Finally, just 800,000 (4% of the original 19 million) have made absolutely no change. They are still in the same situation in the same property on a standard variable, gas only tariff and on the same payment type with British Gas, and are clearly a small minority.
2. Do you offer all customers all of your tariffs? If not, what are the reasons for not offering the full suite of tariffs? All British Gas credit customers are offered all of our tariffs. Due to industry-wide technical restrictions to the numbers of tariffs that can be stored on some meters, our prepayment customers are not offered all tariffs.
3. What can you do to reduce the cost of customer service yet also improve your quality? British Gas has invested substantially in service improvement initiatives over the past few years, in order to both improve our customer service and help to control our costs. We are on track with our publicly announced programme to remove a further £300m of operating costs from our business over 2012 and 2013. At the same time, British Gas has significantly improved its customer service, and we have seen our customer Net Promoter Score (NPS) rise from -37 to +50 from 2006 to 2012. In 2012, we received a maximum 5 star ratings from Which? for our payment policies, billing, and complaints handling, and 5 stars from Consumer Focus for our customer service. To achieve this we have: — invested significantly in technologies and staff training; — simplified our processes to reduce errors and therefore the costs of re work; — re-engineered our metering, billing and back office; — closed down cold call doorstep selling; cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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— one third of our customers now self-serve to some degree; — enabled our agents to take a complete view of all the contacts a customer has with British Gas and assess their service needs accordingly; — introduced sophisticated call routing technology which allows calls to be diverted to the most appropriately skilled agents. This improves the customer experience and increases agent productivity; — revolutionised our website, which has encouraged customers to transact online, making it easier for them to access the service they require, and reduced inbound call volumes. Customers are now able to undertake a wide range of transactions online including submitting meter reads and booking an engineer appointment. We have launched a mobile phone ‘app’ which allows customer to access all our web functionality via this route; and — reviewed all our customer communications (letters, bills etc) which trigger an inbound customer call and eliminated those which were driving unnecessary contact.
4. What proportion of calls/correspondence are caused by billing queries and by how much do you anticipate this will fall after the advent of smart metering? Around 41% of British Gas customer calls & correspondence are related to billing queries. We anticipate that the widespread installation of smart meters will lead to a reduction of around half. We are already seeing customers with smart meters call us 30% less than the general customer base, and their complaints are reduced by half. May 2013
Written evidence submitted by EDF Energy Executive Summary — EDF Energy recognises that rising energy bills are an increasing concern for households. We also acknowledge that consumers should have their energy bills communicated to them in a straightforward and transparent way, to make it as easy as possible for them to select the correct and most affordable energy products for their needs. — Therefore, as a company we simplified our tariff structure even before Ofgem’s announcement of its RMR reforms. EDF Energy currently offers just three types of tariff; two fixed and one variable. We also led the market with our Blue+ Price Promise product, which informs customers if they would save more than £1 a week with any competitor’s product. — Even so, energy price increases are of course of concern to consumers. Such price rises are driven both by rising costs for wholesale energy, and by increased charges for transmission and distribution, as well as by levies to pay for environmental and social policies. — Despite this, the perception of consumers and stakeholders seems to be that higher energy bills are reflected in excessive company profits. In fact, as shown in our official reporting to Ofgem, EDF Energy made a negative net margin on our residential supply business between 2009 and 2011. In our most recent financial results we saw an improving but still negative margin in that business in 2012. — The likelihood is that consumer energy prices will continue to increase in the future. More than £100bn of investment will be needed in the UK’s electricity infrastructure over the next decade, to meet decarbonisation targets and maintain security of supply. This will undoubtedly impact on consumer energy bills. — Transparency will continue to be important to maintaining customer trust in energy markets. Specifically we believe that tariff comparability would be helpful, and would lead to higher levels of consumer switching. To that end EDF Energy advocates the establishment of an independent switching service, overseen by Ofgem. — We also recognise that some vulnerable consumers need further help. Last year, EDF Energy introduced a price reassurance scheme whereby Warm Home Discount Core Group customers will automatically benefit from our very cheapest prices. EDF Energy believes that all suppliers should be required to match this ground-breaking commitment. — The forthcoming review of fuel poverty strategy should be carried out on a cross-Governmental basis, to ensure full engagement and ownership by all relevant departments. — EDF Energy is very concerned about the potential cost of delivering ECO and the resulting impacts on consumer energy bills. Energy suppliers will be required to report to Ofgem on the costs of delivering ECO on a monthly basis. The Committee should review the cost effectiveness of ECO as soon as useful data on the cost of delivery becomes available. — If further delays are seen in the Smart Metering programme, with no relaxation of the end date, this too will result in increased costs which will ultimately be borne by consumers. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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— Most importantly, we believe there is an onus on the Government to bring together and work with energy companies, environmental advocates and consumer groups to improve public understanding of the composition of energy bills and the factors which affect them. Only by doing so will consumer trust and engagement in energy markets be maintained and grow.
EDF Energy’s Response to Questions Prices What factors determine energy prices (wholesale prices, company operating costs, green levies, company profits etc)? What contribution do these factors currently make towards a typical household energy bill and how might this change over time? 1. Perhaps the easiest way to respond to this question is to look at the reasons why retail energy prices in the UK have increased at a rate above inflation during the past ten years. Data from the Committee on Climate Change (CCC) shows that the average dual-fuel energy bill for a typical household increased from around £605 in 2004 to £1,060 in 2010, a £455 or 75% increase (compared to general price inflation of 16% over the same period). There were a number of reasons: — By far the largest contributor was the increase in the wholesale cost of gas, which added around £290 to bills; — Around £75 was due to policies to reduce carbon emissions, including £30 to support investments in low-carbon power generation, and £45 for funding of energy efficiency improvements (such as help for low income and vulnerable households); — A further £70 of the increase was due to increasing transmission and distribution costs; and — £20 was due to VAT. The chart below illustrates the changes:
2. It is difficult to predict what precisely will happen to each of these factors over the coming years. But there seems to be little reason to suppose that pressures on prices will not continue to grow. Thus the costs of policies to reduce carbon emissions and deliver other social benefits will go up: for example, DECC has estimated that the Energy Company Obligation (ECO) will cost £1.3 billion per year to deliver; we share the view of other commentators that in fact the ECO will prove more expensive than DECC’s forecast (see also below). 3. Underlying this is the widely accepted reality that the UK’s energy infrastructure requires significant investment and modernisation. Indeed the Government has said that more than £110 billion will need to be spent in the next decade. It is inevitable that these additional costs will feed through to energy customer bills.
To what extent (if at all) should the Government or the regulator intervene in the market to affect the prices consumers (or certain groups of consumers) pay for their energy? Should any changes be made to the Government’s current approach? 4. EDF Energy believes that consumers are best protected by a competitive market in which information about energy prices is available readily and openly. We therefore support the objective of Ofgem’s RMR cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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proposals to encourage consumer engagement with the market, and to ensure that customers are able to gain access to the information they need to make informed choices. 5. We do not believe that powers envisaged under the Government’s “cheapest tariff” proposals will be needed if Ofgem’s RMR project is completed in the way envisaged. Amendments to the Energy Bill in this area must be sufficiently tightly drafted to avoid any unintended consequences of the legislation, such as re- emergence of price regulation that stifled competition and choice. 6. However, we do believe that some vulnerable consumers need further help and assistance. Last year, EDF Energy introduced a price reassurance scheme whereby Warm Home Discount Core Group customers automatically benefit from our very lowest prices. EDF Energy believes that other suppliers should be required to match this ground-breaking commitment. 7. Finally, there is still more to do in respect of tariff simplification. For example, all EDF Energy tariffs are available to new and existing customers alike: we believe that Ofgem’s RMR proposals on tariff simplification, which may limit suppliers to four “live” tariffs per customer/meter type and payment method, should also ensure that all suppliers are required to adopt the same position as EDF Energy.
How effective is Ofgem in ensuring consumers get a fair deal? Are there any areas for improvement? 8. EDF Energy believes that Ofgem is right to focus its attention on measures to encourage consumers to engage with the retail energy market, and we are supportive of many of the RMR reform proposals. In particular, we believe it is important that Ofgem works with suppliers to ensure that customers can easily access all the information they require. 9. An important aspect of this is tariff comparability, which will significantly improve transparency, and will facilitate consumer engagement in the market. EDF Energy would welcome a central independent switching service overseen by Ofgem, which focuses particularly on vulnerable consumers. To ensure the widest possible take up, this service must be accessible by telephone and by post as well as online
Could it be possible to benchmark energy prices to provide greater certainty about whether consumers are getting a fair deal? If so, how might this be achieved in practice? 10. There is an important role for benchmarking UK retail energy prices alongside those of other EU countries. We believe that this could do a great deal to help reassure consumers that they are getting fair and competitive prices. Such benchmarking could also help consumers understand the drivers of energy prices, and the limited degree to which they are controllable by policy decisions and other domestic factors within the UK. 11. There are, of course, practical difficulties in comparing energy prices because of the adjustments needed for local factors, including taxes. However, such calculations are not impossible, and the chart below sets out a comparison (showing that the UK benefits from below average energy prices in relation to the comparator countries). We believe that Ofgem would be best placed to carry out these calculations and to publish their results.
Source, Energy UK
Could any other measures be put in place to ensure consumers are paying fair prices for energy and to provide consumers with greater confidence in this? 12. We believe that a more informed debate on the drivers of energy costs is vital. We have already argued that Government and Ofgem should publish much more comparative data about UK and EU retail energy prices, and make this information available to consumers. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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13. We have also already mentioned the need for significant investment in the UK’s electricity infrastructure. In this context all those with an interest in energy and climate change policy, not least the Government, have a duty to be open and honest with the public about the impact on consumer power bills, and to ensure that the goals of secure supplies and decarbonisation are achieved in the most affordable ways possible.
Profits Many consumers believe that energy company profits are the reason the energy bills have been going up in recent years. Is this perception fair? 14. We do not accept that this perception is fair, nor is it borne out by the facts. As we have said already, price rises reflect a range of factors, not least changes in wholesale energy prices. The key drivers are movements in international gas prices and increases in non-energy costs, particularly regulated network charges and social and environmental costs. This is illustrated below.
(1) Averaged across regions and major suppliers; assuming typical consumption of 3,300kWh standard electricity and 16,500 kWh standard gas p.a Not accounting for any change in typical demand over time. Change 2008 to 2012 driven 50% by commondity prices (lower but longer peak) and 50% non energy (2) Front-year gas prices: price for delivery in following calendar year, year-ahead power prices: average price of the next two seasons (3) Actual time of energy sourcing depends on company bedging strategy (4) 2013 includes all price rise announcements (final rise by E.ON, took place on 18 Jan) (5) Office of National Statistics estimates. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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15. On average, margins have gone up, but from a very low or negative base. Overall supply margins are modest compared with other retail sectors, as the graph below demonstrates. Whilst the average industry margin is positive only two companies reported consistent profits through 2009 to 2011 from domestic energy supply; as we have said, EDF Energy made a loss in its domestic supply business during this period.
Source: Ofgem, March 2011 Retail Market Review consultation
Why is there so much uncertainty about the level of profits the large, vertically integrated energy companies are making? What could be done to improve clarity? 16. Given the information we already publish there is no reason for uncertainty. Nevertheless, as the Committee has previously pointed out, there is evidence that many consumers blame energy company “profiteering” for price rises. In doing so they reflect the debate played out in the media and amongst political stakeholders. 17. That media coverage and political debate rarely mentions the facts set out in the segmented accounts published by the larger energy suppliers. These accounts clearly set out the varying levels of margins for different activities, including retail and generation. It is worth saying in particular that the reporting of energy sector profits rarely acknowledges the capital intensive nature of power generation, and the significant levels of investment it requires. 18. Accusations of profiteering lead to consumers mistrusting and disengaging from the retail market. Such a lack of trust is not in the interests of consumers nor the industry, nor is it helpful to achieving the aims of key Government policies such as the Green Deal, Energy Company Obligation, and Smart Metering. All of these rely on high levels of consumer engagement to drive take up. 19. There are limits to what energy suppliers alone can do to change the media and political debate, and to inform and educate the public. Therefore, EDF Energy believes that the Government has to take a lead in this area, bringing together energy companies and consumer and environmental advocates in an effort to improve public understanding about the expected trends in future energy bills and the reasons for upward pressures.
