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 8 9 11 12 13 15 16 16 18 20 22 23 24 Rising energy prices
Driving factors behind price rises
Wholesale cost of fuel
Costs of supply – transmission and distribution
Costs of energy and climate change policies
Supplier operating costs and profit margins
Communicating reasons for price rises
Government and regulatory action
Energy company action
A failure to communicate
Ensuring a competitive retail market
Market competitiveness
Measuring competitiveness
3 Profits
Energy company profits
Company structure
Increasing transparency of energy company profits
Consolidated Segmental statements
Supply Market Indicators
REMIT
4 Fuel Poverty
Measuring fuel poverty
Current and new definition of fuel poverty
A better definition?
The role of data-sharing
Need for urgent action
Fuel poverty policies
Efficacy of fuel poverty policies
Closure of Warm Front (WF)
The Energy Company Obligation (ECO)
Rural fuel poverty
Use of levies on bills
Ways to protect the fuel-poor from impact of levies
Reinvesting revenues in energy efficiency programmes
Government spend on fuel poverty
26 26 27 29 29 38 41 45 45 45 47 50 51 53 54 55 56 57 58 61 62 63 2 Energy Prices, Profits and Poverty
Delivery of fuel poverty policies
5 65 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)
150
Gas
Electricity
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*
British Gas**
EDF***
ScottishPower****
SSE*****
RWE******
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%
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.)
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.)
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.)
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.
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
Dual fuel
E.ON
Dual
fuel
SSE
Dual
fuel
Elec
Gas
Elec
Gas
Elec
Gas
46%
52%
50%
39%
58%
48%
51%
not
supplied
not
supplied
Delivery (network 24%
and transmission
on costs)
21%
24%
24%
19%
22%
25%
not
supplied
not
supplied
Environmental
and social
policies
9%
5%
10%
15%
6%
8%
4%
14%
7%
Operating costs
10%
15%
6%
13%
9%
17%
15%
not
supplied
not
supplied
Profit
5%
2%
5%
4%
3%
not
not
not
supplied supplied supplied
not
supplied
VAT
5%
5%
5%
5%
5%
5%
5%
not
supplied
not
supplied
2011
2011
not
stated
not
stated
not
stated
2011
2011
not
stated
not stated
Wholesale
energy costs
Year
Scottish Power
EDF
RWE npower
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
Real 2012 prices
Gas
bill
Electricity
bill
Energy
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%)
£33 (5%)
£80 (14%)
£112 (9%)
£25 (4%)
£22 (4%)
£47 (4%)
RO
-
£30 (5%)
£30 (2%)
EU ETS
-
£8 (1%)
£8 (1%)
CPF
-
£5 (1%)
£5 (0%)
£6 (1%)
£6 (1%)
£11 (1%)
-
£7 (1%)
£7 (1%)
£2 (0%)
£1 (0%)
£3 (0%)
£33 (5%)
£27 (5%)
£60 (5%)
£691
£576
£1,267
-
-£13
-£13
£691
£563
£1,255
Energy and climate change policies
ECO117
Warm Home Discount
FITs
Smart Meters & Better Billing
VAT (5%)
Total (no warm Home discount rebate)
Average rebate (inc VAT)
Total (with rebate)
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
Average household gas and electricity prices
(Real 2012 £/MWh)
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
50
Wholesale price effects
25
Baseline gas price
0
Baseline electricity price
-25
Final gas price
Gas
Electricity
2013
Gas
Electricity
2020
Gas
Electricity
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 wellmeaning, ‘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
£474
£249
Wholesale energy
costs
Delivery to
you home
External costs
£93
Environmental
and Social
policies
£65
£102
Taxes Operating
costs
Our
costs
£48 Our profit
British Gas 2011 Average Gas &Electricity bill (Total £1,031)*
* 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 PhilipsDavies, 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 overcharge 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
Company
EDF
EDF Energy Holdings Limited
EDF Energy PLC
EDF Energy Customers PLC
British Energy Direct Limited
SSE
SSE PLC
SSE Energy Supply Limited
British Gas
Centrica PLC
British GAS Trading Limited
Scottish Power
Scottish Power UK Holdings Limited
Scottish Power UK PLC
Scottishpower Energy Retail Limited
E.On
E.On UK PLC
E.On Energy Solutions Limited
Npower
RWE Npower PLC
Npower Limited
Npower Northern Limited
Npower GAS Limited
Npower Direct Limited
Npower Yorkshire Limited
Pre-tax profit
Profit margin
2007-11
average
2011
2007-11
average
2011
2007-11
average
2011
2,457
n/a
5,301
1,009
7,371
3,849
4,951
676
386
n/a
-127
15
627
41
-211
22
15.7%
n/a
-2.4%
1.5%
8.5%
1.1%
-4.3%
3.2%
24,458
22,812
31,724
32,008
1,031
375
269
-7
4.2%
1.6%
0.8%
0.0%
20,979
12,316
22,824
12,786
1,527
713
1,268
1,898
7.3%
5.8%
5.6%
14.8%
6,261
5,098
3,192
7,450
6,441
3,378
690
625
76
327
295
-14
11.0%
12.3%
2.4%
4.4%
4.6%
-0.4%
9,071
6,529
9,240
7,028
621
24
-199
157
6.8%
0.4%
-2.2%
2.2%
785
3,224
1,449
606
412
309
687
3,293
1,686
386
355
236
96
-12
-102
-36
46
-57
-38
55
-117
-11
55
-27
12.2%
-0.4%
-7.1%
-5.9%
11.2%
-18.4%
-5.5%
1.7%
-7.0%
-2.9%
15.4%
-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/
Company production Generation x x E.ON* x EDF x x SSE Centrica/
British Gas ScottishP
ower RWE x Trading x x x Retail x x x x x x x x x x x x Net‐ Gas work storage x x x x x Renewables x x x x 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
aggregate
margin
2010
aggregate
margin
2009
aggregate
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%
Profit margins
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 crosscomparability. 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
to publish their Statements
to the same year-end
We do not intend to take
forward this recommendation
As in January
2. An independent auditor
to provide an opinion on
the Statements
We propose obtaining an
independent opinion, at least
for the first year, but not
necessarily from an auditor
We propose to take forward
this recommendation
As in January
We do not propose to take
forward this recommendation,
although we do propose
companies produce a checklist
to identify where functions are
undertaken
We do not intend to take
forward this recommendation
As in January
6. Introduce uniform
reporting treatments for
generation fuel costs and
free EU ETS allowances
We propose to take forward
this recommendation
7. Guidance on scope and
definition of exceptional
items
8. Specify consistent profit
base for reconciliation
We propose to take forward
this recommendation
We propose to take forward a
variation of this recommendation
and allow companies that operate
toll processing arrangements to
provide the fuel costs as a
supplementary note to the main
results template
As a result of our amended proposal
on recommendation 3,
recommendations 7 and 8 are no
longer required in their original
form.
3. Instruct reconciliation of
the Statements to an
audited IFRS income
statement
4. Require the reporting of
trading function results,
including disclosure of the
risk each trading function
assumes
5. Perform further work to
assess current transfer
pricing policy
We propose to take forward
this recommendation
We propose to take forward a
variation of this recommendation
and require companies to reconcile
to the UK result in their published
Group Accounts
As in January
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
0%
(forward)
4%
99%
1%
Current
RWE
100%
(forward)
96%
99%
1%
2011
Centrica (British gas)
96%
4%
77%
23%
Scottish Power
85%
15%
90%
11%
First
four
months
of 2013
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
Energy Prices, Profits and Poverty 35
[...] 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
Dual Fuel
Year
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
Energy Prices, Profits and Poverty 41
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 shortterm 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
44 Energy Prices, Profits and Poverty
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
Energy Prices, Profits and Poverty 45
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
46 Energy Prices, Profits and Poverty
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
Energy Prices, Profits and Poverty 51
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 datasharing 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 datasharing 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
52 Energy Prices, Profits and Poverty
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
Energy Prices, Profits and Poverty 53
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 lowincome 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]
Energy Prices, Profits and Poverty 55
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 costeffectiveness 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 fuelpoor 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
56 Energy Prices, Profits and Poverty
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 200910, 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
Energy Prices, Profits and Poverty 57
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 offgas 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-toreach” 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
58 Energy Prices, Profits and Poverty
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)
CERT
CESP
ECO Affordable Warmth
+ Carbon Saving
Communities Obligation
Winter Fuel Payments
Cold Weather Payments
Warm Home Discount
EU Emissions Trading
System
Carbon Floor Price
Renewables Obligation
Taxpayers
Consumers263
Consumers
Consumers
£370 million (2009/10)
£564 million (2009/10)
£101 million (2009/10)
£466 million (2013)
Taxpayers
Taxpayers
Consumers
Consumers
£1.723 billion (2013)
£228 million (estimated) (2013)
£237 million (2013)
£700 million264
Consumers
Consumers
Consumers
£900 million (2013-14)265
£2,156 million (2012/13) (budget available
under the levy control framework)
£196 million (2012/13)
Consumers
Consumers
(budget available under the levy control
framework)
Not yet introduced
Not yet introduced
Feed-in Tariffs for
small-scale renewables
Contracts for Difference
Capacity payments
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
Energy Prices, Profits and Poverty 59
Renewable Heat
Incentive
CCS competition
Taxpayers
£133 million (2012/13)
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
60 Energy Prices, Profits and Poverty
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
Energy Prices, Profits and Poverty 61
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
62 Energy Prices, Profits and Poverty
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
Energy Prices, Profits and Poverty 63
(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
64 Energy Prices, Profits and Poverty
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
Energy Prices, Profits and Poverty 65
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
66 Energy Prices, Profits and Poverty
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
Energy Prices, Profits and Poverty 67
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 areabased 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
68 Energy Prices, Profits and Poverty
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
Energy Prices, Profits and Poverty 69
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,
70 Energy Prices, Profits and Poverty
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.
Energy Prices, Profits and Poverty 71
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 longterm 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
72 Energy Prices, Profits and Poverty
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
Energy Prices, Profits and Poverty 73
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 fuelpoor 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
74 Energy Prices, Profits and Poverty
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 datasharing 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
Energy Prices, Profits and Poverty 75
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 selfregulation 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
76 Energy Prices, Profits and Poverty
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)
Energy Prices, Profits and Poverty 77
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
78 Energy Prices, Profits and Poverty
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.
Energy Prices, Profits and Poverty 79
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 selfevident 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
80 Energy Prices, Profits and Poverty
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
Energy Prices, Profits and Poverty 81
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 fivebedroom 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.
82 Energy Prices, Profits and Poverty
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
Energy Prices, Profits and Poverty 83
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 GHeat 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
84 Energy Prices, Profits and Poverty
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 GHeat 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
Energy Prices, Profits and Poverty 85
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 smartmeters, 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
86 Energy Prices, Profits and Poverty
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.
Energy Prices, Profits and Poverty 87
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-asyou-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.
88 Energy Prices, Profits and Poverty
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.
Energy Prices, Profits and Poverty 89
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)
90 Energy Prices, Profits and Poverty
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 GHeat 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
Energy Prices, Profits and Poverty 91
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.
92 Energy Prices, Profits and Poverty
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 smartmeters 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”
Energy Prices, Profits and Poverty 93
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.
94 Energy Prices, Profits and Poverty
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 feedin 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 owneroccupier 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
Mr Peter Lilley
Christopher Pincher
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
2
SSE
3
RWE npower
4
Age UK
Ev 116
5
Which?
Ev 118
6
E.ON
7
National Energy Action
8
Ovo Energy
Ev 144
9
Consumer Focus
Ev 146
10
DECC
Ev 165
11
British Gas
12
EDF Energy
Ev 193: Ev 202
13
ScottishPower
Ev 205: Ev 211
14
Ofgem
Ev 93
Ev 96: Ev 101: Ev 104
Ev 105: Ev 110
Ev 122: Ev 127: Ev 131
Ev 132: Ev 143
Ev 173: Ev 186
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
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
Ev w49; Ev w59; Ev w61
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
Mexico Oil Spill
HC 450 (882)
Third Report
The revised draft National Policy Statements on
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
Independence?
HC 1065 (1813)
Ninth Report
Solar Power Feed-In Tariffs
HC 1605 (1815)
Tenth Report
The EU Emissions Trading System
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:
Government Response to the Committee’s Fourth
Report of Session 2009–10
HC 455
Second Special Report
Fuel Poverty: Government Response to the
Committee’s Fifth Report of Session 2009–10
HC 541
Third Special Report
The future of Britain’s electricity networks:
Government Response to the Committee’s Second
Report of Session 2009–10
HC 629
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
Fourth Report
Pre-appointment hearing with the Government’s
preferred candidate for Chair of the Committee
on Climate Change
HC 555
Fifth Report
Consumer Engagement with Energy Markets
HC 554
HC 648
HC 1476
Session 2012–13
HC 529 (748)
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:
Government Response to the Committee’s
Eleventh Report of Session 2010–13
Second Special Report
Consumption-Based Emissions Reporting:
Government Response to the Committee’s
Twelfth Report of Session 2010–12
HC 488
Third Special Report
The road to UNFCCC COP 18 and beyond:
Government Response to the Committee’s Second
Report of Session 2012–13
HC 633
Fourth Special Report
Low-Carbon Growth Links with China:
Government Response to the Committee’s Third
Report of Session 2012–13
HC 748
HC 93
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:
Government Response to the Committee’s Sixth
Report of Session 2012–13
HC 106
Second Special Report
The Green Deal: watching brief: Government
Response to the Committee’s First Report of
Session 2013–14
HC 607
Third Special Report
The Impact of Shale Gas on Energy Markets:
Government Response to the Committee’s
Seventh Report of Session 2012–13
HC 609
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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
Ian Lavery
Mr Peter Lilley
Albert Owen
Christopher Pincher
John Robertson
Sir Robert Smith
________________
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
Committee. Thank you very much for coming in. You
probably are aware that Derek Liquorish has been
unable to get here because of some travel difficulties.
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
formal introductory process.
We have been told that there are barriers that prevent
fuel-poor households from engaging in the market and
switching supplier. Given that I find that quite difficult
to do myself, I can well imagine that others who are
less expert in the field may, too. Do you think it is
possible to overcome those barriers? Or do you think
it is always going to be a difficulty for fuel-poor
households to take advantage of the opportunities of
switching?
Mervyn Kohler: From the point of view of the older
population, one of the major barriers, of course, is
access to the internet and to the use of a computer,
because without the information available online, the
whole process of switching becomes extremely
tedious. Sometimes in this world the task of being an
active consumer is a full-time job in its own right and
that may be another barrier in some senses. Switching
is obviously worthwhile, particularly the first time you
switch, although it becomes subject to a law of
diminishing returns thereafter. Arguably, if we had a
strategy of fair pricing in the first place, would we
need to encourage people to be switching all the time?
Ron Campbell: I think there is probably a more
general point than that, that in fact we have seen a
significant degree of disengagement from the
competitive market across all consumers. My
understanding is that switching rates across all
categories of consumer are quite low; they are in a
degree of decline.
In the case of low-income consumers of course, as
Mervyn says, there is a number of barriers, not least
of which is access to the kind of technology that, in
fairness, I think facilitates that kind of process.
However, there are other barriers—there is lack of
confidence; there is lack of knowledge; in some cases
there will be a problem because the consumer is
indebted and consequently cannot switch. Also, one
of the fundamental problems, possibly across the
market, is that there is a degree of scepticism. There
is a perception that there is very little to be gained
from the switching process and consequently people
do not get involved to the extent that perhaps they
once did.
Q2 Chair: Are they right or wrong?
Ron Campbell: As Mervyn said, there is probably still
a meaningful benefit for a first-time switcher but,
again as Mervyn said, the law of diminishing returns
applies. If you look at the general offerings across all
six of the main energy suppliers, we seem to be seeing
an increasing convergence in terms of the overall costs
and I think the conclusion there is that in many
instances the benefit of switching will be marginal.
Q3 Chair: Are you familiar with the Citizens Advice
scheme, which I think is run with Ofgem, called
Energy Best Deal? Is that something that might be
helpful for vulnerable consumers?
Ron Campbell: Yes, I am familiar with the concept. I
have read some reporting on it and yes, our view is
that Energy Best Deal is a beneficial development but
that it has the potential to be considerably better. It
is modest in scope; it is modest in its ambition. Our
preference certainly would be for Energy Best Deal to
develop into something that could be provided on a
much wider—probably national—basis, and that it
should be concerned with much more than simply
guiding people towards the best energy-price offer in
a competitive market. For example, we would like to
see an advice service that, in addition to providing the
support and guidance in switching to the best payment
option, provided advice on access to grants through
energy efficiency schemes and/or advice on debt and
money management, and a fairly comprehensive
service that extended beyond simply, “This is the best
deal you can get through the competitive market”.
Mervyn Kohler: Ron’s point there is important.
Anything that has a collective flavour attached to it
means that people begin to discuss issues, to
understand the issues better and to develop a greater
awareness of what can be and what is possible either
in that market or in relation to their consumption of
energy more generally. So there is room for
encouragement for schemes like that.
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Ev 2 Energy and Climate Change Committee: Evidence
12 March 2013 Ron Campbell and Mervyn Kohler
Q4 Chair: Mr Campbell, could you just explain
collective switching and how that works and how
people benefit from it?
Ron Campbell: Thankfully, I have Mervyn here, who
I think may make a better fist of explaining how it
will work. As the Committee knows, the Government
invested significant amounts of money in supporting
collective switching arrangements, primarily through
local authorities but also through voluntary-sector
agencies. That money was made available in the
autumn of last year and, as we understand it, progress
will have been limited up to now. I would say
however that the kind of collective switching that
seems to be encouraged by the Government initiatives
seems to us to be more the kind of initiative that we
would want to see, that is to say, it appears to be based
on a community, on a geographical area, and as such
would not have the exclusive nature that might apply
across some other collective switching arrangements,
for example, where there is a compulsion to pay by
direct debit in order to join whatever that community
of switchers was.
Mervyn Kohler: Nothing very much to add,
Chairman. We, Age UK, are participating in this really
with the intention of finding out how useful it is and
how helpful it can be, remembering that a lot of the
older population in particular—but probably the
population as a whole—will sometimes want to buy
their energy for reasons other than simply price. This
adds extra tiers of complication to a collective
arrangement. If people like the idea of paying on a
traditional quarterly bill basis or of some add-on
services like a safety check and things of that nature
in the package they are getting from their supplier,
that makes the whole collective principle more
difficult to organise and goes back to the fact that you
can really do it adequately only if you are using a
computer-based system.
Q5 Sir Robert Smith: There is a lot of concern that
the ECO will not make a significant impact on fuel
poverty. Is that a concern you share?
Mervyn Kohler: Very much so. 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.
Q6 Sir Robert Smith: So expanding the ECO would
be a solution?
Mervyn Kohler: Or finding some other form of
finance with which to do the essential energy
efficiency work that we want done in houses. In
England now, we have no publicly funded scheme.
We are front-loading it all on to the energy companies
and that means that all consumers, including those in
fuel poverty, are contributing towards the cost of these
housing improvements that we all recognise as the
ultimate solution of where we want to go.
Ron Campbell: As Mervyn says, the most recent
impact assessment suggested that between 125,000
and 250,000 households might be removed from fuel
poverty over that 10-year period to 2013. That is not
necessarily a reduction in the scale of fuel poverty
because we do not know fully what the impacts of
other developments in energy markets will be as a
result of Government programmes. However, given
that there are currently 4 million fuel-poor households
in England alone, and that of course the ECO funding
is distributed across Great Britain, we think that is a
very modest outcome.
As Mervyn says, despite constant assurances from
Government during the passage of the most recent
Energy Act that additional resources would be
available to address fuel poverty, that the level of
resources that would be available would dwarf
previous levels of expenditure and that therefore we
should not be overly concerned about the loss of
Warm Front, that just has not proved to be the case.
Resources are considerably reduced and, in fairness, I
think they will not be deployed in the optimal manner
because there are two things: the level of resources
and the means by which these resources are deployed.
The existing ECO schemes—at one point the
Government’s estimate was £1.3 billion; we would
emphasise that the energy suppliers suggested the cost
of ECO might be as much as double that amount—
these resources would be much better deployed
through the kind of programme, the National Retrofit
Programme, that will be introduced in Scotland,
which, rather than considering fuel poverty in
individual households will look at addressing fuel
poverty on a community basis. You will have heard
this before. You will have heard this from us. You will
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
extremely enthusiastic about the idea of a communitybased, street-by-street, energy efficiency programme.
Sir Robert Smith: So more resources and
community-based would be your approach?
Ron Campbell: Much more resources and
community-based would be the approach. As Mervyn
says, this is a problem too with the Energy Company
Obligation. The imposition of levies on domestic
consumers, while it obviously has a beneficial impact,
also has a negative impact. To some extent, we have
seen this in Government programmes before, that the
well-intentioned schemes that impose fairly
significant levies on domestic consumers result in the
redistribution of fuel poverty. The households who
cannot benefit from the programmes that are
introduced and implemented lose out in real terms.
Mervyn Kohler: Just to underscore Ron’s arguments,
I believe the approach to use a local initiative to get
this sort of work done to be truly important because
that brings the community together. People live in
areas where the housing will often share similar
characteristics and they can chat to each other about,
“What’s happening in my house; what’s happening in
yours” and gain strength, reassurance and confidence
about what is happening to them and to their home as
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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
local initiative really work, we have to somehow draw
in the local authorities, who have both information
about households in their patch and who will
understand the nature of the housing stock in the area.
Making it more possible for more local authorities to
become engaged is a very important aspect of what
we hope we will find in the forthcoming fuel poverty
strategy.
Ron Campbell: Could I just reinforce that point, very
quickly? I am not sure about what the protocol is
about quoting other witnesses. I did laboriously copy
out what the Minister said to the Committee in the
autumn, but regardless of that, the point is that the
Minister was strongly supportive of the area-based
approach.
I think there is another point here that, given the
eligibility criteria for schemes, and the view of energy
suppliers that accessing eligible households is
prohibitively expensive and adds significantly to the
cost of these schemes, we need to reduce the
expenditure that goes on reaching the eligible
households. It is a very expensive process.
Q7 Sir Robert Smith: On a specific community that
I suppose is even more difficult, the concern is that
the ECO will not tackle fuel poverty in rural areas—
although it does solid walls—and that the fuel poor
will not be able to benefit in the same way as
elsewhere because you would want to combine it with
the Renewable Heat Incentive, where there is an
upfront capital cost or a Green Deal cost.
Mervyn Kohler: That is absolutely right. There is a
technical problem as well, that as you define an area
as having characteristics of multiple deprivation and
so on, sometimes in rural areas the geography just
does not allow you to identify those sorts of clusters
in the way you can do in an urban world.
The problems of rural fuel poverty sometimes invite
different solutions, not available in urban areas, which
is to do with renewable generation and so on, which
could be very helpful. Going forward, a special focus
on rural fuel poverty issues might be helpful as part
of a fuel-poverty strategy.
Ron Campbell: Within the Carbon Saving
Community Obligation there is a fairly modest 15%
rural safeguard. I am not sure how reasonable it is,
but if you were to translate that into monetary terms,
I think it would be equivalent to about £29 million as
the rural safeguard element. It is probably advisable
that there be such a specific requirement, that a certain
level of work be carried out on behalf of rural
households because otherwise energy suppliers are
going to find the measures expensive and they are
going to find accessing eligible households expensive
and they are going to find the whole logistics issue
expensive. That is one of the difficulties with a
programme like this that is to a large extent driven by
suppliers. It is not like Warm Front, where you would
have a rural household that knew because it had seen
a leaflet about the eligibility criteria and the measures
that were available, that they could get a grant for
£6,000 towards the cost of a new oil-fired central
heating system and/or additional insulation measures.
As Mervyn says, there are significant problems with
rural households. There is the built type. That is an
issue that is more commonly found in rural
communities than in urban communities. Of course,
there is the off-the-mains-gas network issue, which is
a significant problem. However, the main concern in
relation to ECO support for rural households is that
energy suppliers, or whoever is tasked with delivering
the measures, will not be prepared to fund the level
of required works.
Sir Robert Smith: Except they are being focused on
solid walls so that will help rural building.
Ron Campbell: Yes, the Energy Company Obligation
is. That is the primary rationale for that part of the
Energy Company Obligation, the Carbon Reduction
Obligation. ECO is quite a complex issue, given that
it is now seemingly divided, with three different
components. In relation to the Carbon Reduction
Obligation, rural households should not be any more
disadvantaged really than urban households with that
built type. However, we have not seen any indication
that there is an enthusiastic appetite for these
measures and again the energy suppliers are now
asserting that in order to incentivise take-up of solid
wall insulation, the subsidy will have to be even
greater than was originally envisaged and certainly it
was originally envisaged that the level of subsidy
would be that which would be sufficient to comply
with the golden rule of the Green Deal. This is another
problem that the suppliers have raised.
If I could just make another point about solid wall
insulation, if it transpires—and it looks as though this
is the case—that private sector householders
occupying a property with solid walls are not
encouraged to take up a Green Deal arrangement,
despite the fact that 50% of that cost might be
defrayed by ECO subsidy, if that is the case and the
private sector does not take this up, we said from the
outset that the £1.3 billion ECO expenditure should
be devoted in its entirety to fuel-poverty programmes.
We think this is a particularly rational solution. If the
idea was to kick-start development of the solid-wall
insulation industry in this country and, by doing so,
bring about a situation whereby this measure became
economically feasible, became cost effective, then you
can do that by using the social-rented sector as, to
some extent, a testing ground.
Sir Robert Smith: Thank you.
Q8 John Robertson: Can I ask why it is not taken
up by the private sector?
Ron Campbell: I think it is simply the scale of
expenditure required. I think we would be talking
about £10,000 or so for external solid-wall insulation
and despite the fact that the subsidy would be
significant—the subsidy might be 50% or so—it
would be organised in such a way—in righteous
economics it should be organised in such a way—as
to just tip that measure over into compliance with the
golden rule in the Green Deal. So, say it would be
£5,000, but it would not be £8,000 or it would not be
£9,000. It would just be enough to make this measure
cost effective. I cannot honestly see the marginal
economic benefits that would accrue to a household
prepared to invest £5,000 in that measure being
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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
population living in solid-walled properties.
Mervyn Kohler: To build on that point—and you may
not want to go here yet because I’m talking about
more generally the difficulties; the barriers to getting
this sort of energy retrofit work performed—a lot of
people will be looking at the construction, the
inconvenience of the work. In the private sector, about
one third of the housing stock is occupied by older
households, and I am afraid I hear from a lot of older
people, “Oh, I don’t think I’ll be around for another
five or 10 years at the most and I can’t be bothered to
have the work done”. We have to get over that barrier
as well, as we craft and develop the ECO or whatever
we have for the future.
Q9 Barry Gardiner: Mr Campbell, National Energy
Action suggests that 45% of fuel-poor households will
be unable to benefit from cavity-wall insulation under
the ECO. Can you just explain why that might be the
case?
Ron Campbell: To be honest, I do not recognise that
figure.
Barry Gardiner: Maybe if you want to check
whether you did come up with it and if so if you
want to write to us and advise us why, that would
be helpful.
Are you aware of the sensitivity analysis that DECC
has done for uptake by 2022?
Ron Campbell: No, I am not familiar with that.
Q10 Barry Gardiner: What about the Committee on
Climate Change’s recommendation of uptake for
2015?
Ron Campbell: Of solid-wall insulation?
Barry Gardiner: They have done an uptake on solidwall, loft and cavity-wall insulation.
Ron Campbell: I think these things are not terribly
scientific. I think there is a general recognition
certainly that the kind of measures that were the basis
of previous grant schemes—
Barry Gardiner: What is it that is not particularly
scientific? Any estimates that DECC come up with or
any recommendations that the Climate Change
Committee come up with?
Ron Campbell: Both, I think. There is a degree of
conjecture in these things. You have to look into the
heart of households and energy consumers to see just
what it is; how they will react to various grants,
schemes and incentives. The Climate Change
Committee did say something rather supportive about
the negative impact of the cost of ECO on fuel-poor
households and in relation to solid-wall insulation. It
did suggest that this was a good and rational
deployment of resources to fund solid-wall insulation
on behalf of fuel-poor households.
Mervyn Kohler: I think a lot of these projections are
anticipating how the public is going to respond and
here we are so recently into the Green Deal-related
programmes, it is very difficult to make a judgment
and that is probably where a certain amount of the
speculativeness that Ron is referring to comes in. We
certainly do need to make sure that the public get
behind the concepts that we are trying to extol here—
the idea of making homes much more energy efficient.
Sometimes it is not helped particularly by the fact that
the Green Deal has been crafted very much as a
market-led initiative and the energy companies are
seen to be among those who will be in the van leading
the charge.
Q11 Barry Gardiner: My point, Mr Kohler, was that
it has been marketed and also stated that the policy
is there to reduce carbon emissions and therefore the
recommendations that are put forward by the Climate
Change Committee are related to what is necessary to
achieve those levels of emission reductions. For solid
wall, for example, they said that there should be 2.3
million installations of solid wall by 2015. So given
what you have said about the marketing of the scheme
and the reluctance of people to have work done in
their properties, do you see any possibility of those
recommendations being fulfilled?
Mervyn Kohler: Not, I fear, without considerably
more effort to generate interest in this sort of subject
from communities and so on.
Q12 Barry Gardiner: You said that in an ideal world
you would tip the scales to make any subsidy conform
with the golden rule of the Green Deal. Nevertheless,
that would be ideal only if the Green Deal itself and
the golden rule itself were incentivising people to take
up the Green Deal programme, would it not?
Mervyn Kohler: Absolutely correct.
Barry Gardiner: It is not, is it?
Mervyn Kohler: No.
Q13 Barry Gardiner: So when Energy UK found
that the cost of ECO could not be perhaps the £1.3
billion that DECC have estimated but £2.35 billion or
more, adding on average £94 to consumers’ bills, do
you think that is a more realistic estimate?
Ron Campbell: This is the kind of report that we have
had from the industry relating to the last few years of
what they see as very challenging targets, so the
super-priority group element of the carbon emissions
reduction target reaching these households and
offering them some kind of incentive to adopt energy
efficiency measures—I am not entirely sure what the
figure was, I think it was something like £200 per
household—and that I think is for fairly basic
measures. If I could go back—
Barry Gardiner: I would rather you answered the
question.
Ron Campbell: If the cost of the scheme is as
expensive as the energy suppliers claim, it will work
out at £94 per household.
Q14 Barry Gardiner: DECC have rejected having
benefit entitlement checks carried out as part of ECO.
Would that have been a useful way of ensuring that
more people in fuel poverty engaged in this deal?
Mervyn Kohler: It is an absolutely essential way of
making progress on several fronts all at once. Linking
benefit entitlement checks to energy efficiency work
is a convenient link to make. The important thing at
the end of the day is that the benefit entitlement check
is carried out because—certainly again I would speak
with knowledge only in this respect of the older
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Energy and Climate Change Committee: Evidence Ev 5
12 March 2013 Ron Campbell and Mervyn Kohler
population—the numbers of people who are underclaiming on benefits, and under-claiming by very
significant amounts is quite frightening.
Q15 Barry Gardiner: So why do think DECC
decided not to include it?
Mervyn Kohler: Presumably again on the grounds
simply of managing the costs of the programme.
Q16 Albert Owen: Can I just move on to more
general environmental and social levies? We have
heard that these social and environmental programmes
are paid for through levies on the energy bills and
these costs can hit the fuel poor the hardest. Why is
that?
Mervyn Kohler: It is a question of proportionality. A
person in fuel poverty is going to be spending, by
definition, a larger chunk of their available income on
energy and if a chunk of that energy cost is going up,
it bites on their broad budget in more general terms.
Also, the fact of the matter is that we charge for these
environmental and social obligations on a per
household bill basis. There would be surely a greater
case in terms of equity if it was charged on a per
consumption-unit basis.
Q17 Albert Owen: I understand your general theme
there, but some housebound people who are fuel poor
need heating all the time so they would pay more
under a per-unit charge.
Mervyn Kohler: Absolutely right. Again, with the
older population, living in their homes 24 hours a day,
7 days a week, probably needing a higher ambient
temperature because of their health conditions, people
who might be incontinent and need gallons of hot
water to wash their bedding and things of that nature,
they will need to be looked at in a slightly different
way if we were to move to a payment-by-consumption
basis. They would need to be properly safeguarded.
Q18 Albert Owen: I am not really sure what you are
saying as an organisation. You said in your opening
remarks that you supported the units. Yes? Unit cost.
However, that would be detrimental to some people
whom you represent.
Mervyn Kohler: As an organisation we look at the
figures, which give us the flavour in the big picture of
things, that people who are in fuel poverty are usually
smaller consumers so let’s start with that and then deal
with the exceptions, who we want to protect.
Q19 Albert Owen: However, are they the
exceptions? The people I come across or visit in their
houses in my constituency who have concerns, they
are growing in number. So I am not so sure that the
balance would be, in the way that you said, better for
them by going to unit price.
Mervyn Kohler: This may be a subject worth more
research and more discussion, but I come back to the
fundamental point that the most profligate users of
energy are wealthy households, and the converse is
true as well.
Q20 Albert Owen: The Fuel Poverty Advisory
Group has advocated that there be a protected block
of consumption. Do you think that would work? Is
that the practical solution to the dilemma that you
outlined there: that you can identify who are the fuel
poor and then in their bills there is a block of
consumption exempted?
Mervyn Kohler: The fly in that particular ointment is
whether you can identify the fuel poor. We have spent
a lot of time debating the definition of who is in fuel
poverty or not and wherever you make a definition of
a description of a household, you are going to have
silly cliff-edges where people are either in or out of
the box and sometimes inside it and sometimes
outside it.
Q21 Albert Owen: Nevertheless, a lot of people on
benefits are fuel poor as well so those would be an
easy target group for the DWP.
Mervyn Kohler: They would, and undoubtedly to find
some way of protecting those people by a strategy
such as having a protected block of expenditure would
be a help—and a help to people who are living on
such seriously narrow margins that even a small
amount of help is going to be very welcome respite.
Q22 Albert Owen: So you think it is a good idea and
it is something worth looking at?
Mervyn Kohler: It is definitely an idea worth
looking at.
Ron Campbell: My assumption here is that all
households would benefit from a number of units that
were not subject to any kind of levy, so it would not
simply be a question of identifying fuel-poor
households. The hypothetical benefit to fuel-poor
households would result from the fact that they
generally do consume less energy. Consequently, what
would be a higher charge on the second tranche of
units would not impact so badly on these households
because they consume so many fewer units of the
second tranche.
The main issue about raising funding for Government
social welfare and environmental objectives is not so
much to do with how the levy is structured and
whether the levy is right in principle. The levy is
regressive in its function, not simply because energy
costs represent a higher proportion of low-income
households’ expenditure and income; it is because it
does not take any account of their ability to pay.
Q23 Albert Owen: Neither do the other breakdowns
of the bill. Transmission costs—if you are rural poor
in the west of Scotland, you are still paying more for
your transmission costs. So it is not just the
environmental and social costs that that applies to in
the bill.
Ron Campbell: The fundamental issue here from our
point of view is less to do with modifying the way
levies are imposed on domestic energy bills and more
with developing some kind of system that better
reflects ability to pay and that, we consider,
unavoidably involves Exchequer-funded programmes
rather than levies on consumer energy bills.
Q24 Albert Owen: Just one final question, I think
you have covered most of what I was going to ask.
How confident are you that these are passed on to the
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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
know from the bill. I am sure you are familiar with
the figures, Ofgem suggests 11% or £59 per annum
on electricity and 6% or £49 on gas. Do you think that
fairly reflects what people are paying?
Mervyn Kohler: I think that to have the information
about these extra charges much more clearly spelled
out on the bill is a good thing in principle. It makes
people, if they are going to pay any attention to their
bill at all say, “Oh, what are these social and
environmental levies? Oh, is that what it’s about?”,
and it would perhaps improve their overall awareness
of the energy that they are using, how they are using
it, why they are using it. It would help with that
background noise of making energy something that
people are prepared to talk to each other about in the
convenience store or in the pub or whatever.
Albert Owen: They are talking about it now and they
don’t like it, many people.
Ron Campbell: Levies are simultaneously problems
and solutions.
Albert Owen: My question was do you think there is
sufficient information now?
Mervyn Kohler: There is not sufficient information on
consumer bills, no.
Albert Owen: That can be done quite easily by the
regulator suggesting that the energy companies do it?
Mervyn Kohler: A very simple change, yes.
Q25 Albert Owen: What about DECC? How can
they control how companies decide on the levy?
Mervyn Kohler: I think I was answering you, Mr
Owen, on the basis of how we explain to consumers
what the levies are about, not how we fix the levies.
Q26 Albert Owen: That was my first part, yes,
which you answered. You are saying it is very simple;
it can be done. The second part I wanted to talk about
relates to when you were talking about unit costs and
household costs earlier. Can DECC have a direct input
into this?
Ron Campbell: I think DECC can frame the structure
of levies in any way they see fit. I could not imagine
what the—
Q27 Albert Owen: Do you think they should be
more proactive or just leave it to the companies? We
will be asking them and we will be asking the
companies, but we are asking you now.
Ron Campbell: Presumably they will tell you that
they are being as proactive as they can.
Albert Owen: They will give us their account. We
are asking for yours.
Ron Campbell: Levies are very complex. As we have
been discussing here, certainly you can structure
levies so that they benefit, for example, the majority
of fuel-poor households. The unintended consequence
in certain cases—depending on the individual
household’s circumstances, say, an all-electric
household—is that you might end up inadvertently
penalising a fuel-poor household, but these are issues
where there has to be a kind of utilitarian approach.
The vast majority of fuel-poor households would
presumably benefit from option A, but a smaller
proportion of fuel-poor households would further be
penalised.
Mervyn Kohler: I think the question of whether
DECC leaves the setting of the levies to the
companies is an unusual one and an odder one, but I
would feel instinctively that it is for DECC to decide
and to apply uniformly across the companies, or else
we are inviting the companies to do even more
obscure things with their bills in order to try to
provide the argument that they are offering the best
price to consumers, and we are all surely about
simplifying bills rather than making them more
complicated.
Q28 Mr Lilley: Presumably we can all agree that
cost efficient programmes to reduce the amount of
energy you consume—particularly for poor families—
is a good thing, and the Green Deal therefore in
principle, if the golden rule is met, meets that criteria
and that the cost will be less than the benefit. You
mention ECO costing £1.3 billion. My simple
arithmetic, if there are 20 million households, is that
that makes £65 per household, presumably over the
lifetime of the programme. Do you think that is a
good deal?
Ron Campbell: I think if the overall expenditure can
be limited to the £1.3 billion, I think that is one of the
main concerns at the moment. The industry is
suggesting that, because of the way the programme is
structured, expenditure might be in the region of
100% more than the £1.3 billion. It is all to do with
the outcomes and the value for money of course, and
to go back to—
Mr Lilley: Surely the ECO is designed to cope with
the things that cannot be financed by the Green Deal,
i.e. whether costs exceed the benefits to the
household? Almost by definition the costs exceed the
benefits, so it is not a good deal.
Mervyn Kohler: Yes, the cost of ECO is going to fall
on all households and only a handful will see the
benefits of that programme of expenditure, in terms of
having work done in their homes. That is the balance
that we have to try to address. That would be the
balance if you were the householder in question
looking at the extra cost of the levy on your bill, and
looking at the energy efficiency that you are getting
out of your property at the moment.
Q29 Mr Lilley: Are your organisations concerned
about other costs of the Government’s climate change
programme, in general? The costs of moving from
relatively low cost coal, gas and old nuclear, to
renewable energy, which costs twice or more as much:
wind, offshore wind, new nuclear?
Mervyn Kohler: We are very conscious of the fact
that the energy industry is facing huge costs going
forward, in terms of generating and the manner in
which electricity and gas are provided to us, and
distribution. All these matters will add remorselessly
to our energy bills. If we are concerned about fuel
poverty, of course we will be concerned about how
these extra costs are going to be factored into bills and
consumer costs going forward into the future, because
it looks as if it could plunge a lot more people into
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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
picture.
Q30 Mr Lilley: Are you aware that, according to
Lord Stern’s report that the Government uses as
justification for imposing all these higher costs, the
costs of these measures will not be exceeded by the
benefits in terms of reduced damage from climate
change until the next century, in 100 years’ time?
Mervyn Kohler: From my point of view, I do not
think I have the intellectual apparatus to challenge
Lord Stern.
Q31 Mr Lilley: No, I am not seeking to challenge
him. I am asking whether you accept his analysis,
which is in his report?
Mervyn Kohler: I can see the argument that we have
to make a difference to climate globally. The
contribution that we will make in the United
Kingdom, by sheer dint of our size, will be a relatively
small part of that, but that is not an argument for not
doing it.
Q32 Mr Lilley: Don’t you think it is a bit rich that
your client group—the elderly, the least well off—
are being asked to subsidise future generations, which
again, according to Lord Stern’s forecast, in 100
years’ time will be three times as well off, even on
his worst scenario for climate change, and in 200
years’ time will be seven times as well off, even on
the worst scenario he shows for global climate change.
Should the poor today subsidise the rich tomorrow?
Mervyn Kohler: You make your challenge to me, Mr
Lilley, about the older population. I would submit in
return that the older population feels a sense of the
importance of leaving an inheritance to their children
and to future generations. A safer planet might seem
to me to be an important part of that inheritance.
Q33 Mr Lilley: However, if their planet is going to
be seven times as well off, it is pretty well saved,
isn’t it?
Mervyn Kohler: “If”, you said.
Mr Lilley: According to him, his worst scenario.
Q34 John Robertson: I want to ask some questions
about the Energy Bill and the Retail Market Review.
Unfortunately, your colleague who is not here—the
first question was to him, really, but perhaps if I can
structure it in a way that you will be able to let me
know what your thoughts are. The Government have
said—I think I can even quote part of it here—that the
costs of the Contracts for Difference will be passed to
consumers in their energy bills and that there is no
intention to charge the industries for it. How do you
feel about that?
Ron Campbell: Obviously, in relation to our client
group, anything that impacts negatively on energy
costs is to be deplored or at least regretted. We
recognise—and I suppose this is very much in line
with what Mervyn was saying earlier in response to
Mr Lilley’s question—that there are compelling
arguments related to the generation mix and how we
develop the generation mix in the future, and that—
unavoidably, it seems to us—additional costs will be
incurred as a result. We get a kind of tentative
reassurance from Government. I personally do not
find it remotely reassuring, but I think it is intended
to be reassuring in that, as much as energy costs may
be higher, they will be less high than they would be
if we continued with business as usual in terms of
generation. That simply, in relation to the fuel-poor
population, isn’t good enough.
We say this in relation to as and when you identify
a detrimental impact on fuel-poor households, your
primary objective should be to develop a
proportionate response to ease or eliminate that
detriment. As I say, there are two issues here. One is
the macro energy generation issue. The other one is
back at the individual household level—what actions
do you propose to take to mitigate the negative impact
on these households?
Mervyn Kohler: We have to look at this in the round
as well. To add to Ron’s point, the Government is
trying to steer the market by a number of different
levers, of which Contracts for Difference is one and
carbon taxes and so on are others. We have to look
across the piece here and see what benefits there will
be for consumers. I would submit that we would be
talking about the potential costs to consumers of
things like Contracts for Difference, and the benefits
that might be accrued if we looked at the revenues
from carbon taxes going forward as being a pot of
money we could use to help people in fuel poverty.
Q35 John Robertson: Yes. I have many elderly
people in my constituency, and I sometimes think that
perhaps we should be looking after not just them but
people with disabilities, people who do not have the
money. Should we try to introduce some kind of levy
that helps them, as opposed to other people?
Mervyn Kohler: It is perfectly right and proper and
laudable, and no doubt Age UK would argue that it
should be done too, that we make special provision
for people who are disabled or who have special needs
and so on. However, what we know in the long run is
that the solution that we want to reach is housing that
is much more energy efficient, where we do not have
to have this discussion about, “Do you have enough
money to keep yourself adequately warm?” The
slowness of our collective effort, our willpower as a
country over the last 30 years to improve our housing
stock is why we have an urgent problem now, with so
many people in fuel poverty and so many different
potential ways—I do not criticise your potential ways
of helping people who are poor, but they are
essentially “finger in a dyke” operations, whereas we
actually want a bigger dyke.
Q36 John Robertson: Yes. Mr Campbell, NEA said
that the Government had failed to undertake a
rigorous and convincing analysis and fully consider
the advice consequences of the Energy Bill. What was
missing from the Government’s analysis?
Ron Campbell: I think the fundamental thing that was
missing was a credible indication of the impact that
electricity market reform would have on households
in general, and fuel-poor households in particular. As
I say, much of the emphasis in the impact assessments
related to the Energy Bill have concerned, not the
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Ev 8 Energy and Climate Change Committee: Evidence
12 March 2013 Ron Campbell and Mervyn Kohler
actual degree of detriment to households but have
concentrated on how much worse potential detriment
would be if the proposed measures of the Energy Bill
were not undertaken. We have no way of deducing
from that kind of analysis just what the implications
are for fuel-poor households. We have 4 million fuelpoor households in England at the moment, 5.0
million-something fuel-poor households in the UK.
We have no idea how many fuel-poor households
there will be in 2020 or 2025, and we would like to
see some kind of analysis that demonstrated the extent
of that problem over the next 10/15 years or so, but
more importantly, I think, increased recognition of the
need to undertake remedial action to address what
appears to be a significantly growing problem.
Q37 John Robertson: NEA have suggested an
alternative approach to that set out by the RMR would
be to offer a universal social tariff to households
meeting the pre-defined eligibility criteria. Can you
explain this proposal in a bit more detail, and what
you think would be preferable to simply putting all
consumers on the lowest tariff rate?
Ron Campbell: This would be an attempt to bring
clarity, consistency and uniformity across the energy
industry, working on the assumption that you have
identified a category of the population that is
particularly
vulnerable,
that
is
financially
disadvantaged and that is in need of specific
assistance. We see this now across a whole range of
fuel poverty labelled programmes, because eligibility
criteria are converging. Whether it is based on the
Warm Home discount, whether it is the Affordable
Warmth element of the Energy Company Obligation,
whether it is cold weather payments, the most
vulnerable and financially disadvantaged households
are being prioritised for assistance. I think in relation
to a universal social tariff, that simply reflects the way
other benefits work or other sources of support work,
that there is a consistency across all entitlement to the
extent that a household knows whether they qualify
for some kind of support and/or an adviser knows how
they can refer people into that level of support and
what that degree of support will be. So you do not
have individual suppliers having a non-standard offer.
Q38 Ian Lavery: I want to focus very quickly on the
Hills Fuel Poverty Review, the independent review for
Government, which was published in March 2012.
Some concerns have been expressed about the new
fuel poverty indicators recommended by Professor
Hills. Can you explain the potential pitfalls of the new
low income, high costs indicator?
Mervyn Kohler: 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, and things like that,
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 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.
Neither measure helps us do anything very tangible
with targeting measures to alleviate fuel poverty. So,
in that sense, there is a certain amount of technical
happiness about getting the right definition of fuel
poverty, but it doesn’t necessarily help us with
practical implementation of fuel poverty strategies.
Q39 Ian Lavery: Do you think that the Hills Review
in some cases was a distraction from designing
effective fuel poverty policies?
Mervyn Kohler: It has certainly taken people’s eye off
what is happening on the fuel poverty front. As we
have seen, the price of energy continued to spiral
upwards in such a widespread way. It has also brought
into disrespect the will of Parliament, for example, in
2000 with the Warm Homes Energy Conservation Act,
getting agreement from the Government that fuel
poverty would be eliminated as far as practicable by
2016. We are not going to get there. What is
Parliament going to do about it?
Q40 Ian Lavery: Finally, if the Government decides
to adopt the new definition, do you think a new target
should also be set?
Mervyn Kohler: There certainly needs to be a new
strategy. How far we can attach targets to that I do not
know, but I certainly want to see the targets bringing
down the numbers of fuel-poor much faster than we
have currently forecast for the intervention of Green
Deal and ECO and, above all, to make sure that the
trajectory is downwards instead of remorselessly
upwards, as it has been for the last seven or eight
years.
Chair: Thank you very much indeed for coming in.
It is much appreciated.
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
am sorry we are running slightly behind time but we
will proceed now. I will not go through a formal
introduction, as we know who you are, and you should
know who we are.
Some of the Committee visited Glasgow last month,
and we did hear concerns from members of the public
who said they were simply unable to afford their bill.
One homeowner claimed their bill was more than
£400 a month. We were not able to stand that up while
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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
to switch off their heating for six months of the year.
Do you think that is a genuine and widespread
experience for people?
Richard Lloyd: I think it is, Chairman, and we have
been polling every month now for a year what are
consumers’ top financial concerns. Domestic energy
prices are consistently either the top concern or the
second. The second is often the price of petrol or
diesel. We found that a significant proportion of
consumers are dipping into savings, using credit to
pay for domestic energy costs; up to 40% of
consumers in our most recent tracker. So all the
evidence we have seen is that this is a very widespread
and longstanding problem for consumers. They are
worried about the trajectory of prices into the future,
they are worried about what they are hearing from the
Government about where prices are likely to go before
potentially the effects of decarbonisation start to
mitigate that, and they are looking to the Government
for solutions, and all of this with a backdrop of deep
mistrust of the energy suppliers.
Audrey Gallacher: I think probably Citizens Advice
will have more specific anecdotal evidence around the
clients that go to them, but we have a small
complaints handling team up in Glasgow in fact that
deal with debt and disconnection cases. It is a
statutory responsibility that we have. They have never
been busier. They are reporting that they are seeing
increasing cases of consumers who have selfdisconnected from pre-payment meters, to an extent
that they are encouraging us to do more work to
understand the drivers behind that. So I think, as
Richard said, it is a significant problem—not one that
is going away, but one that is only getting worse, but
I am sure Anne probably has lots more examples
around that.
Anne Pardoe: Yes, I think it is one of the biggest
issues that our bureaux are dealing with at the
moment. Last year we had 97,000 inquiries just to our
bureau alone about fuel debt. In the first three-quarters
of this year we have received 68,000, which is roughly
the same proportion of our overall inquiries.
Interestingly, every year we survey our bureau, as a
policy team, to see what the biggest issues they think
we should be working on for the year are, and this
year, perhaps unsurprisingly, welfare reform came top,
and then energy prices were something that they
thought we should be doing something about second.
Energy prices are rising hugely out of step with
household income, and the cost of living is rising
hugely as well. It is becoming more and more of an
issue, and we think that it is going to get worse, with
the prices continuing to rise. We are particularly
concerned about the impact of welfare reform on
benefit claimants as well.
I brought a couple of examples along with me of some
bureau clients who we have seen quite recently, since
January this year. We had one client who was a widow
and she lived alone on a very low benefit income. She
was in poor physical health. She was working parttime, but was currently signed off sick. She could not
afford to turn her heating on during the winter as she
was terrified that she wouldn’t be able to pay the bill
when it came. She had resorted to wearing extra layers
of clothing, hats and scarves, indoors. We also had a
35-year-old woman, with two young children, who is
in receipt of benefits. She had arrears with her gas
company that were being collected through her prepayment meter at the rate of £8 per week. She could
only afford to put £20 per fortnight on her meter,
which only gave her £4 worth of gas. She and her
children were very cold and the children were getting
ill and hadn’t been going to school as a result.
Q42 Chair: Could a benchmark retail energy price
help?
Richard Lloyd: In our view, yes. One of the problems
with the market, both retail and wholesale in our view,
is that there isn’t a clear reference point for pricing.
In particular, if you look at other markets where there
is a benchmark price set by the regulator, for example,
in some states in the United States, in Northern
Ireland, and around that, suppliers can compete. It
gives consumers—the vast majority, as you know, are
very disengaged in this market—some assurance
about whether they are 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
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. So, in
our view, yes, it would help.
Q43 Chair: Consumer Focus, you have expressed
concern about the Carbon Floor Price. Could you tell
us how you think carbon tax receipts could be used to
alleviate fuel poverty?
Audrey Gallacher: There is a campaign running at the
moment called the Energy Bill Revolution, which is
looking at making the homes in the country more
energy efficient, so making them as energy efficient
and up to the standard of homes built today.
Obviously, to do that would cost a significant amount
of money. We know there is pressure on public
spending, so it is quite difficult to see where that
would come from. To us, there is an obvious vehicle
around the Carbon Floor Price, which is obviously a
tax on carbon. As an organisation, we would rather
see that scrapped. We do not think it is a very good
policy vehicle. We do not think it really delivers the
intent to reduce carbon; it just displaces it across
Europe. We would do much better to try and work
with other member states to sort out the EU ETS.
However, on the basis that we have this, that it is
raising significant tax receipts every year, the Energy
Bill Revolution suggests anything up to £4 billion a
year.
There has been some economic modelling done and it
shows that if you use that money you can make homes
more energy efficient. You can take nine out of 10
homes out of fuel poverty and, as a by-product, clearly
you are reducing carbon, which is an ongoing aim,
but you are improving the health of those households.
Potentially you are offsetting the need to build
increasing amounts of generation plant, because we
won’t be using as much. It would also create quite a
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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
looking for in these current economic times.
Q44 Mr Lilley: Mr Lloyd has referred several times
to lack of trust in the energy companies by consumers.
Do you think this is justified? I presume you mean by
that that they think that the profit margins taken by
the energy companies account for a significant
percentage of the increase in price that they have
experienced. Do you agree with that?
Richard Lloyd: I think there is a justified lack of trust.
The energy suppliers acknowledge that and they are
saying to us they are trying to rebuild that 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, who are making significant
margins on their generation business, perhaps not so
significant on their retail end of the business. That
fuels the perception among consumers that there is
something going on in the industry.
Q45 Mr Lilley: I am not talking about perception; I
am fully aware of the perceptions of consumers. I am
saying, do you objectively think that increased profits
account for a significant proportion of their increased
bills?
Richard Lloyd: I think they do.
Mr Lilley: How much?
Richard Lloyd: This is part of the problem that we
have with the industry—
Mr Lilley: The simple answer is you do not know.
Richard Lloyd:—is that there isn’t enough
transparency about what is going on in the market—
both at the retail and the generation end—to be able
to objectively assess whether there is some advantage
being taken of consumers through people being very
reluctant to move in this market. So my view is, yes,
people are right to distrust the market. Whether they
are right to distrust individual suppliers, I would say
depends on how transparent those suppliers are being
about what they are doing about the costs that they
are imposing on people, and in general—I will have
to come back to this—what we are asking consumers
about is consistently finding there is a low level of
trust for those reasons.
Q46 Mr Lilley: Roughly, what proportion of the cost
to consumers is profit to shareholders? Is it all stages
of the process do you think?
Audrey Gallacher: We did some research last year:
“Who Pays?”, which is about consumer attitudes to—
Q47 Mr Lilley: No, I am not asking about consumer
attitudes. I am asking about the reality, the facts, the
money going to shareholders, not what people think it
is but what you know it is or do not know it is.
Audrey Gallacher: We have done some work looking
across the whole value chain, so distribution activities
and generation. We thought about 20% of the bill was
made up of profits and some investment. We really do
not know—and this is another issue for consumers—
companies continually tell us that they need to make
profits because they need to invest, but we do not ever
see what that investment is. However, we thought
approximately 20% of the bill—all told, not just
suppliers, right through the value chain. That was peer
reviewed by some DECC economists, who did not
find any fault with it but were not going to sign up to
it. Again, it is quite a lot of conjecture because we
just do not know.
Q48 Mr Lilley: By how much do you think that
percentage has increased?
Audrey Gallacher: One of the concerns that we have
had on—
Mr Lilley: Could you just answer the question: by
how much do you think that has increased? It could
be, “Yes, 5%, 10%” or “don’t know” or “100%,
don’t know”.
Audrey Gallacher: We have some figures where we
have seen that—
Mr Lilley: Tell me what the figures are.
Audrey Gallacher: I will need to look for them in my
brief, but profitability across from 2008 to 2012 has
shown that the—can I come back to you on that
because I don’t want to waste a lot of time looking
for it?
Q49 Mr Lilley: Sure. Presumably, at one stage they
might have been earning zero profit. It could have
gone up to 20%, so the maximum amount of the price
increase it could account for is 20%, if previously they
were earning zero profit, which would have been an
unsustainable position.
Richard Lloyd: What we can say is that on the retail
end for the Big Six, for the largest suppliers, margins
have been on average about 1.3% to 3.2% over the
last three to four years.
Q50 Mr Lilley: That is trivial compared with the cost
increases my consumers have suffered.
Richard Lloyd: For the same companies, the
wholesale electricity businesses that they own have
been showing margins of between 30% and 10%. So,
again, this is part of the difficulty consumers have in
trying to figure out—when they are presented with for
a group, say, like Centrica—what the truth is here.
You are hearing about very substantial margins on
their generation business, still reasonable pretty
healthy margins on the retail business—
Q51 Sir Robert Smith: What percentage of the bills
is the generation business?
Richard Lloyd: About 60% of the average bill.
Sir Robert Smith: So that is 8% on the final bill?
Mr Lilley: No, you are giving the figure as a
percentage of the final bill, aren’t you?
Richard Lloyd: Yes.
Sir Robert Smith: When you were saying 17%, was
that on their wholesale operation or was that—
Richard Lloyd: 17% on their wholesale operation is
margin.
Sir Robert Smith: So that only makes up half the
bill then?
Richard Lloyd: Your maths is better than mine,
Robert. We can write to you with what we think in
more detail the numbers look like.
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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
are feeding public concerns that the main reason for
the rise in their bills is an increase in the profit margin.
You have little evidence for this, and the maximum,
from the figures you have given us now, if they
previously had or could in future have zero profit—
which is obviously unsustainable—is it could add
15% to their bill. Bills have gone up by much more
than that, so it must be other factors. You should be
expressing that. The main factor I would have thought
is increased fuel costs. A secondary factor is increased
Government costs imposed by all these green levies.
Richard Lloyd: We have always stressed that a
significant proportion of what people are paying as
an increase in their bills is due to decarbonisation, to
social policies.
Mr Lilley: You have not told us that.
Richard Lloyd: You did not ask me about that, with
respect, Peter.
Mr Lilley: No, we asked you—you volunteered.
Richard Lloyd: You asked me about the contribution
of profit to the increase in people’s bills.
Mr Lilley: I am talking about what you talked about.