How useful are Ofgem’s electricity and gas supply market indicators in monitoring the level of profits made by energy companies? Could they be improved? 20. Ofgem’s indicators are misleading and can be seen to cause mistrust amongst consumers. For example, the indicators only cover standard tariff dual fuel customers and therefore do not recognise the full range of tariffs in the market. Moreover, the average gas consumption used is higher than EDF Energy’s estimate of the domestic average, significantly overstating the estimated margins quoted. 21. Despite its powers to do so, Ofgem does not ask for, or include, updated cost estimates from suppliers. Thus, for example, by relying solely on DECC’s estimate of the costs of the new ECO, Ofgem risks overstating supplier margins to a material degree. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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22. Finally, the indicators do not reflect the position of individual suppliers, reinforcing the misconception that all suppliers are the same. In particular they ignore the impact of economies of scale on respective levels of profitability. While Ofgem’s indicators show substantial profit margins, smaller domestic suppliers like EDF Energy are making a loss on supplying domestic customers; the impact of economies of scale is illustrated below. The indicators also imply a higher level of overall profitability in domestic energy supply than is actually seen.
How useful are the segmental generation and supply statements that major energy suppliers are required to produce in understanding where companies are making their profits? 23. EDF Energy believes that the segmental accounts provide robust information as to the size and source of energy company profits. The process for producing these was verified in early 2012, when they were reviewed by the accounting firm BDO, on behalf of Ofgem. In particular BDO endorsed our approach to basing transfer prices between generation and supply businesses on published wholesale prices. A number of detailed recommendations were made and have been applied, further adding to the accounts’ veracity. 24. It is a requirement that the segmental accounts can be reconciled with audited figures (prepared under International Financial Reporting Standards) published in Group accounts. This is an important safeguard. 25. Some stakeholders have said that the segmental accounts are too complex to understand, whilst other press for even more details. EDF Energy believes that the segmental accounts strike the right balance between completeness and accessibility, and are no more complex than financial statements generally.
Do Ofgem’s supply market indicators and the segmental reports provided by energy suppliers help to increase transparency and public trust in energy companies? Could they be improved to provide greater transparency? 26. We believe that Ofgem’s supply market indicators should be withdrawn as they are misleading, and will never be as accurate as the segmental accounts, which reflect the real costs, real revenues and actual profits of energy suppliers. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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To what extent do the way energy companies communicate profits to the general public influence the public’s perception of these companies?
27. EDF Energy publishes a breakdown of a typical consumer’s bill on our website. An example is shown below. It is important to note that margins are not shown separately simply because it is difficult to show negatives in this format.
28. However, there is no doubt that all energy companies could do more to help customer understanding of these areas. For example, referring to terms such as EBITDA (which is not a measure of net profit) is not helpful. In addition, providing more details of the significant investments of capital made in the UK by all of the companies already and in the future would also provide helpful context.
Fuel Poverty
Is the Government on track to meet its target of eliminating fuel poverty by 2016 and will reduced Government spending in this area affect their ability to achieve this target?
29. Government has consulted on its intention to revise the fuel poverty definition to one which facilitates a better use of limited resources. We acknowledge DECC’s recognition that the proposed change will essentially make it impossible to eradicate fuel poverty.
30. DECC is no longer funding a programme focussed on providing free heating and insulation measures to vulnerable householders, with the key programme to deliver this, ECO, now funded solely through customers’ energy bills. This is regressive in impact compared to funding from general taxation and has the potential to increase prices disproportionately for lower income households, not all of whom will benefit from the associated programmes.
31. It is important to ensure that the impact of funding, and the resultant burden on consumers, is carefully considered. EDF Energy is particularly concerned at the potential cost of delivering ECO. DECC has estimated that the ECO would cost energy suppliers £1.3 billion per year (about £53 per customer per annum). However, a recent report by NERA Economic Consulting from November 2012 reviewed DECC’s model and suggested that correcting unreliable assumptions in DECC’s modelling would raise the estimated cost of the programme to around £1.7 billion per annum (ca. £69 per customer per annum). In reality both these estimates will probably turn out to be false: what is important is that the real data is made available as soon as practicable and their implications are properly considered.
32. Unlike previous obligations, energy suppliers will be required to report via Ofgem on the costs of delivering ECO on a monthly basis. The Committee should review the cost effectiveness of this policy as soon as accurate information on the cost of delivery becomes available. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Has the Hills Review resulted in any changes to fuel poverty policy? How could its findings be used to improve the efficacy of fuel poverty policy? 33. Following the 2011 Hills Review, DECC is proposing to issue a new fuel poverty strategy early in 2013. EDF Energy welcomes this opportunity to review current policies and their impact in assisting those who struggle to heat their homes affordably. 34. To be effective the new fuel poverty strategy should be cross-Governmental to ensure full engagement and ownership by all relevant departments, and not only DECC. For example, the DWP and HMRC have full information on household income and benefit status and are therefore best placed to identify those householders who would most benefit from policy interventions. 35. An immediate opportunity to maximise the benefits of such work would be to clarify that Warm Home Discount (WHD) data sharing can be used to ensure that the most vulnerable customers benefit from the cheapest tariff price. 36. The WHD scheme has demonstrated the benefits of data sharing to enable effective targeting to the most vulnerable customers as defined by various benefit proxies. There is enormous potential to go further in identifying similar households who could benefit for assistance under other programmes such as the ECO Affordable Warmth programme. Improving the energy efficiency of the housing stock through the installation of energy efficiency and heating measures is the most effective way of reducing the impacts of the costs of heating a property. Using data sharing to identify those eligible for this programme would reduce search costs for suppliers with the obligation, and would minimise the impact of ECO on all consumers’ bills.
To what extent are current fuel poverty policies reaching the right people? Are there any particular groups that are currently not getting the necessary support? And will this change under the move to ECO? 37. The groups targeted by programmes such as ECO and WHD are relatively good proxies for households who will struggle to affordably heat their home. However, being able to reach those in greatest need, who often fail to or are unable to respond to offers of support, will continue to be a challenge. The example of the WHD Core Group, where the most vulnerable consumers are easily reached through the use of data sharing by Government should be extended to other policies. This will ensure that those in greatest need benefit from the help available. The Government should seek to secure wider data sharing powers to support this.
What support is available for fuel poor households living in solid-wall and hard-to-treat properties? Could this be improved? 38. ECO will build on the experience gained through the delivery of CESP in promoting the installation of solid wall insulation measures. However, the scale of ECO will result in significant delivery challenges as the number of solid wall installations increases. 39. We hope that as this market matures, and as Green Deal Finance comes available, solid wall insulation should be able to be deliverable across all relevant groups, including those who struggle to heat their home affordably. 40. As a minimum, there needs to be sufficient uptake of Green Deal Finance to enable ECO measures to be delivered cost-effectively. The ECO programme comprises three different elements, where different rules apply to meet delivery targets. The Carbon Emissions Reduction Obligation (CERO) represents more than half of the estimated cost of delivery. To achieve this part of ECO, suppliers must promote the installation of hard- to-treat cavity or solid wall insulation measures. Where possible other insulation measures can be installed alongside these. Customers will contribute to the cost of the higher cost measures through Green Deal Finance. This will ensure there is no upfront cost to the consumer and their contributions to repayments are lower than the amount saved on their energy bills. Customers’ contributions are capped at a level intended to ensure they save money overall, with suppliers paying the balance. 41. Therefore, ensuring that as many homes as possible benefit from solid wall insulation at reasonable cost will have the greatest beneficial impact on all demographic groups, not only the fuel poor.
Will the Government’s proposals to ensure that consumers are on the cheapest tariff have any impact on fuel poverty? 42. At this stage, we are not clear what the impacts of Ofgem’s RMR and DECC’s “cheapest tariff” proposals will be on fuel poverty. As outlined above, we believe that some vulnerable customers will not be able to engage in the market effectively, even with more information. We therefore urge Government and Ofgem to encourage other suppliers to match our price reassurance commitment for vulnerable customers. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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To what extent do fuel-poor households engage in switching? What are the barriers to greater levels of switching from these groups? 43. Ipsos Mori conducted a study in April 2012 which found that the lowest rate of awareness regarding changing supplier was lowest among groups considered to be vulnerable, including the DE social grades the BME ethnic group, these in rented accommodation, those with no internet access and those on standard credit and PPMs. This is shown in the below graph. Did you switch your gas supplier in 2011? All Payment method Social grade Ethnicity Previous survey years (all) 2012 Direct Standar PPM AB C1 E White BME 2008 2010 2011 debit d credit (gas) Base: (1,232) (803) (168) (159) (242) (375) (133) (1,104) (127) (1,256) (1,369) (1,331) All with % % % % % % % % % % % % mains gas who are respon sible for the bill Yes 13 16 5 10 19 14 8 14 6 20 17 15 No 87 84 95 90 81 86 92 86 94 80 83 85 Source: Ipsos MORI
Did you switch your electricity supplier in 2011? All Payment method Social grade Ethnicity Previous survey years (all) 2012 Direct Standar PPM AB C1 E White BME 2008 2010 2011 debit d credit (elec) Base: (1,461) (946) (193) (198) (284) (452) (161) (1,321) (139) (1,519) (1,540) (1,500) All with % % % % % % % % % % % % mains electri city who are respon sible for the bill Yes 14 17 7 12 18 14 10 14 8 19 18 17 No 86 83 93 88 82 86 90 86 92 81 82 83 Source: Ipsos MORI
44. Rebuilding trust is crucial for encouraging consumers, particularly those who are vulnerable, to have the confidence to engage in the competitive energy market and to interact with suppliers. In particular, negative messages about the energy industry discourage consumers from entering into dialogue with their supplier about the wide range of support available, such as securing the best tariff, accessing insulation measures or obtaining WHD rebates. 45. We also believe that Ofgem and Government should have a more visible role in signposting consumers and external stakeholders to the many programmes delivered by energy companies, which are designed to benefit consumers. Highlighting such beneficial activity will help to build trust in the industry and therefore encourage consumers to engage with energy providers more proactively.
To what extent do fuel-poor households currently take advantage of energy efficiency schemes? Could anything be done to increase uptake? 46. EDF Energy has delivered 80,000 insulation measures through the CERT scheme to consumers in the Super Priority Group. In addition 24,000 insulation measures were delivered to vulnerable customers within CESP areas. 47. Whilst the success of the CERT and CESP schemes has seen many fuel poor households benefit from energy efficiency measures, the cost of identifying these customers and securing their take up has been significant. The WHD scheme has demonstrated the benefits of data sharing to enable the effective targeting of support to those in the greatest need. February 2013 cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Supplementary written evidence submitted by EDF Energy EDF Trading Both EDF Energy and EDF Trading (EDFT) are wholly owned subsidiaries of EDF SA. EDFT is engaged in the trading of global commodities, including oil, coal, carbon, gas and electricity. It offers market access services (ie access to wholesale markets to meet the needs of industrial participants) to all EDF Group subsidiaries, including EDF Energy, and also to third party customers ranging from utilities and commodity producers to banks, investment houses and governments. Whilst being a UK-based entity that employs over 1,000 people world wide, it does not form part of EDF Energy. It is important to note that EDFT and EDF Energy are separate legal entities with resulting separate accounts. Based in London, EDFT’s activities are global and extensive. For example it: — Operates a fully integrated coal and freight business with multiple sources of supply worldwide including South Africa, Asia, the US and Eastern Europe; and — Has a midstream business that ranges from a fleet of ocean-going dry bulk carriers to inland rail and barge logistics, coal terminals, LNG re-gasification, underground gas storage and crude oil marketing and transportation. Across Europe and North America, it has extensive power transmission and gas interconnector capacities. All profits—or indeed losses—that EDFT makes through its global operations are tracked and reported separately to those of EDF Energy. Any assessment of its profitability should therefore reflect the extensive and global nature of its activities rather than the fact that it is based in the UK. This choice is a testament to the skills and resources available in London to host an international trading business. The 2011 profit before tax for EDFT was €614.5 million (answer to Q88). The Committee may wish to also note that for EDFT, the difference between UK GAAP accounting and IFRS accounting is minimal. All transactions between EDF Energy and EDFT take place on an arm’s length basis, including the payment by EDF Energy of brokerage fees for providing access to the wholesale energy markets. Furthermore, EDFT like EDF Energy, operates to strict risk mandates set by EDF Group to ensure that its overall risk is contained. Brokerage fees paid to EDF Trading for 2012 were around £1.3m. These are based on standard brokerage fees applicable in the industry, and are reflective of a highly competitive market for brokering services.
Intra-group Loan The Committee asked about an intra-company loan of £1.6 billion provided to EDFT. Our parent company in France does make loans to EDFT to help cover its short term and long term capital requirements in order to ensure it maintains a sufficiently strong cash liquidity position and strong independent credit rating. As the Committee will be aware, access to credit is a key requirement of participating in wholesale markets. However, for the avoidance of doubt this loan would be between EDF SA and EDFT and not between EDF Energy and EDFT. Interest on these loans is charged at commercial rates, in line with the relevant tax legislation, so there can be no question of them being used as a means of repatriating profits (answer to Q91).