You talked about consumers’ concerns that it was
about the companies’ dishonesty and lack of
transparency. You never mentioned the Government’s
position in your opening remarks.
Richard Lloyd: I have said consistently publicly that
there are a lot of components—
Mr Lilley: Except today.
Richard Lloyd: With respect, you did ask me a very
specific question about profit but I am very happy to
talk about the range of policies that are also driving
the increase in bills, and I was saying that I thought
very clearly that the 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. On top of that—as I also said
in my opening remarks—people are worried about
what they are hearing from the Government about the
costs they are going to have to pay to decarbonise the
system. I thought I was quite clear on that.
Mr Lilley: You did actually say that, and I apologise.
I suggested you had not said that. You did say that.
Audrey Gallacher: I have some figures. Do you want
me to come back?
Q53 Albert Owen: Can I just—Mr Lloyd is
absolutely right to say that there is this lack of trust
because of transparency, and it is the companies
themselves that actually admit to this now. Do you
ever think that we will get to a position where there
is full transparency and that people will accept that
energy costs are going to keep going up? Do you think
we are ever going to get to that stage or is it always
going to be this sort of cloak and dagger we are
worried about, whether the price has been reflected,
whether the costs are passed on to the consumer? Do
you think we are ever going to get there because some
of the energy companies are asking for that, to be fair
to them?
Richard Lloyd: The reforms on the table at the
moment aren’t going to get us there. I think the
opportunity is there, were the reforms on the table to
go further. The most forward- thinking suppliers
actively want that degree of transparency because they
want to regain the trust of their customers, as I said
before. Why do those reforms not go far enough, in
my view? Well, I think if we have a much simpler
market, we are taking some steps towards getting that
simplicity, whereby people feel they are more likely
to be able to engage in it, to be able to spot the
cheapest deal, to switch more easily, to get—if they
are not engaged with the market—a price that they
can feel confident is fair.
Q54 Albert Owen: I understand all that, but my
point is—and the current Secretary of State for Energy
and Climate Change has said it as well—that in the
short term there is going to be an increase but, when
market reform comes in, there is going to be mid to
long term cheaper bills in the future, but we are going
to have to pay this bill. Do you accept that premise?
Richard Lloyd: I do accept the premise and support
the idea that if we get the system to work better, more
efficiently, that if we can all better manage our energy
consumption, we should be better off than where we
otherwise would be. However, that is a very difficult
message to get across to people.
Q55 Albert Owen: Final point, do you think
collectively we have a responsibility to have that open
argument with the public?
Richard Lloyd: I think we do, and part of that needs
to be a responsibility on the part of suppliers and the
regulator to get out into the open what is going on
between the different arms of their business, to get
some numbers out, some facts out, a reference price
as we were mentioning earlier. In the end, having that
honest conversation—as one of the suppliers has been
saying they have been wanting to have with the
public—about what is genuinely driving the increase
in their bills, what they can do to manage that, and
where the investment that we are all paying for
through our bills is taking us. However, I fear we are
a way off that and, in particular, while there is still
this question mark about what is going on with the
profitability of companies, there will still be that
suspicion that there is something not quite right in the
system, and that is the hump we have to get over.
Q56 Sir Robert Smith: That leads into one of the
aspects of how the companies communicate with their
consumers, and I think Consumer Focus have
expressed concerns that it can be misleading with the
way they make their comparisons. You say
particularly with European countries’ prices. What
other aspects of the communication are misleading?
Audrey Gallacher: What I have found quite
frustrating over the last few years—and it leads to this
point around trust and profitability—is that around
2008, companies told us that they didn’t make any
money at all, and so that is why they had to increase.
This is in relation to price increases, so “We don’t
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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
that period, from 2008 to 2011, there has actually been
a 36% increase in profits across the Big Six, but that
is another story.
Sir Robert Smith: Is that 36% across the whole
vertically—
Audrey Gallacher: Yes, so, on the production and the
trading arms as well. We have taken that from
financial accounts. We then heard that prices have to
go up because wholesale prices are increasing, and
clearly we have seen that. We have evidence of that.
We know that there was a spike, but since that big
price spike in 2008, wholesale gas, wholesale prices
have come down and we haven’t seen a corresponding
reduction in consumer bills. That is something we
campaigned about for ages—whether prices were
passed on. Ofgem has found some potential evidence
that falling prices were not passed on as quickly to
consumers as rising wholesale prices were.
Now that we have a less volatile or certainly a lower
wholesale price, companies are now using the excuse
of social and environmental obligations and other noncommodity costs to justify price increases. So, I think,
as consumers we are just about sick of these
continually changing messages, which adds to that
degree of mistrust that Richard has been speaking
about. I really don’t think it helps because we don’t
understand the magnitude of those issues on bills,
particularly in relation to certain costs that you
discussed in the previous evidence session. We have
no idea what those costs are. We are going on what
the companies tell us. So I think there is quite a lot of
conflicting information out there.
My worry would be that we now have an industry that
points towards Government and blames Government
for rising costs. There is absolutely no doubt that
Government energy policy will contribute to
consumer bills, but to continually be involved in this
kind of bun fight over whose fault it is isn’t really
going to take the debate forward or help consumers to
reduce their energy costs.
Q57 Sir Robert Smith: Can you see any way of
providing a clear way of communicating those
Government costs to consumers?
Audrey Gallacher: One of the things that is quite
difficult is that there is not really an open discussion,
so we have seen situations whereby, for example, at
the moment the Energy Bill is looking at introducing
measures to put consumers on the cheapest tariff
because it was mentioned by the Prime Minister in the
House of Commons. However, there isn’t really as
much prominence of how Government energy policy
is potentially going to contribute to consumer bills.
We have accepted that we need to break the link with
fossil fuels, that we need to decarbonise and that all
these measures will mean that, longer term, prices will
be cheaper than they would have been had we done
nothing, but we still have a good 10 years to get
people there. That is going to be massively painful,
and I don’t think there has been a proper debate about
whether consumers can afford that, the pace and the
scale of it. Also, potentially, Government policy is
much more targeted at the supply side rather than
reducing demand. So if you have done things to make
houses more energy efficient, people use less. We
shave peaks. That would deliver the same benefits in
terms of carbon reduction, but it would probably be a
bit more comfortable for consumers, so there is an
issue.
We have a budget. Every year the Chancellor gets up
and says what he is doing with taxes. A lot of these
levies on energy bills are, in effect, imputed tax, but
there doesn’t really seem to be the same level of
public exposure around them, and that makes it
difficult for consumers to make a judgment. The last
thing we need is industry and Government at each
other’s throats because what we need is consumers
changing their behaviour, becoming more energy
efficient, engaging with the smart metering
programme, taking up the Green Deal, all of those
things. While there is that continued argument in the
background, there is a real danger that consumers will
not take action because they are leaving it up to
everybody else to sort it out.
Q58 Sir Robert Smith: So you think the
Government needs to be clearer about costs as well as
the industry?
Audrey Gallacher: Yes. We have done research and
consumers were not aware that they paid social and
environmental obligations on their bills.
Sir Robert Smith: Even though you have said that
the companies are exaggerating that, that had not got
through to the consumers?
Audrey Gallacher: I do think they are. I am quite
worried now about what the background commentary
is on profits. Potentially, we need the Government to
come out and make a statement on whether prices are
fair or not and let us know where things are
potentially going.
Richard Lloyd: If I can add to that, Robert? I think
there is a limit, especially where consumers are at the
moment, to what you could expect people to do in
engaging with these numbers. If organisations, like
Consumer Focus and Which?, are not able to translate
the limited data we are being given—because it is
very limited—about what is driving costs into a way
that consumers would engage with, then I think the
suppliers will struggle as well.
There are examples of companies producing graphics
with a radiator with different chunks of it in different
colours, attributing costs to different drivers, to
different sources, but in the end if you know that most
people don’t look at their bills or read their annual
statements or want to engage in that level of detail, I
think there is a job for the Government to do to help—
and for us to help in doing that—to translate what is
going on into more accessible information to
consumers. There is a lack of transparency in the
market that allows us to do that.
Q59 Sir Robert Smith: Do you think Ofgem could
have more of a role in encouraging an open
understanding of what is going on?
Richard Lloyd: I think it should, and they need to
think about how they can much more clearly present
what is going on to consumers; much more
proactively do that. I think they have been far too
quiet about this for too many years. Surely it is part
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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
interests of consumers, to be explaining to consumers
in much more understandable language what is going
on in this market and what they are doing to protect
people from unnecessary costs.
Anne Pardoe: We would agree with that as well. We
would like to see Ofgem take far more of a role in
mediating the public debate around this. When there
is a round of price rises from suppliers, they have the
information there, they have the ability to say, looking
at the market, “This is fair” or “This is not fair.” Is
the level of profits fair? Surely it is part of Ofgem’s
job to look at that and mediate that debate. We would
also like to see more of a unified, sensible public
debate about the costs. What are the costs imposed by
the Government? What are energy profits? What are
the wholesale? We think Ofgem has a role to play in
mediating that public debate as well. We would like
to see them do a lot more.
Q60 Sir Robert Smith: I suppose a lot of the debate
has been about the retail market, and trying to make
that as competitive as possible to maximise
efficiencies, but you have highlighted that, in a sense,
underlying that you can have a really efficient retail
market but if the wholesale market is producing a
product that isn’t so competitive then retailers cannot
make much difference. It is only on their retail margin
that they are going to be competitive. So you are
thinking that there are deficiencies in the wholesale
energy market. What sort of data on wholesale gas
and electricity prices are currently publicly available
and what do you think needs to be done to tackle your
perception of the deficiencies?
Richard Lloyd: There is a very small proportion of the
trades in gas and electricity for which there is publicly
available data. For example, while 70% of day ahead
trading is on N2EX, an exchange for electricity, only
6% of total consumption is estimated to be traded.
The vast majority of trades are done behind the scenes
for a far longer curve into the distance; three years
and that kind of timeframe. It is impossible for people
outside the industry to know what kind of deals that
far out are being done, and there is no transparency
about the prices that are being paid. In particular, in
the vertically-integrated companies, there is a lot of
self-supplying going on, for which there is no publicly
available data. So our view is, at the very least, there
needs to be much more transparency about the prices
that are being paid to wholesalers, including by their
own retail businesses.
We have welcomed the moves that Ofgem have been
encouraging to make more energy traded openly
through exchanges. Some suppliers agree that one of
the things they could do to rebuild trust in the market
would be to do much more through exchanges, rather
than the kinds of very large volume trades that are
going on behind the scenes. However, in the end, there
is very little data that suggests to third party observers
what is going on, what are the prices that are being
paid to the wholesalers.
Audrey Gallacher: Yes, I would agree. Early
estimates are that about 85% of trades are made
bilaterally, so there isn’t really any proper disclosure
around about that price. Of course, we have seen the
recent scandal where the reporting organisations, who
rely on traders to tell them the price, are suggesting
that that price may have been slightly manipulated to
improve position.
Sir Robert Smith: Did that not actually ironically
improve the position to the benefit of the consumer?
Audrey Gallacher: I am sorry, I don’t know enough
about it. I suppose the issue is that we are looking at
this market reference price to set Contracts for
Difference, for example, in the future, so it is really
important that we have a robust price to start with.
Whether or not there is any kind of merit—
Q61 Sir Robert Smith: So greater liquidity in that
market?
Audrey Gallacher: I think that is the main thing. First,
we don’t understand the price that is being paid, and
Ofgem has options open to it, we think, through the
European Directive to get more information on the
costs companies are actually paying. However, the
long-term goal is that we need to sort out liquidity,
because we are not going to have a true reference
price if we do not have a properly competitive market.
This is an issue that Ofgem identified in the probe in
2008 and we need to get it sorted out, particularly as
we are bringing in electricity market reform and we
are going to be reliant on that reference price. The
biggest thing—which I think Richard alluded to—is
that it is a potential barrier to new entry into the
market. Acquisition products are generally 12 month
fixed rate contracts. Right now the market is
completely or more or less illiquid after six months,
so it is quite difficult for any new supplier to come in
and purchase the cheaper energy that they need for
that contract without taking a significant risk. They
will either price that risk into what they are offering
customers or they just will not enter the market.
Richard Lloyd: I think it would be helpful if we had
the same focus on what it would take to create a
genuinely competitive wholesale market, as we have
had on the retail market in recent months. So what
would it take in terms of transparency in the
publication of data, in ensuring more wholesale
trading is done through exchanges? If there is—and
as I say we don’t know because we do not see the
data—an unfair competitive advantage being given to
the retail arms of the wholesale companies in the
vertically integrated suppliers’ case, should there be a
restriction on self-supplying? Should the generators be
required to put all their energy on to the market rather
than selling it to themselves in this very nontransparent way? So I think we need Ofgem and
DECC to take as hard a look at that as they have on
generating competition in retail.
Q62 Sir Robert Smith: Is there an argument, though,
that the vertical integration might mean a benefit for
the consumer in terms of hedging and, therefore, in
what is a very big market, the companies’ ability to
see its way through the troughs and peaks?
Richard Lloyd: That is what the suppliers would say
and that may well be true. Again, we cannot look into
enough of the trades to say if that is right. What we do
know, though, is that if you are a vertically integrated
company and you increase your wholesale price, even
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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
pass that price through to the consumer, you are still
a net winner as a group. So what is there in the system
that incentivises efficiency in generation, maximum
competition in generation, and therefore what is being
passed through to the consumer being kept in check?
At the moment it is a very murky world and, as we
have seen with the allegations of gas price rigging,
one that is reliant on a very small number of players,
a small number of traders who have access to very
sensitive market information. The vast majority of
trades are not done transparently.
Q63 Chair: I think you have advocated a review of
competition. Do you think that needs to go beyond
what Ofgem have already been doing in this area?
Richard Lloyd: I think it does. As I say, we have
welcomed the moves that Ofgem have been proposing
on greater liquidity and ensuring that the smaller
suppliers can challenge the bigger in this market.
Although I think there is much more that could be
done, both to address the consumer confidence point
that I was discussing with Peter earlier, but also to
ensure that they can reassure the consumer that this is
a market that is operating efficiently and
competitively, and the previous efforts to look at this,
segmented accounts and the investigation into
vertically-integrated suppliers and what is going on,
did not deal with that adequately. I think you will find
some suppliers would advocate, too, that there is now
a moment where part of the process of regaining trust
in the energy industry needs to take a very hard look
at how the generators are operating, how the
wholesale market is operating and potentially some
changes to ensure that people have confidence in that.
Q64 Christopher Pincher: Can I clarify something
that Ms Pardoe said earlier, with respect to the role of
Ofgem and price and profit? I can understand that
Ofgem may have an interest in a role with respect to
prices that are charged, but do you think that Ofgem
should have a role with respect to profit? After all, a
company can be very efficient and that might improve
its profit margin. Does Ofgem have a role to play there
or shouldn’t that be more properly the role of the tax
system?
Anne Pardoe: I certainly think they have a role to
play in terms of saying whether a price is fair, looking
at the retail price and the wholesale price. Whether
they have a role to play in profit, I think that is more
something for them and the Government to look at, to
be honest.
Q65 Mr Lilley: How would you define a fair price?
Anne Pardoe: A fair price? I think it is more of what
is a reasonable price, given what people can afford to
pay, given that it is an essential service and based on
the wholesale cost of the energy.
Q66 Mr Lilley: Those are two rather different things,
aren’t they? So you are saying the price should not
reflect primarily the costs?
Anne Pardoe: I think, given Ofgem’s role as
regulating the market in the interests of consumers, as
well as other businesses, I think they should have a
role to play in deciding what a reasonable price is.
Audrey Gallacher: I think there is a different issue
about the cost reflective price and the degree of crosssubsidy that currently goes on. I think a fair price is
arguably going to be one that is cost reflective, we
haven’t seen that—well, we have seen issues of a
fairly significant cross-subsidy so we are talking about
allegations that are being made around predatory
pricing where acquisition deals are significantly—
Mr Lilley: So prices may be too low?
Audrey Gallacher: There is a concern that inactive
customers are providing a cross-subsidy for suppliers
to offer attractive deals. While that might be great for
those individual customers, and while it might be
difficult for me as a consumer advocate to say I do
not want people to get cheap bills, there is an issue in
that. As Anne says, it is an essential services market.
It is a non-discretionary spend, and at the beginning
of this session we heard some really quite emotive
stuff around the impact that an inability to afford
energy has on households. We know it has a massive
impact on health and wellbeing and all of that stuff,
so there is an issue about having a fair pricing regime
that doesn’t allow those degrees of cross-subsidy.
Although I suppose there is then another question
about whether as a society we rely on a competitive
market to deliver what essentially might be some
social intervention that is required by Government.
We could find ourselves—particularly as we see the
levels of investment required over the next 10 years—
with lots of affordability issues. One of our concerns
is that the energy policy debate has not given enough
prominence to the affordability issue. We would like
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
the competitive market to deliver that for consumers
or whether we just need to recognise it will only go
so far and we need some other intervention, like a
really decent energy efficiency programme or some
additional financial assistance.
Richard Lloyd: There is a market I am fond of
quoting—and apologies if I have told you this
before—there is an example of regulators in the
United States that, on behalf of consumers in their
area, go to the market and see what the best price is
that they can get with their expert knowledge on
behalf of people who are on a default standard tariff.
The market operates around that. It effectively
becomes a price for others to beat. That gives the
unengaged consumer confidence that an expert on
behalf of them has secured the best possible price,
with all the variables in that market, the pressures that
are exactly the same as in our market, in terms of
wholesale costs and Government policy. However, it
effectively sets a benchmark around which the rest of
the retail market could operate.
Which? is always the last consumer advocate to
advocate price controls, and we are not advocating it
in this case. I think that, particularly if we have a
much simpler market, people are more likely to move
around, they are likely to be mobile. Competition
should be the best way to keep prices fair and keen.
Nevertheless, given the complexities and the lack of
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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
comfort from an expert intervening in that market and
saying, “This is a price that is fair”. That is why
collective switching has occasionally given people
that assurance because, as individuals in this market,
they are feeling completely overwhelmed or
disempowered relative to the size and expertise of the
supplier that you have to engage with.
Q67 Mr Lilley: I was excited by the suggestion that
there are under-priced, cut price deals available. I
haven’t been able to find them. If there are, why don’t
we all pile in and it will have the effect of reducing
any excess profits that the company are making and
put pressure on them to be more efficient. I would
have thought the answer to my question—which I will
offer you—was that a fair price is one which does
not have a monopoly price element, so it is generally
competitive, where there is pressure through
competition on the suppliers to keep down their costs
and where the Government does not impose too many
extra costs, which I fear it is doing and that is my
principal concern. That is the principal avoidable
element, if we did not have all these feed-in tariffs
and high cost energy we are being forced to use. The
last point is contentious but the first two ought not
to be.
Richard Lloyd: If I can come in on your third point?
I think there is an issue, putting aside the rights and
wrong of decarbonisation, about whether the costs to
the consumer of decarbonisation are being kept in
check too. With ECO, there is the hope that
competition between suppliers will keep the price of
ECO under control. I think that is rather naive. The
Smart Meter programme: again, the Government is
hoping that competitive pressures between suppliers
will keep the cost of that programme in check.
Contracts for Difference: how do we know that the
price that is being negotiated between the Government
and suppliers is the best possible for the consumer?
So again, there is a cloud of non-transparency hanging
over a significant and growing chunk of what people
are being expected to pay, and a hope on the part of
Government that competitive pressures, competitive
forces will keep those costs in check and, therefore,
keep the price that is passed through to the consumer
in check. If we cannot see the numbers, if we cannot
see the data, certainly we cannot reassure consumers
that they are paying a fair price, and I think that feeds
the suspicion we were discussing earlier.
Anne Pardoe: There is also the point to make on
whether that should be on consumers’ bills at all in
the first place and whether it could be funded through
general taxation, which is generally less aggressive
and has less of a distributional impact which
colleagues in the earlier session were talking about
around if people who are paying for these energy
efficiency programmes are not benefiting from them
personally, that can have an impact of pushing people
into fuel poverty, so there is a wider debate around
how you fund that as well.
Q68 Sir Robert Smith: Can I just ask if Which?
were confident that the market was working and that
the horrendous bills people were paying reflected the
world we live in, but your readers wanted to believe
there was a magic solution and that it was all down to
large companies exploiting them, would you be up
front with them and say, “I am afraid there is a real
problem and it is the fundamentals that are causing
your bills to be this high”?
Richard Lloyd: We are already being that up front
with them because we know that there are pressures
in the wholesale market. Everyone knows that. What
we do not know is whether those pressures are being
kept sufficiently in check through competition,
through competitive forces. What we also know is that
the retail market is not operating effectively for
consumers, so absolutely. In all our public messages,
just to reinforce the point I made to Peter, we are
constantly saying, “No one should be fooled by
anyone that your energy bills are going to come down
in the near future”. The wholesale market is bound to
be driven upwards in the medium term over time
through pressures on commodity prices. We all know
that.
Sir Robert Smith: What we need to know is that it
is not being driven higher than it needs to be.
Richard Lloyd: What we want is to be able to assure
people that they are not being taken for a ride through
the structure of the market, through a lack of
competitive forces, through unnecessary Governmentimposed social and environmental costs, and that this
is a market within which you can be confident:
provided you move around in it and use your
consumer muscle, you can get a fair deal. At the
moment it is only a very small minority of people that
are engaged enough to be able to do that. Yes, we
are already telling the million and a half people who
subscribe to us that they should be in no doubt that
you should expect that your bills will rise. What you
should be in doubt about is whether the current system
is keeping that rise in check enough.
Q69 Ian Lavery: Which?, Mr Lloyd, has suggested
there is a lack of information relating to the uncleared,
over the counter (OTC) trades and you say there is a
particular cause for concern with regard to these. Can
you say what is known about these types of trades
and how they influence wholesale energy prices and
ultimately value for money for the consumer?
Richard Lloyd: It is the dominant form of trading,
over the counter in the wholesale market. It is about
80% of electricity and 70% of gas that is traded in
that way. They are largely primarily commercially
confidential contracts so there is no data about the
prices, the volumes, the products that are being traded
in that way. If such a large proportion of wholesale
energy is being traded in that way, it is very difficult
to understand how a price signal is sent to, for
example, small suppliers, how you can be confident
that those trades are being done in a genuinely
competitive fashion and how the interests of the end
user is being taken into account. It is significant. It is
often trades between the retail and wholesale arms of
the same business and, as I think I mentioned earlier,
only about 6% of total electricity consumption is
traded externally, for example, through to N2EX.
There are ways of finding out. There is data available
if you want to pay for it about some of the trades that
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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
is very hard to get to the bottom of the prices that are
being paid and what are the dynamics in those trades.
That is why we think there needs to be much more
trading through exchanges and much more price
transparency, much more data transparency.
Q70 Ian Lavery: In the interests of competition, do
you think there should be some form of alternative
model such as a pooling system? Would that be fairer
in terms of competition?
Richard Lloyd: We think it is worth exploring other
mechanisms including the pool that has been tried in
the past but I think for us probably the primary focus
should be on whether there should be a restriction on
self-supply and whether in vertically-integrated
companies there should be a legal separation of their
retail from their wholesale generation arms. That
would help bring the transparency and, we think, the
competitive forces to bear given that the six largest
companies are dominating the wholesale and the retail
markets. We think that is the first place to look.
There are other issues here about the ability of smaller
players to access the market, in particular their ability
to get credit that will allow them to trade and hedge
in a way that allows them to compete with the large
suppliers. I think a mix of liquidity and transparency,
probably some form of self-supply restriction, would
go a way towards reassuring us that the market at the
generation end is operating more competitively.
Audrey Gallacher: I think we have looked at issues
around the pool and what we could do because
obviously there are advantages in that buyers and
sellers have access to each other, there is a lot more
transparency around the price. It would also probably
help market entry, as Richard has already alluded to.
There were potential concerns around gaming, so
there would need to be some safeguards in place. I
think for us one of the issues is that we are going
through such a massive round of policy change and
electricity market reform that to make that kind of
wholesale change to the wholesale market might just
create too much change, making it riskier, which
would ultimately increase investment costs being
passed on to consumers. I suppose our issue is how
much we can reasonably do all at the one time, given
the scale of the job that is in front of us and whether
it would be a prudent idea to start dismantling the
whole of the wholesale and trading arrangements. I do
not have an answer but we would need to weigh those
things up. It may well be that looking at options to try
to fix what we have rather than scrapping it and
starting again may be a better option at this
particular time.
Q71 Ian Lavery: Ms Gallacher, I know it has been
stated from Consumer Focus that there is evidence of
a decline of competitive intensity in the UK energy
market, do you have any evidence of this?
Audrey Gallacher: It depends on what your measure
of competition is. Historically it has always been
around the levels of switching, so we have seen that
levels of switching have significantly tailed off since
2007, from 20% down to about 11%, I think, are the
figures but I am going to have to come back to you
and clarify those figures. If that is a measure that you
are using: consumer engagement in the market and
switching, we know it has reduced. What we think is
that there needs to be just a whole additional raft of
information and more effective monitoring within the
market to really understand what is going on, because
companies will come back and say, “Quite a lot of
switching goes on within the company”, with
consumers going on new products that are more
attractive and that, in itself, is evidence of consumer
engagement, but we really do not understand that. We
don't know the spread of products across companies,
how many customers are on them. We know about
payment methods—that about 55% of people are on
direct debit—but there is still a whole chunk of
consumers who are paying cash and cheque, about
15% on pre-payment meters. Frankly, there is no
competitive offering out there for them.
In the last 3 years, about 280-odd new tariffs have
come out on to the market. Only 3% of those have
been available to pre-payment meter customers, so we
have a really segmented market, where you have a
core of engaged consumers, you have people who are
online, prepared to pay by direct debit and who can
get access to good deals, but you still have
approximately 45% of the market who nobody really
appears to be competing for. I am sure the companies
will call me on that one, but there is a real issue about
the products that have been made available and this
links back to the work that Ofgem is doing on its retail
market review. Quite a lot of the solutions that it is
putting in place and the remedies are really targeted at
a group of consumers who are arguably already fairly
engaged. I have real concerns that there is a big chunk
of the market out there, generally the people who are
in fuel poverty and the people who have real
affordability issues, for whom the market is just not
working.
Q72 Ian Lavery: How could Ofgem use EU
legislation to encourage suppliers to disclose the
actual cost of trading energy?
Audrey Gallacher: Since 2011, there has been a
European Directive in place. It came in on the energy
third package, which is about Ofgem being able to
require companies to say how much they actually
spent. Continually, when we talk about the
relationship between wholesale and retail prices, it is
quite difficult because Ofgem will make an
assessment. It will come out with a report, and then
the companies will commission an alternative report
that will completely refute what Ofgem says. This
really confuses customers all the more and that is
because nobody really knows the actual cost that has
been paid. Companies will say, “You have used the
wrong hedging strategy. That is not the price we paid.
That is not the average consumption for our
consumers”, so lots and lots of holes are picked in the
various bits of analysis. Moreover, there is an ability
for Ofgem to go and require companies to tell them
how much they paid. It would be done retrospectively
but it might be quite a good check on the industry if
they knew that there would be an audit coming down
the line that would require them to disclose what they
had paid and therefore we could retrospectively see
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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
or increasing too quickly and give some retrospective
reassurance. The fact that that would be a threat to
companies might keep them honest in the
intervening period.
We have put it to Ofgem that it should do this. It has
not so far. It has not explained why not. I do not know
whether it is too complex, if it does not have the skills,
if it cannot do it, but we think that there are potentially
tools available there that it would appear that Ofgem
has not yet utilised.
Richard Lloyd: We would support that, and just to
reiterate that what that would not do, of course, would
be give market participants pricing signals, so it would
be a retrospective reassurance, not a means for
ensuring that there is greater competition in the day
ahead, the month ahead, further ahead in the market.
Why have Ofgem not done it yet? I do not know. In
what form they would do it that would allow third
parties to scrutinise this has yet to be explained, but I
think it would help.
Q73 Sir Robert Smith: Back to trying to understand
the market and improve transparency and information.
Ofgem have come up with a supply market indicator,
which you and Which? have some concerns over. It
is, I suppose, a sort of averaging. Could you maybe
outline your concerns with where it could be
improved?
Audrey Gallacher: Is it the segmental accounts or the
ongoing Ofgem weekly stuff?
Sir Robert Smith: The supply market indicator.
Audrey Gallacher: We think it is okay. It has given a
picture of potential profitability. The information
could probably be disaggregated. It would not be a
simple message, but you could make that information
available. I suppose the issue we have is that the
industry continually picks holes in it and we also have
done some kind of backward analysis where we have
looked at what the segmental accounts are seeing
around company profitability compared to what the
market indicator was saying around what company
profits should be, and we have put that in a written
submission. There are some issues around how
accurate it is and this is why we have often put a
challenge out to both Ofgem and industry that what
might be quite helpful is if we had a set of metrics
that everybody could agree on so that instead of
continually having these arguments about whether we
were looking at the right things and how helpful or
otherwise they might be, is that if we are all agreed
what it is we are looking at, we could hopefully get a
more robust picture on what is going on in the
market—competition, profit value, whatever—but
also it just shuts down these circular arguments that
are not really doing anything in taking it forward or
tackling issues around consumer trust.