EDF Energy’s Segmental Accounts EDF Energy has completed the Business Function Table according to Ofgem’s requirements. In no case does “another part of the business” have profit and loss (P&L) responsibility for a particular supply or generation activity. May 2013
Additional Questions Received on 24 April 2013 Questions on Trading These Questions are Related to Electricity Only 1. What percentage of your total electricity trades are over-the-counter (OTC) versus trades on the wholesale exchange? EDF Energy traded a total of 176TWh of electricity for delivery in 2012 (97 TWh of sales and 79 TWh of purchases) out of which 21% were executed on exchanges and 71% were brokered on the OTC market through EDF Trading. The remaining 8% was traded via structured bilateral contracts. It should be noted that the majority of the trades settled through exchanges have been executed on the N2EX auctions on our behalf by EDF Trading. It forms part of EDF Energy’s contribution to the reliability of the day ahead index achieved through a gross bidding agreement with N2EX entered into in April 2012. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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2. What are your criteria for trading OTC versus on the wholesale exchange? Since the advent of the New Electricity Trading Arrangements in March 2001, the OTC electricity market has been the main route to the wholesale market for energy companies who wish to forward hedge their electricity market risks. In our case, the majority of this volume is executed through EDF Trading which provides market access services at arm’s length conditions for our hedging orders. EDF Energy hedging activity is dependent upon the liquidity of the market. Liquidity closer to delivery is well developed on exchanges whereas the more forward time frame requires access to the OTC market. Exchanges, such as N2EX and APX, are a growing part of the traded market, but they are focussed on prompt periods at this time and this only really provides a service for short term position management. The many published sources of forward OTC product prices provide a transparent market benchmark upon which to base any market transactions, for example, the pricing of large B2B market-indexed customer contracts.
3. What is the average difference in price for your OTC versus wholesale exchange trades? EDF Energy’s only access to exchange traded products is in the prompt timescale to optimise the portfolio position, which is entirely forward hedged, for short term fluctuations in market conditions (eg due to weather, unexpected outages). The average price achieved with these trades is reflective of our residual ability to balance our portfolio position from our physical assets in the event of any changes in supply conditions (eg outage at a power station) or demand (increase in forecast demand of our customers). In 2012, EDF Trading traded on the N2EX auction on our behalf at an average of £45.30/MWh. APX trades, which EDF Energy transacted directly for the purposes of short term position management (balancing), were priced at an average of £45.75/MWh. Both of these sets of trades were done during 2012 using short term instruments at different moment in time. Under no circumstances could these average prices compare to the average price of EDF Energy’s forward hedging activity. To smooth its long term price risk, EDF Energy gradually secures purchases and sales on the market as liquidity allows. Purchases and sales realised for 2012 delivery were first entered into in March 2009 and progressively developed over 2010 and 2011 to reach average price of £49.40/MWh.
4. Does your company deal in long-term contracts? Who has access to the information contained in the contracts? In 2012, the following volumes were delivered by long-term contracts: — 12TWh was sold to Centrica indexed to market prices as part of their 20% ownership of EDF Energy’s nuclear output. The Secretary of State, and other relevant government officials, are party to all information pertaining to this contract given it was put in place at the time of the British Energy acquisition. — 14TWh was sold via structured trades to a mixture of counterparties and large customers. Please note that these deals were inherited by EDF Energy as part of the British Energy acquisition and most of the counterparty based structured trades expired March 2013. — EDF Energy also has a number of long term power purchase agreements with small generators in its portfolio, namely wind farms. These contracts are volume variable and market indexed.
These Questions are Related to Gas Only 5. What percentage of your total gas trades are over-the-counter (OTC) versus trades on the wholesale exchange? EDF Energy traded a total of 2 billion therms for 2012 delivery, of which: — 95% was executed through EDF Trading as our market interface for forward hedging purposes. — 5% was traded on the on-the-day Commodity market (OCM) exchange by EDF Energy for balancing purposes (ie the market period just before physical delivery which is used to ensure that our physical inputs and off takes to the gas network are balanced). Proportions are broadly the same on buys and sells.
6. What are your criteria for trading OTC versus on the wholesale exchange? EDF Energy predominantly trades where market liquidity permits. On the longer term products the OTC market remains dominant. However, in the shorter term, the OCM exchange offers increased market liquidity and the only Out of Hours liquidity. EDF Energy’s use of market reflects this liquidity shift. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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7. What is the average difference in price for your OTC versus wholesale exchange trades? The majority of the gas traded by EDF Energy on either the OCM exchange (On the day Commodity Market) or OTC is not for overlapping time periods, ie the majority of our Within-Day and Day-Ahead trades are done on the exchange but this is not possible for longer dated trades as the platform does not allow trading in longer timeframes so the prices below are not comparable as they are not for like for like products. For 2012 delivery: — Gas trades on a forward hedging basis for 2012 delivery have been at an average price of 62.82p/th and were first placed in September 2009. — Gas trades through the OCM exchange platform for 2012 delivery have been at an average of 60.6p/ th and are traded using short term instruments.
8. What announcements have you made in accordance to REMIT? Where is it posted? If you trade gas outside of the UK within the EU, where do you post announcements for other EU markets? EDF Energy does not operate any physical assets that require REMIT publications for gas. West Burton B CCGT, as well as all other power generating assets, is published as part of the EDF Energy electricity REMIT website since early 2012 http://remit.edfenergy.com The Hole-House Farm gas storage facility operated by EDF Trading is fully compliant with REMIT requirements and has published a number of announcements on its own website, and more recently on the newly established REMIT website operate by National Grid Company which provides a platform for market participants to publish in a centralised place https://www.remit.gb.net
9. What access to market information do your traders have about any other division of your company? Do they have access to storage levels, upstream information if applicable (geological data), or daily production/ consumption data? EDF Energy does not operate gas assets at the moment. Operation of the Hill Top Farm storage asset (currently under development) will be handed over to EDF Trading, and operated under a single control centre with its own Hole House Farm storage facility. Accordingly, all information required to be published under REMIT legislation will be made available by EDF Trading either on the NGC REMIT platform or its own website (in the event the NGC platform is not available). EDF Trading also receives gas from an EDF SA (partly) owned offshore facility through an off take agreement. Any REMIT relevant information in this case would be published by the facility operator. EDF Trading is not allowed to act on any REMIT inside information relating to EDF Group assets prior to publication and controls are in place to ensure our compliance with this regulation.
10. Does your company deal in long-term contracts? Who has access to the information contained in the contracts? EDF Energy has no long-term gas contracts.
Additional Questions 11. How many of such “immobile” customers are there? Approximately 510k (9%) of our domestic customer accounts have not changed their tariff or account since 1998. These customers are supplied under our evergreen standard variable tariff, which has, on average, been the cheapest standard variable tariff of the major suppliers for 45 of the last 52 weeks.
12. Do you offer all customers all of your tariffs? If not, what are the reasons for not offering the full suite of tariffs? Every tariff we offer is available to all existing and prospective domestic customers. However, customers with an agreed debt repayment programme through a prepayment meter may be unable to access the full range of tariffs and discounts until they have repaid the debt, for example, because they are unable to pay by direct debit. These customers are supplied under our standard variable prepayment tariff, which is, on average, the cheapest standard variable prepayment tariff of the major suppliers.
13. What can you do to reduce the cost of customer service yet also improve their quality? In recent years EDF Energy has made a significant investment in its customer service systems and this has been supported by significant investment in training and quality. This has also included the introduction of 24 hour live web-chat services and improved online account management tools. As reported on our website we have started to see the effects of this investment with improvements in our customer service performance in 2013: (http://www.edfenergy.com/products-services/for-your-home/customer-commitments/#). cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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We expect that continued improvements in efficiency and quality will be realised over the coming years.
14. What proportion of calls/correspondence are caused by billing queries and by how much do you anticipate this will fall after the advent of smart metering? Currently approximately 22% of our customer calls are caused by billing queries. We anticipate that smart metering could bring about a 50% reduction in billing call volumes post 2020. However, we expect this to be partly offset by an increase in the average handling time of calls by up to 25%. In the shorter term, we are expecting an increase in call volumes handled in customer services as part of helping customers transition to smart metering.
15. If the billing problems were sorted out, do you think this could encourage new entrants to come into the Supply business, as you might not have the big upfront cost of establishing large customer call centres to cope with the inevitable problems. As can be seen above, although we would expect a reduction in call volumes post 2020 as a result of smart metering this will only partially reduce the overall demand on customer services and will also be preceded by an increase in call volumes. However, recent years has seen an increase in the number of new entrants in the domestic supply market, with three new entrants already in 2013. EDF Energy May 2013
Written evidence submitted by ScottishPower Executive Summary i. At ScottishPower we are committed to providing consumers with access to the best deal for them and to promoting opportunities for them to engage actively with us. Over the last 15 months, we have introduced a number of key initiatives aimed at building trust and creating greater transparency in the market. We have already reduced the number of core products available to customers from 12 to 798 and simplified our standing charge structure for all customers. We are focussed on providing customers with choice, clarity and control over their energy purchases. ii. Profits exist to provide a return on investment and to remunerate risk and innovation. They arise and indeed are necessary at various parts of the energy chain, reflecting principally the level of assets employed and the risks faced. Most of ScottishPower’s profit arises in the networks segment, whose prices are regulated by Ofgem after a process of diligent study, and this reflects the huge investments there. Profits in energy retailing, where there is somewhat less investment but more risk, tend to be lower. The generation segment— renewable and conventional, has significant assets and investment as well as significant risk, and that again will require profit to sustain it. It is important that discussion of energy company profits recognises their essential purpose in each segment in order to maintain a viable industry. iii. The industry is facing a large investment challenge in order to maintain reliable, diverse energy supplies while progressing on the path towards decarbonisation. Contributing towards meeting this challenge, we have a major investment programme in place. Our parent company, Iberdrola is planning to make £3.8 billion of investment in the UK between 2012–14 (that is, some 42% of the Group’s total global investment). Clearly, sustaining such a large investment programme requires appropriate returns on capital. iv. There has been much discussion in recent years about the impact of rises in energy costs on world markets and how these have led to higher bills. However, bills are also being significantly affected by rises in non-energy costs. For example, investment in electricity networks to modernise them and accommodate increasing renewable generation is leading to higher charges. It is necessary for retail companies to pay the costs of the Renewables Obligation and the carbon price floor, not to mention the small scale Feed-in Tariffs, the costs of smart meter roll-out, the Energy Company Obligation (“ECO”) and the Warm Home Discount scheme. These are all important programmes, and it is for Government and not the energy companies to decide the nature and scale of them, in the light of the expected bill impacts. v. In terms of present impact on bills, the largest single programme is the new Energy Companies Obligation (“ECO”) (with an estimated annual cost of between £1.3 billion and £2.35 billion99). That programme could comprise around four–8% of a typical dual fuel bill but will have benefits over time in terms of reduced consumption. However, the benefits tend to arise more slowly than the costs, because the measures installed typically last many years but have to be paid for as they are put in. There are also important questions about the design of ECO and whether it will be as cost effective as the main parts of the predecessor CERT scheme. 98 of which two are energy services products 99 The costs of the Energy Company Obligation, NERA, 21 November 2012 cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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vi. In any event, in the current discussion about energy prices, the benefits of energy efficiency schemes are not taken into account at all. We estimate that electricity demand per household is falling at around one–2% per year and gas demand at around three–4% per year, in significant part as a result of energy efficiency measures. But the benchmark consumption levels used to discuss energy bills are not updated annually, so that the benefits of energy efficiency programmes are omitted from the debate, while the costs continue to influence prices. vii. Suppliers and other industry stakeholders have a key role to play in informing and empowering consumers, with appropriate support from trusted voices such as Ofgem, consumer groups and Government. We support the aims of the Retail Market Review in seeking to build consumer trust. As part of this drive, we have introduced improved tariff information for consumers and we were the first supplier to develop a midata solution to provide personalised tariff information to any customer who wishes it in electronic form. We have also worked hard to improve our engagement with consumers, through our Best Deal100 and Winter Commitments,101 and working with some of our more vulnerable customers through new engagement panels to better understand any concerns.
Prices 1. What factors determine energy prices (wholesale prices, company operating costs, green levies, company profits etc)? What contribution do these factors currently make towards a typical household energy bill and how might this change over time?
1. There are two core components to energy bills, namely, the unit costs and the consumption level of any given consumer. In terms of unit costs, there are a number of components, all of which contribute to the costs of supplying a customer. Our typical bill is shown in the following table:
Table 1
TYPICAL SCOTTISHPOWER BILL BREAKDOWN Proportion Proportion Component Description (electricity) (gas) The basic costs of purchasing the energy for the 39% 58% Wholesale Energy customer. In the case of electricity, this includes Costs EU ETS and the Carbon Price Floor tax. Network and The costs of delivering the energy to the 24% 19% Transmission Costs customer’s home. The cost of meeting obligations set to deliver 20% 11% Government policy, such as ECO, Warm Home Discount, and Value Added Tax. In the case of Supplier Obligation electricity, it also includes Feed-In Tariffs and the Costs & VAT Renewables Obligation The costs of looking after customer accounts, 13% 9% Account Management including maintaining call centres, taking meter Costs readings and sending bills. The profit that we make as an energy retail Typically Typically 3% Profit company. 4%102
2. Looking to the future, we expect further increased costs from meeting energy efficiency obligations and transporting energy (and in the case of electricity, the RO, FiTs and carbon price floor) which are likely to have the effect of increasing consumer bills. The costs of the new ECO energy efficiency scheme are difficult to predict; for example, they will depend significantly on the willingness of consumers to part fund measures under the Green Deal. This is as yet an unknown quantity. We estimate that charges for energy transportation will rise by the equivalent of 2% of the bill value in each of the next two years. Over the longer term, electricity bills will be influenced by the need to pay sums due under Contracts for Difference under Electricity Market Reform.
3. The rollout of smart metering, as required by the Government, could cost between £9 billion and £12 billion by 2020.103 Although in time this is likely to benefit customers by improving customer service and reducing costs, as well as facilitating improved energy efficiency, and the net long term costs therefore could be zero or negative, the short term impact could be to increase prices. If supply companies decide to purchase the meters themselves, the necessary return on capital will show in the accounts as profit; if the meters are leased, a similar sum of money will show up as operating costs instead. 100 http://www.scottishpower.co.uk/support-centre/service-and-standards/our-commitments/ 101 http://www.scottishpower.co.uk/your-home/our-winter-commitments 102 In recent years, profit margins on supply to domestic customers have been much lower—nearer 1% 103 Smart meter rollout for the Domestic Sector: Impact Assessment, DECC, March 2011 cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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4. Table 2 shows the increase expected in ScottishPower’s capital investment per annum with over half of that investment expected in the regulated Networks business.
Table 2 TYPICAL SCOTTISHPOWER AVERAGE ANNUAL INVESTMENT Year Average Annual Investment £m104 2007 £712m Average 2008–2011 £850m Planned Average 2012–2014 £1,250m
5. Profits exist to provide a return on investment and to remunerate risk and innovation. They arise and indeed are necessary at various parts of the energy chain, reflecting principally the level of assets employed and the risks faced. Table 3 shows ScottishPower’s 2012 profit (EBITDA) by business, showing that the overall profit mostly arises in the Networks business (62% of total profit). Networks also accounted for around 56% of total investment made in 2012.
Table 3 SCOTTISHPOWER 2012 RESULTS BY BUSINESS ScottishPower Business Profit (EBITDA) Comment £m105 Networks 760 Regulated Liberalised Business 292 Competitive, market led (Generation and retail) Other 33 Renewables 136 Competitive, within a regulated support framework Total 1222
2. To what extent (if at all) should the Government or the regulator intervene in the market to affect the prices consumers (or certain groups of consumers) pay for their energy? Should any changes be made to the Government’s current approach? 6. Competition can drive innovation and efficient delivery of services and ensures that prices are over time properly aligned to costs, return on capital and risks. It is not possible for the overall level of prices to be below the level needed to support the costs, return and risks for a sustained period as this would leave the industry unable to attract investment or market entrants. Direct intervention as respects the level of prices therefore risks being counter-productive except in areas such as networks where competition is not possible. A sound foundation of independent economic regulation is important in such cases. 7. Interventions aimed at assisting certain groups of consumers are essentially redistributive, in that the costs of such interventions are paid for by other consumers. Schemes such as the Warm Homes discount achieve this without significant market distortion; it is for the Government to set the levels of such schemes, balancing the benefits for those who receive payments against the costs for other consumers. While we are happy to administer such schemes to the best of our ability, we think that traditional welfare payments can be easier to target more precisely and have a generally more progressive tax base.
3. How effective is Ofgem in ensuring consumers get a fair deal? Are there any areas for improvement? 8. Ofgem’s core function of the regulation of networks has generally been regarded by all parties as tough but fair. They have approached the assessment of price controls with appropriate rigour and evolved results which do not give investors all they want, but have enabled the provision of necessary capital. 9. As regards energy suppliers, Ofgem’s approach has been to support the operation of the market, but ensure both a high level of consumer protection, and the necessary conditions in which consumers can be informed and engaged. We agree with this approach, as embodied in Ofgem’s Retail Market Review (“RMR”). 10. A key aim of this is seeking to ensure that all consumers have the confidence and ability to engage in the market and get the best deal for them. If designed properly, we consider that these proposals could provide a basis for helping to strengthen consumer engagement in the market. Any reforms should seek to strengthen 104 The average split by ScottishPower business for 2012 -2014 is Networks 52%, Liberalised 10%, Renewables 33%, Corporate 5% 105 Financial performance is presented at EBITDA level. Further costs such as depreciation, bad debt provisions and asset write- off need to be deducted from this to arrive at Operating Profit (for 2012 this is approximately two thirds of EBITDA). The figures shown have been prepared for group reporting purposes. Our formal statutory accounts for 2012 have not yet been prepared. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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incentives for consumers to engage and suppliers to compete actively for customers, whilst facilitating future innovation, investment and new entry into the market. Indeed, we have sought to contribute to this through our Best Deal106 commitments, initiatives to reduce our core tariff numbers and improved clarity of our tariff information.
4. Could it be possible to benchmark energy prices to provide greater certainty about whether consumers are getting a fair deal? If so, how might this be achieved in practice? 11. It is always possible to create some kind of benchmarking of prices, but careful consideration is needed as to how this could be used to make meaningful and accurate assessments on whether prices are fair. There are a number of ways that this could be done, for example, through a comparison of prices in the GB energy market with those in other energy markets or by introducing a tariff comparison metric that would allow a more ready comparison of prices for different customers. Any benchmarking across other energy markets would have to include an assessment of the tax regime, regulatory framework and investment costs facing each market to provide a more accurate comparative picture. Any tariff comparison metric would have to be carefully designed to reasonably reflect differences in tariffs. 12. We estimate that electricity demand per household is falling at around 1–2% per year and gas demand at around 3–4% per year, in significant part as a result of energy efficiency measures. But the benchmark consumption levels used to discuss energy bills are not updated annually, so that the benefits of energy efficiency programmes are omitted from the debate on bills, while the costs continue to influence prices.
5. Could any other measures be put in place to ensure consumers are paying fair prices for energy and to provide consumers with greater confidence in this? 13. We continue to support the underlying aims of Ofgem’s Retail Market Review and the opportunity that this presents to ensure that the energy retail market works effectively for consumers, through an appropriate balance of competition and consumer protection. We consider that reforms which complement a strong competitive market could help consumers to better access the best price for them and to have confidence that they can do so. As a supplier, we have sought to complement this work with our own “trust and transparency agenda”, underpinned by our World of Difference commitments, in which we have focussed on providing customers with choice, clarity and control over their energy purchases, including through improved tariff information and tariff choices. We have also sought to help improve wholesale electricity market liquidity and market access for small suppliers.
Profits 1. Many consumers believe that energy company profits are the reason the energy bills have been going up in recent years. Is this perception fair? 14. Movements in wholesale prices have been a key driver of price increases in recent years. Our own customer research suggests that consumers tend to substantially over-estimate the contribution of supply company profit to their bills although this may reflect a lack of differentiation between supply company profits and those elsewhere in the chain. Accordingly, while supply company profit remains a small contributor to consumer bills, profits in the other segments (especially generation and networks) are growing commensurately with the large investments being made. It is important that discussion of energy company profits recognises their essential purpose in each segment in order to maintain a viable industry. 15. Furthermore, the costs associated with social and environmental obligations are a growing element of unit costs driving bills upwards. Whilst we are committed to delivering the programmes and investment that follows from these obligations, we do consider that it is important to recognise that our delivery is within the context of an overall framework set by the Government. We welcome the concept of the Treasury’s Levy Control Framework as providing clarity around the extent of these obligations as set by Government within the constraints of its assessment of overall affordability. 16. We also think that there is a tendency to equate headline energy company profits with price rises. Our most recent price increase was in fact driven by a combination of rising wholesale costs (8% increase), distribution and transportation costs (11% increase)107 and the costs of delivering energy efficiency initiatives (34% increase) between 2011 and 2012.
2. Why is there so much uncertainty about the level of profits the large, vertically integrated energy companies are making? What could be done to improve clarity? 17. In principle, there is significant transparency around the level of profits of vertically integrated energy companies given that they prepare both consolidated accounts for group activities, showing profits in detail for each business, and the consolidated segmental statements for Ofgem, covering retail and generation businesses. However, there are a number of different calculations used by investors to assess profits (for example EBITDA and EBIT which can differ significantly and are used for different purposes) and it is easy for these to cause 106 http://www.scottishpower.co.uk/support-centre/service-and-standards/our-commitments/ 107 Figures expressed on a dual fuel basis. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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confusion. It is an important task for energy companies to be as clear as possible in the information they provide, so that customers can understand the levels of profit in different areas of the business. 18. The different business models for different elements of the vertically integrated energy chain are not always readily distinguishable for consumers. For example, a significant proportion of our profit (62% of EBITDA profit in 2012) is derived from our Networks business, which is subject to strictly regulated price controls determined by Ofgem (see Table 3 above). This profit is principally needed to provide a return on the very significant capital investments in networks. However, it may not be readily distinguished by all commentators from that of the retail business in supplying energy. 19. We therefore consider that more could be done to promote the segmental statements produced by vertically integrated companies to make them more accessible and user-friendly. We also believe that we need to do more as an industry to communicate our messages clearly to all external stakeholders, including the media.
3. How useful are Ofgem’s electricity and gas supply market indicators in monitoring the level of profits made by energy companies? Could they be improved? 20. We think that the market indicators are more accurate in providing an indication of how the profits move from year to year than they are in terms of the absolute level. Work done by Nera for Energy UK has indicated a number of methodological questions about the Ofgem calculation which they consider to overstate profits in a number of ways. However, this does not detract from the value of the indicators in showing how things have changed from one period to another. 21. The methodological differences may explain why the market indicators tend to give higher profit figures than the audited data used in the industry’s segmental accounts. We would welcome more work being done to reconcile these differences, perhaps by commissioning an independent review of the methodologies used.
4. How useful are the segmental generation and supply statements that major energy suppliers are required to produce in understanding where companies are making their profits? 22. We think that the segmental statements are useful and enable the sources of profit to be much better understood. However, we would welcome steps to improve their visibility to consumers and stakeholder groups. We would also like to see them required to be provided by all suppliers and not just the vertically integrated suppliers (or at least some version of the same to be provided by all suppliers) and include comparisons of profit levels with those of other industries to provide some context. Indeed, we consider that Ofgem could have a role to play here in facilitating the use of statements in a more accessible format for consumers and others.
5. Do Ofgem’s supply market indicators and the segmental reports provided by energy suppliers help to increase transparency and public trust in energy companies? Could they be improved to provide greater transparency? 23. We think that the Ofgem supply market indicators provide a valuable indication of how things are moving, close to real time. Similarly, the segmental statements provide considerable transparency as to the segments within which energy companies are making their money. Ofgem has periodically updated its guidance on the statements to make them clearer, more consistent and more accessible to the public. However, we also recognise that there needs to be a concerted effort by the industry generally to better communicate the position. We are committed to working with the Government and others to do this. As part of this, more can also be done to provide greater context of company results against the future investment needed.
6. To what extent does the way energy companies communicate profits to the general public influence the public’s perception of these companies? 24. Energy suppliers need to have an open, honest and sensible dialogue with consumers about prices and how these are made up, including the element of profit that contributes towards the bill. That dialogue also needs to take into account the way in which energy efficiency programmes are leading to steady reductions in average consumption levels, so that the movement in the overall bill value is properly described. At present, consumers are having to pay the cost of energy efficiency programmes, but are not being told about the benefits when energy bills are discussed. As part of a discussion about prices and profits, we must also communicate the scale of the future investment challenge and the importance of appropriate returns to sustain this.
Fuel Poverty 1. Is the Government on track to meet its target of eliminating fuel poverty by 2016 and will reduced Government spending in this area affect their ability to achieve this target? 25. Whilst the taxpayer-funded Warm Front programme has ended in England and Wales, a broadly similar programme has been set up as the Affordable Warmth element of the new ECO. The new programme is somewhat bigger than Warm Front and should therefore do more to help alleviate fuel poverty; however, energy companies may find it difficult to find qualifying consumers as they have little access to income data. This could increase costs of delivery. As the costs of the programme will fall on energy customers, rather than cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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taxpayers, the funding is more regressive and this will offset some of the gains. As ECO rolls out, we remain committed to playing our part in meeting fuel poverty challenges faced by households under the framework set by the Government. 26. Given the developments in incomes and energy prices, it seems unlikely that fuel poverty will be eliminated by 2016 despite the considerable improvements to the housing stock made through existing insulation programmes.