I have already said this, but the longer we continue to
talk about consumers or if consumers feel as if they
are getting ripped off and they are not getting a good
deal and somebody is going to fix it for them, it takes
the onus off ourselves doing something about the fact
that energy is becoming increasingly unaffordable and
we need to take measures personally to sort it out.
That is my view.
Richard Lloyd: We think the indicators are not
enough. They do not say a great deal more than we
already know. They are based on estimates of
expected wholesale and operational costs. We think,
as Audrey has just said, there is a much more robust
set of indicators that would be much more helpful.
Sir Robert Smith: Do you have an idea of what
indicators those would be?
Richard Lloyd: Yes, I think there is information about
wholesale energy trading that they could put out.
There are volumes of trading, numbers of market
participants and so on, to allow us to build a much
more robust picture of what is happening in the
market. There are probably indices they could develop
that would allow us to track that better too. I would
be happy to write to you with more detail, but it would
be a build on what they currently have.
Q74 Christopher Pincher: Which? and others take
the view that the SMI indicators are okay. Ofgem
takes the view that more substantial data needs to be
reported upon hence the Consolidated Segmental
Statements, but when you commissioned BDO to
analyse the CSS, they found some significant issues
about the data that was supplied. What do you think
are the main deficiencies in the CSS in terms of the
timeliness of data, the data that is included and the
understandability, if there is such a word, of the data?
Richard Lloyd: BDO themselves concluded—and it
was quite a thin report as you will remember—that 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.
Without that greater scrutiny about what is going on
in the wholesale market it is impossible to tell
whether—just by looking at the segmented
accounts—what is going on is indeed fair. It is quite
a mixed picture that BDO reported, yet Ofgem seem
to have parked that and moved on.
Strong supporters of segmented accounts but they do
not show enough to us of what is going on in the
market for us to be able to say that, in particular, with
the vertically integrated companies what is happening
is competitive and fair.
Audrey Gallacher: I would echo that. A fundamental
omission is that the trading activity is not included in
them and, as they are pretty out of date by the time
you get them, some of the values are questionable,
but, yes, I have no doubt that it costs Ofgem and
companies a whole lot of money that will ultimately
will be borne by consumers who produce them. So
there is an issue about either sorting them out and
make them more robust or not doing them—we really
question the value of them.
Q75 Christopher Pincher: They are costly to
produce. Have you seen any benefit as a result of
them? Has there been any change in behaviour or any
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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
produced?
Audrey Gallacher: I have not observed anything like
that. I do not understand either 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. I might be wrong but personally I have not
seen any evidence that it has changed things because
of that fundamental omission on trading activities.
Richard Lloyd: What it has not done, if I may, is
allow us—again sorry to keep going back to my
earlier point—to translate what we think is an accurate
picture of what is going on in the market to
consumers. Again, to go back to the earlier point, 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.
Q76 Christopher Pincher: Just in the term you used
there, the translation of data.
Richard Lloyd: Yes.
Christopher Pincher: There seems to be general
agreement among you that the data provided is not
really comprehendible by many people who may wish
to benefit from it. Does that then mean that rather than
improve the situation, the CSS and the data in it, and
the SMI and the data in it, simply muddy the waters?
Audrey Gallacher: I think it is a difficult one because
obviously 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. I think the fact that prices have doubled over
the last seven years is probably the bigger issue for
consumer interest in energy but, nevertheless, we have
this thing that goes out there and generates a bit of a
story. If that is something that brings focus on this
market and encourages Ofgem, Government,
consumer bodies, and 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.
I suppose it is just the fact that we have these things
rather than what they are themselves that potentially
brings the benefit because it brings more focus to this
debate. I know that sounds kind of strange because
we are thinking they are not very good, but they do
act, probably, as a bit of a catalyst and a prompt to
have these kind of discussions and if it leads us to
a place where we have something that is a bit more
meaningful that will allow us to offer consumers those
assurances or challenge the industry when things go
wrong, I think at this point in time we have reports
that do not do either of those jobs. They do not allow
us to reassure consumers. They do not allow us to find
out where there are problems in the market and get
somebody in place to try to fix them, so in that respect
they do not work.
Christopher Pincher: What you seem to be saying is
that although they act as a catalyst for debate and they
focus concerns, they do not really encourage greater
understanding of the way in which the market works
and the costs and the way pricing operates.
Audrey Gallacher: Yes.
Q77 Christopher Pincher: What are the disparities
between the data as reported through SMI and the data
as reported through the CSS? Are there any glaring
differences?
Audrey Gallacher: Yes, we looked back
retrospectively through to 2010, when the segmental
accounts were speaking about industry profitability at
about 0.3%, but Ofgem were showing that the
difference was on margins of about 6% across the
board on the weekly monitoring, whereas on the
segmental accounts it was 0.3%. There was quite a
significant gulf between those two different reports.
Obviously, when we were looking back at them, it was
two years before we obtained the segmental accounts.
There is an issue that Ofgem on an on-going basis is
telling us the potential level of profitability in the
industry, albeit that industry refutes that, but we then
look at the financial statements that tell us quite a
different picture. That in itself can be quite confusing
when you understand where that disparity lies,
whether it is around pricing strategies or whether it is
the veracity of the reports themselves.
Q78 Mr Lilley: Am I right that the SMI is simply
the retail cost and profit breakdown?
Audrey Gallacher: Yes.
Mr Lilley: So the problem is that it does not tell you
anything about the wholesale cost and profit
breakdown?
Audrey Gallacher: I think it is looking at the
relationship between prices as well.
Richard Lloyd: They use estimates of expected
wholesale costs in arriving at that figure.
Mr Lilley: Yes, so it is just the retail?
Richard Lloyd: Yes.
Q79 Mr Lilley: Over time that will even out,
whereas the Consolidated Segmental Statement does
that give us the breakdown for the generating level,
for example, in electricity?
Audrey Gallacher: It gives generation and retail but
it does not give trading activities.
Mr Lilley: All right, but it does give generating which
is what we need to know as well as the retail figure?
Richard Lloyd: Yes.
Audrey Gallacher: Yes.
Mr Lilley: It is surprising they make such a meal of
this and do not seem to define things very clearly. It
says in our briefing, or rather in Consumer Focus
stuff, that to get from a 6% margin across the majority
of consumers to a 0.3% margin across all consumers
might imply predatory pricing. That is still at the retail
end, not wholesale?
Audrey Gallacher: Yes, that has just picked up the
retail aspect of the segmental accounts that were
saying supply businesses looked as though they were
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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
if you looked at the SMI through that period, Ofgem
is suggesting that there was a £30 margin which is a
6% margin. There is an issue that we have two sets of
information that are quite significantly different and
the issue is can we understand why that is? Is it about
how robust the reporting arrangements are? Clearly
one of them was after the event, actual what was
reported by companies. One of them is Ofgem’s
estimates, so it will again call into question whether
those estimates are so far out from what has been
reported. It just continues with this level of
uncertainty over what consumers are paying, and
whether they are paying a fair price. I think probably
more work needs to be done to ensure that the—
Mr Lilley: It ought not to be beyond the wit of man
to establish what the profits and what the costs and
what the prices are?
Audrey Gallacher: It apparently is.
Mr Lilley: I am baffled.
Richard Lloyd: I think if you are baffled, the average
consumer is baffled many times over.
Q80 Mr Lilley: That brings me to another point. I
am slightly diverging, Chairman, but in my younger
days Which? used to tell us which was the best buy
for things.
Richard Lloyd: We still do that.
Mr Lilley: Do you tell people which is the best buy,
given their particular household circumstances or
consumption pattern, for buying electricity and gas?
Richard Lloyd: We do. We also do customer service
ratings so we can tell people not only—if they provide
the right data—who the best supplier is likely to be,
but also whether they are likely to be treated well or
badly by them.
Mr Lilley: Most of us would put the priority on
having a low bill. Have you seen the work by Stephen
Littlechild who says The Sunday Times’ best buy was
the SSE tariff and that is now prohibited under the
Government’s widely supported proposals for limiting
the number of tariffs? Do you think that is a good
thing, that by trying to simplify the market we outlaw
the best deals?
Richard Lloyd: It depends, I am afraid, is the answer.
Our view is that simplifying the market is absolutely
essential in enabling more people to engage in it and
thereby we would hope for a more competitive market
to exist and for prices to be keener.
Q81 Mr Lilley: Why do you think people are
particularly incapable of shopping around in this
market? I went to buy some hair shampoo the other
day and there were 40 different varieties at all
different prices. I managed to stagger through and buy
some. No one says I need to be protected from myself
in this market. If I go and buy a car, there are scores
of different models at different prices and I can
negotiate a better deal here than I can there. Nobody
says I have to be protected from it. The competitive
forces seem to work.
Richard Lloyd: You have a much simpler pricing
arrangement. You do not need to figure out for your
shampoo whether you are a low, medium or high user
of your shampoo.
Mr Lilley: Yes, I do. There are all different varieties.
You have not studied the shampoo market.
Richard Lloyd: I think perhaps the shampoo market
may be a poor analogy but it is the simplicity. In our
view what we have done is ask consumers, “Look at
the tariffs and the pricing structures that exist now.
Can you spot the cheapest deal for you?” We wanted
to test whether people could themselves navigate
around the market without an intermediary and
people—with the way pricing information is presented
under the existing mechanisms—in most cases could
not spot the best deal on the market for them.
Mr Lilley: However, there are many markets which
would not exist.
Richard Lloyd: We would like to see simple markets
that consumers can operate in and operate in a far
more mobile way. That is what we were set up to
create. It is not in our interest to promote complexity.
Mr Lilley: You give consumers the information on
the assumption that they could use it, but in this
market you say, “No, we are not going to give them
the information. Let us reduce their choice to four
tariffs and that is it”.
Richard Lloyd: No.
Mr Lilley: This almost inevitably means that the
companies will cut out their cheapest tariffs, does it
not?
Richard Lloyd: Again, the cheapest tariff needs to be
one that is competitive and that is exactly why we
have been saying if the price is presented in a
complicated way that people cannot compare easily
then competition will not be sufficient to keep that
price in check. That is why we have said that Ofgem’s
proposal for a comparative rate is just too
complicated. You need to have a single unit price that,
like your shampoo, you can compare one product
against another at a glance and spot the cheapest deal.
I would be delighted if there was no need for
comparison sites, for pages of reports about how you
can find the best deal in the gas and electricity market.
It is different from shampoo. You need it to live. You
cannot get by without energy and that is why a move
to more simplicity, in our view, is to the greater good
of consumers and then we can get on with advising
people about which supplier to look to for other
dimensions of service delivery and customer
satisfaction.
I think under the current reform arrangements we will
not move to a market where the prices are presented in
a simple way that will allow people to choose between
suppliers quickly, and that means we will not get those
competitive forces operating that we were talking
about.
Q82 Mr Lilley: Would it not be fairly easy to devise
an app for our mobile phones that if it had our gas
and electricity bills fed in to it automatically, it would
tell us which is the best deal?
Richard Lloyd: We have developed a prototype for
that with Scottish Power and we have been asking the
energy suppliers, all of them, to buy in to that system
where you could download your consumption data,
plug it in to a comparison site like Which? Switch and
find the best deal on the market for you. They have
been dragging their feet on that, so I am with you on
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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
out of switching but, again, you have to recognise that
it is a minority sport still. There are not that many
people who are that interested, despite the cost, in
going to the market and switching.
Mr Lilley: For most people the most important single
worry is their heating bill.
Richard Lloyd: It is the paradox about this market
that despite people being worried about the price, a
lot of people are so disengaged in the market that they
are not shopping around and getting the best deal for
them even with a simpler structure of tariffs there will
be gains for them to do that. That is why we need a
mix of things to enable consumers to engage—simpler
pricing, easier and quicker switching with less hassle,
easier means to identify the best deal on the market
for you—and not this halfway house of some tariff
simplicity but still complex presentation of pricing,
slow switching and so on.
Q83 Sir Robert Smith: Is there a fear of getting
yourself trapped in an even worse deal or is it just that
some people’s minds go blank and they think it is all
too confusing?
Anne Pardoe: I think with the complex market,
obviously if you simplify it then you reduce the areas
where suppliers can compete and offer innovation.
The issue being that for some of the sharper elbowed
consumers, more able consumers, then that is fine.
They may be able to, with some difficulty, navigate
their way round the market. The issue comes for time
poor and also less able consumers who just do not
have the time or the ability to sift through all those
and work out which is the best deal for them. In order
to allow them to engage in the market more
effectively you need to simplify. In terms of your
example, where I think you said SSE had this with
the tariff—
Mr Lilley: The Sunday Times said it was the best buy
on the market.
Anne Pardoe: Yes, the issue around that is if everyone
did decamp and switch on to that tariff it would no
longer be viable for SSE to run that tariff because of
the way that pricing is worked out, quite often some
tariffs are subsidising other tariffs. It sort of works out
in a way that if we all were savvy consumers and
switched on to that, that would probably not be
available anymore and a lot of the suppliers say,
although they would not say on their advertising, “It
is open for 200,000 consumers” or whatever, and then
as soon as that number of people are on that, that tariff
would then be closed and they will have to open a
new one.
Mr Lilley: It seems a very funny position for a
consumer advocate to say a tariff may be too good;
too many people may be attracted to it; let us be
satisfied that it has now been outlawed by the
Government. This whole business baffles me.
Anne Pardoe: No, it is not. It is just giving everyone
an equal chance to be able to access a tariff which is
the best one available for them. Obviously, we would
love suppliers to offer the best tariffs to everyone, but
it is simply not the case that that happens at the
moment. With pre-payment meters, in particular, I
think there is one supplier now that is moving to open
all their tariffs to pre-payment customers, but in the
vast majority of cases the pre-payment customers do
not have access to those deals.
Audrey Gallacher: I think some of the Big Six, and
certainly smaller suppliers, have alleged predatory
pricing and we have had some positive statements
from some of the larger suppliers.
Q84 Mr Lilley: I would love some predatory pricing.
I would go and sign up for some predatory pricing.
You are against predatory pricing and you are against
high pricing. What sort of pricing are you for?
Audrey Gallacher: I think predatory pricing of
shampoo is okay, but when it is an essential service
and the people subsidising that predatory pricing are
the people who can least afford it and who are really
suffering quite significant hardship as a result of it
then there is a question about whether that should be
allowed. So we would move towards fair pricing,
whatever fair pricing may be, but we would move
towards fair pricing rather than cheap pricing.
Chair: I think on this note of bafflement we will have
to draw to a conclusion. Thank you very much for
coming in.
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Energy and Climate Change Committee: Evidence Ev 21
Tuesday 16 April 2013
Members present:
Mr Tim Yeo (Chair)
Dan Byles
Barry Gardiner
Ian Lavery
Dr Phillip Lee
Mr Peter Lilley
Christopher Pincher
John Robertson
Sir Robert Smith
Dr Alan Whitehead
________________
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
Committee. There is, as you know, a lot of interest in
this inquiry. We are televised today, so could you
please identify yourself by name, starting with you,
Tony Cocker.
Tony Cocker: Tony Cocker, CEO of E.ON UK.
Juliet Davenport: Juliet Davenport, CEO of Good
Energy.
Jim Poole: Jim Poole, Director of EDF Energy’s retail
supply business.
Alistair Phillips-Davies: Alistair Phillips-Davies,
Deputy CEO of SSE.
Q86 Chair: Mr Phillips-Davies, can I start with you?
Can you tell us exactly when SSE stopped misselling?
Alistair Phillips-Davies: I would like to start in terms
of the mis-selling announcement that Ofgem made.
Personally and on behalf of the management team,
individually and collectively, I would like to apologise
for the issues that we faced, the fact that the standards
that we showed during the period that Ofgem
investigated us were not the standards we would have
liked to have lived up to and were clearly not what
customers would have expected. But in answer to your
question specifically, we cleared all the items in
relation to the Ofgem investigation principally during
2011, and then there were some minor clear-ups as
well that took until September 2012.
Q87 Chair: It is the case, is it not, that your staff and
agents continued mis-selling up to and after the point
at which the Trading Standards Authority started to
investigate?
Alistair Phillips-Davies: The Trading Standards
Authority?
Chair: Surrey County Council.
Alistair Phillips-Davies: Are we talking about the
Ofgem investigation or Surrey County Council?
Chair: Surrey County Council.
Alistair Phillips-Davies: In respect of the Surrey
County Council investigation, which related
specifically to scripts in 2009, all of those issues
related to that were dealt with immediately after the
judgment.
Q88 Chair: But you were happy for your staff to
continue using dishonest selling methods and would
have continued presumably doing so indefinitely for
the benefit of your profits had Surrey Trading
Standards Service not started their investigation?
Alistair Phillips-Davies: No, I do not think that is
the case.
Q89 Chair: What action did you take to stop this
process prior to the investigation by Surrey Trading
Standards Service?
Alistair Phillips-Davies: In respect to the matter with
Surrey Trading Standards, there was essentially one
script where there was a detailed discussion between
us and them around whether that script was
appropriate. When it was ultimately decided that there
were inappropriate elements within that script, we
changed that script.
Q90 Chair: Illegal elements, not “inappropriate”;
illegal and misleading.
Alistair Phillips-Davies: We have apologised to our
customers for what happened in regard of that. We
have obviously been fined in regard of that, and we
have put that matter right.
Q91 Chair: You will create a better impression with
this Committee and your customers if you do not use
weasel words like “inappropriate” for illegal and
misleading sales scripts, will you not?
Alistair Phillips-Davies: If you say so, yes.
Q92 Chair: It is not, if I say so, that is what the vast
majority of people who have been in touch with this
Committee have already told us. We have had the
benefit of a lot of contributions from the public today
about the questions we should ask you, and, not
surprisingly, this is one of them. Will you just be
absolutely clear that SSE continued the use of illegal
and misleading sales scripts up to and after the point
at which the investigation by Surrey Trading
Standards Service commenced?
Alistair Phillips-Davies: After the investigation
commenced?
Chair: Yes.
Alistair Phillips-Davies: So, prior to the judgment?
Chair: Yes.
Alistair Phillips-Davies: There were a number of
changes made to the scripts at the time that the
investigation commenced, and then there were further
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Ev 22 Energy and Climate Change Committee: Evidence
16 April 2013 Tony Cocker, Juliet Davenport, Jim Poole and Alistair Phillips-Davies
changes put in place after the judgment was issued
and there was a clear ruling on what had happened.
wants to contact us, we would consider that case and
we would compensate them for it.
Q93 Chair: Prior to the commencement of the Surrey
Trading Standards Service investigation, your
company took no action to stop the use of illegal and
misleading sales scripts, yes or no?
Alistair Phillips-Davies: Can you repeat the
question, please?
Chair: Yes. Prior to the commencement of the
investigation by Surrey Trading Standards Service,
your company took no action whatever to stop the use
of illegal and misleading sales scripts by your staff?
Alistair Phillips-Davies: No, I have to disagree with
that.
Q100 Chair: So the onus is on the offended party
rather than you as the guilty party?
Alistair Phillips-Davies: We have placed adverts in
national papers and we have written out to
approximately 10% of our customer base or those
people who may have been affected by these practices
in an attempt to try to make sure that they all come
forward and we can have a proper conversation with
them about what compensation they are due. We have
been doing that for the last 17 months. We have done
it in conjunction with a well-known or leading
consumer body and we estimate, in conjunction with
Ofgem, that probably less than half of 1% of our
customers would have been affected by this.
Q94 Chair: What action did they take and when?
Alistair Phillips-Davies: As a company, we have
always sought to hold the highest standards in respect
of dealing with our customers.
Q95 Chair: What action did you take to stop the use
of illegal sales scripts and when?
Alistair Phillips-Davies: We have a compliance
function within the company and that compliance
function would audit what was going on. We would
review scripts and other materials that we used for
sales to try to ensure that that complied with all
relevant legislation, whether regulatory or legal. That
is an ongoing process that we have had for a number
of years and since we have been in the business of
energy sales.
Q96 Chair: How many of your customers were missold tariffs?
Alistair Phillips-Davies: In the Ofgem report that was
issued two weeks ago, they estimated in the region of
23,000 people would have been disadvantaged by
some of the sales practices that went on during the
period of their investigation.
Q97 Chair: Is it the case that these mis-sold tariffs
started from 30 September 2008?
Alistair Phillips-Davies: The Ofgem investigation did
not cover the period that early. It covered the period
from 2009; I think October 2009, from memory.
Q98 Chair: We have been contacted by Surrey
Trading Standards Service to point out that this illegal
and misleading sales script was used from 30
September 2008. Do you dispute that fact?
Alistair Phillips-Davies: No, and we have a sales
guarantee in place. If there is any customer who feels
they have been mis-sold to, we have had in place for
17 months a guarantee that offers any customer who
thinks that they have been mis-sold to the opportunity
to come to us. We were the first and remain the only
company that has sought to recompense customers
fully for any disadvantage that they have received as
a result of any mis-selling.
Q99 Chair: You will compensate people who were
mis-sold from the beginning of October 2008?
Alistair Phillips-Davies: Yes. If there was anybody
who was mis-sold to who could prove that to us and
Q101 Chair: What date do the advertisements
suggest you will pay the compensation from?
Alistair Phillips-Davies: I would have to go back and
look at the advertisements, but if there is any customer
who feels that they have been disadvantaged by the
mis-selling practices from October 2008, we would
happily recompense them.
Q102 Chair: It was suggested to us that the
compensation offer was only going to apply to
customers from October 2009, but I am happy to note
your on-the-record commitment to using the earlier
date.
Alistair Phillips-Davies: We will seek to rectify that,
and we will also talk with the consumer body we have
been working with about how we communicate with
any people who have not been made aware of that.
Q103 John Robertson: I was interested in your
advert, of which I have a copy here. Do you not think,
considering this is 7 April 2013, that that is actually an
insult to the people who buy their energy from you?
Alistair Phillips-Davies: No.
Q104 John Robertson: You think that is fair, and yet
you have already said that you were making changes
to the script earlier at that time? You must have known
you were cheating and all you were doing was trying
to continue cheating but to manufacture some new
words to try to convince people that you were not. Is
that not right?
Alistair Phillips-Davies: No.
Q105 John Robertson: You are a member of the
board? One of our public who have tweeted us has
asked if you were a member of the board during this
mis-selling.
Alistair Phillips-Davies: I was a member of the board
during the period of the investigation that Ofgem
undertook, the report of which came out two weeks
ago, yes.
Q106 John Robertson: So why are you still a
member of the board?
Alistair Phillips-Davies: During the period of the misselling when Ofgem are investigating what we did, we
took extensive action in regard to retraining,
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Energy and Climate Change Committee: Evidence Ev 23
16 April 2013 Tony Cocker, Juliet Davenport, Jim Poole and Alistair Phillips-Davies
additional audit procedures, significant changes of
staff. We took unprecedented action in respect of
actually closing our doorstep sales activity in 2011,
terminating a number of contracts of external
agencies, and we have replaced a lot of the senior
management within the retail business. We now have
the right team to deliver for our customers and I
believe I am the right person to lead that team.
Q107 John Robertson: So what you are really
saying is, “It was a big boy who did it and he ran
away. It is not my fault, guv”?
Alistair Phillips-Davies: I am not running away from
this. We have said we are sorry. We absolutely
acknowledge that what we did—
Q108 John Robertson: Words are easy. To me that
is an insult.
Alistair Phillips-Davies: Words are easy but equally,
Mr Robertson, we have spent the last 17 months—
John Robertson: You knew before that you were
cheating. You were cheating the public; you knew
that.
Alistair Phillips-Davies: As soon as we became aware
of things that may have been misconstrued or viewed
as mis-selling or illegal or anything else, we took
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
the customers who were affected, which again I would
reiterate is less than half a per cent of our customer
base.
Q109 Chair: How much profit did you make as a
result of this mis-selling?
Alistair Phillips-Davies: In Ofgem’s estimate there
were 23,000 customers who may have been mis-sold
to. What they said was that they felt that we were
making £45 a year out of those customers. Of the
customers that we have spoken to to date and settled
with, the average compensation figure we have paid—
I am rounding up and adding a small amount on to
cover any interest and other inconvenience—has been
between £65 and £70. If you took £65 and £70 and
multiplied by 23,000, I would imagine you would end
up with a number of about £1.5 million in terms of
the detriment that has been suffered by customers. We
have obviously provided £5 million for that and we
will go through a process to make sure that we deal
with all the customers who contact us, and then we
will go through a process that we have been
discussing with a leading agency for any customers
who have not approached us to try to make a fair and
reasonable recompense to them by trying to identify
what their circumstances were. On top of that, we
have borne the not insignificant fine of £10.5 million,
which we decided to accept to try to draw the matter
to a close.
John Robertson: Chair, can I come back?
Chair: Yes.
Q110 John Robertson: Just so it is not just Mr
Phillips-Davies who is getting hammered all the time,
the other companies, are you squeaky-clean in all this
or do you want to hold your hand up now and say
guilty?
Jim Poole: I can speak for EDF Energy. EDF Energy,
in the past, has been through an investigation by
Ofgem into this area. It did not identify any misselling activities, but it did identify control
weaknesses, which Ofgem commented at the end of
the investigation, that we corrected very quickly. We
are confident now that those controls are robust and
in place.
Q111 John Robertson: That is quite interesting,
because I complained to your company about people
phoning me up that had information about my energy,
and yet they refused to tell me where they got their
information from. Does that sound like being legal?
Jim Poole: That does not sound right.
Q112 John Robertson: You are right, it does not, but
that happened and it was your company. What are you
going to do?
Jim Poole: Certainly, if you give us the details of that,
I will look into it. As I say, there was a thorough
investigation and we have taken all of the actions that
Ofgem asked us to take. As Ofgem said at the end of
the investigation, the speed with which we did that
was appropriate.
Q113 John Robertson: Mr Cocker, what about
E.ON?
Tony Cocker: Ofgem is currently investigating E.ON.
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
prices and to enable customers to make the right
decisions in terms of their energy tariffs, so we will
work fully with Ofgem. If there are findings, we will
implement those findings.
Q114 John Robertson: As far as you are aware, you
are squeaky-clean?
Tony Cocker: I think it is too early to say. We are
working as hard as we can—
John Robertson: I am bound to say, Mr Cocker, I
would expect a company to know whether they are
doing things right or not doing things right. You and
I both know that you know whether you are squeakyclean or not. Come clean now and tell us if you are
or you aren’t.
Tony Cocker: We are working as hard as we can to
make sure we are squeaky-clean.
John Robertson: Not good enough.
Q115 Chair: One of the points that I think many
people are concerned about is the lack of transparency
in the operations of the big six, the fact that their
corporate structures are extremely complex and with
very large numbers of subsidiaries, with vertical
integration, in fact with profits being generated partly
in the generation business, partly in the trading
business, partly in the supply business. I want to ask
all three of you this. Why do you use these very
complex and somewhat obscure structures?
Tony Cocker: Mr Chairman, I think the way we think
about it, we have a number of businesses in the UK,
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Ev 24 Energy and Climate Change Committee: Evidence
16 April 2013 Tony Cocker, Juliet Davenport, Jim Poole and Alistair Phillips-Davies
and each of those businesses has to stand on its own
two feet. We have 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 renewables
business. We also have an upstream gas business and
a gas storage business. Each of those businesses has
to operate and stand on its own two feet, as I say.
Then in terms of ensuring transparency for our
customers, we explain as clearly as we possibly can
what is the makeup of our customers’ bills and as
clearly as we can what is the makeup of our profits,
both in terms of the retail profits that we make in the
retail business, which is providing a service to those
customers, and also in the other areas of the business,
the generation business or the exploration and
production business.
Jim Poole: I guess the easiest way to explain the
structure is that we have 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. The
segmented accounts that are produced accurately
reflect the performance of those two businesses.
Alistair Phillips-Davies: We have 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. Those three streams are
reported in our financial accounts every year, and they
are subject to audit. Also, Ofgem have over the last
three or four years asked us to produce specific
accounts in relation to retail and generation businesses
solely in the UK, because we do have some businesses
based in Ireland as well. We produce those accounts.
They are fully reconciled to the published accounts
and the Ofgem auditors have given us a clean bill of
health on the fact that what we are doing is entirely
appropriate. I think they went as far as to say, in
response to issues around trading profits, that because
we reconcile those accounts fully and they are
publicly available there was no opportunity for us to
disguise or hide profits within either the generation or
supply business. We do not have a central trading or
hedging business that we attribute any significant
profits or losses to, so they are all entirely attributed
to either the customer business or the generation
business. They are available every year. I have a copy
here if you want to see them.
Q116 Chair: Is not the effect of these very complex
structures to allow you to move profits at will from
one part of the business to another?
Tony Cocker: No, absolutely not. You keep calling it
a complex structure. Actually, Mr Chairman, it is a
very simple structure. As I said, we have a generation
business. There is a team that runs that. We have a
retail business and a team that runs that, a renewables
team that runs that business, an E&P team that runs
that business. It is actually very simple and
straightforward and we report very transparently on
each of those businesses, including through the Ofgem
segmental analysis.
Q117 Chair: Just on that, all the transactions
between the generation business and the retail
business are at prices that are available publicly, are
they?
Tony Cocker: No, the retail business buys all of its
electricity and gas through our trading business. It is
a service from our trading business, which is based
in Germany. The generation business sells all of its
electricity and procures all its fuel also through a
service that is provided by the trading business. They
are completely separate, completely standalone. Each
of them, as I say, has to stand on their own two feet,
and those transactions are at market prices.