2. Has the Hills Review resulted in any changes to fuel poverty policy? How could its findings be used to improve the efficacy of fuel poverty policy? 27. We broadly welcome the Government’s plan to adopt the new Low Income High Costs definition (LIHC) as proposed by Professor John Hills under his Review. This measurement should help the Government to better identify and design policies that focus resources on those most in need, whilst giving appropriate weight to long-lasting energy efficiency improvements to the housing stock. 28. However, the new Low Income High Cost approach makes it almost impossible to literally eradicate fuel poverty. This is because under this approach, half of all households will always be defined as having higher than average (median) costs and it is difficult to imagine that none of these households would be low income. Accordingly, we welcome steps to reconsider the existing statutory target with a view to supporting more focussed ongoing efforts to mitigate fuel poverty challenges. In this context, we also welcome the Government’s commitment to publishing a revised Fuel Poverty Strategy later this year.
3. To what extent are current fuel poverty policies reaching the right people? Are there any particular groups that are currently not getting the necessary support? And will this change under the move to ECO? 29. During the Government’s consideration of the design of ECO, the Hills Review highlighted the potentially regressive impact of the ECO given that it was based on a supplier obligation funded by consumers generally. This was exacerbated by the strong focus on solid wall insulation at the expense of more cost- effective measures, so risking that the scheme as a whole might have increased rather than reduced fuel poverty. 30. Although the final ECO scheme brought forward by the Government provides a greater scope for the installation of more cost-effective measures, a focus on solid wall insulation remains. There remains a high risk that ECO will cost much more than estimated in the impact assessment, especially if fewer people than expected take up Green Deal plans to part fund measures. This could mean that ECO may exacerbate fuel poverty in some groups. 31. We are strongly committed to building on our existing partnership working to further deliver energy efficiency measures to low income and vulnerable persons and communities under ECO. However, we would note the significant challenges that can often arise in terms of outreach to households willing to take up energy efficiency measures and so in this context we welcome the introduction of the Government’s referrals service scheme to facilitate delivery. We would also welcome further opportunities to work with the Government on ways of strengthening outreach to those at risk of fuel poverty.
4. What support is available for fuel poor households living in solid-wall and hard-to-treat properties? Could this be improved? 32. The new ECO with its emphasis under the carbon saving obligation on delivering solid wall insulation or hard-to-treat cavity insulation to households should increase the support available for those living in such properties, including those either in or at risk of fuel poverty. We are committed to delivering the benefits of such measures. However, much will need to be done to encourage consumers to take advantage of this support, given their frequent reluctance to take-up energy efficiency measures and especially the more challenging treatments such as solid wall insulation.
5. Will the Government’s proposals to ensure that consumers are on the cheapest tariff have any impact on fuel poverty? 33. We are committed to helping consumers find the best deal for them that we offer, that is the one which best suits their particular preferences. We have recently written to over 500,000 credit customers, in support of our 2012 Winter Commitments, to highlight the potential benefits of converting to a direct debit payment method, with just over 3,000 customers already switching to direct debit to date. 34. In theory, if consumers can better access cheaper tariffs, then this should help to alleviate the impact of their bills and so potentially reduce the risk of being in fuel poverty. However, it is not possible to state conclusively at this stage whether the Government’s proposals will have this effect. A number of industry analysts and academic commentators have observed that the Government’s tariff proposals could result in the cheaper tariff offerings being withdrawn and more generally a reduction in competition. We agree with the Government’s decision to include a sunset clause in the Bill which should help to mitigate that risk in the longer term. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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6. To what extent do fuel-poor households engage in switching? What are the barriers to greater levels of switching from these groups? 35. Overall switching levels have fallen since 2008, although we still consider that they are high relative to many other markets. Recent data from Consumer Focus suggests that, while consumers in poorer demographic groups tend to switch less than those in the wealthiest groups, there is still a reasonable level of switching activity (13% switching compared to 17% of the wealthiest customers108). Moreover, our experience in respect of Pre-Payment Meter customers (where the proportions of those on lower incomes tends to be higher) shows that there is evidence to suggest reasonably frequent levels of switching. Going forward, we are committed to promoting our choice agenda to all consumers and we have recently started working with some of our more vulnerable customers through engagement panels to better understand any specific concerns that they may have.
7. To what extent do fuel-poor households current take advantage of energy efficiency schemes? Could anything be done to increase uptake? 36. We know that it is hard to get fuel poor households to engage with existing energy efficiency schemes. Our experience with the Carbon Emission Reduction Target (CERT) has shown that even when the measures are offered for free, many consumers are still unwilling to take up the offer. 37. These challenges are likely to continue under the new ECO, particularly making delivery of the Affordable Warmth sub-obligation challenging. In this context, we welcome the Government’s introduction of a referrals service to promote opportunities to households and are keen to engage further with the Government on possible additional ways in which eligible households can be identified and encouraged to take up the measures that might benefit them. February 2013
Supplementary written evidence submitted by ScottishPower ENERGY PRICES, PROFITS AND POVERTY—FURTHER INFORMATION I am writing in response to your email of 24 April in which you requested further information on a number of topics, some of which came up in Neil Clitheroe’s oral evidence to the Committee on 16 April. The questions asked were as follows: (a) A question by Barry Gardiner MP as to the reasons behind the £119 million adjustment in our 2010 segmental statement relating to free carbon permits under EU ETS (we think that the figure of £190m mentioned in the transcript may be a mis-hearing); (b) A question by Barry Gardiner MP seeking information on the check list in our segmental statements for 2011; (c) Ten questions relating to our energy trading; and (d) Four questions relating to our retail business. I attach an annex which addresses each of these areas. Do please get in touch if you would like any further information.
Annex A. Reclassification of Free Carbon Allowances Generation companies in the UK have an obligation to procure carbon allowance certificates in relation to the volume of carbon emitted by their power stations. Up to December 2012, a number of certificates were allocated free in such cases by the Government. In its 2010 segmental statements, ScottishPower allocated the £119 million value of the free carbon permits (which in its statutory accounts accrued to the generation business) to the trading business and disclosed the adjustment clearly in a footnote. There was limited guidance from Ofgem in relation to the 2009 and 2010 segmental accounts as to the preferred approach to the free carbon allowances. We were aware that there were a number of different models within the industry as to how generation plant should be accounted for, ranging from tolling agreements (where the economics of the power generation were taken totally into trading businesses) to arrangements where the economics were fully within the generation business. In order to assist with comparability, our chosen approach for the 2010 statements was to exclude the free allowances, which had no impact on the operation of the power stations, but to show the adjustment clearly so that a permit-inclusive figure could be easily calculated. BDO’s report for Ofgem on the industry’s 2010 segmental statements109 discussed the merits of the various possible approaches to this issue, commenting that our approach would give greatest uniformity and would 108 Switched On? Consumer experiences of energy switching, Consumer Focus, 28 January 2013 109 Completed 16 January 2012 and published by Ofgem on 31 January 2012 cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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also allow most consistency with reporting from 2013 when free allowances cease (and with new generators in the market who did not receive free allowances). However, they observed that such an approach would involve more work in producing the segmental accounts and that it might be more practical to adopt another approach. Ofgem considered these recommendations and for the 2011 segmental statements issued guidance that all companies should account for the free allowances in the generation segment. ScottishPower prepared its 2011 segmental accounts accordingly.
B. Check list in 2011 Segmental Statements Ofgem introduced the check list for the 2011 segmental statements. This was designed to show where both the economic impact and decision taking in relation to various functions reside. Our check list (attached as annex 2) confirms that the profit and loss implications of all the identified functions resides in the Generation and/or Supply business as appropriate and in no case is allocated to “another part of the business”. However, a lot of decisions are made by the trading business on behalf of the Generation or Supply business, and so in 15 cases the identified functions are shown as being undertaken in “another part of the business”. The financial implications nevertheless remain within the generation and/or supply businesses and are therefore fully reported upon in the segmental statements.
C. Energy Trading Questions These Questions are Related to Electricity Only 1. What percentage of your total electricity trades are over-the-counter (OTC) versus trades on the wholesale exchange? In 2012, OTC trades represented 84.9% of total power traded, exchange trades 14.6% and bilateral Power Purchase Agreements with third parties 0.6%.
2. What are your criteria for trading OTC versus on the wholesale exchange? We select the trading platform for each individual trade based on it representing the most economic route to market available to us at that point in time. Market liquidity, or availability of trade bids/offers, is a key factor. The choice of OTC or exchange platforms is increasingly affected by regulatory constraints. We anticipate that the introduction of the new European Market Infrastructure Regulation (EMIR) regulations will incentivise market participants to increasingly use exchanges rather than OTC platforms.
3. What is the average difference in price for your OTC versus wholesale exchange trades? There is no clear pattern in the difference in bid/offer prices between the two options, as prices may be cheaper on one platform on any given day, or during any moment within that day, but more expensive the following day. However, there are different fee and collateral implications across the two options. For OTC trades, we need to have negotiated bilateral master agreements with sufficiently creditworthy counterparties and have sufficient remaining credit capacity in order to trade. We incur a transaction fee, payable to the OTC broker, each time we execute an OTC trade. For exchange trades, we need to have negotiated membership of the exchange (or a bilateral master agreement with a member of the exchange through whom we can subsequently trade). We also need to post collateral known as initial margin each time we trade to cover the risk of default. We also subsequently need to post/receive variation margin on a daily basis until expiration of each trade which reflects the difference between the price of the trade and its subsequent market value. We incur a transaction fee which is payable to the exchange, and a clearing fee which is payable to the clearing house, each time we execute an exchange trade. Furthermore, we may incur credit costs with a broker clearer.
4. Does your company deal in long-term contracts? Who has access to the information contained in the contracts? We purchase a relatively small portion of our wholesale electricity via Power Purchase Agreements (PPAs) as part of our approach to meeting the Renewable Obligation (RO) commitments of our supply business. The counterparties to our PPAs are 11 independent renewable generators who operate windfarms in the UK and our own renewable generation business, ScottishPower Renewables. As these contracts are bilaterally negotiated, only ScottishPower and the counterparty have access to the information in these contracts. We do not currently have any other long term electricity contracts, except for normal forward trades. We trade the vast majority of our wholesale electricity on a forward basis via a combination of OTC and exchange trades. Details of each individual OTC and exchange trade are immediately disclosed to all market participants cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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by the relevant exchange or OTC broker upon the trade being executed. These details include the size, period, shape and price of the trade, and a time/date stamp, ensuring transparency of this trading activity.
These Questions are Related to Gas Only 5. What percentage of your total gas trades are over-the-counter (OTC) versus trades on the wholesale exchange? In 2012, 89.5% of gas volumes traded by ScottishPower were OTC trades, while exchange trades represented 10.5%.
6. What are your criteria for trading OTC versus on the wholesale exchange? We select the trading platform based on it being the most economic route to market. Market liquidity, or availability of trade bids/offers, is a key factor. The choice of OTC or exchange platforms is increasingly affected by regulatory constraints. We anticipate that the introduction of the new European Market Infrastructure Regulation (EMIR) regulations will incentivise market participants to increasingly use exchanges rather than OTC platforms.
7. What is the average difference in price for your OTC versus wholesale exchange trades? There is no clear pattern in the difference in bid/offer prices between the two options, as prices may be cheaper on one platform on any given day, or during any moment within that day, but more expensive the following day. However, there are different fee and collateral implications across the two options. For OTC trades, we need to have negotiated a bilateral master agreement with a sufficiently creditworthy counterparty and have sufficient remaining credit capacity in order to trade. For exchange trades, we need to have negotiated membership of the exchange (or a bilateral master agreement with a member of the exchange through whom we can subsequently trade). We also need to post collateral known as initial margin each time we trade to cover the risk of default. We also subsequently need to post/receive variation margin on a daily basis until expiration of each trade which reflects the difference between the price of the trade and its subsequent market value. Furthermore, we may incur credit costs with a broker clearer.
8. What announcements have you made in accordance to REMIT? Where is it posted? If you trade gas outside of the UK within the EU, where do you post announcements for other EU markets? Since REMIT entered into force in December 2011, ScottishPower has publicly disclosed inside information in respect of its generation and gas storage facilities in compliance with those requirements. We do not own or operate any upstream gas production assets. We have robust procedures in place and have deployed staff training for impacted employees in order to ensure that we comply with REMIT obligations. The information reported includes our planned outage dates, real-time asset availabilities and return to service dates during periods of unplanned outages. Furthermore, in relation to our relatively small gas storage facility at Hatfield Moor, we disclose opening and closing stock levels and total injections and withdrawals on a daily basis. In addition to disclosing information which was already reported on behalf of the industry by Elexon and National Grid, we maintain reports on our gas storage and generation assets via our Asset Status Update1 and Planned Outage2 reports. For activities undertaken by the Iberdrola group outside of the UK but within EU states, a similar approach is taken. These reports can be viewed on the Iberdrola website3. It should be noted that Iberdrola does not own or operate any gas production or storage assets outside of the UK but within the EU.
9. What access to market information do your traders have about any other division of your company? Do they have access to storage levels, upstream information if applicable (geological data), or daily production/ consumption data? ScottishPower neither owns nor operates any gas production assets so our traders have no access to such production information, although they do have access to market information about our gas storage facility at Hatfield Moor. Inside information in relation to that facility is disclosed to the market in accordance with REMIT’s requirements to ensure that we comply with our REMIT obligations on transparency—see our response to Q8. Our traders also comply with the prohibition on insider trading in respect of any such inside information. Our traders have access to production4, storage5, interconnector flow, and national demand data published on behalf of competitors by National Grid via their public access website. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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10. Does your company deal in long-term contracts? Who has access to the information contained in the contracts? Yes. We purchase wholesale gas via Gas Sales Agreements (GSAs). The majority of gas purchased under these GSAs is delivered to Scottish Power at the UK’s virtual trading hub, the NBP, and in this case no information on how this gas is supplied is provided to Scottish Power by the counterparties. We also have two GSAs linked to specific gas fields in the UK Continental Shelf (UKCS) which were executed in the 1990s. The gas volume from these two contracts is relatively low in comparison to our annual demand (the percentage varies from year to year but is less than 5%). The information that we receive is in relation to the expected volume of gas produced from these fields and is not publicly available unless via the REMIT submission of the producer. We do not receive any other information from the counterparties who operate in the North Sea that is not in the public domain. As all of the contracts described above were bilaterally negotiated, only Scottish Power and the counterparty have access to the information in these contracts. Additionally, we trade wholesale gas on a forward basis via a combination of OTC and exchange trades. In this case details of each individual OTC and exchange trade are immediately disclosed to all market participants by the relevant exchange or OTC broker upon the trade being executed. These details include the size, period, shape and price of the trade, and a time/date stamp, ensuring transparency of this trading activity.
D. Energy Retail Questions 11. How many of such “immobile” customers do you have? We do not consider any of our customers as being “immobile”. Although some customers engage with the market less often than others, we would be very ill advised to take their loyalty for granted and a strategy around giving poor value for money in the areas where our brand is strongest would be self defeating. We do not charge higher margins in our traditional supply areas.
12. Do you offer all customers all of your tariffs? If not, what are the reasons for not offering the full suite of tariffs? All of our products are available to all customers, though some products require online or direct debit facilities. The only exception to this is where a customer has a meter in his or her home which requires a particular kind of tariff. This is the case for prepayment customers. Another example is that we have specific tariffs for customers with electric heating that would only be available to customers with a suitable multi-rate meter.
13. What can you do to reduce the cost of customer service yet also improve your quality? We operate within a competitive market and are subject to competitive pressures which encourages efficiency in our operations. Within a typical ScottishPower dual fuel bill, customer support costs (consisting of billing, account and data management and service support costs) currently account for 7% of the overall charge. We work hard to deliver the best service we can to our customers and we constantly challenge ourselves to improve the quality of our service, within the context of keeping prices as low as possible. In 2012 we were awarded a 5 star rating by Which? for our Billing and Account Management, and experienced an increase of 10% in the overall Satisfaction score in the uSwitch customer survey. Between 2010 and 2012 we have also experienced a significant reduction in complaints referred from Citizen’s Advice and Consumer Focus, of 80% and 40% respectively. We also continuously monitor and publish a set of customer service metrics and in 2013, 90% of our customers rated their customer experience as giving “Full Satisfaction”.
14. What proportion of calls/correspondence are caused by billing queries and by how much do you anticipate this will fall after the advent of smart metering? In 2012, around 27% of our inbound customer contacts related to billing queries. In the long term, we expect the installation of smart meters to reduce this considerably as customers experience the benefits of increased accuracy of billing and greater visibility, understanding and control of their energy consumption via In-Home Displays, web-pages or Smartphone applications. However, we would also expect that, as smart meters are rolled out, we may see a shorter term increase in the number of customers contacting their supplier to support them through the changes that smart meters may bring. May 2013
References 1 http://www.spenergywholesale.com/documents/asset_status_update.pdf 2 http://www.spenergywholesale.com/documents/planned_outages.pdf cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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3 http://www.iberdrola.es/webibd/corporativa/iberdrola?IDPAG=ENWEBCONLINNEGRMT 4 http://www.nationalgrid.com/uk/Gas/Data/EFD/ 5 http://www.nationalgrid.com/uk/Gas/Data/storage/
Written evidence submitted by Ofgem 1. Introduction 1.1 Ofgem welcomes this inquiry, particularly as it should help to bring further transparency to this sector, building both stakeholder understanding and consumer trust in the market. We agree with the Committee that this is an important step towards improving consumer engagement, which should drive energy suppliers to work harder to retain customers and win new ones, resulting in more effective competition. This should deliver real benefits for consumers through ensuring bills are no higher than they need to be, better service and more meaningful choice. 1.2 Consumer trust and markets that work effectively are particularly important now. They are needed to help realise the benefits of an ambitious smart meter programme and to support the significant change that the GB energy sector will undergo in the next few years to reduce emissions and improve security of supply; a transformation that is likely to put further upward pressure on consumer bills110. 1.3 Everything we do is about making a positive difference for energy consumers. We actively monitor the market and have taken action where we have identified problems. We have seen improvements in the market and in transparency, but it remains work in progress. We have published, and continue to produce a range of documents to aid transparency. We plan to continue this work and improve its effectiveness. Ofgem’s retail market reforms will seek to deliver an energy market that is simpler, clearer and fairer for consumers. 1.4 Our response to the call for evidence focuses on those questions for which Ofgem has evidence it can draw from.
2. Ofgem’s Legal Environment: Objectives and Powers 2.1 Ofgem111 is the regulator of Great Britain’s gas and electricity markets. Our powers, duties and objectives come from GB statutes and relevant EU legislation. This legal framework requires us to interpret the interests of consumers in a broad sense, as explained below.
GB and EU legislation 2.2 Ofgem’s Principal Objective is to protect the interests of existing and future energy consumers112.We are generally required to act in the manner we consider will best further the Principal Objective, by promoting effective competition in the markets we regulate wherever appropriate. However, we must always first consider whether there are other ways which would better protect those interests. In performing our duties, we must also have regard to a number of other factors, including the interests of individuals who are chronically sick, of pensionable age, with low incomes or live in rural areas, as well as to those of other consumers. 2.3 In addition to GB requirements, we are subject to a range of duties and objectives laid down by the EU law (including the Gas and Electricity Directives)113. Among other things, these emphasise Ofgem’s role in developing an environmentally sustainable, competitive, single energy market within the EU. This in turn constrains us in terms of the end user price controls that can be implemented in the GB market.
Ofgem’s approach to regulation in energy markets 2.4 It is for Government to determine the broad policy parameters for the GB energy market within the context of EU law. The current policy aims to achieve full market liberalisation and therefore places particular emphasis on the promotion of competition. Within this context, Ofgem works to regulate the market in line with the domestic legal framework and the EU Directives (which emphasise our role in developing competitive markets). We therefore seek to protect the interests of GB energy consumers through the introduction and promotion of competition in the energy market and by other means. We do not regulate end consumer prices or control company profits. 2.5 This has important implications for how we regulate and supervise the markets. Our focus is on ensuring the markets work effectively and monitoring whether or not this is the case. Although prices and profits provide important information about how markets are functioning, companies are free to price at whatever level they 110 See page 11 here: http://www.ofgem.gov.uk/Markets/WhlMkts/monitoring-energy-security/Discovery/Documents1/Project_ Discovery_FebConDoc_FINAL.pdf 111 For the purposes of this document, references to Ofgem will be taken to cover both Ofgem and the Gas and Electricity Markets Authority. 112 These interests, as set out in Gas Act 1986 and the Electricity Act 1989, include the reduction of greenhouse gases, the security of the supply of gas and electricity to consumers, and Ofgem’s fulfilment of the objectives in the EU Gas and Electricity Directives. 113 As noted above, these same EU-level objectives are incorporated into the Principal Objective. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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believe meets their business objectives and are under no obligation to pass cost reductions through to customers. They are free to organise their businesses as they see fit.
2.6 We protect the interests of consumers by monitoring the market and taking action where we find concerns. We take regulatory intervention very seriously, and intervene only where we can make a positive difference to consumers. That is, where we are confident that the benefits of intervention outweigh the costs, and the risk of unintended consequences is minimised. We are required by law to ensure that our interventions are both necessary and proportionate.
2.7 In terms of market transparency, we consider it an important element in the functioning of the market as it increases consumer confidence and engagement, which can intensify competition. We have been quick to tackle poor transparency where we have found problems. Furthermore, we believe that our current measures, which we detail in this submission, strike the right balance between transparency of prices and profits for consumers while giving the market and all energy suppliers the flexibility to compete effectively. In this context it would be inappropriate for us to require companies to organise and operate their business in a specific way in the pursuit of transparency.
2.8 We remain confident that our current actions will make a positive difference for consumers. However, some of these measures are relatively recent, and our RMR proposals have yet to be implemented. This means it will take time before consumers realise the full benefits.
Enforcement
2.9 Ofgem engages in market monitoring as part of its activities. We have the power to investigate suspected breaches of licences, competition or consumer protection law. Where a breach is found we have the power to impose fines and/or take other enforcement action.
2.10 We have taken a variety of enforcement action in recent years114. Between April 2010 to February 2013 we completed 14 formal investigations into 11 different companies. These included both licence condition and competition law breaches and resulted in fines imposed totalling over £35 million and nearly £4.7 million payments secured to directly benefit consumers. During the same period, we also completed a large number of informal investigations into alleged breaches of the relevant legislation relying on a variety of tools to secure improvements in supplier practices and action to put things right for consumers. In some cases agreement was reached on financial payment by way of redress and outcomes were duly publicised.
2.11 However, taking an enforcement action can be a complex and lengthy process, especially if the case is contested by the regulated company. The detail and progress of all investigations cannot be made transparent until decisions are reached. This can make enforcement an opaque process from the perspective of the outside world.
3. The Role of Transparency in Driving Effective Competition
3.1 This section sets out our view on the importance of transparency for well functioning energy markets, shows how we have improved it, and explains our ongoing actions to build consumer confidence.
Why is transparency important?
3.2 Transparency facilitates market functioning in a number of ways: — First, transparent and simple consumer prices and bills facilitate consumers to engage with the market. Consumer engagement is important to drive companies to compete more vigorously to retain customers and win new ones. Ofgem’s commitment to tackle poor transparency of consumer prices and bills is at the heart of our Retail Market Review which is leading to reforms to deliver a simpler, clearer and fairer market for energy consumers. Furthermore, the Supply Market Indicator improves consumers’ understanding of the relationship between retail prices and the costs that suppliers incur. — Second, transparent wholesale markets will result in accessible and robust wholesale prices (for gas and electricity) enabling independent suppliers and generators to compete more effectively115. This is important to ensure consumers get the best possible deal from the energy markets. One key objective of Ofgem’s Liquidity Project is to ensure that all market participants have access to the prices and products they need to compete effectively. 114 See: http://www.ofgem.gov.uk/Media/FactSheets/Documents1/factsheet%20113%20-%20enforcement.pdf. In addition to the investigations in the factsheet, in Oct 2012 we imposed penalties of £125,000 and £375,000 on Opus Energy Ltd and Wales and West Utilities Ltd respectively. 115 Page 1 here: http://www.ofgem.gov.uk/Markets/RetMkts/rmr/Documents1/July%202012%20liquidity%20open%20letter.pdf cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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— Third, transparency of where the companies make their profits allows consumers to better understand how profitable energy retail services are. This understanding should lead to greater trust and engagement with the market. In addition, more transparency on the profitability of large energy companies makes it easier for new firms to enter the market—or independents to enter different segments of it116. The Consolidated Segmental Statements provide information on the profitability of large energy companies’ generation and domestic and non-domestic supply business. — Finally, we use the publication of information as a means to achieve our statutory objectives. Transparency in this respect may provide reputational incentives on companies to improve their performance and we have seen this operate effectively through our Social Obligations Reporting where we publish information on, amongst other things, consumer debt and disconnection.
3.3 In order to communicate more effectively with consumers and other stakeholders, we regularly produce factsheets117 on important aspects of energy market and our key areas of work. These factsheets are designed to present information in an accessible and non-technical way.
3.4 In sum, the benefits of appropriate market transparency cannot be underestimated. As reported in Ofgem’s Project Discovery, the substantial wave of external investment in the GB energy market after liberalisation could be largely attributed to the high degree of transparency in the GB market and the perception that the risks of government and regulatory intervention were low118. This is particularly important in the current context, where significant investment is needed.