Q118 Chair: This transparent structure involves a
company in Britain buying from another company in
Britain via an intermediary in Germany at a price that
is not disclosed. That is your transparency?
Tony Cocker: No. The retail business does not buy
from the generation business. The generation
business, through the trading business, sells all of its
generation into the market and the retail business,
through the trading business, buys all of the electricity
and gas that we require for our customers through
the marketplace.
Q119 Chair: Wouldn’t it be much simpler just to
transfer it straight from the generating business to the
retail business at a price that you could then publish?
Tony Cocker: No, because we want to be very focused
on simple standalone businesses, each of which stands
on their own two feet and each of which is
competitive in their own marketplaces.
Q120 Chair: How does it work in your case in EDF?
Jim Poole: Very similar model. The upstream
business sells its energy at market prices into the
market and the downstream business, the business I
am responsible for, effectively does the same. It buys
from the wholesale market and the prices that impact
the performance of both those businesses are the
prices of the wholesale market. The view that
vertically integrated businesses effectively self-supply
is not the case. As I say, the upstream sell into the
market and the downstream buy from the market, and
that means that we get an accurate reflection of the
downstream profitability of the business. It is
appropriate, because clearly we are competing with
businesses that are all doing the same thing in terms
of buying energy from the wholesale market.
Q121 Dr Lee: How is the market price set? In each
case, how do you arrive at a market price for any
particular commodity?
Tony Cocker: Our retail business buys the electricity
or the gas at the market price, so at the prevailing
market price in the traded market.
Q122 Dr Lee: Is that done at that time or is it done
over a period? Is it a spot price?
Tony Cocker: The retail business for our residential
supply business will buy the electricity and gas
gradually over the front of the coming two to three
years to manage the volatility in the prices, so we get
a smoother price than if we attempt to buy all of it
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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
one month.
Q123 Dr Lee: Do you think that market price is set
by country conditions or is it a global price? The price
of liquid natural gas is different in different parts of
the world, for example. You say it is based in
Germany in your case. Clearly, the decision on
nuclear has made a difference to the price of gas in
the region. How do you make a calculation over two
to three years on how much you are going to buy and
at what price when something like that can happen?
How do you do it? I do not quite understand how you
price something in that environment.
Tony Cocker: For our residential business, for
example, our risk management team here will say,
“Okay, we are going to buy a certain amount of gas
for summer 2014 now, and we will buy that in the
market”. By “in the market” I mean it is the UK North
West European traded gas market and the indicator of
that price is the NBP price, which is published on a
daily basis. That is a very clear and transparent price
and a very clear and transparent way of doing it from
our business perspective.
Q124 Dr Lee: Do you think that is truly subjected to
market forces in the way that you can trade oranges
and lemons and there is a proper market, or is there a
danger that it is not really?
Tony Cocker: The UK traded market, the North West
European traded market particularly around the UK,
is the most liquid, it is the most traded energy market
in Europe. Therefore, the price that we procure our
gas for through that market we believe is a fair price.
There have been some issues and you will recall in
September of last year there was accusations of
traders attempting to manipulate the price. Clearly,
that is bad behaviour and absolutely should not
happen, and all the serious participants in the market
absolutely do not condone that sort of behaviour.
Q125 Dr Lee: That was actually my next question.
Is there any evidence of any of your companies being
involved in an equivalent to a LIBOR scandal in terms
of fixing of price at all?
Tony Cocker: Absolutely not.
Dr Lee: There is no game-playing, nothing at all?
Tony Cocker: We have thoroughly reviewed it and
absolutely not.
Q126 Dr Whitehead: Could each of you let me
know how much you trade, bearing in mind what we
have just been discussing, over-the-counter and how
much over the wholesale markets, bearing in mind
that all of you in one way or another self-supply?
Alistair Phillips-Davies: I will answer. We routinely
trade 100% of our generation in the day-ahead market
and our demand as well, so it is relatively routine for
us to put all of our power into the day-ahead market.
Q127 Dr Whitehead: These are not financial
contracts?
Alistair Phillips-Davies: Well, they go into an
auction. There is an auction structure that Ofgem
support, and the support has been fully transparent.
Anybody can bid for that power and we routinely put
100% of the volume of our generation into that market
on a day-ahead basis. In addition to that, in respect of
I think both of the smaller energy companies here and
four others, so therefore six in total, at our cost we
have made available to them free credit so they can
trade in that market. We have offered them favourable
terms without quoting bid-offer spreads. We do a
number of contracts with those six smaller companies.
Therefore, in terms of short-term liquidity, which is
this day-ahead auction market, and/or medium-term
liquidity, offering to trade with the various companies,
we have done clearly more than anybody else in order
to improve that liquidity.
Q128 Dr Whitehead: Could I be clear that you put
all your generation in—
Alistair Phillips-Davies: We routinely put all of our
generation into that day-ahead market. We can come
up with figures. Do we do it absolutely every day?
No, but we routinely put 100% of the generation into
that market. If you wanted we could give some
statistics or if you want to send somebody to come
and see our traders and look at it or verify that, we
would be very happy for you to do that, but that is
what we routinely do.
Q129 Dr Whitehead: Then you buy from that dayahead market as if that were not your generation?
Alistair Phillips-Davies: That auction, which is free
to anybody to bid into, we end up selling in that
auction, and we end up buying back from that auction
for our supply business as well.
Q130 Dr Whitehead: You do not trade two years
ahead, three years ahead?
Alistair Phillips-Davies: No, we will routinely look
to hedge our position further out as well. In terms of
that day-ahead market we do routinely put all of our
volume into that market, but we will actually keep
contracts further out as well.
Q131 Dr Whitehead: What is the effect on the dayahead trading and the hedging strategy?
Alistair Phillips-Davies: Say that again. What is
our—
Dr Whitehead: You say you hedge against the dayahead trading for longer term trading. What is the
effect of that?
Alistair Phillips-Davies: What do you mean? Sorry, I
don’t understand the question.
Dr Whitehead: Well, you have just mentioned that
you put everything into the day-ahead market, which
you then trade as if it were not your generation, but
you hedge presumably in order to mitigate the effect
of the day-ahead trading in terms of the long-term
market arrangements, which is then relayed back to
your own self-supply?
Alistair Phillips-Davies: Yes. So, if we are trying to
mitigate the issues around particular price spikes and
things like that—so, for instance, in March we
obviously saw gas prices more than double at times
during March—then we would want to trade ahead for
things like that in order to mitigate the risks to our
customers of not being able to supply them. Similarly,
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Ev 26 Energy and Climate Change Committee: Evidence
16 April 2013 Tony Cocker, Juliet Davenport, Jim Poole and Alistair Phillips-Davies
we do the same within the electricity market, which
is what you are talking about. We would seek to hedge
some of our exposure forward and, therefore, we
would end up putting generation into the market and
our supply business would end up buying generation
out of that market as well, that day-ahead market, to
cover its position, because it could not take it straight
from our generation business.
Q132 Dr Whitehead: How do you do that?
Jim Poole: The model is very similar, actually. We
trade over the horizon for both the supply business
buying energy and the upstream business selling
energy. The over-the-counter market it is about 86%,
and the auction market is about 14%. Very similar to
the way that Alistair has just described, we then do
effectively the gross bidding process in the day-ahead
market, so a very similar model. Buying over that
longer period of time clearly helps to manage any
peaks that we see in the market prices.
Q133 Dr Whitehead: Are you also hedging?
Jim Poole: Yes.
Juliet Davenport: We buy and sell in a very different
way from everybody else. We buy power from about
500 independent generators on longer and short-term
contracts. We then balance that in the day-ahead
marketplace. One of the reasons why we buy power
from a significant number of generators is that it gives
us a forward position so that we are not changing our
prices constantly for our customer base. In fact, we
have only changed our price once in four years on the
electricity side recently.
In terms of the percentages, that changes. Obviously,
we trade in 100% renewables, so we have wind and
solar on our portfolio. How much we are selling and
buying in the day-ahead market will change on a daily
basis. Essentially, we have a very different business
model. We do buy power from our own generation as
well, but we will balance that in the day-ahead market
as well.
Tony Cocker: Our approach is to hedge over the front
three years both for our generation portfolio and for
our retail portfolio, but separately as I described
earlier, and then also to use the day-ahead market. We
put about 60% of our volume through the day-ahead
market. Right from the beginning of this day-ahead
auction, which Alistair described, we have been very
supportive of building that to ensure that there is
adequate or good liquidity in that market. Overall, we
churn our volume, so sell and buy our volume, for
generation about four times before delivery. To your
question about hedging and then day-ahead, we might
hedge the volume out but then conditions might
change on generation so we might sell it back. We do
that four times overall on average for the generation
side of the business.
Q134 Dr Whitehead: Selling back to yourself?
Tony Cocker: No, back to the market; backwards and
forwards into the market.
Q135 Dr Whitehead: I imagine you should have a
very robust reference price right across the curve on
the basis of that model, the model that, with the
exception of Good Energy, you have all said is pretty
much similar between companies?
Alistair Phillips-Davies: I think one of the issues with
electricity is that you have 48 half-hourly periods in
every day, so despite the fact that you may have
reasonable liquidity further down the curve, let us say
a year out, for a season or a quarter or a month, it is
more difficult to get liquidity if you happen to want
to buy 5.00pm until 7.00pm on a Thursday afternoon
in October 2014. That is a pretty difficult product to
buy, and that is simply a function of the fact that you
can’t store electricity very easily. Essentially, you
have 8,000-odd hours in every year and for each of
those hours it is split into two, so therefore you have
an awful lot of chunks of electricity to try to trade to
completely balance yourself further out. That is why
you tend to go for either flexible supply contracts or
have flexible generation on standby that you maybe
own or contract with in some way, shape or form. I
think there is good liquidity, but the problem is the
granularity of that liquidity given how many halfhours the day is chunked up into. I do not know
whether Juliet would agree, because it is probably an
issue for you.
Juliet Davenport: I think the issue with liquidity
particularly for smaller suppliers is down the curve
and how do you sort that. For the day-ahead liquidity
we have seen improvements over the last two years,
and that is good. We can now balance the position
day-ahead. But in terms of further down the curve I
think it is still very difficult. One of the reasons why
Good Energy’s business model has grown up as it has
is because by dealing with smaller generators we can
get a forward position. But I do worry personally
about some changes in policy we are seeing that might
restrict that going forwards rather than improve it.
Alistair Phillips-Davies: Also, further about liquidity,
I would just add that you get unintended consequences
from things like a carbon price support mechanism
that makes it incredibly difficult to trade power in a
period where you have a tax rather than something
you can hedge in terms of the carbon price. Therefore,
really there is very, very limited liquidity, if any
liquidity at all, beyond the point in time where there
is certainty from Treasury on what that carbon price
support mechanism will be. It is not necessarily a bad
thing but it is just because of the nature of it you can’t
hedge your exposure to that tax and, therefore, trading
the power will give you a significant exposure,
potentially, to how that tax is set.
Q136 Dr Whitehead: Ofgem’s liquidity project, did
indeed mount a challenge to provide, they said, robust
reference prices along the curve and they say that the
big six in particular have failed to meet this challenge.
That appears to contradict what you have said this
morning in terms of the likelihood of a robust
reference price indeed round the curve; unless hedging
strategies actually detract from that?
Alistair Phillips-Davies: From my perspective, SSE
have clearly done more than anybody else to try to
provide liquidity into this market and also to small
independent suppliers who may have issues. As I said,
I think it depends where you draw the line going down
the curve. I think there is pretty good liquidity out a
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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
of years, you get these issues like the carbon price
support mechanism, which make it very difficult to
trade there or very risky.
Tony Cocker: I have to say I would not agree with
Alistair that SSE have done more than anybody else,
but I would say that there has been progress made.
Having said that, our proposals to Ofgem were to
absolutely put in place a no self-supply restriction, in
line with the comments we just made, and to require
all generators to trade at least 30% of their generation
in the day-ahead market. When I say “all generators”
I mean all significant generators, which would include
a number of the players who you have not invited to
these sessions today, so the standalone generators.
Those were two of the key things that we proposed to
Ofgem to further continue to improve the liquidity in
the wholesale market, which we believe is vital both
for competition in the market and for confidence in
the market.
Q137 Dr Whitehead: Just a closing thought: if you
are all hedging in different ways as you have
described, how come the results are all so similar?
Alistair Phillips-Davies: I think if you look at the
average weighted cost of going into the supply
businesses across the different companies they are
actually quite different. Maybe we end up making
similar profits, but equally I think over the last two or
three years you have seen reasonably steady rises in
energy. There have been small blips, like clearly the
last month or so has seen extraordinary prices for
gas, but—
Q138 Dr Whitehead: Forgive me, if you are trading
mainly transparently on the day-ahead market, and
you are then hedging on forward markets in order to
offset the effect of that and each company is working
on its own information in order to hedge those results
of what it has done on the day-ahead markets, you
would anticipate that the results of the hedging for
each company would turn out to be rather different.
Therefore, the outcome in terms of performance and
prices and what have you would also be different. But
that is not the case, is it?
Alistair Phillips-Davies: There is a very wide
variation in domestic electricity purchase costs. I note,
just looking at the last year where I have all the
information from, the highest company is 30% to 40%
different from the lowest company there. You perhaps
are not—
Q139 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.
Q140 Dr Whitehead: Do you have any view on that,
Mr Cocker?
Tony Cocker: I agree that the data show that there are
significant differences in the cost of energy from the
segmental accounts, and there are also significant
differences in the cost to serve and there are
significant differences in the profitability of the
individual businesses. Underlying those differences, at
the end of the day 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.
Jim Poole: The only point I would add is that, as has
been mentioned, the breakdown is in those segmental
accounts. I think it is a good reference place to go to
see the costs. Clearly, that also highlights the
profitability of the businesses being quite different in
terms of their supply side of the business. EDF Energy
has not made a profit in that part of the business since
2009, so it is an improving picture but it is still not a
profitable business for us. We are focused on trying to
engage customers and grow our business in terms of
the activities that we have in the market, because that
is one of the challenges that we have. Although we
are one of the major suppliers, we are a relatively
small one of the major suppliers, and actually being
bigger and having scale is something that we are very
keen to do. An active, competitive and engaged
market is something that we are very keen on.
Juliet Davenport: I think also it depends on the type
of product you are trying to deliver to your customer
base and understanding what those customers want.
Our customers particularly have appreciated stability
in prices and I think customers do not want to see
their prices constantly changing. What you see in
profitability may change from year to year in terms of
the supply business and not only the hedging policies
are different but also the pricing policies will be
different depending on what product you are
delivering.
Q141 Sir Robert Smith: I just want to ask Mr
Phillips-Davies: what motivated you to make the
market more liquid?
Alistair Phillips-Davies: Essentially, as we
understood it, there were a number of people who
were saying that the market was not liquid enough to
be fair to some of the smaller suppliers. What we did
was seek to put activities in place to try to provide
more liquidity. We clearly have a large business. We
have differing customer needs day in, day out, as you
win and lose customers, and we also have a large
generation portfolio. Having a reasonably deep and
liquid market at a time when a lot of banks have
exited the market because bank capital is not there to
do it is helpful and, therefore, we were prepared to do
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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
trying to keep out small suppliers and whatever, we
were perfectly happy to say, “No, that is not true. We
will put our money where our mouth is”. We want to
see a vibrant, competitive market, and therefore we
made available credit terms to those small suppliers
so that they could trade more actively. We are very
happy to see a deep, liquid and competitive market,
and we would support actions that delivered that.
Tony Cocker: In the business model that I described
earlier of how we operate the business as separate
businesses, each of which has to stand on their own
two feet, 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.
Q142 Mr Lilley: I am obviously a bit obtuse, but if
most of you are selling all your electricity into the
market a day ahead, when you enter into longer-term
contracts who are you buying from?
Alistair Phillips-Davies: From the large generators.
Q143 Mr Lilley: So they are also selling you stuff
they do not have?
Alistair Phillips-Davies: No. There are large
generators, so—
Mr Lilley: Oh right, the people we are not seeing.
Alistair Phillips-Davies: So, International Power—
that is now GDF—I would imagine would have a long
position in the UK because they have generation; they
do not have a particularly big supply business.
Intergen is a reasonable-sized generator, and Drax
equally. I think the output from their power station is
larger than their supply business. Then finally in the
case of EDF, I would imagine since they have bought
British Energy they have a significant surplus of
generation, over-supply. So, all of those four people I
would imagine would sell substantial volumes of
energy into the market that some of us would need to
buy, because we can’t cover all of our supply business
with the generation that we currently have or own.
Q144 Mr Lilley: I can see that if you are supplying
more than you are producing, you will have to buy
from a third party, but I was thinking in terms of the
term of contract that if you are all selling just a day
ahead, who are you buying from a year ahead?
Alistair Phillips-Davies: For instance, I suspect all
four of those people will be looking to potentially
hedge their business. I think generators look to hedge
further ahead so they provide themselves with some
certainty, particularly a generator who relies on coal,
like Drax, because you will enter into forward
physical contracts to ship coal to the UK and therefore
you will want some certainty of making a profit out
of it, so those sorts of people would. I think where
you do get into difficulties, as I say, is where you get
to the end of where you have certainty on carbon price
support because the swing factor on that in terms of
being able to hedge your position is very large
basically. It is just a risk that is very difficult to deal
with. Therefore I would imagine or I know that there
is a reasonable market through into 2015, but much
beyond that the market gets relatively patchy and, as
I say, the spreads between bids and offers are quite
wide at that stage.
Tony Cocker: Can I just clarify, you said if you sell all
day-ahead from generation, and I think your natural
assumption is we sell all day-ahead. You are reserving
it all to day-ahead; you are not doing any trade, any
selling down the curve. In fact, what we do is we will
sell on our generation side one, two, up to three years
out, but then we will constantly need to adjust our
position as gas prices change and coal prices change.
We will unwind it, and then we will sell on the dayahead market 60% of our generation. As I said before,
we churn four times. So, let’s say three years out,
where liquidity just about starts—as Mr PhillipsDavies just said—to today we will be buying and
selling that generation in aggregate four times before
we get to full delivery, because we constantly have to
adjust that position.
Q145 Mr Lilley: The overall effect of that will be to
smooth out peaks and troughs in prices but
collectively, if one of you happens to be particularly
skilful at trading, then the others must be losing a
fraction on the trading side. Trading can’t itself
generate profit.
Tony Cocker: There are also other players in the
traded market. It is not simply the electricity retailers
and electricity generators in the electricity market in
the UK. There are other players as well. Alistair
before mentioned banks and there are also
independent trading houses and that is true both in
electricity and gas. There are a large number of
participants in these traded markets.
Juliet Davenport: I think there is another element to
that as well, because obviously there is the
forecasting, how much your customers are going to
use, what impact weather is going to have. The market
of last resort is National Grid and as soon as you go
into the market of last resort you are paying a penalty
for being in the market of last resort, so you can be
better as a trader by knowing exactly what your
portfolio is doing. For us it is even more important
because we trade wind and solar, so we need to know
what the day-ahead weather is doing and we will be
trading that within day, an hour ahead, depending on
what is happening with the sun and the wind.
Q146 Mr Lilley: But if you are doing particularly
well because you have better weather forecasters than
the rest of us, which wouldn’t be difficult, someone
else will be losing. It is just demand.
Juliet Davenport: Potentially what you may not have
is gen-sets coming on to fulfil that position, because
expensive gen-sets are helping to balance the market.
You are using those much less than you would need
to if you are better at trading.
Alistair Phillips-Davies: So, your assertion about
having a good weather forecaster is correct. If you
have a good weather forecaster, it helps, no doubt.
Q147 Mr Lilley: But the trouble is, in talking about
this, the public often gets the impression that traders
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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
profit, another must be making a loss.
Jim Poole: I think the interesting thing is that the way
we are approaching energy is really around managing
the risk of the business.
Q148 Mr Lilley: Collectively it is worthwhile doing
it because you are smoothing things out?
Jim Poole: Yes.
Mr Lilley: But certainly it would be wrong to suggest
that there are people who are traders who are making
a profit in aggregate. Some traders will be making a
profit; others will be making a loss. The overall effect
will be to smooth things out over time. That is a sort
of a question stated as an assertion.
Alistair Phillips-Davies: Yes. I suspect, rather like the
foreign exchange market, ultimately probably enduser consumers will pay a small premium for the bidoffer spread on the foreign exchange they are buying.
Equally, the cost of us hedging out our exposures to
our customers and doing that in a traded market, if
you do it well that benefit will flow through to
customers. If you do it poorly, that dis-benefit will
either flow through to your customers or flow through
to a reduced bottom line.
Juliet Davenport: I think an efficient use of resource
is what it comes down to.
Q149 Dr Whitehead: Your traders will have, clearly
in terms of hedging strategy and down the curve,
preferential information about your own generation,
and therefore the trading on the basis that that
preferential information will be loaded towards selfsupply.
Alistair Phillips-Davies: There are very clear rules in
the remit in European legislation, where any
information that we have in relation to generation sets
we have to make available to the market for stock
exchange announcements and things of that nature.
Those rules been in place for—I don’t know if Mr
Cocker can remember—a couple of years now,
something like that, so therefore a screen is publicly
available to everybody. We have to post what happens
in the generation business and/or in the storage
business.
Q150 Dr Whitehead: Right down the curve?
Alistair Phillips-Davies: Yes. Well, if you make
nominations to National Grid, National Grid will then
publish that as well about when there are outages and
things of that nature. It is generally the very shortterm movements where you lose sets or where sets
have had a problem that is going to affect things in
the short term, which the remit market covers. Longerterm we will provide information to National Grid and
they present plans as to roughly what is going on in
terms of how people are setting there. So, there is
quite a lot of information available and we are very
careful to keep our traders or the people who hedge
our retail and generation business away from that
information until it is made public. They are not
allowed to do anything with it until it is made public.
Q151 Barry Gardiner: I want to begin to explore
with you accounting and transparency and what you
referred to as the simple process earlier, Mr Coker,
and the Chairman referred to Ofgem and their remarks
that there were limitations to transparency and
comparability, and that is particularly in relation to
the CSS, the new Consolidated Segmental Statements.
They allow you or they require you to separate your
business out and show your gains and losses in terms
of your generation, in terms of your domestic and
your retail supply. The problem is though that there
are inconsistencies here in the way in which you
account for things and there are various lacunae, shall
we put it that way, in the way in which the rules say
that you have to allocate things.
Just picking up on the trading element of what we
were talking about and in particular the hedging that
you discussed with Mr Whitehead, any gains or losses
on financial instruments such as hedging, which have
a major effect on the profitability of your businesses,
the CSS include a checklist table where that trading
activity can be allocated to the different segments, but
there is also a box that says “another part of business”,
and that box is frequently checked. Can you say for
each of the three of the big six businesses whether
you have allocated financial instruments gains and
losses to that other part of the business box? Mr
Cocker.
Tony Cocker: I haven’t been back through our
Ofgem postings.
Q152 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.
Alistair Phillips-Davies: We will write to you. I just
say for us we only have a generation and a supply
business and they are reconciled to the accounts.
There is nothing else in there. I suspect it would be
the same for one other company as well. You are a
publicly listed company in the UK, you have complete
transparency for the publicly listed companies in the
UK of what is going on. We will write to you as well,
but I believe it is—
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.
Q153 Barry Gardiner: Mr Poole, EDF Trading is a
UK registered company, yes?
Jim Poole: It is not part of the EDF Energy
organisation in the UK. It is a group—
Barry Gardiner: But it is a UK registered company,
yes?
Jim Poole: I didn’t believe it was actually, but—1
1
Note from the witness: In response to Q153 from Barry
Gardiner MP, I said I did not believe EDF Trading was a
UK registered company. This was incorrect—the business is
registered in the UK (company number is 03750288) to the
following address: EDF Trading, 3rd Floor, Cardinal Place,
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
Trading, and is authorised and regulated by the Financial
Services Authority as an Energy Market Participant.”
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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%
owned by its French parent company?
Jim Poole: It is, yes.
Q155 Barry Gardiner: Indeed. In the year ending
31 December 2011 it made pre-tax profits of £530
million. Is that correct?
Jim Poole: That is right, yes. I think that is euros.2
Barry Gardiner: Euros?
Jim Poole: I thought it was euros.2
Q156 Barry Gardiner: I thought it was pounds, but
anyway, maybe you will write to us on that.
The trading arm isn’t owned by the other UK-based
parts of EDF, and so its activities are not separately
reported within the segmental statements, although
some of its revenues and expenses are allocated to UK
segments. Is that not right?
Jim Poole: So it is reported separately under our
group financial performance, and it does the trading
activity—
Barry Gardiner: Not within the segmental
statements is what I said.
Jim Poole: Yes, so it is not within the segmental
statements.
Q157 Barry Gardiner: So when you are looking at
segmental statements, it is not giving you a complete
view of the business, is it?
Jim Poole: It gives you a complete view of the
business, of how those two businesses performed in
relation to the energy that was procured from the
wholesale market, so it does isolate those businesses
from any trading activity.
Q158 Barry Gardiner: Yes, this is one of the things
we will come on to look at. The prices that can be
shifted around groups through inter-company sales
and loans and management fees and suchlike, that sort
of transfer pricing is very difficult to get a handle on.
In 2011 you and EDF Trading had a short-term
intergroup loan of £1.6 billion, didn’t you, or was that
euros as well?
Jim Poole: I am not aware, sorry.
Q159 Barry Gardiner: You are not aware of that?
Perhaps you could check that, and when you do could
you tell us about paying interest on that loan and
whether through that the company could repatriate
profits to France and not show them in the
consolidated accounts?
Jim Poole: Okay, I will check and respond.
Q160 Barry Gardiner: Thank you very much. Why
is that you use different accounting standards, so
2
Note from the witness: “In response to Q155 from Barry
Gardiner MP I suggested that pre-tax profits from EDF
Trading should be 530 million euros, rather than pounds. I
suggested this because EDF Trading’s financial results
usually are reported in euros. However Mr Gardiner’s figure,
£530 million, was based upon a conversion to sterling from
EDF Trading’s pre-tax profits, as reported in euros. EDF
Trading’s 2011 pre-tax profit was €614.5 million, which is
roughly equivalent to £530 million. Therefore Mr Gardiner’s
figures were correct, and I retract my comments about the
currency.”
sometimes you use IFRS, sometimes you use GAAP?
I think EDF Trading uses GAAP, whereas EDF
Energy Holdings uses IFRS. Isn’t that just another
way in which by using the different accounting
standards you are not able or the public is not able—
and indeed the regulator is not able—to compare
apples with apples, but finds it is comparing apples
with pears? Why do you use those different
accounting standards in those different parts of the
business if it is not for confusion?
Jim Poole: It is not for confusion. They are the
accounting standards that are relevant to the activities
that are undertaken by that business and how those
results are consolidated within the group’s position.
Barry Gardiner: Sorry, could you say that again? I
did not quite catch that.
Jim Poole: It is not designed for confusion.
Accounting can be—
Q161 Barry Gardiner: It may achieve confusion,
but it is not designed for confusion. Is that the answer?
Jim Poole: Accounting can be complicated, but our
intent isn’t to try to do that. It is to use the appropriate
standards that are relevant for the parts of the business
and how those results are consolidated within the
group.
Q162 Barry Gardiner: Mr Cocker, some companies
can sell capacity and that earns revenue because it is
available for dispatch even if it is never used. For a
plant with low fixed costs that can be a particularly
profitable venture, can’t it?
Tony Cocker: Yes. It depends on the price.
Barry Gardiner: It can be a particularly profitable
venture. Is that right?
Tony Cocker: It depends on the price. Forgive me,
can you maybe carry on, and I can understand where
you are headed?
Q163 Barry Gardiner: I would have thought you
could always see where I am headed, but what I am
saying here is—well, let me put this another way. You
can allocate that to different parts of the business,
can’t you?
Tony Cocker: No, we are very clear. Generation profit
arises in generation, retail profit arises in retail,
upstream gas profit arises in upstream gas and
optimisation or trading profit arises in trading.
Q164 Barry Gardiner: What about your overheads,
then? Estates, administration, marketing, pensions,
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
from the way Mr Poole does it, may be entirely
different from the way Mr Phillips-Davies does it, and
therefore getting a handle on how you have allocated
those overheads and comparing again company with
company is extremely difficult.
Tony Cocker: If we look at the Ofgem segment
accounts, I would be very happy separately to discuss
with you how we allocate overheads to, for example,
the residential business, the industrial and commercial
business and the generation business. I am very happy
to discuss that. Of course what we are trying to do
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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
therefore when we are allocating overheads, we are
trying to reflect what drives those overheads. For
example, is it accounts, is it staff numbers or what?
We apply them on a sensible basis and I believe there
is also guidance from Ofgem on how to allocate some
of those things.
Q165 Barry Gardiner: But you talked earlier, I
think, about your trading arm based in Germany,
didn’t you?
Tony Cocker: Yes.
Q166 Barry Gardiner: Are any of those allocated to
that? Would they be?
Tony Cocker: The trading business in Germany has
some services from us here in the UK—
Barry Gardiner: So you are able to allocate across
there.
Tony Cocker:—so we allocate some costs to them,
but it is relatively little service that they receive from
here in the UK.
Q167 Barry Gardiner: BDO recently recommended
to Ofgem that the Consolidated Segmental Statements
require suppliers to report on trading activities and
that was not brought forward. It would not be in your
interests to have it brought forward, would it?