Ofgem’s past actions to enhance transparency
2008 Energy Supply Probe
3.5 In the 2008 Energy Supply Probe119 (The Probe) Ofgem carried out an in depth review of the energy supply market to understand better how well the market was working in the interests of consumers. We launched the Probe at a time of heightened suspicion with energy companies and low transparency on their prices and profits. The Probe reassured consumers we would take action to add transparency and stop erosion of trust in the market where appropriate. For example, we sought to reinforce consumer trust by communicating we had no evidence of a cartel operating in GB.
3.6 The findings of this review brought to consumers’ attention a number of important features of the market. These included the link between wholesale energy costs and retail prices and energy supplier profitability.
3.7 On the wholesale-retail link, the Probe examined how changes in wholesale gas and electricity prices are passed through to consumers by the large energy suppliers. It showed there was a lag between changes in wholesale and retail prices, and explained that this was the result of suppliers’ hedging of their wholesale market exposures120.
3.8 Regarding profitability, the Probe showed the range of suppliers’ sales margin targets of 4 to 10 percent. The Probe also explained more about the structure of energy supply businesses: how they have low levels of invested capital and a high level of pass-through costs. Both these factors would suggest significantly lower levels of profitability than the capital-intensive generation parts of these companies.
2009 Project Discovery
3.9 Ofgem’s Project Discovery121 (Discovery) publicly identified the unprecedented challenges that Britain’s energy market would face in the years ahead, including: (1) the impacts of the global financial crisis, (2) tough environmental targets, and (3) the closure of ageing power stations. At the time, we warned that these challenges could lead to an increased risk to consumers’ energy supplies. Ofgem’s 2012 Capacity Assessment122 showed that this risk has not gone away.
3.10 One key message from our Discovery modelling was that consumer bills would rise under all the future scenarios considered. As a result, we cautioned that increasing numbers of consumers would find it difficult to afford adequate levels of energy to meet their requirements. 116 Page 14 here: http://www.ofgem.gov.uk/Markets/RetMkts/ensuppro/Documents1/Energy%20Supply%20Probe%20- %20Initial%20Findings%20Report.pdf 117 http://www.ofgem.gov.uk/Media/FactSheets/Pages/FactSheet.aspx 118 Page 16 here: http://www.ofgem.gov.uk/Markets/WhlMkts/monitoring-energy-security/Discovery/Documents1/Project_Discovery_ FebConDoc_FINAL.pdf 119 http://www.ofgem.gov.uk/Markets/RetMkts/ensuppro/Documents1/Energy%20Supply%20Probe%20- %20Initial%20Findings%20Report.pdf 120 Page 9 here: http://www.ofgem.gov.uk/Markets/RetMkts/ensuppro/Documents1/Energy%20Supply%20Probe%20- %20Initial%20Findings%20Report.pdf 121 http://www.ofgem.gov.uk/Markets/WhlMkts/monitoring-energy-security/Discovery/Pages/ProjectDiscovery.aspx 122 http://www.ofgem.gov.uk/Markets/WhlMkts/monitoring-energy-security/elec-capacity-assessment/Documents1/ Electricity%20Capacity%20Assessment%202012.pdf cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Social Obligations Reporting 3.11 As part of Ofgem’s work to protect consumers in vulnerable positions, we collect information from suppliers on a quarterly and annual basis in relation to debt and disconnection123. This information is used to review suppliers’ performance in relation to specific obligations, including areas of their business where consumers in vulnerable positions may be affected. By monitoring these statistics, Ofgem can identify areas of suppliers’ policies and practices where improvements need to be made. 3.12 In recent years, our focus in this area has seen disconnection levels fall to historically low levels and supplier debt and disconnection practices have developed to do more to take account of consumers’ ability to pay when setting debt repayment levels. 3.13 The projects detailed above show that Ofgem has been at the centre of improving market transparency, identifying trends in costs, prices and profitability. This work continues with the Consolidated Segmental Statements and the Supply Market Indicators, which we discuss below.
Ofgem’s current actions to improve transparency 3.14 Ofgem is firmly committed to improving transparency and consumer trust in the GB energy market. We seek to go as far as we can within our legal remit and without harming competition in the non-regulated segments of the market.
Consolidated Segmental Statements 3.15 The production of the Consolidated Segmental Statements (the Statements) is an important element of our work to improve transparency on energy company profitability. We require the six largest energy companies to publish the Statements annually, which show the profitability of their generation and supply arms separately. 3.16 As a result, and for the first time, data is available on the companies’ revenues, costs and profit, disaggregated for their generation and supply arms. The segmental information has been effective in providing consumers and other stakeholders with extra transparency and insight into the large energy companies’ segmental results. 3.17 Since their introduction, Ofgem has worked to improve the transparency and cross-company comparability of the Statements. We also commissioned a detailed review of the Statements in 2011 by the accountancy firm BDO. This review concluded that the methods the companies use to complete the Statements were broadly fair and appropriate. They also made a number of recommendations to improve the transparency and comparability of the Statements. We consulted on a range of proposals based on these recommendations and enacted the modifications last year124. 3.18 Since the introduction of the Statements we have also produced an annual summary document125 aimed at interested stakeholders. This document brings together the information contained in the six Statements, summarising the results and comparing them to previous years. This year we will also include the results of an independent opinion carried out on the Statements from the accountancy firm PKF126. 3.19 Furthermore, starting with the 2011 Statement, we will publish an accompanying factsheet aimed specifically at consumers, the media and MPs that outlines the top level findings from the Statements. 3.20 However, there are limitations to the transparency and comparability of the information contained in the Statements. This is mainly because of the various differences among the companies in how they operate and structure their businesses and therefore how they report their results127. In particular, differences in the way the trading arm remunerates the generation and supply arms will create differences in how the information contained in the Statements is calculated.
Supply Market Indicator 3.21 The Supply Market Indicator (SMI) is also key to our efforts to increase transparency. Its role is to help interested parties gain a greater understanding of the relationship between retail prices and the costs that suppliers incur. 3.22 The SMI shows the relationship between the annual costs for the representative large energy supplier and an average domestic consumer’s annual energy bill. It calculates the indicative average net margin128 that a large energy supplier may make for a typical gas, electricity and/or dual fuel customer for the following 12 123 In relation to prepayment meters, priority services registers, energy efficiency information and advice and gas safety checks. 124 http://www.ofgem.gov.uk/Markets/RetMkts/rmr/Documents1/Amended%20Guidelines_FINAL.pdf 125 http://www.ofgem.gov.uk/Markets/RetMkts/rmr/Documents1/FIR_results_Final.pdf 126 Overall, across the six Statements, PKF found that the companies have completed the Statements appropriately, but have highlighted areas in which they consider the companies could improve intelligibility and the link between the Statements and company’s published financial results. 127 Another minor reason is that five out of the six large companies use a financial year-end for reporting their results, while SSE has a financial year-end in March. 128 Net margin is calculated as the difference between revenue and all costs. It is an average figure and not representative of any one supplier. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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months. It tracks costs and the average consumer bill over time, allowing interested parties to analyse trends and market developments. 3.23 We have sought to develop the SMI over time to make the information as transparent as possible. For example, we moved from a quarterly report to weekly website updates in March 2012. The weekly updates are a regular, public and open source of intelligence on energy bills, costs and associated margins. 3.24 We publish our methodology on our website to ensure public access.129 This provides information on the types of costs that suppliers face, and how we use that cost information. 3.25 We also make wider use of the SMI information, by producing regular consumer-friendly factsheets130, which explain trends in energy prices and household bills. 3.26 We note that while the SMI is a useful tool to analyse trends and market developments, it is incorrect to equate the SMI’s net margin figure with supplier profit since: — The SMI does not capture all the tariffs that are available in the market. — It uses an indicative Ofgem-developed 18 month hedging strategy to calculate suppliers’ hedged wholesale costs. In reality, suppliers have different and varying hedging strategies.
Liquidity Project 3.27 Ofgem proactively monitors the wholesale electricity market and makes its findings publicly available131. As part of this exercise we identified poor and stagnating liquidity as a barrier to competition, preventing the entry and growth of new players and imposing costs on consumers. 3.28 As a result, we launched the liquidity project, which alongside the RMR, is central to our efforts to ensure that consumers get the best possible deals from competitive energy markets. Its aim is to ensure all market participants can access the wholesale market products and price signals they need to compete effectively. 3.29 From the outset, we have been clear that industry-led initiatives could deliver the improvements needed to meet this goal, and challenged industry to deliver three key objectives: (1) availability of products which support hedging, (2) robust reference prices along the curve, and (3) an effective near-term market. The second of these objectives impacts directly on the level of transparency of the wholesale market, as it aims to ensure that all market participants have access to the robust price signals they need to operate effectively. 3.30 As set out in our December 2012 consultation132, our focus on liquidity has already started to drive improvements, in particular the trading commitments made by some large suppliers in relation to trading with independent suppliers and the growth of trading on day-ahead auction platforms. However, overall our objectives remain unmet: in particular, we have seen little market-led progress to date in relation to our second objective of robust reference prices along the curve, which is particularly important for improving transparency. 3.31 Given the importance of all three objectives, we now have a firm preference for intervention to improve liquidity. To this end, we are consulting until mid-February on a “Secure and Promote” licence condition which would secure the developments we have already seen and potentially push further in those areas where we have not seen sufficient progress. However, further progress towards our objectives could still influence the final shape of any intervention. We therefore encourage market participants to continue to identify measures that could meet our liquidity objectives.
Retail Market Review 3.32 The Retail Market Review (RMR) is central to our efforts to protect consumer interests. By reforming the energy market to make it simpler, clearer and fairer for consumers, we aim to encourage and equip consumers to get the best deal for themselves. 3.33 The commitment to tackle poor transparency is at the heart of the RMR. The proposals aim to make it easier for consumers to navigate the energy market by giving them simpler choices, clearer information and fairer treatment. 3.34 In addition to proposing rules to improve the information consumers receive, and to tackle tariff proliferation and complexity, we are proposing to introduce new Standards of Conduct on suppliers, enforced through a licence condition, specifically aimed at ensuring that each domestic customer is treated fairly133.
129 http://www.ofgem.gov.uk/Markets/RetMkts/rmr/smr/Documents1/SMR_METHODOLOGY.pdf 130 See for example: http://www.ofgem.gov.uk/Media/FactSheets/Documents1/Why%20are%20energy%20prices%20rising_factsheet_108.pdf http://www.ofgem.gov.uk/Media/FactSheets/Documents1/household-bills.pdf 131 For example, see: http://www.ofgem.gov.uk/Markets/RetMkts/rmr/Documents1/summer%202011%20assessment.pdf 132 http://www.ofgem.gov.uk/Markets/RetMkts/rmr/Documents1/Secure%20and%20Promote%20Consultation.pdf 133 Page 24 here: http://www.ofgem.gov.uk/Markets/RetMkts/rmr/Documents1/ Draft%20domestic%20licence%20conditions%20for%20the%20Retail%20Market%20Review%20proposals.pdf cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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3.35 We consulted on updated proposals134 and received stakeholders’ responses in December 2012. We are currently analysing responses and engaging with stakeholders to finalise our proposals. We intend to publish our final proposals by Easter.
Reporting Company Complaints Data 3.36 To aid transparency and make it easier for customers to compare companies’ performance, Ofgem has introduced a common format that all suppliers are now using to present information on how many complaints they receive and how quickly these are handled. The information will be updated on a quarterly basis and will be published in a common format that will be easily accessible to consumers. 3.37 Ofgem is expecting improvements in suppliers’ complaints handling processes and has encouraged them to provide information which demonstrates how well they are performing and the measures they are taking to improve. Many suppliers have responded by publishing a ‘top 5’ of reasons for complaints together with what they are doing about them. 3.38 Greater transparency in this area should mean that suppliers improve the way that they handle complaints and that the things that they learn from complainants will lead to a better service for all energy consumers.
Our actions to improve transparency remain work in progress 3.39 As a result of the actions above, there is more transparency on market prices and energy company profits. 3.40 However, we have been, and remain, concerned about how effectively the sector communicates with consumers. For example, there is still more that the companies can do to make the Consolidated Segmental Statements clearer to consumers in a way that substantially increases their understanding and trust. They have a key role in delivering this and we would hope to see them taking this responsibility seriously. 3.41 We remain dedicated to working with companies and other stakeholders to improve the effectiveness of prices and profits communications. However, in a competitive market, it is ultimately the responsibility of suppliers to be accountable to their customers on pricing policies.
4. Prices, Profits and Poverty 4.1 This section presents the latest evidence we have on prices and profit indicators. It also addresses some of the Committee’s questions on fuel poverty points related to our remit.