Tony Cocker: In our case, it is a strange question. We
simply receive a service from a trading organisation
that is overseas. We have an exploration and
production business, which produces gas and oil both
in the Norwegian sector of the North Sea and the
British sector of the North Sea. It is sort of consistent
to saying we should report also the profits in Norway;
it is clearly a separate jurisdiction and we wouldn’t
dream of doing that. We have nuclear power stations
in Germany, and undoubtedly from time to time the
electricity from those power stations finds its way
over here, and we would not dream of identifying the
profit of that for the UK.
Q168 Barry Gardiner: But if you had done like
EDF had done—Mr Poole hasn’t written back to me
yet and told me whether he did do it, although I think
he did—and had that short-term intergroup loan of
£1.6 billion, the very fact that you do not have to
record the transactions or pay any interest on that
loan, the way in which you can shift that between
trading arms—what I am saying to you is that is
extremely beneficial to the way in which you are able
to show either inflated or reduced profits in any one
part of your business as it may suit the company at a
particular moment in time. Is that not the case?
Tony Cocker: No, I fundamentally disagree with you.
The Ofgem segmental accounts are reconciled to our
UK audited accounts, and they give a fair
representation of the profits in our business. If you
separate it out between generation and retail, our retail
business makes a margin of less than 5%, as you have
seen from the Ofgem reports. Our generation business
is profitable, and at the same time over the last five
years in our generation business we have invested
more in capital expenditure in new power stations or
upgrading existing power stations than we have made
in profit in those businesses, and you can see that from
our published accounts and from our Ofgem reports.
Q169 Barry Gardiner: Are you saying to me that it
would not be possible that where a trading arm is
based overseas, profits from the UK business activities
might fail to show up in the segmental statements
presented to Ofgem? Is that what you are really
telling us?
Tony Cocker: I am saying there is a business that is
based overseas that may make some profit from
trading around the UK, but at the same time there is
also a business based in Germany—
Q170 Barry Gardiner: But I asked you what will
show up in the segmental statement accounts.
Tony Cocker: You are absolutely right; that will not
show up in the Ofgem segmental accounts.
Q171 Barry Gardiner: So, in that respect, there is a
failure of transparency, is there not?
Tony Cocker: The Ofgem accounts deal with only
parts of each of our businesses. They deal with the
retail business, and they deal with the generation
business. They do not deal with the exploration and
production business, they do not deal with the gas
storage business and they do not deal in our case with
the trading business. The key thing is I believe that
the Ofgem segmental accounts were developed to
focus on the retail business, to give transparency of
the costs and profits of those retail businesses. I
believe they do an adequate job of that, a good job of
that, of showing the transparency of the retail business
here in the UK for the residential customers and
industrial and commercial customers.
Q172 Barry Gardiner: So, if in fact it is not to your
advantage as a company to have trading excluded
from the Consolidated Segmental Statements, why
don’t you just include them? Why don’t you just say,
“Yes, let’s include them”? You have given a very
strong argument that you gain no advantage from this.
Tony Cocker: I believe the data that we currently
provide give an accurate description of the retail
business here in the UK.
Q173 Barry Gardiner: You have told me that there
is therefore information that is not provided in the
Consolidated Segmental Statements; you agreed with
me on that. So, even though there is information that
is not provided, you say, “Well, because we are giving
adequate, we will not give full”. That does not seem
to be a very robust position for open transparency
and simplicity.
Tony Cocker: That is not what I am saying. I think it
is a robust position for simplicity. We have a retail
business and we are very clear on that, and there is
then a question of how wide you want to cast the net.
Do you want to cast the net to the E&P business in
Norway, the nuclear generation business in Germany?
Q174 Barry Gardiner: BDO suggested in their
report that it should be cast as wide as trading arms,
but you disagree with that. Ms Davenport, you have
been in a sense observing this discussion because you
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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
do you make of the openness, transparency and
simplicity of the way in which the accounts are
reported to Ofgem?
Juliet Davenport: I think we would appreciate more
transparency to make sure. One point of view is that
we are a publicly listed company here in the UK. We
have to publish our accounts and there is quite a lot
of detail. I think in terms of any energy company, a
private company in the UK can restrict the amount
that they publish as well. I do think there is a case for
making all companies—not just necessarily the big six
but obviously start there—across the board have more
transparency so we understand what is going on. From
my point of view, I think customers have lost trust in
energy companies full-stop across the board, and the
more transparency we can provide to customers across
all types of energy companies the better. I think we
need to start to rebuild that, and I think if we rebuild
that, we can see a better functioning energy market in
the future.
Q175 Barry Gardiner: Do you think including the
trading activities in the CSS would aid that
transparency and help rebuild that trust?
Juliet Davenport: I think that is possibly one route to
look at it, but I think you should look at the overall
market as well, and there should be a complete review
of what is happening in companies and how that is
being reflected to consumers.
Q176 Ian Lavery: At a time when energy costs and
energy prices are becoming unaffordable to many
people, I am absolutely alarmed to learn of the fact
that out of the big six energy companies one of the
big six never paid any corporation tax in any one of
the last three years. In addition to that, it is suggested
that three of the big six have enjoyed significantly less
effective tax rates than should be expected. That is an
absolute outrage as far as I am concerned. I might
be totally naïve. I wonder if each of the individual
companies could explain whether they are either one
of the three that enjoy these significantly less than
expected taxes, or indeed you are the company that
has never paid any corporation tax within the last
three years?
Alistair Phillips-Davies: Okay, I will start. We are a
UK-listed company. I think there was a survey based
on our last report and accounts. We are between the
30th and 35th largest company in the FTSE and we
were the 17th largest taxpayer in the UK. We paid
around about £460 million of direct taxes last year, so
I believe that means we pay our fair share.
Jim Poole: EDF Energy, if I look at the performance
of last year, had a corporation tax liability of £200
million.
Jim Poole: Our EBITDA3 operating profit was £800
million and corporation tax I think is 24%, so I think
it is the right amount that we would expect to pay.
Tony Cocker: I think if I look over the last five years
and average it, our total profits for E.ON in the UK,
so all the elements in the UK, not just the retail
business but also including gas storage and
exploration and production, 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 £6 billion and we also paid £330 million on
business rates. We do have a lower corporation tax
rate, as you would describe, than the standard
corporation tax rate, but that is because we have
invested so much money, £6 billion in that period in
capital expenditure. In addition to that, we have also
invested nearly £1 billion to repair the deficits in our
pension funds for our existing pensioners and current
and deferred employees, which we believe is very
important. We have a very big pension fund with lots
of pensioners; so, very significant investments into the
UK, significant corporation tax and other tax paid.
Yes, our rate is slightly lower, but that is because of
those very, very significant investments.
Q178 Ian Lavery: At least you have said that. I just
wonder whether the other two gentlemen would say
whether they enjoy paying less than the normal rate.
Tony Cocker: Mr Lavery, I would not say I would
enjoy—
Ian Lavery: Well, if you pay less, I am sure you
enjoy it.
Tony Cocker: No, it is a rate. We have invested £6
billion, and the way corporation tax works is the
depreciation on assets for corporation tax purposes is
different, at a different pace than the depreciation for
accounting purposes, and therefore you end up with a
lower rate. But in due course, of course, all of that
will come back.
Alistair Phillips-Davies: The majority of our profits
are made in the UK despite the fact that we invest
more annually currently than we make in profits. We
invest in CAPEX. I think we pay a pretty full rate,
because the bulk of our activities is in the UK, just
subject to normal UK corporation tax. The number I
quoted of £460 million was corporation tax plus NI
and other direct taxes but excludes VAT and things of
that nature because I don’t think they are direct taxes.
Our total profits across the entire group are £1.3
billion. So I think you will find that our rate is
somewhat as I stated. We are paying rather more than
the average among large FTSE companies. If we are
between 30th and 35th and we are the 17th largest
taxpayer, we are paying rather more than many big
companies in terms of paying our fair share within the
UK. You can get our accounts to look at, but I think
that is what you would find, and that is why I quoted
that statistic.
3
Q177 Ian Lavery: Is that a significantly reduced
rate? Do you enjoy better rates than others or is that
what you would expect to pay?
Note from the witness: “In response to Q177 from Ian Lavery
MP, I said that “Our EBITDA operating profit was £800
million...”. However, EBITDA is the term for earnings
before interest, and is not the same as operating profit. I
would like to clarify that “our EBIT operating profit was
£800 million”.”
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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
investment comes from the Government for
renewables?
Tony Cocker: None of it. We have invested—
John Robertson: Because it is not all £6 billion from
your company.
Tony Cocker: Yes, it is.
John Robertson: A lot of it comes through the
Government for investment in other areas, is it not?
Tony Cocker: I am sorry, John, it is money that comes
from our company. We have invested in the last—
Q186 John Robertson: What was the dividend to
shareholders recently, or last year?
Alistair Phillips-Davies: Ours would have been in
excess of £600 million in total for the year.
Jim Poole: So we returned to the group £400 million,
but I would stress that the inward investment was
£1.3 billion.
John Robertson: No, it is okay. I will come to the
reason why I am asking the question in a minute.
Tony Cocker: I do not recall the exact number, but it
was less £200 million.
Q180 John Robertson: You do not get any money
from the Government to invest into other areas; is that
what you are telling me?
Tony Cocker: We have invested in onshore wind,
offshore wind—
John Robertson: You do not get anything for that?
You have paid all that?
Tony Cocker: We invest upfront. Obviously in the
case of the existing onshore wind farms and the
existing offshore wind farms we will benefit from the
Renewables Obligation Certificate.
Q187 John Robertson: When you are calculating
your dividends, does your dividend just mean the
retail part of the industry, or does it also include the
generating part of the industry?
Alistair Phillips-Davies: For our business the retail
part last year made about 19% of the overall profit
and the rest came from regulated networks and
generation and our dividend is obviously derived from
the profitability of all those three business, which
totalled just in excess of £1.3 billion last year before
tax.
Q181 John Robertson: Is that included in your
investment figures?
Tony Cocker: No, we invest upfront, and then—
John Robertson: Are you sure?
Tony Cocker: Yes, the ROCs, the Renewables
Obligation Certificates, we will receive over
effectively the lifetime of the plant. We have invested
that £6 billion upfront in onshore wind, offshore wind,
refurbishing Ratcliffe power station £750 million—it
is about the same as Wembley Stadium—and also in
upstream gas in the North Sea, Huntington Field that
just opened yesterday, and also in gas storage
facilities.
Q182 John Robertson: You do not get any money
from the Government to help you with that? The £6
billion is purely out of the purse of the company?
Tony Cocker: The £6 billion is investment from the
company. The Renewables Obligation Certificate is a
subsidy from which we will earn in due course—
Q183 John Robertson: Do you know how much you
get from that?
Tony Cocker: No.
John Robertson: Could you write to us and tell us?
Tony Cocker: We can.
Q184 John Robertson: EDF, how much money do
you get for renewables and so on, and do you include
that into your investment bill?
Jim Poole: The investment number I gave was £1.3
billion, which was the money that was invested last
year, primarily in our nuclear assets and our upstream
coal gas generation and gas storage activities, and that
is funded by the company.
Q185 John Robertson: You do not get anything
from the Government, then?
Jim Poole: No.
Q188 John Robertson: I take it that is the same—
Tony Cocker: That is the dividend for E.ON UK.
Q189 John Robertson: I just wanted to know
because I have a problem with that. You are paying
out your dividends that cover your whole industry and
yet when we ask you a question about how much
money you are making you always split everything up
into retail and generation. We know from the figures
that Ofgem have given us you are making roughly
25% on the generating side of the business, as
opposed to, which is always what you quote, a 6% or
a 2% rise in retail. Yet when you pay your dividend
out to your shareholders you bring them both together.
Why can you not bring them both together when you
are working out the price of your electricity for your
customers? Why can you not reduce the 25% increase
to 12% and do something that would help those that
really need it? Why can you not do that? To me you
just put the figures together and you use them for your
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
still making 25% profit. In effect, all the companies
when they sell it are selling it to themselves. You
might have put it into the market, but it is your
electricity that you have generated, and now you are
selling it back to yourselves. It is a con, is it not?
Jim Poole: If I can comment on that, in terms of in
EDF Energy the supply business did not make a profit,
as can be seen and as I mentioned earlier on.
Q190 John Robertson: But what did you make in
generation?
Jim Poole: So the overall performance of the business
in terms of EBITDA was £1.7 billion.
Q191 John Robertson: See this is the problem that
ordinary people have, and we have many people who
tweet us and ask us questions on this. Their problem
is that you make all these billions of pounds of profit
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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
into a big pot and then you all go in and you bid for
it and you get it. But you are the people you put the
stuff in the pot in the first place.
Tony Cocker: I am sorry; I am going to have to
disagree with that picture. As I said right at the
beginning, the way we run our business is that each
business, whether it is retail or generation, is a
standalone business—
John Robertson: But not if you are a shareholder.
Tony Cocker: I added them up. The ones that I have
just described happen to be owned by E.ON UK plc,
so I quoted the dividend. But each business has to
stand on its own two feet and—
John Robertson: Not if you are a shareholder.
Tony Cocker: No. First of all, from a profitability
point of view, from an analytical point of view, our
profit last year in our retail business was £234 million,
our profit in our residential business per customer was
£27 per customer and in fact in our residential
business over the next few years we will have to
invest in smart meters, which we believe will cost us
about £1.2 billion. So that is a huge—
Q192 John Robertson: Okay, I have made my point.
Let me ask you a question that one of the general
public has asked. How much money did you make
from interest from customers paying in advance
during the summer for their winter energy? How much
profit did you make in interest?
Alistair Phillips-Davies: I am not aware that we made
any profit. We have clear rules about paying money
back to customers. Ofgem have clear rules in place
so—
Q193 John Robertson: But do you understand what
these people—it is not just one person who has asked
this question. They are paying upfront and yet they
are paying for something that in effect they are not
getting at that point in time and you can use that
money. It must be sitting in a bank somewhere, or you
have maybe invested it. They would like to know
what you have done with that money.
Tony Cocker: Let’s say a customer joined us in
September 2013 on the basis of a direct debit, then
they would owe us for much of the winter and then
we—
Q194 John Robertson: Yes, but you have had all
these customers, most of them a long time, so what
do you do with that money? When you are getting it
in the summer, what do you do with it? Do you invest
it, do you stick in the bank to get interest or what?
You are not spending it on electricity, because we do
not need it.
Tony Cocker: As Mr Phillips-Davies says, if the
customer gets out of balance, if they have paid us too
much, then we pay them back.
Alistair Phillips-Davies: I would agree. You
obviously know that the industry has worked
reasonably hard, I think, to try to make sure that we
repay credit balances to people but if we have a credit
balance it would clearly be sat in our bank and
therefore will help fund our business and we need to
be aware that we have to pay those balances back
to customers. If customers have any concerns about
balances or excess balances they have with us we
normally have a process to pay them back. but if we
don’t and the customers request it. we will absolutely
do so. If we are not living up to that then we will
clearly take that away.
But your basic assertion is right, John, that we should
not be sat on any significant balances of customers’
monies, and that is correct. It does happen from time
to time. and we will repay them.
Juliet Davenport: Can I just—
Q195 John Robertson: Sorry, we think of you as one
of the good guys at the moment, but if you want to
change your mind on it—
Juliet Davenport: Just a comment. We have about
2,000 customers, a proportion of our customer base,
who we pay a fee for depositing in advance and so
we recognise that. That is potentially a way forward
if people get a similar rate to what they might get in
the bank on those credits. That is what we are looking
at going forward over the whole lot.
Q196 John Robertson: So you are one of the good
guys?
Juliet Davenport: We already have customers on that,
so maybe yes.
Q197 Sir Robert Smith: Obviously the argument
has been that the retail price of the electricity is set
by the market from the point of view of the
companies, but part of the market is much less flexible
and that is the dynamic teleswitching customers. So.
I wondered, for those of you who have dynamic
teleswitching customers, how you set the price for
them?
Alistair Phillips-Davies: It will be relatively similar
and probably unfortunately for them—because there
is a weighting of a lot of the policy scheme costs on
to electricity more than gas—particularly those people
therefore who have electric heating, they will
probably bear an excessive share of the burden of
those schemes. Looking at the figures recently,
probably the rises in prices that may come over the
next couple of years will be bigger for those people
because they will get more allocation of costs from
those particular schemes on a unit basis. I think there
is definitely an issue around that. because what you
are potentially doing is disadvantaging people who
often fall into the more vulnerable and fuel poor
groups by lumping costs, which are seeing the biggest
increases, i.e. those from Government schemes, on to
those particular customers. I think that is a genuine
issue and one that the Committee might want to have
a look at.
If you wanted to do something very simple and
straightforward around that, you would clearly ask for
people to cap the ECO scheme. People have clearly
said that they believe the ECO scheme will not be
more expensive and in the impact assessment we are
seeing costs run away at 50% plus above that. For
somebody to cap that cost I think would be very
helpful for customers generally, and particularly for
those customers who are more likely to be prepayment
electricity customers and therefore are more
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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
probably usefully do for those people.
Q198 Sir Robert Smith: But those customers also
find it very difficult to switch because of the—
Alistair Phillips-Davies: There are some customers
who are on historic heating tariffs that have very
unusual arrangements around metering and things like
that. Is that what you mean?
Sir Robert Smith: Yes.
Alistair Phillips-Davies: Where there are fewer
suppliers who offer deals for those particular people—
yes, I think that is a fair point and a fair issue that we
have in our market, but equally, in respect of any of
those customers that we may have, we are absolutely
clear and transparent on our pricing and I think it is
fair to say at the moment, given the burden of costs
and where we are on things like ECO, they are
probably enjoying a slightly lower unit rate than they
might do if we were charging them at a proper cost
reflective rate. That was something I saw recently
announced, and that is why I flagged up that issue to
you. Going forward next time prices do change, I
think they will see a bigger increase than other people.
Those are the numbers that we are looking at.
Q199 Sir Robert Smith: Do you other companies
operate in the dynamic teleswitching?
Juliet Davenport: We are looking at time of day
switching, which is not dynamic teleswitching, and I
think with smart meters we could potentially offer
more of those because they potentially do give
customers the opportunity to load switch and therefore
reduce their costs going forward. What you have is a
tariffing system that is more retrograde than our
current tariff in terms of buying train tickets. You
can’t buy off peak and peak power easily and switch
easily as well, but we are hoping to see, with smart
metering coming in, that you may be able to offer
more dynamic tariffs to individuals. But teleswitching
is a very specific issue.
Q200 Christopher Pincher: Mr Cocker, earlier on
when you were talking about transparency you said,
“We try as hard as we can to explain our customers’
bills”, and I am sure you probably all claim that you
would all try as hard as you can to explain your
customers’ bills, but do you think customers would be
surprised at that statement?
Tony Cocker: When I meet customers and we discuss
the bills and what is the makeup of the bill, roughly
half from energy, 20% roughly from network cost,
bringing the electricity or gas to their door, then
customers do understand that and they do understand
what are drivers on us: one, to give them that
transparency; two, to provide them with a fair price
and simple products; and, three, to control our costs,
the costs we control, to help to hold the prices down
where we can. So I think they do understand it when
we discuss it with them, and they do understand that
many of the costs are going up as we invest in our
electricity and gas system, to refurbish it and make it
cleaner, and that the best thing that we can all do is
reduce energy waste. There is clearly a big focus on
that, both ECO coming up, CERT and CESP where,
as I think you know, we were the first to complete.
So, I think customers do understand roughly the
makeup of the bill, what is driving the increases and
the need for all of us to help with energy efficiency.
Q201 Christopher Pincher: That is not what our
Twitter feed is telling us. One of the questions that
was put earlier on is why are bills and payments laid
on in such a complicated manner. Consumer Focus
are saying that you could be much more transparent
in simplifying your bills. For example, you talk about
costs rising in terms of percentages. Unless you know
as a customer what the component of the bill that
percentage relates to, which you probably do not, you
do not know meaningfully what that price rise is.
Tony Cocker: I think we can always explain better.
We are learning each time. I am not sure whether
Consumer Focus’ reference was to the explanation of
what makes up the bill, as in the costs that go into it,
or whether it was the simple, “Is your bill on one
piece of paper?”
Q202 Christopher Pincher: I will give you an
example. One big six supplier said that the cost of
implementing the Government schemes has
approximately doubled between 2011 and 2013. When
you drill down, when you ask the company what is
the component of the bill that relates to policy-related
costs, it is 17%. So rather than talking about a
doubling of the cost for a relatively small component
of the bill and misleading your customers, why don’t
you simply say, “As a result of Government policy
changes, we are adding an extra £25 or £30 to your
bill this year”?
Tony Cocker: You are right, we can communicate
better, we all have to learn and continue to improve
on
communication. From
the fundamental
conversations I have had with customers, they do
understand that a portion of the bill is the wholesale
energy cost, a portion is the cost of getting it to the
door and a portion is the cost of Government subsidies
either for energy efficiency or for renewable
generation.
Q203 Christopher Pincher: But can you not say
what the cost is in pounds and pence of Government
policy, what the cost is in pounds and pence for
transmission, what the cost is of wholesale costs? You
must know them.
Tony Cocker: Yes, of course we can.
Christopher Pincher: It is a very simple structured
business, so why can’t you tell your customers what
those costs are?
Tony Cocker: There is no reason why we can’t. I think
it is just how we explain this picture. You are
recommending we explain it in way A or way B. We
have explained it in way A, and you are saying maybe
it is a better explanation if we use way B. I think we
are both trying to explain it to our customers in as
simple way as we can.
Q204 Christopher Pincher: But you would accept
that explaining in pounds and pence, which is what
most customers are interested in—that is why if they
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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
more simple and sensible way, a more transparent
way, to use an overused phrase.
Tony Cocker: I am perfectly happy to explain it in
pounds and pence.
Q205 Christopher Pincher: What about the rest of
you?
Juliet Davenport: Just as a general comment, our
customer service team and our marketing team get
very nervous when we have to do a price change. It
is like jumping into a very cold swimming pool, you
don’t know quite how it is going to feel until you get
there. We do a lot of work in terms of explaining what
is going on, if our prices are changing, why they are
changing. Generally—and slightly touching wood
here—we have very good feedback in terms of how
we have explained that and how that has come across.
I do not think there is any problem with explaining it
in pounds or pence or percentages. You have to, to
a certain extent, do it in both because some people
appreciate one way, some people appreciate another. I
think you should do it in as many ways as possible,
using social media, using your website, using direct
letters. We have a lot of communication tools now that
can improve this, and I hope that we are doing a good
job on that.
Jim Poole: To the point around engaging in
transparency and simplicity, the breakdown you ask
for we now produce, so we are deploying a new bill.
We have listened to some customer feedback about
more clarity and more information and we are now
deploying a new bill that regularly shows the
breakdown of how the bill is made up to help build
that education and transparency. We have also
significantly simplified, I think, what it is we offer to
customers to make it easier for them to engage. We
now have just a standing charge and a single unit rate.
We only have two tariffs in the market, which was
something that generated some confusion before. As I
say, we have deployed new bills and annual
statements. We are very keen to see that sort of
engagement from our customers and to help our
customers engage. Those that can’t engage, and
particularly our vulnerable customers, we are
effectively now trying to automatically engage them
in the market by moving them on to our cheapest
tariff.
Q206 Christopher Pincher: Mr Phillips-Davies, can
I ask you to answer the question to the Committee but
not to me, because I am afraid I have a health question
that I need to ask now, so my apologies.
Alistair Phillips-Davies: Fine, okay. Thank you. I will
be very brief, then. Simply, the bulk of the information
that appears on the bills is often legal or regulatory
requirements. I think the bills are a little complex and
confusing for people generally. I think we should
make that information available, put more on an
annual statement over the internet, through accounts
or when requested, and we should seek to simplify the
bills for people. Therefore, we would welcome
working with Consumer Focus and Ofgem to try to
simplify people’s bills, to make it clear what they are
paying and why they are paying it.
Q207 Sir Robert Smith: In terms of understanding
what is going to be happening to customers in the
future, you have talked about the investments you
have made in generating capacity. How does the scale
of the investments that you have made in the last
couple of years compare with the needs looking
forward in the years to come in terms of generating
capacity to meet the needs of this country?
Alistair Phillips-Davies: I will go briefly. I think we
have done quite a lot on the decarbonisation agenda,
although if we are going to meet the legally binding
targets for 2020, there is a lot more to be done.
Whether I truly believe that everybody in Europe is
going to get there, given the current financial
constraints on Europe generally, I don’t know. That is
quite an interesting debate as to how much we really
have to invest and whether people are all going to
meet their targets or a number of countries are going
to decide when they get closer they will not meet them
and therefore what the implications are for us.
The other thing is that in terms of going forward, we
could do with having some of the legislation that is
being brought forward at the moment clarified earlier
and made simpler. We have seen the regulator and
other people comment on the fact that the UK’s
electricity system is tighter, we have a number of plant
that are closing at the moment and the investments
that may need to be made for flexible thermal capacity
are not being made. If you want an example of that, I
would just ask anybody to re-run 12 December 2012
with a similar day in December 2013, and you will
find that all the major generating plant that were
available in the UK were turned on and actually 5,000
MW of that plant, or close to 10% of them, will not
be available because they will be closed by the time
you get to December 2013. Therefore, the UK could,
not necessarily will, if a similar situation arose have a
very serious situation indeed in terms of security of
supply. So the quicker we can get the clear policy
pieces in place then potentially the more of a safety
net we will have and the more likely we are to avoid
an issue. The thing to do is have a look on 12
December 2012 and you will see that there are six or
seven major plants that will not be available that were
all needed to keep the lights on that day.
Q208 Barry Gardiner: Mr Phillips-Davies, the
supply market indicators, which you recently had a
spat with Ofgem about, are indicators of the current
state of the market and hence the future profits that
you as a company might make, and yet you have
heavily criticised Ofgem. You said, “Their
methodology appears to have consistent bias towards
overstating profit margins”. Are you aware of the
statement that Ofgem has released, I think since we
have been in Committee, on energy supply margin
figures, where they say, “It is astounding that Centrica
and SSE claimed that Ofgem initiatives to make the
link between retail and energy prices more transparent
is undermining public confidence in the energy
market”. They point out that this comes just over a
week after Ofgem fined SSE a record £10.5 million
for mis-selling, and they say that you should be
supporting their aim of making the market clearer.
How do you respond to that?
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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
support Ofgem if they were making the market
clearer. What we find unusual is the fact that the
figures that people trumpet in reporting Ofgem’s
numbers—I remember a year or 18 months ago when
they talked about making £125 or £130 margins from
customers—never seem to materialise in our bottom
line.
Q209 Barry Gardiner: Maybe they do not
materialise because you see the writing on the wall
because they release those indicators. But you don’t
dispute that they are a correct indication of the level
of profit that you would make if you continued
operating at that level, do you?
Alistair Phillips-Davies: 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.
Q210 Barry Gardiner: They point out that, “The
weekly figures we publish are projections that will
inevitably differ from the figures in the company’s
yearly statements. The margins in these statements are
for each individual supplier, and they reflect all the
tariffs it offers, including discounted rates where they
make lower margins. These margins also reflect the
effective changes in energy consumption due to
weather and actual operating costs, which vary by
company and vary year on year. Our weekly indicators
are a projection for a typical standard tariff consumer.
These indicators have been helping provide
consumers with more information about the
relationship between retail and wholesale prices
since 2009.”
Alistair Phillips-Davies: I believe that their
consumption figures are overstated. I think almost
each and every time that they have published those
numbers those consumption figures have been
overstated. I do not think we have ever seen
consumption in UK at the levels that they have there.
Q211 Barry Gardiner: So, the row between you and
the regulators is going to go on?
Alistair Phillips-Davies: I do not know whether it is
row between us and the regulators. I think there is an
issue about people being fair, honest and transparent
and we do apologise—
Q212 Barry Gardiner: Who has a better record on
that, you or Ofgem?
Alistair Phillips-Davies: On what?
Barry Gardiner: Honesty and transparency. That was
not a question.
Q213 Chair: We are a bit over time. Just to wrap this
up, on the basis of not just what you have heard today
but generally, do the three of you representing the big
six really have any conception of the level of public
distrust of the way you run your businesses?
Alistair Phillips-Davies: Yes, I think we do. I think a
number of the businesses have worked very hard on
trust and we will continue to work hard. Clearly what
happened two weeks ago is going to require us to
redouble our efforts.
Q214 Chair: Do you think the way in which your
company particularly have handled the mis-selling
issue has increased or decreased the trust of your
customers in that business?
Alistair Phillips-Davies: I would have thought for
some of the customers it would have decreased the
level of trust but equally, having looked at comments
and listened to calls from customers who we have
spoken to over the last two weeks, I think there are a
number of customers who also feel that we have dealt
with the issue well. We remain the only company in
respect of any issues on mis-selling and complaints
handling, and things like that, who have actually gone
out and tried to talked to our customers and
recompense them for the actual losses that they may
have suffered. We are still the only company to do
that.
Q215 Chair: Can your industry not understand that
there are those of us who support the idea that you
should make decent, fair profits, and want you to do
that so you can invest in the capacity that this country
needs, and that the public tolerance of that would be
enormously enhanced if you adopted the same kind of
basic approach to transparency in the way you run
your business as most other industries take for
granted? Can you not see that?
Tony Cocker: I think we, as E.ON, have worked
hugely hard on this issue over the last 18 months.
I completely agree with you; we recognised that the
industry had lost the trust of stakeholders and many
customers. We worked very hard last year to improve
transparency, to simplify our bill—got it down to one
page—to reduce our number of tariffs, to simplify our
tariffs so they are much more comparable, to
communicate much more clearly where we spend the
money that customers give to us, so on the network
costs, the energy costs, our own overheads. We have
worked very hard. We have to continue to do that
because we are on a journey, we have challenges
internally and we all know we have not been as simple
as we should have been in the past, and we need to
improve on that, we need to continue to do that. At
the same time we also know that the whole of the
industry, not just the big six, needs to invest and
therefore there are a lot of drivers that are pushing
prices up. I think we have tried to be clear on what
those drivers are and explain those both in public and
also to customers in private, and we need to continue
to engage on that.
With respect to the question that Mr Gardiner had for
Mr Phillips-Davies, we believe that the SMI has the
right intent to give a transparent indicator of the
pressures on prices, and there are opportunities to
improve it and we would be very keen to work with
Ofgem to improve it. So I completely agree with you,
Chairman, that the industry has lost trust and the
industry is working hard—or in our case we are
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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
continue to do so.
Jim Poole: I think we have taken lots of steps, so I
think we do need to start looking at the things that we
have done because they are, and customers are telling
us that they are, starting to have an impact. We have
simplified our bills; we have simplified our tariffs
down to two. We have launched a product where we
proactively tell people if they could save money of
more than £1 a week with another supplier and we
have seen a significant response in terms of an
increased trust with us through that offer that we have
made. We have done, I think, the right thing for our
most vulnerable customers and the ones that are
perhaps least likely to engage in the market by
automatically engaging for them and putting those
customers on our cheapest product. We welcome more
work in terms of transparency. We think the
segmented accounts are a good reference point, but if
we need to do more to make them clearer and more
easily understandable, then we should do that.
Coming back to the Ofgem supply indicator report, I
think the things you read out are some of the
weaknesses of it because it talks around the
profitability of one product and it gets interpreted as
being the profitability of a business, and that is where
we get a disconnect. I agree it would be good to have
something that was a robust indicator and I think it is
in our interest to work collectively to try to improve
it and make it the case.
Juliet Davenport: Helping all of this and
underpinning all of this is making sure this
marketplace is fit for multiple types of players in the
place, not least customers, and to make sure that
customers feel part of this marketplace, that they can
engage, they can reduce energy, they can change the
way they use energy and in fact they can generate
their own. I think by doing that and by engaging them
in part of this market we can rebuild trust.
We have two-way partnership with our customers.
They sell us power as well as us selling them power.
I think beginning to build that up as an overall
marketplace and a possibility, and making sure there
are more market players in this marketplace, is
absolutely key to building trust for the future and
bringing investment into this market.
Chair: Thank you for your time this morning. It has
gone on a bit longer that we planned, but it is very
illuminating from our point of view, and I am grateful
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
sorry we have overrun a bit. We will aim to wrap up
by 1.00pm so you can protect the rest of your day. I
will start on the same issue that we started the earlier
session with, if you were here. Could you tell us
whether any of your companies have been involved in
any selling practices that you think were either illegal
or unethical?
Ian Peters: If I can start, Mr Chairman, British Gas
has not been involved in any mis-selling investigation
and is not currently under investigation, so to the best
of my knowledge there is no systemic mis-selling
practice in British Gas. Clearly with 30,000 people
talking to customers every day I can’t absolutely
assure every one of those conversations to be perfect,
but there is no underlying mis-selling issue and there
has not been in the last decade in British Gas.
Neil Clitheroe: We take every instance of mis-selling,
misleading customers very seriously and it is
unacceptable. We are currently under investigation
from Ofgem, are working with them. Where we have
found historical problems, where we have misled a
customer, we have paid compensation, we have made
sure that we have put them on to the right tariffs and
paid compensation. We have done that over the last
four or five years. We have changed significantly in
this area. We no longer do doorstep selling, but more
importantly we have improved every part of our sales
process over the last two years. We have come top of
the Which? survey of telesales companies in the last
two years. So, we have improved significantly, and if
there are historical instances that we have, then
obviously we will resolve the problem, we will pay
compensation and we will apologise for that.
Q217 Chair: Do you expect to be paying
compensation?
Neil Clitheroe: There have been instances where we
have had somebody who was doorstep selling in 2009
who did not present products correctly. We have paid
compensation where we have found that. We have
written to customers where we suspected that, we
have had phone calls coming into us where we have
discovered it and we have corrected it and done that.
So yes, we have paid compensation to some
customers.
Q218 Chair: The question, if you did not hear it, was
whether your company has been involved in any kind
of mis-selling of tariffs that is either illegal or
unethical?
Paul Massara: At the moment we have one
outstanding investigation by Ofgem, which relates
back to August 2010 in relation to explaining of direct
debits. That is on information finding and has been
continuing on, I must say, for nearly three years now.
There has been no statement of case produced for it
and we are still talking to Ofgem. We do not believe
we have done anything wrong. Ofgem are still asking
the questions. But we, like many of the players in the
industry, have done a huge amount over the last
couple of years to improve our services and our
practices. Therefore we believe now, as we operate in
this market today, that we are clean, completely.
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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
contesting cases that turn out to have been ones where
the company was at fault may be a way, in some small
degree, of mitigating the degree of offence and
mistrust that results from such cases?
Paul Massara: Absolutely, but at the same time I
think you would want a process that is fair. The fact
that this investigation has been going on now for
nearly three years, with no statement of case being
raised against us, also raises questions, I think, about
how Ofgem does its investigations.
Q220 Chair: If the company is absolutely confident
that it has done nothing wrong, it can say so. If you
think you might have done something wrong, it would
be in your interest to try to clear it up before Ofgem
have completed their process.
Paul Massara: Absolutely, I agree with you, and that
is why we have not reached any settlement with
Ofgem.
Q221 Chair: So, you are not expecting any kind of
criticism from Ofgem at all?
Paul Massara: We believe we do not have a case to
answer on it.
Q222 Chair: It is not quite the same thing, is it? Do
you expect Ofgem’s conclusions, after three years’
investigation, to give you a completely clean bill of
health?
Paul Massara: Will they find something? It is
impossible to say, to be honest. They have not even
issued a statement of case so it is hard to know what
they are driving for.
Q223 Chair: Let me just put the question one more
time. Presumably you have looked quite carefully
internally at what has happened. Are you absolutely
confident on the basis of that analysis that you have
done nothing wrong?
Paul Massara: Yes.
Q224 Chair: Fine; thank you. On the question of the
structure of your businesses, do you each have a
supply, a generation and a trading aspect of the
business?
Ian Peters: 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. There was a lot of talk about transparency
in the previous meeting, so for the Committee’s
benefit the trading division executes the hedging
business for our downstream business and we are
charged a cost reflective fee, which in 2012 was £7
million. There is no transfer of value and every
transaction is undertaken at market rate, so £7 million
is the small amount of executional cost passed to the
residential business through our trading arm.
All of our numbers, as with one of the other suppliers,
add up to our group accounts. There is no kind of
black hole—or lacuna I think was your word, Mr
Gardiner—in our numbers. They all add up to the
total.
Neil Clitheroe: We have a similar structure with 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. All transactions, external transactions,
internal transactions, internal offsets, are priced at
market. There is no transfer price. Everything is
priced at market. All of that reconciles back in terms
of our accounts through to the statutory accounts, and
obviously those are audited, but the key point for us
is that everything that we have is referenced to the
market prices.
Paul Massara: Ours would be exactly the same, and
as of 1 January in fact the generation business is now
a European generation business and therefore that is a
separate P&L completely. The trading division will
have their P&L and, effectively, the downstream
supply business will have theirs. We trade everything
effectively, or 90% of our supply, through the traded
market and we buy from the market as well. Therefore
we have a very similar structure to everyone else. In
fact, we would not be allowed to pass profits around
because of the taxation issues, that they would look at
whether there has been profits moved between
jurisdictions or cases. So, we have complete
transparency and the transparency aligns very clearly
with the segmental reports.
Stephen Fitzpatrick: We run a very simple business
model. We supply to UK customers only. We are a
UK-registered business; we have no overseas
operations. We are in the process of splitting out our
trading from our retail business. We think it is the
most efficient way to deliver better value for
customers, and at the moment we do not have any
generation.
Q225 John Robertson: I am sure my colleagues will
come back with questions about corporation tax and
things like that. There is this idea that RWE are
transparent and yet you put everything into one pot
from all over Europe together. How do I know what
you are doing in the United Kingdom? What do I
know about your generation here and how much it is
worth? How do I find that out?
Paul Massara: Up until now you have had our
segmental reports that would give the position
between the UK generation and the UK supply
business, which is completely visible and transparent.
I think there has been a very good insight into what
we are doing.
Q226 John Robertson: What happens from now on
in? We can’t see that?
Paul Massara: No. From now on we will report both
our retail profit and also our generation profit in the
UK as a separate position so that you will have that
full transparency, clearly to do it as part of the
segmental statements.
Q227 John Robertson: Let me get this right; you are
basically going to hide it?
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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
continue to be transparent. I think it is completely—
Q228 John Robertson: If you were transparent, you
would not be here today and you would not be in front
of us so many times. The one thing the general public
thinks is that you are not transparent. Why do you
think they would say that?
Paul Massara: I think that is a broader and wider
question that relates to having an honest conversation
with consumers and I do not feel necessarily there has
been an honest conversation. I do not think the
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. I do not think necessarily that we have
it right, and I would share some of the concerns that
my colleagues had earlier on before relating to
Ofgem’s intermediate monthly reports, which I think
are misleading and are not particularly helpful. I also
would say that there has not been an open and
transparent conversation from Government about the
cost of Government policy and the impact on
people’s bills.
Q229 John Robertson: I made a statement to one of
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,
and he ran away”. When are you—I mean you as a
group of companies—ever going to take responsibility
for the problems that we have? The problem is that
people don’t like you and they don’t like you because
they feel you are ripping them off. You can cover it
anyway you like, you can use gobbledygook about
having an intelligent conversation with somebody, but
I have to say that most of the people that you might
want to have a conversation with will not understand
what you are talking about. You might think that they
are being ignorant and that you are all knowledgeable,
but at the end of the day they pay the bills.
Paul Massara: I totally agree with that.
John Robertson: You need to get down the level of
letting them understand what you really mean. I think
at this point in time you are nowhere near that. To be
honest, Mr Massara, I think it is deliberate.
Paul Massara: Can I answer that question, if I can?
There are a couple things. As an industry I would say
that we have not helped ourselves; we have not helped
consumers to build trust, because I do not believe that
we have given them the insight and the visibility.
When we look at the bill that people get on their
doorstep, that bill is incredibly complicated. It is not
the bill that helps consumers understand it. It is
interesting that there are 26 regulation issues from
Ofgem that require things to be changed on that bill.
We are simplifying bills, we are changing bills, and I
think we have to be more open and transparent.
The second issue that we believe fundamentally is that
we have to explain to consumers how their bill is
made up and where those components of the bill are
likely to go in the future. We are launching an Energy
Explained series, which effectively will do that, both
to the general press and to the public, but also to go
out to the public and explain to them how their bill is
made up and how those different segments are likely
to be impacted so they can make informed decisions
about saving energy.
Q230 John Robertson: A question I ask at the end—
and I only thought of it when I was listening to your
answers—is: when you pay your dividends to
shareholders, how much are you giving them these
days? What was your last dividend?
Paul Massara: I can’t remember what the last
dividend is. It is probably £200 million or so.4
Q231 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.
Q232 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—
Q233 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.
Q234 John Robertson: Do you know how much you
get from Government to help you with that?
Ian Peters: Virtually nothing.
Q235 John Robertson: They don’t give you
anything?
Ian Peters: Virtually nothing. I will have to come with
precise amounts.
Q236 John Robertson: I wonder what they are
spending the money on, then.
Ian Peters: There are some subsidies for exploiting
new gas fields. I think that is right.
John Robertson: I think the exploitation is of the
general public, if you ask me, never mind the oilfields.
4
Note from the witness: “The actual number is £125 million.”
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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
say to me now that you trade transparently on the dayahead market and then hedge in order to balance your
positions. Would that be an accurate description of
what you do as companies?
Paul Massara: That would be an accurate description
of what we do. We trade about four times what we
actually trade in the forward market. We trade four
times—recycle in the forward market, but 90% of
what we do goes through the spot market, of all our
production.
Ian Peters: We do broadly similar. Again, in terms of
the multiples we sell about 30% of our generated
power into the day-ahead market. In terms of selfsupply, in 2012 the downstream business bought about
10% of our power from Centrica Energy, the upstream
operation, and only 6% of our gas. So, the underlying
self-supply percentages are very small.
Neil Clitheroe: We hedge over a two- or three-year
period and 30% traded in the day-ahead market as
well.
Q238 Dr Whitehead: You are obviously a
different—
Stephen Fitzpatrick: We buy between 12 and 18
months forward. We buy on the day-ahead market, we
buy on the within-day market, so a pretty
straightforward situation.
Q239 Dr Whitehead: I am trying to understand this
better. Your hedging strategies as companies are in
what relation to any day-ahead trading? That is, to
what extent would you hedge before you went into
day-ahead trading, and to what extent is the hedging
as a result of what has happened as far as day-ahead
trading is concerned?
Paul Massara: From our perspective, we would look
to hedge in the forward curve for two to three years.
We want to give customers a longer-term duration for
their standard tariff. Obviously for fixed price
contracts for standard fix we would have to match it
as best as possible. Then we would run into the day,
but it would lead to incredibly volatile prices for
customers if we were to balance everything in for
customers and therefore we have a hedging
programme over two to three years, which I think is
similar to many of the other players.
Neil Clitheroe: You obviously get an increased
certainty the closer you get to the point of delivery.
Two years out you can see maybe in January two
years’ time an average weather pattern with an
average customer base and you start buying a
proportion of your gas or your power for that delivery
in January, and then the closer you get the more
certainty you get. Maybe your customer number has
increased, maybe volumes on average have dropped
in terms of consumption, maybe the weather is
different, all the way up to the point of delivery. So
you are basically hedging against the certainty you
know at that point. At ScottishPower we will leave
some positions open right the way through to the point
of delivery, but three years before we are likely to
have covered hardly anything because you don’t know
what is going to happen in three years’ time at that
half hour when you are actually delivering that power.
Ian Peters: For us it is a broadly similar story. To
ensure primarily security of supply we buy anything
two years up to cover all of that. We do leave open
positions in the short term, that is primarily to manage
weather volatility. How good your weather forecasters
are is relevant, but the majority of the position is
bought forward in layers.
Q240 Dr Whitehead: Essentially the impression that
one might get that the hedging is a post hoc activity,
actually that is an initial activity? That is, you will
secure your positions with over-the-counter trading.
Sometimes there will be an open position, but the
minority of positions, that is the rump position that is
left, will be then catered for on the day-ahead market?
Ian Peters: That is right, and it is why you do see
different outcomes in terms of hedging, because we
do not all hedge the same. We take different risks and
different rewards along the way and that is reflected
in the segmental accounts that come out. But you are
right, your fundamental point, Alan, is pre hoc rather
than post hoc.
Q241 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.
Paul Massara: I think we would obviously be buying
to hedge our position. We have a strict hedging policy
relating to our forward exposure in retail and therefore
we have as systematic approach on how we hedge.
We go into the market via the trading team, they give
us a price and we buy. We do not know what the
generation team are doing at any time. They may be
buying or selling from their generation; that is their
choice.
Q242 Dr Whitehead: But that is completely
untransparent, isn’t it?
Paul Massara: For us, we know we are getting a
market price from our traders and that is it. That has
to be the case from a tax position, and we have to
know that and we pay a small fee for doing that. We
do not know what the generation business is selling
in at the same time because it is completely ringfenced. In terms of whether that can that been seen
through the segmented statements, no, it can’t be, but
then what you have is us purchasing at market rate
that feeds into the margin for our supply business.
Q243 Dr Whitehead: When you say you are
purchasing at market rates, you are purchasing, I
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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
you have relating to your own generating activities?
Paul Massara: To the market, whether it is the OTC
market, on who is trading out there. As we talked
about before, I think there are a lot of different
players, independent power stations who are long,
other people are buying and selling, so there are trades
out there.
Q244 Dr Whitehead: But you will trade at the
market rates and you will trade on the basis of your
traders. How will your traders be incentivised in order
to get the best deal on the forward curve prior to any
patching up, you might describe it, taking place on the
day-ahead market? How are they incentivised? Do
you simply say, “Go out to the market and get the best
deal, guys”, or are there any arrangements that can be
informed by the nature of what it is that you are
supplying yourself, i.e. are there any preferences on
the basis of clearly a good market price for the fact
that you have deals available to you that relate to overthe-counter trading?
Paul Massara: Yes. As part of our formula, we would
go to the traders and ask them to buy at market rate.
We would want to make sure it is at market rate,
because that affects my P&L, whether they are buying
and the generation may be selling to them but they
will also be selling at a market rate. There may be a
bit of a spread, but that is it. If they decide to hold the
position and trade it for themselves, then that is their
trading position, and that is nothing to do with my P&
L. My P&L is transacted at the market rate.
Neil Clitheroe: It tends to be based on staying within
risk parameters. What we are looking for from our
energy management area is to hedge within risk
parameters so it does not put a huge amount of risk
at the point of delivery. Is the value at risk within
parameters? Have they covered 18 months out, or two
years out, 10% of the power at that point in time? So,
the measurement of our traders tends to be based on
those risk parameters.
Q245 Dr Whitehead: Your forward hedging strategy,
and I appreciate that may be different between
different companies in terms of, for example, how
much of your positions you have covered early, how
much of your positions you leave open, at what point
on the curve you are taking positions. If you do that
well you will make a particular return, won’t you? So
you would make a good return and you will be ahead
of other companies in terms of your proceeds from
your positions.
Ian Peters: Yes. To go back to your earlier point, there
is no insider information here. There are no
preferential deals, and our trading operation is simply
an executional function. They operate to deliver a
strategy that we define, the downstream business.
Q246 Dr Whitehead: But if you do it badly—
Ian Peters: Then we can be out of the market.
Dr Whitehead: The customer will have to cough up.
Ian Peters: That way we are not competitive or, if we
get it right, the other way round. That plays into the
broader decisions we make around our operating
costs, our profit returns and the degree to which we
want to be competitive in the market. It is one of but
not the only consideration.
Q247 Dr Whitehead: Bearing in mind the way round
that you are undertaking the hedging process and then
the patching process, shall we say, in terms of your
overall positions, what perhaps I could suggest is that
if you hedge very well, you get that right, then you
are banking those proceeds. If you get it wrong, the
customer coughs up, so either way you win.
Ian Peters: Well, no. If you look at—again, in the
spirit of transparency—British Gas’s residential
accounts you will see movements up and down, and
there are years when, to be frank, we have hedged
well and we have passed that on in terms of lower
prices to consumers and we have grown market share.
There are years when we have lowered our profits
because we thought it was wrong to pass it on to the
customer. So, it is one of a number of considerations.
Q248 Dr Whitehead: How might we know that you
are doing that?
Ian Peters: To an extent, you can see the outcome in
terms of the overall margins around segmental
accounts. British Gas have said that we aspire to make
an average return post tax of 5%, and the weighted
average costs of gas and electricity, which are the
outputs of what we are discussing, can be derived
from the segmental accounts.
Paul Massara: I would absolutely agree with that. We
lost money in the supply business in 2009, 2010 and
2011, and we could not pass that through to get a
benefit and that is it. The fact is if you look at the
consolidated reports they give a full breakdown of
your energy input and of your margin, and the fact is
on the whole the big six have earned 3% margins in
the last four years. Those are the facts.
Stephen Fitzpatrick: Can I offer an observation? I
was a little bit confused as to the direction of the
inquiry, but I have ended up completely agreeing with
the point that you have ended up making, which is
that it can certainly appear to be, from an outsider’s
point of view, a one-way bet. Our observation, as an
independent supplier that is only buying in the
wholesale market, is that it appears to us that the free
bets that our larger competitors have is that they can
be pretty sure, within a certain margin, of the demand
that they will need to satisfy their incumbent customer
base and they can hedge that. If they get it wrong,
they can be relatively comfortable that they will not
lose too many customers. If they are able to achieve
a better than market price, let’s say, they can use that
lower commodity price to go out to win new business
and undercut other competitors, including us.
If one of my large competitors wants to take a
directional position, betting that the market will go up
or down, I would say they can put the cost of that
towards their incumbent customers that they know are
much less likely to switch away, and any benefits they
can use either in profits or they can try to grow a
market share through winning business on aggressive
discounting. This kind of one way, it is a legacy from
the ex-monopoly nature of my competitors here. That
is what leads to anti-competitive behaviour, and that
is one of the main reasons why 15 years after
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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
sector. We think this price inconsistency, the gap
between the cheapest prices available and the average
or the most expensive, is by far and away the biggest
reason for lack of trust in the sector and also lack
of competition.
Paul Massara: I would fundamentally disagree with
that statement. If we go and bid or if we go and hedge
in the sector than somebody, then effectively, yes, that
would be a choice about how you would take that.
The fact is that about 30% of all of the customers we
lose now go to new suppliers. The reason they are
going to new suppliers is because new suppliers are
not required to meet the cost obligations that we are
required to as a big supplier, that is ECO. The cost of
ECO now is probably somewhere between £70 to
£100 per customer, which small suppliers have an
advantage for. So they have an inbuilt advantage to be
in the marketplace.
In a competitive marketplace you would expect
suppliers to react to that and therefore we do. We react
to that by trying to match them or trying to get close
to them on the broker tables. That allows the
discounting on the front, which allows the differential
pricing. So because we have an ECO policy that does
not apply to everybody equally, leading to a distortion
in the marketplace, which is also leading to a
distortion in the tariff structure.
Q249 Dr Whitehead: But the fact is that as three of
the big six you are exercising very substantial power
in terms of, as we agreed, your pre hoc trading
arrangements down the curve. Indeed, the Ofgem
liquidity inquiry suggested that you do not have a
robust reference price down the curve in a way that
would actually enable trading to be placed on a more
equal forward footing in the market in general, i.e.
you are in a position where you are able to generally
hedge quite successfully in the forward market. Would
you say that that ability to do that outweighs, in terms
of your overall market advantage, the disadvantages
that you may face in terms of what you are required
to undertake in regard to obligations as opposed to the
very small traders?
Paul Massara: Absolutely not.
Stephen Fitzpatrick: I am just going to step in and
say that we have never faced any challenges hedging
in the wholesale market. We do not think that we are
at a disadvantage, and if any one of my larger
colleagues or smaller colleagues would like to ask me
for a price I would be happy to quote them a price for
electricity or gas for two or three years. I do not think
there is a lack of a reference price. I have no axe to
grind on that; I think—
Q250 Dr Whitehead: The Ofgem analysis is wrong?
Stephen Fitzpatrick: We are on the record for the last
two or three years as stating that the wholesale
market—everybody wants more liquidity and more
transparency but it is by far and away a much smaller
piece of the lacuna that is missing in the regulatory
framework to drive more competition. I don’t feel at
a disadvantage.
Ian Peters: As a general statement—and we talk to
some of the small suppliers—liquidity, the aggregate
is not the issue it was perhaps three to four years ago.
There are pockets where it is. For example, the
average clip size in power is about 10 MW. Some of
the small suppliers we talk to would rather it be 1
MW, so we are talking to them about changing terms
to enable that. As a general statement, I do not think
liquidity is a barrier to entry.
Neil Clitheroe: Access for small suppliers to
generation from the bigger companies and the
independent companies is an important issue that
everybody needs to facilitate. We wrote to 56 small
suppliers a couple of years ago. We are currently
working with 20. We are transacting down to a clip
size just now of 0.25 MW. Our lowest gas trade is at
50 therms, and we have given extended credit lines to
a number of smaller suppliers. Putting a smaller
supplier on an exchange, where they have to cover
that collateral, is very difficult when they are trying to
get started. So we are working hard with them. I think
there is more that we are trying to do. We are trying
to have more discussions on this topic, but I think
that access to small suppliers, alongside the straight
liquidity point, is as important to bring more retailers
into the market.
Q251 Mr Lilley: Every economic transaction has
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
who actually generate it—in other words, instead of
only selling it to the daily market they are selling
ahead to you—or there are banks who are themselves
taking the risk that when they actually have to deliver
in three months or three years’ time, the price will not
be too high, the price will be low. Which is it? If it is
companies trading between themselves, then it means
that the companies who are successful in hedging
ahead will be matched by others who are less
successful or fail. They wouldn’t say it like that
because they would lose their jobs, but less successful.
If it is between banks and the industry, then if you are
doing well in hedging futures the banks will be doing
badly. Is there something wrong with my analysis?
Paul Massara: I think generally the analysis is
correct. I think people may be hedging for different
risk reasons, so people may have a different profile.
Some people will be selling three years, two years,
one year; some people may decide they have to get
rid of it, they have a plant that has to despatch and
they want to sell forward. Therefore, there are
different risk appetites. In general there are two equal
parties who are coming to a fair price to trade on that.
It may be banks, but banks have pulled back because
of liquidity issues, but generally I think it is a fair
position. I think there is more that we could do on
transparency and it would help. I also think that
obviously with the Energy Bill coming in it creates a
degree of uncertainty. We do not know what the
capacity mechanism is going to be like. We do not
know how CFDs are going to be structured, therefore
it is difficult to transact forward without a clear
position in the marketplace. Once we get that clarity
I think that may also help liquidity as well, is an
honest point.
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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
itself if it could make it clear that they can’t all be
profiting at the expense of each through hedging.
There is a degree of misunderstanding out there that
somehow there is a magic, that hedging can make
money out of the customer. Well, except in the way
that Mr Whitehead is aware of as sort of a “heads I
win, tails you lose” system, I do not see how that can
be the case.
Paul Massara: We certainly do not recognise the
“heads I win, tails you lose”. I think we are in a
competitive position and we look to see where the
market is and where we are. We lose market and we
have to look every day at what tariffs are out there
and how we compete.
Q253 Barry Gardiner: You have all seen the first
session so you know where I am headed. See if you
can head me off at the pass.
Mr Lilley: Why don’t you go straight to the pass?
Barry Gardiner: You are such a killjoy, Peter.
Mr Lilley: You have had the foreplay. Now let’s get
on to it.
Barry Gardiner: Right, here we are. Mr Clitheroe, in
2010 ScottishPower moved £119 million of profit
away from generation in its Consolidated Segmental
Statement and reclassified its carbon permits to
another segment. Why did you do that?
Neil Clitheroe: I will need to come back to you on
that one, Mr Gardiner. I do not know the answer to
that, in terms of the 2010 segmentals.
Q254 Barry Gardiner: But you understand, in terms
of what we were saying about transparency, all that
we were saying in terms of having consistency of
presentation?
Neil Clitheroe: Yes.
Q255 Barry Gardiner: For you to have whisked it
out of one segment and put it into another looks as if
what you are trying to do is either show less of a profit
in that sector or more of a profit in the other sector.
Either way it is not exactly transparent, is it?
Neil Clitheroe: 2010 was the first year of the
segmentals and there were improvements that we had
to make in 2011. I think the key improvement that we
made was to reconcile the whole of the 2011 accounts
to a statutory audited account. So those are our legal
accounts, the legal entities, and we did that in 2011.
Those have been reviewed by Ofgem and they
represent an accurate split between the retail and
generation businesses. In 2012 we made further
improvements; we will make further transparency
improvements as we go through that. The key thing I
can say is that the 2011 accounts, which are the latest
ones that are within the retail and generation splits,
are correct in those and have been audited by Ofgem
and are aligned with our statutory accounts.
Q256 Barry Gardiner: Isn’t it the point that you
have a discretion here as to which segment you show
something in and, by varying it, you vary it to suit
yourself and that in itself impedes transparency on
behalf of the consumer?
Neil Clitheroe: I think there are various aspects to
transparency, and the transparency that we have
between retail and the generation business is
improving. It improved in 2011 and we will improve
it more in 2012. In 2012 we are transacting everything
based on market rates, and therefore our ability to
actually move anything is reduced because it is all at
market rates and that is what is in the 2012
segmentals. We have also done a huge amount of
work on transparency with regard to bill breakdowns,
service standards and so on.
There is work that we need to do. We made further
recommendations to Ofgem in terms of the trading
that we do. We have made recommendations to
Ofgem that we will provide the information on the
market for all our trades, provided other players do
that, and we did that in the last liquidity consultation
of the RMR. So, there are a number of steps that we
have made since 2010. Are we there yet? No, but are
we on line to do that—
Q257 Barry Gardiner: But you will provide the
Committee with a note as to precisely why you moved
that £119 million of profit away from generation?
Neil Clitheroe: Certainly for 2010.
Q258 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—
Q259 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—
Q260 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
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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
but I will have to write to the Committee and confirm.
Q261 Barry Gardiner: Mr Massara, income and
costs relating to the levy control framework and
Government policy are also not disclosed in full—
feed-in tariffs, warm home discount, renewables
obligation and the levy control framework. RWE
npower states in a note that other direct costs of
generation largely relate to the Community Energy
Saving Programme and power purchase agreement
costs, but you do not break that down, do you?