Prices and profits 4.2 In December 2012, the average annual bill for a standard account was £811 for gas and £531 for electricity.135 These prices are based on average annual consumption figures, averaged across all the incumbent suppliers, all payment methods and averaged across Great Britain. 4.3 The figure below presents the breakdown of the main cost components that make up the gas and electricity bill.
134 http://www.ofgem.gov.uk/Markets/RetMkts/rmr/Documents1/The%20Retail%20Market%20Review%20- %20Updated%20domestic%20proposals.pdf 135 http://www.ofgem.gov.uk/Media/FactSheets/Documents1/household-bills.pdf cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Figure 1 WHAT MAKES UP THE TYPICAL ENERGY BILL?
Gas Electricity 4% 6% 5%
5% 11% 2%
5%
4% 16%
67% 58%
16%
Wholesale energy, supply Distribution charges Transmission charges costs and profit margin
VAT Environmental charges Other costs
Source: http://www.ofgem.gov.uk/Media/FactSheets/Documents1/household-bills.pdf 4.4 The above information shows that wholesale energy costs, supply costs and profit margin are the largest component of consumer bills. Of these, wholesale energy costs are by far the biggest cost element and profit margin the smallest. 4.5 The Consolidated Segmental Statements are Ofgem’s best information source for company profitability. 4.6 Ofgem does not regulate the prices customers pay, or the profits companies make. In a competitive market companies that compete less effectively will lose customers and generally earn lower profits. Individual companies need to justify their prices and profits to their customers, or risk losing them. 4.7 The table below shows a profit measure (margin136) taken from the Segmental Statements for the past three years.137 It is aggregated across the large six energy companies. It shows that the supply margin fell to 3.1% in 2011 after and increasing from 1.8% in 2009 to 3.8% in 2010.
Table 1 AVERAGE PROFIT MARGIN BY SEGMENT 2011 aggregate 2010 aggregate 2009 aggregate Margins margin margin margin All segments 7.6% 7.2% 5.8% Generation 24.4% 21.9% 22.5% Supply 3.1% 3.8% 1.8% Electricity—Domestic 1.5% 0.3% 2.1% Electricity—non-Domestic 3.3% 4.7% 4.0% Gas—Domestic 4.3% 5.7% -0.4% Gas—non-domestic 6.5% 6.2% -0.5%
Source: Consolidated Segmental Statements.
136 Calculated by dividing EBIT/Revenue. EBIT: Earnings Before Interest and Taxes. 137 We advise caution when interpreting the data, as the difference in business models and the changes in the licence condition over these years make comparisons across the years difficult. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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4.8 For reference, the telecoms, high street retail, and supermarkets sectors’ average margins were close to 10%, 7% and 5% respectively in 2010.138 And the OFT, in its recent assessment of the UK road fuel sector, found gross margins of 12% for diesel and 7% for petrol139. 4.9 While we have not done a comprehensive cross-sectoral analysis for this submission, the above numbers provide an indication that overall margins (ie “All segment margins”) for the large energy companies are not significantly out of line with other sector averages.
Fuel poverty 4.10 Fuel poverty is part of a wider problem of poverty and social exclusion caused by a combination of poor housing conditions, low incomes and high energy prices compared to these incomes. While the causes of fuel poverty go beyond energy markets, we are committed to driving forward the debate and working with Government to eradicate fuel poverty. In this context, Ofgem’s main role is to ensure energy prices are no higher than they need to be. Our Retail Market Review aims to encourage and equip all consumers to engage effectively to identify how to save money, whether by switching supplier or moving to a cheaper tariff with their current supplier. Doing so effectively will ensure prices are no higher than needed.
To what extent are current fuel poverty policies reaching the right people? 4.11 Ofgem is finalising a new Consumer Vulnerability Strategy. We recognise that purely using a ‘group’ approach may miss out other consumers in vulnerable situations. We have proposed using a broader definition of consumer vulnerability, to recognise that it is a dynamic state that can affect anyone at any time and for many different reasons. It may be permanent or long-term; but equally it can be transitory, for example following a bereavement or relationship breakdown. It may affect all aspects of a person’s life or just one part. 4.12 Importantly, vulnerability is not all about the individual; it may also be affected by the market itself. Fuel poverty is one form of vulnerability, and as part of our new strategy we are proposing to consider consumer vulnerability in a broader, more holistic way.
To what extent do fuel-poor households engage in switching? What are the barriers to greater levels of switching from these groups? 4.13 Vulnerable consumers are generally less likely to be willing or able to engage with the energy market140. There is a clear relationship between social grade and switching rates; professional and managerial social grade ABs are much more likely to have switched than state-supported grade Es.141 4.14 There is also a disparity between the main ethnic groups, with white respondents much more likely to switch than those from black and minority ethnic groups.142 4.15 Fuel poverty is most common among those who live in private rented accommodation. Our Consumer Engagement Tracker shows that consumers living in rented accommodation are less likely to have switched supplier. 4.16 The barriers to engagement that consumers may face are likely to be more acute for vulnerable consumers than for active ones who are more confident participating in the market. Rebuilding consumer confidence in the energy market will be required to increase trust between energy suppliers and their customers. We believe that there is a key role for face to face advice provision by trusted intermediaries who can provide support to vulnerable consumers who may benefit from switching energy supplier. 4.17 For example, consumers with internet access are more than twice as likely to have switched in 2011 compared to those without it. However, the elderly are less likely to have used the internet. Furthermore, disabled individuals are about three times more likely never to have used the internet than individuals with no disability143. 4.18 Existing initiatives such as the Energy Best Deal campaign have a vital role to play in reducing barriers to engagement and assisting vulnerable consumers who have never switched energy supplier. Ofgem and Citizens Advice have been working together since 2008 developing and delivering consumer advice through the Energy Best Deal campaign. The campaign works by holding practical presentations delivered to low income consumers and front-line staff who work with people at risk of fuel poverty. 4.19 In addition, schemes that have utilised data sharing between Government and energy suppliers, such as under the Warm Homes Discount Scheme, have been particularly successful in identifying households for targeted support and advice. Such initiatives not only direct support where it is most needed but also reduce operational costs for suppliers and thereby ultimately benefit all consumers. Where data sharing could be of 138 Ofgem (2011), “The Retail Market Review”, Consultation and Associated Documents, reference 34/11, page 123. 139 http://www.oft.gov.uk/shared_oft/markets-work/oft1475.pdf. The OFT does not report net margins, which would be smaller than gross margins, as they incorporate operating costs. 140 FDS International, Vulnerable Customer Research, March 2011 141 Customer Engagement with the Energy Market—Tracking Survey, Ipsos MORI (April 2012). 142 Ibid 143 Office for National Statistics (Q2 2012), Internet Access Quarterly Update Q2 2012 cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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further use is in the identification of Affordable Warmth Group households under the new Energy Company Obligation where the targeting of households for energy efficiency measures will become increasingly difficult.
5. Annex 5.1 This annex compiles all the documents mentioned throughout this submission and provides details of additional consumer-focused factsheets.
Publications targeted specifically to consumers 5.2 As part of our commitment to keeping consumers informed and making the gas and electricity market as transparent and accessible to consumers as we can, Ofgem publishes consumer-focussed factsheets throughout the year. This publication schedule includes several standard factsheets which explain to gas and electricity customers how their bills are made up. These factsheets are refreshed regularly to keep them in line with current trends. 5.3 Our factsheets are designed to be easy to understand, accessible and as free from industry jargon as possible. In line with our Welsh Language Scheme, we also publish factsheets aimed at consumers in Welsh. All of our factsheets are available on the Ofgem website http://www.ofgem.gov.uk/Media/FactSheets/Pages/ FactSheet.aspx 5.4 This table highlights our factsheets explaining the retail market to consumers published this year, and also examples of comparable factsheets published earlier on our website.
CONSUMER-FOCUSED FACTSHEETS Publications Past Year (s) Description The Energy Supply Market 2008 A factsheet for consumers about Ofgem’s probe into the Probe energy supply markets in 2008. Wholesale and Retail Prices 2009 In 2009 Ofgem published its first report on wholesale and Explained retail prices to help customers gain a wider understanding of the relationship between the two. Liquidity in GB Wholesale 2009 As part of the 2008 probe into the energy retail markets, Markets Ofgem noted concerns about the level of wholesale market liquidity, particularly in the electricity market. This factsheet was designed to allow consumers to understand our concerns. Ofgem’s Energy Probe Gives 2009 In 2008 Ofgem completed a major investigation into Customers More Muscle Britain’s retail energy market. This factsheets explains to consumers the range of reforms which were designed to make it easier for consumers to shop around, negotiate and choose the best energy deal. Helping Domestic Customers 2010 A factsheet published at the beginning of the RMR process which introduced the package of new rules to improve domestic customers’ experience of the energy market. This document summarises these changes and answers some frequently asked questions. Help With Your Energy Bills 2010 A helpful factsheet giving consumers advice on how to get the best out of the energy market. Why Are Energy Prices Rising? 2011 Consumers are facing tough economic times including increasing energy prices. This factsheet explains why energy prices are rising. Switching for Business 2011 For business customers, switching energy supplier can Consumers make a big impact on cutting your bills. Ofgem published this factsheet because we wanted to make sure that businesses understand how to compare deals and how to go about switching. Smart metering—What it 2011 Factsheet for domestic consumers explaining the plans for Means for Britain’s Homes implementation and the benefits to consumers. Typical Domestic Energy 2011 This is a regularly updated factsheet which presents Consumption Figures Ofgem’s revised consumption figures for typical domestic gas and electricity customers. Direct Debits—What You Need 2012 Direct debit is one of the quickest and easiest ways to pay to Know factsheet energy bills with over 50 percent of customers paying for energy in this way. This fact sheet explains clearly how the big six suppliers’ direct debit arrangements work. This factsheet is updated regularly, including twice in 2012. cobber Pack: U PL: CWE1 [E] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Publications Past Year (s) Description Making the Electricity Market 2012 Ofgem announced proposals to open up the electricity More Competitive for wholesale market. This factsheet explored how more Consumers factsheet competition in the energy market and a better deal for consumers. Protecting Customers: Ofgem’s 2012 This factsheet explains to consumers how Ofgem conducts Enforcement Powers investigations into the conduct of companies that we believe may be breaching licence conditions, acting anti- competitively or breaching consumer protection law. Back Billing leaflet 2012 2012 This leaflet provides consumers with information on suppliers’ commitments, and the responsibilities customers have, with regard to the back-billing principle. Getting The Best Deal From 2012 Following Ofgem’s wide-ranging review of the energy The Energy Market market, we consulted on proposals to help consumers understand their choices. This factsheet was designed to help consumers make better decisions about their gas and electricity. Current Household energy bills 2013 Our essential guidance for consumers on how to explained—factsheet understand your energy bill and ways to make savings. Administering Cert and Cesp 2013 The CERT and CESP programmes delivered significant for Government—factsheet carbon savings through the installation of energy efficiency measures in millions of homes, a large proportion of which contain vulnerable customers. This factsheet explains to consumers Ofgem’s role in administering these Government schemes. Future Consolidated Segmental 2013 Starting with the 2011 Statement, we will publish an Statements accompanying factsheet aimed specifically at consumers, the media and MPs that outlines the top level findings from the Statements.
OTHER RELATED PUBLICATIONS AND PROJECTS Publications/ Year (s) Description Energy Supply Probe 2008 In depth review of energy supply market to understand better how well the market was working for consumers. We found no evidence of a cartel. We added transparency on link between wholesale and retail prices, hedging and supplier profitability. Project Discovery 2009, 2010 Investigation into whether or not future security of supply can be delivered by the existing market arrangements. We identified unprecedented challenges, including: (1) the impacts of the global financial crisis, (2) tough environmental targets, and (3) the closure of ageing power stations. One key message from our Discovery modelling work was that consumer bills would rise under all the future scenarios considered. Financial Information 2009—ongoing Important element of our work to improve Reporting transparency on energy company profitability. We require the large energy companies to annually publish the Statements, which show the profitability of their generation and supply arms separately Supply Market Indicator 2008—Ongoing Key indicator in our efforts to increase transparency. Its role is to help interested parties gain a greater understanding of the relationship between retail prices and the costs that suppliers incur. Wholesale electricity market 2008-ongoing Presents the findings from the assessment of the GB liquidity assessments wholesale electricity market, focusing on liquidity monitoring. We have been doing this since liquidity concerns were raised during the Energy Supply Probe in 2008. cobber Pack: U PL: CWE1 [O] Processed: [26-07-2013 10:04] Job: 031434 Unit: PG01
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Publications/ Year (s) Description Liquidity Project 2009-ongoing Central to our efforts to ensure that consumers get the best possible deals from competitive energy markets. Its aim is to ensure all market participants can access the wholesale market products and price signals they need to compete effectively. Capacity Assessment 2012—ongoing Analysis of electricity generation margins. Undertaken annually for the Department of Energy and Climate Change as required by the Energy Act (2011)
February 2013
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