Paul Massara: I do not think we do, not in that
position.
Q262 Barry Gardiner: Do you not think that again
to break it down would provide people with much
greater transparency here?
Paul Massara: I think the greater indication of
programmes, giving people greater insight would be
helpful. There is a degree of competitive concern
about it, but on the basis that these are post-dated, yes,
I think that could be done.
Q263 Barry Gardiner: Could you perhaps provide
us with a note after you have talked with your fellow
directors as to whether you think you might be able
to do that in the future?
Paul Massara: I would need to go back and talk to
them, yes, sure.
Q264 Barry Gardiner: Thank you. Mr Peters, some
of the companies, such as yourselves, offer additional
services, which can also distort profits presented at a
group level. Centrica group offers boiler servicing, for
example. They are not presented in the segmental
statements. Particularly given your market share in
gas, the very fact that you have that market share
means that you tend to get quite a revenue stream
out of that, don’t you, and yet that is not part of the
segmental statements?
Ian Peters: The segmental accounts only relate to
residential energy supply, and all of our services
business, which covers everything from plumbing to
drains to electrical services, are all outside the scope
of the segmental accounts. At the aggregate level it
all adds through to the published accounts, so there
are no black holes, but it is an entirely separate
business outside the scope of the Ofgem returns.
Q265 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—
Q266 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.
Paul Massara: I will have to come back and confirm
on that.
Q267 Barry Gardiner: Thanks very much. In terms
of the BDO recommendation, don’t you think that
trading activities should be reported in the
Consolidated Segmental Statements?
Ian Peters: I have already disclosed that there is no
kind of out of market transfer. I have disclosed to the
Committee, the £7 million that flows between the two.
I think that is good in the spirit of transparency. As a
general point, I think it would require the entire
market to move in unison.
Q268 Barry Gardiner: Would you be in favour of
that?
Ian Peters: I would be sympathetic to that as long as
everybody else moved in the same way.
Q269 Barry Gardiner: Thank you. In that case, Mr
Massara, when you are discussing with your
colleagues the other positive news that you gave the
Committee this morning, could you perhaps discuss
whether you would be prepared to do that and disclose
that as well?
Paul Massara: I think it becomes problematic when
you have a European trading business, which trades
across all of Europe, and therefore you end up saying,
“Well, are we disclosing what we are making in
trading in Romania, Hungary and Poland?” I am not
sure that helps the average consumer to get insight to
the segmental reports. Certainly, we could disclose
what fee we have for doing it but, like everyone else
I think, we trade at market. There is a minute fee that
we pay the traders for transacting that we could pay
anybody. We happen to pay our traders. But I do not
think it is going to add to insight for consumers to
understand what our trading position is across the
whole of Europe.
Neil Clitheroe: In terms of being able to see for
ScottishPower that the energy management area is
simply a transactional area that is managing things on
behalf of retail and generation and it is effectively a
hedging mechanism, a post box mechanism for those
businesses, then showing that on a confidential basis
I think is fine, Mr Gardiner.
Q270 Barry Gardiner: Mr Massara, just a thought;
you complained earlier in the session that the cost of
Government schemes adds approximately £70 to £100
to the consumer bills. Do you not think it is therefore
odd that you are not prepared to disclose how much
those individual elements of the Government schemes
actually cost you in your segmental accounts?
Paul Massara: No, I think I have said already that I
think that is a good idea. In fact, we are going to go
out with an Energy Explained position where we will
be showing people’s bills. As DECC themselves have
said, 60% of the increase in electricity prices until
2020 is actually going to come from Government
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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
consumers that bills will be going up because there is
£110 billion of capital that needs to be invested in
refreshing the infrastructure, and that comes with the
cost.
Barry Gardiner: I entirely agree with that.
Neil Clitheroe: That is shown clearly on
ScottishPower’s website. Most customers see their bill
in terms of how much they pay per month, so we
show very clearly for £100 direct debit precisely
where every pound goes in terms of all those
obligations, in terms of all those delivery charges, in
terms of all those wholesale charges. That is there on
our website today.
Q271 Barry Gardiner: Do any of your companies
use base erosion and profit shifting or a tax haven in
your accounting?
Ian Peters: Not to the best of my knowledge.
Q272 Ian Lavery: I think you were all present
beforehand at the earlier panel, but I have to raise this
question. At a time when the public say the energy
companies are making obscene profits, there are
hundreds of thousands of people being added to the
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
companies paying significantly less corporation tax
than would be expected and there is one company that
never paid any corporation tax at all in the last three
years. I wonder if Mr Massara could confirm how
much corporation tax his company has paid in 2009,
2010 and 2011?
Paul Massara: We will not have paid corporation tax
in those three years. The very simple reason why is
because we have invested £5 billion in the last five
years building power plant, creating jobs, creating
employment and helping to keep the lights on. If we
had not made that investment, we would not have the
deductibilities that we would be allowed. That is a
simple accounting UK rule. There is no mystery to it.
There is no desire to not pay tax. We have fully paid
all our taxes, the substantial employment tax, business
tax and all the other taxes. The fact is you are allowed
depreciation for your investments, and we have been
the biggest investor by a mile in the renewable
offshore business, and therefore we have allowed
deductibilities. There is nothing amazing about that.
In fact, I would go the other way to say if this country
wants to get £110 billion of capital invested, then the
basic levels you are going to need to allow people that
deductibility. It is no different from any other industry.
People should not be surprised that if you make heavy
investment that you get deductibility for it.5
Q273 Ian Lavery: I am sorry, but I am absolutely
amazed that you have not paid any. To say that it
should not be a surprise—it absolutely is a surprise.
Looking at the other statistics for the other companies,
every other company has paid corporation tax, albeit
at different levels. It might be an opportune moment
5
Note from the witness: “Please see our letter to the
Committee on 17 April which provides clarity on our
position on corporate tax and capital expenditure.”
to ask the representatives of the other companies if
they have and if they currently enjoy a significantly
less than expected tax rate?
Ian Peters: From a Centrica point of view, the answer
to that is no. Our 2012 tax charge in aggregate was
£1.1 billion; £773 million of that relates to the UK.
That is a tax rate of 44%. It is one of the highest in
the UK. We will pay £400 million of corporation tax,
which makes us the sixth highest payer of corporation
tax in the UK. On top of that, roughly the same in
supplementary corporation tax and petroleum revenue
tax. When you add it all together, we are at the higher
end of that range and that excludes the £140 million
in National Insurance.
To the investment point—and I will take issue with
RWE on this—that is despite having invested £11
billion over the last five years, and £9 billion of that
is in securing energy supplies in the UK, most recently
the Cygnus gas field, which will keep 1.5 million
homes going for the next 15 years. So, no, is the
short answer.
Neil Clitheroe: In 2009, 2010, 2011, we paid £669
million in corporation tax. In addition, obviously we
paid the usual other taxes: employees’ National
Insurance, business rates, and so on.
Q274 Ian Lavery: Did you pay less than would be
expected?
Neil Clitheroe: Over the five years that we look at,
we have paid out £1 billion. We have paid less in the
last two years because of capital allowances from the
investments that we have made. Basically, in 2008 we
were making between £550 million and £600 million
of capital investment. In 2012 we were close to £1
billion. We have doubled our capital investment so
we have seen a reduction because of that. The other
reduction we have seen is just the reduction in the
corporation tax rate that has occurred in this country,
which has affected deferred tax liabilities. But in
terms of the overall numbers—and for an energy
company you do need to look at it over a longer
period just because of the investment profile—we
have paid £1 billion over the last five years.
Paul Massara: If I can just add one clarification. I
think over the last three years net profit has only been
about £40 million, including generation and retail.6
Compared to that, the £5 billion we have invested
over five years just gives you the view of where you
would be paying tax anyway. We have been losing
money in the retail business and in fact now we are
losing money in the generation business too.
Q275 Ian Lavery: I am really sorry but according to
my figures over the period I mentioned before, 2009,
2010, 2011, npower’s pre-tax profits were nearer £750
million and there wasn’t any corporation tax paid. It
is astounding, isn’t it?
Paul Massara: I have different numbers, so I can
come back to you on that.7
6
7
Note from the witness: “The correct aggregate EBIT for the
years 2009–2011 is £31 million.”
Note from the witness: “Please see our letter to the
Committee on 17 April which provides clarity on our
position.”
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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
well. We have had E.ON who said they had invested
£6 billion, which was £1 billion more than yourselves,
and they were paying, albeit a reduced—this is the
Starbucks gambit, isn’t it? It is basically, “I employ
so many people therefore I won’t pay tax”. Do you
understand how the general public feel about this?
Anybody watching these proceedings will be
absolutely shocked that you are willing to stand up
and say that, “We deserve not to pay tax”. If I said
that I would get crucified.
Paul Massara: I think there is an informed debate
that needs to be had, which says there are general
accounting rules that if you make significant
investment creating jobs, education, if you create and
keep the lights on—which I think we are all trying to
do—then you are allowed to depreciate. That is no
different from any other industry, and that is all we
have done. We just happen to have been a very big
investor and we have not made the profits out of the
business that we expected.
Q277 John Robertson: So you have used the rules
to suit yourselves.
Paul Massara: No, not at all.
Q278 John Robertson: I can honestly say I am glad
I don’t get my energy from you. If I did I would be
switching as soon as I left this room. I am so annoyed
about that. Let me ask you a couple of questions that
some of the general public have sent us, one of which
I asked earlier. What are you doing with the money
that is paid during the summer months and that is
stored up and makes interest for you?
Ian Peters: Can I take that one? Across a whole year
we try to get direct debits to balance out. The figures
we have for 2012 would say across the whole of the
year, on average, we were owed £550 million by
customers in aggregate and we had £120 million of
credit balances on the other side, so net the interest
free equation actually worked against us. More
particularly, if any customer has more than £100 on
their account at the end of the period we will
automatically refund it. We now have I think the
unique ability for customers to go online and manage
their own direct debits. They can get payment
holidays and if they want a refund at any time they
can take it. I don't think anybody else can do that.
That is great in terms of putting customers in control.
Q279 John Robertson: ScottishPower? And I am
one of your customers.
Neil Clitheroe: We are pleased about that, John. We
try to balance across the year. If a customer at the
annual point is more than £100 in credit then we pay
interest on that amount that is linked to the bank rates.
I can’t remember the exact interest, I will have to
come back to you, but we pay interest on that amount
and then we refund that to customers. It is something
we introduced about four years ago called “Credit
where credit’s due”, so we have done that for quite a
long time. However, we do try to balance it across the
year. It is better for customers to be paying the right
amount over the year, and there are troughs. At the
moment with the cold weather most customers are in
a negative position and over the warmer weather, over
the next three or four months, they will play catch-up
with that.
Q280 John Robertson: Mr Fitzpatrick?
Stephen Fitzpatrick: I am glad I have the opportunity
to answer this one. About three years ago we decided
that it was a bit anomalous that we were asking
customers to pay in advance over the summer and we
would keep their money and not pay them any
interest. So three years ago—about six months after
we launched—we brought in Ovo interest rewards
where we pay customers 3% throughout the year on
any credit balance at the end of every month. For
every customer who is in credit over the summer we
are paying 3% interest to every single customer, and
if they fall into arrears over the winter, as is the case
with many customers this winter, there is no interest
penalty. It is their money. We want to encourage them
to pay the same amount throughout the year and we
think that if there is any benefit that we get from that
we should give it right back to them. We set the rate
at 3% so there would be absolutely no confusion as to
the fact that we were not making any money. In fact
we lose money from this, but we think we would
rather be above suspicion on this point.
Paul Massara: We manage it throughout the year and
we may have balances from the customers in the
summer but in the winter then clearly there is a big
deficit. Funding them in the winter and not funding
them in the summer is rolled into the general price, so
we don’t pay interest, per se, but again if a customer
has more than £60 on their account they would
automatically get it sent back.
Q281 John Robertson: They don’t have to ask for
it? They would get it?
Paul Massara: Yes.
Q282 John Robertson: Here is a question that was
asked at our evidence session in Glasgow, and also
people have been tweeting it to us, and it is, why are
low energy users penalised because the cost of usage
goes down the more you use? I thought we were
trying to encourage people not to use it.
Ian Peters: This is about how costs play through. At
one level it can look quite seductive to tip it the other
way, but I think the Committee should be aware of
the distortions that will then create. One
consequence—and there are probably three—is it
makes high consumers very profitable and low
consumers unprofitable. I think the risk there is many
of the vulnerable customers would get disengaged
from the competitive market because they would be
loss making. Secondly, there is not a great correlation
between consumption and vulnerability, and I think
perversely one of the bigger beneficiaries of that
would be second homeowners who are sitting there
with very little consumption. So there is a debate to
be had in this area but I think we have to have it in
the round, have a look at things in total, because I do
worry at creating loss-making customers at a time we
are trying to make pricing cost reflective.
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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
made was the fact that they probably would like to
use more electricity in some cases but they can’t
afford that, but they seem to be penalised and the
number of people that are in fuel poverty seems to be
going up and up year on year. Here is a chance for
the companies to punish the people who are the big
users, and I am not talking about businesses. I
appreciate businesses have to have a certain level. As
a city MP I have to say that, and the evidence session
we took was in Glasgow where we do have more than
a fair share of people in fuel poverty. The point I think
was well made. The fact is that they feel as a low user
who is probably trying to cut back on their usage they
are punished, whereas others who can turn everything
on are winning on it and they don’t think that is fair.
Ian Peters: I recognise that perception. What I do
think, though, is it puts the onus on us to do
everything we possibly can for all customers,
particularly the vulnerable ones, to keep their bills
down and, despite rising prices, British Gas bills have
gone up by an average of about 3% or 4% over the
last four or five years because of what we have done,
particularly for the vulnerable market. Last year alone,
we spent £223 million, I think, helping precisely those
customers insulate their homes better, do everything
we can to get them on to the right tariff. So I think it
is in the bigger context of working with our customers
to help them keep their bills down. It is not just
about tariffs.
Q284 John Robertson: We talked to people in
California about the same thing, and they are getting
to the stage where they are talking about splitting the
cost of electricity up depending on the time of day. Do
you think you will go down that road at some stage?
Ian Peters: That will get enabled by smart meters,
and British Gas are very happy to lead the industry.
We have about 80% of the smart meters. We have
rolled out about 600,000. They have a kind of
embryonic time of use tariff within them. I would
expect within the next six to nine months to see a very
significant breakthrough in enabling lower costs to
lower price through smart meters.
Stephen Fitzpatrick: Could I make a suggestion here,
just on a practical point? If you want to see flat unit
pricing—and I think the perception that people that
use more energy get charged lower prices is to do with
two-rate tariffs that are set up to hide the fact there is
a fixed cost of providing the infrastructure. So a lot of
companies have in the past marketed “No standing
charge”.
John Robertson: A lot of these accounts still have a
fixed price on it. It is hidden in the bill.
Stephen Fitzpatrick: What I would suggest we do is
we start the conversation around convincing network
operators that they should receive a pence per kWh
transmission and distribution cost. As long as there is
a fixed cost to retailers for providing infrastructure
then the two options are you either create loss making
low volume customers and you ignore the fact that a
power line to a house that only uses a small amount
of electricity and a power line to a house that uses a
lot is broadly the same. So you either ignore that fact
and lose money on small consumption customers or
you end up in a position where you have this standing
charge and then unit costs. If we can get to a point
where National Grid and the other network companies
can charge per kWh then retailers can pass on those
costs on a per kWh basis. Otherwise there is very little
that we can do that ends up in a good outcome for
customers.
Paul Massara: I agree with that. I think part of the
changes under RMR is you are going to see more
standing charges coming in. That is part of the
development. In fact, we have just moved from having
a two-rate tariff ahead of RMR in order to put in the
standing charges, and people have written to us
saying, “We don’t like having the standing charges
because we are small users”. Some of those small
users are actually second homes, and so you may have
a different approach to that than you do to people who
actually are in fuel poverty, which is clearly—
Q285 John Robertson: I am sure something can be
done in that respect, but the small number of second
homes compared to first homes is a very small number
of people. I understand where you are coming from
but I don’t accept that as a reason for it. I have to put
the record straight because I have just been told that I
mis-said that Centrica’s bills have gone up by 6% and
not 3% or 4% as I said.
Ian Peters: The prices went up 6% last year. There is
an important distinction between prices and bills.
John Robertson: I am just putting that on the record
just to make sure that people understand that.
Ian Peters: I will accept that prices went up 6%. The
bills went up—
Q286 John Robertson: Going back to the charging
by usage, one of the great fears in California, in
particular, is the fact that they try to encourage
businesses to run at times when there is low usage so
that they can meet the requirements that they have. At
some stage if we don’t start getting investment into
our electricity markets and start building some power
stations, then we might get to the stage where we are
talking about cutting people off because we don’t have
enough power to meet the needs, particularly as the
coal-fired power stations are closing. Have you looked
at this and thought about how you are going to handle
it? Again, I do not want to see the fuel poverty people
being the ones that suffer.
Neil Clitheroe: I think you are absolutely right, Mr
Robertson, because the margin that is in generation is
reducing all the time. We have closed a plant, as you
have seen, in Scotland in the last three months, at
Cockenzie. That is a good plant that we have closed,
and that has come off the system and other plants are
coming off the system. I think as usual there are two
or three ways to solve that. One is we need plant, we
need certainty in terms of that capacity, and that is
going through on the Energy Bill at the moment.
There are things you can do on demand. We are seeing
a lot of business customers, refrigeration business
customers, we are giving a lot of energy advice to
them and moving their demand from the day into the
evening and you can level that out. But how far you
can take the peak down with those activities is
questionable. I think that peak will still exist. Those
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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
we need to provide that. So there is a lot of work to
do on this to provide more firm generation, and that
will only come through some certainty through the
capacity mechanism that is going through the Energy
Bill at the moment.
Ian Peters: From my point of view, the primary
accountability for securing energy supply rests with
National Grid. But this is an investment story. I think
Centrica is doing its part. I talked about the Cygnus
gas field. We have secured planning permission to
build an 850 MWh offshore wind farm. I think there
is a debate to be had around storage. The economics
of storage now are very fragile. I think, as we have
just seen from the near crisis we had a few weeks ago,
it would probably be a good thing if we had more
storage but we need to look at how that is incentivised
and remunerated. We, as a company, are doing our
part to invest in securing supplies for the future.
Q287 Sir Robert Smith: One of the answers has
prompted this observation that you are all, quite
rightly, highlighting that Government schemes put
costs on to bills that consumers have to pay, but then
you are also quite keen to take the credit for the
insulation and energy saving measures you put into
people’s homes. Do you recognise that those are
coming out of those costs that are being put on to
people’s bills as part of the Government schemes?
Paul Massara: I think we would all say that fuel
poverty is a combination of economic poverty and the
housing situation. Obviously that is a real issue, and
so, although we have some of the lowest costs per
unit, we have some of the highest bills in Europe
because effectively the usage is so high. As an
industry we have a real issue, as actually as society
we have a real issue with fuel poverty, because fuel
poverty is not going down, it is going up, and we need
a way of tackling it. The sensible way to do that is to
effectively apply funds to those people who need it
the most, who have the poorest housing. So I think
that is absolutely the right thing to do. The question
we would have is do the design of those systems and
the processes achieve that lowest carbon position at
the best possible price? Our assertion would be that
on CESP it did not achieve that at the lowest possible
price. Towards the end we were paying £50 or £60 a
tonne of CO2 to get those obligations away, which is
very expensive. We believe or we think ECO will be
very expensive. The Government’s own position is it
is 1.3, which is £77 a tonne. We believe it could be
significantly higher.
So we absolutely agree that it is needed to be done. If
anything, I would say that the Energy Bill is too light
on demand side management and it needs to have
greater emphasis on it. But everybody clearly has an
interest in getting those costs in at the best and the
lowest possible price for those people who need it.
Our concern is that the way that some of these
initiatives have been structured means that those
prices are going to be higher than they otherwise
would have had to be.
Ian Peters: Just a couple of additions to your point,
Mr Smith. We have done much more than our
obligations, particularly around fuel poverty. We have
the broadest criteria for the warm home discount. We
have uncapped it and 530,000 of my customers will
benefit from that—they already have, actually, by
March—which is much more than we were obliged to
do. I would support the point RWE made that there is
a case for a mid-year review around ECO. There are
many assumptions that have gone into that and we
have some reservations about how that is playing out.
We are doing what we can to roll it out at the lowest
cost, but I think DECC’s assumptions are fragile and
would warrant a mid-year review.
Neil Clitheroe: You know my views obviously on
Green Deal and ECO from the last Select Committee,
but there is an interesting point on all of this and that
is what is happening to consumption in the UK.
Obviously all of these investments are going ahead
and consumption is falling, but the averages that are
used for consumption at the moment, in terms of the
Ofgem average—16,500 for gas, 3,300 for
electricity—have not been updated since 2010 to
reflect the reductions that all the companies are seeing
with regard to consumption. Therefore, when you look
at the bill values then the bill values are effectively
quoted too high, because there has been a drop. We
are seeing numbers at 14,500 for gas, 3,100, 3,150 for
power. We are speaking to Ofgem at the moment
through Energy UK to try to influence that debate. But
that is an important point because we are not seeing
in the tariff tables the impact of all that investment
into average bills in the UK. I do think that is a lost
opportunity in terms of the transparency of what
energy is costing.
Paul Massara: To add to that, I think we would have
the same problems that others have suggested about
the Ofgem monthly analysis, on volumes and on types
of tariff. Also in terms of when we are making
decisions now, we are going into the market and
making decisions about prices. We are having to make
estimates of what ECO is going to be worth and
therefore we are having to factor in those costs. Those
don’t apply or don’t occur in Ofgem’s analysis. So
there are significant faults with that and the worry is
that people jump on a headline and say, “Wow, I can’t
believe they are earning £125 a customer” but
continuously, year after year, it comes out and shows
that we are only earning 3% or 4%. To me that does
not build trust in the marketplace, and I think it is
right that we get those numbers correct in order to get
a sensible conversation.
Q288 Mr Lilley: On profits and prices, opinion
surveys consistently show that a very high proportion
of consumers believe that the 50% increase in their
bills in recent years is largely due to the increase in
the profits of the energy companies. Indeed, when we
went to Scotland that was the view of the audience
that we had there. There were many activists, and
some members of the Committee believe it. I would
like to believe that it wasn’t so. If it were so, it would
mean there was a margin being earned that had gone
up from 100 to 150. Your profits are 50 of that 100, a
third of the total. That is clearly extreme. We could
bring in the Monopolies Commission and bring down
prices. I suspect it is not so, but it would be helpful if
we could have the information in a usable form. How
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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
has been due to an increase in profit? Not just the
profit at the retail and supply end but the profit at the
generating end as well, because people outside do not
distinguish between the two, and rightly not. They are
part of the profit of the whole industry. We do not get
that. Somebody will say, “We only generate a fraction
of what we supply and therefore we can’t throw the—
”. What is the percentage to begin with and how much
has it increased?
Paul Massara: I think that data is there. It is all in
the segmental reports. I think that the—
Mr Lilley: Well, because it is all segmented—
Paul Massara: But it is segmented between supply
and between generation and it is very clear, and that
is—
Q289 Mr Lilley: For example, if the generation
profits are 20% they are 20% of what, of the
wholesale price that is going—so not 20% of the final
bill, so you are shooting yourself in the feet.
Paul Massara: Absolutely. We announced in our last
set of results that our profits in the UK as a whole
were up 25% and everybody goes, “Oh my goodness,
they are up 25%”. What they do not say is we have
invested £5 billion over the last five years and
therefore you would be amazed if your profit doesn’t
go up. What they don’t say is in 2009, 2010 and 2011
we lost money in the retail business and are now
making a wafer thin margin. What we have to do is
be able to communicate better, because fundamentally
we are not earning above margin.
Q290 Mr Lilley: Some of us would like to help you,
but give us the figures. If the bill was £100 in the past
and £3 of that was profit at the retail end and £5 was
the generating end, and now it is £200 and it is £6, I
would like to know that but I do not have it in that
form.
Paul Massara: Sure. We can provide that for you.
Q291 Mr Lilley: You can say, “Look, okay, profits
have gone up a bit or down a bit or something but the
big increase is either in fuel or in other operating
costs, because of increased investments and these
absurdly expensive forms we make you produce
energy in now or Government add-ons and things”.
We ought to be able to get those but as something for
the total bill, not segment by segment.
Ian Peters: We do that through our light bulbs. In
short, British Gas residential’s profits in 2007 were
571. They were 606 in 2012. So the short answer is
none, but we lay out the breakdown—the moving
parts, wholesale, moving it around, transport and
distribution—on the back of the bill every month for
our customers.
Stephen Fitzpatrick: Mr Lilley, if I could offer one
observation, from all of my time in the energy sector,
neither you nor the Government nor the Department
of Energy and Climate Change nor Ofgem will ever
chase these guys down on profitability because they
are always a couple of years ahead of the numbers
that they are reporting to you. As an observation from
the customer’s point of view—and we speak to a lot
of our customers all the time and we listen very
closely—nobody cares about the profits that energy
companies make if they feel they are getting good
value. So all of the time that we have spent today, and
all the time we have spent over the past years, about
energy company profitability to me is a bit of a red
herring because I think energy companies should be
profitable. I think it would be great if we had more
profitable energy companies. It would mean more
investment in the business and maybe more money
to spend on communicating the good that the energy
industry does. But energy customers do not feel that
they are being treated fairly because they keep finding
out that there is a new deal that they can get offered
by another company or even the same company. Their
neighbour is paying less than they are. Their bills keep
going up. I think it is a complex industry that, as
industry participants, the larger industry companies
have done a very bad job in trying to simplify that for
the customer.
I would make one proposal to the Committee, that
where we start to see a more uniform approach to
energy pricing so that there is less of a disparity
between the cheapest deals on the market and the most
expensive deals, then people become a lot less
suspicious that they are being overcharged. All this
talk about profitability and where the money is going
and so on, I think from a tax point of view it is
perfectly reasonable to ask that if the profits are being
generated in the UK that tax is paid in the UK. But
otherwise I would say create a market where
competition works and then people can see the results
for themselves, whether that is in generation or in
supply. But if you have more competition you do not
need to ask these guys about their profits because
good companies will be profitable and poor companies
will leave the market.
I would suggest to Paul that if npower are apparently
not very successful in running their retail business
over the past three or four years, then we will very
happily talk to you about taking over the business and
I think we would do a much better job.
Ian Peters: I don’t always agree with Stephen but on
this one I do agree with him. This is about stating
values and there is no doubt that since we have started
writing to our customers saying, “These are the other
tariffs, the other prices you can get from British Gas”
it absolutely has changed the perception.
Stephen Fitzpatrick: But, Ian, you run Sainsbury’s
Energy and you won an option yesterday offering
customers buying Sainsbury’s Energy a £200 cash
back deal sweetener to sign up for 12 months. You
did not offer that to your 9 million British Gas
customers and so that is what leads to lack of trust.
Ian Peters: There are two things on that. That was a
particular transaction to do with collective switching
that involved local authorities, which was priced on a
particular basis.
Stephen Fitzpatrick: Next year for those customers
the price is going to go up by £200 and they will
wonder why.
Ian Peters: I am not saying that. If a British Gas
customer phones up our call centre today, and asks for
our cheapest deal, we will explain to them the British
Gas number and the Sainsbury’s number.
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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
do provide those details, so for £100 that you spend
today in 2010 you would have been spending £81 as
a monthly average. That £19 is made up of £4 of
wholesale cost increase, £5 from the wires and pipes
increase that has come from the investment, £8 from
VAT and various sort of ECO, green levies and so on,
a £1 increase—
Mr Lilley: VAT and ECO? They are different things.
Neil Clitheroe: In fact it is 5%, 5%, so it will be £2,
£2 to £10 between 2010 and 2013, and operating costs
are £1. So we do provide that detail on our website to
try to improve understanding of this.
Q292 Mr Lilley: That includes the generating
element in this?
Neil Clitheroe: That is within that £4 increase from
£46 to £50 for the gas and the power.
Q293 Chair: That does not tell you what Peter says
in terms of presentation from saying that the profits of
the company came from—
Neil Clitheroe: It shows the profitability.
Q294 Mr Lilley: The figures in our brief do not show
that. I would agree that complexity is a source of
aggravation, but it is a source of aggravation if the
price is going up. When the price is coming down or
static it is not such a source of aggravation. There is
great complexity in the price of computers, but
computers are coming down. There is great
complexity in the price of mobile phones, but mobile
phones are getting cheaper. People do not worry about
the complexity when things are going down. When
they are going up they blame them on you and if you
do not give us clear figures about where the profits
are they will blame it on your profits, so it would be
helpful for us to know where the profits are, what they
are on average for an average consumer and how
much they were a few years ago. Then, when the BBC
comes out with one of their things, “Oh profits have
gone up by so much” we will be able to say, “This is
what they were last year. This is what they are this
year. The big increase has come somewhere else”, if
it comes somewhere else. If it has come from rising
profits, then we will be able to—
Paul Massara: We have already stated in our papers
the historical and the forward view of that, in terms
of profit margins and how the bills are likely to rise
in the future by each of those costs.
Chair: Thank you for your patience. It has been a
helpful and illuminating session for us, and we look
forward to seeing you again in due course.
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Ev 52 Energy and Climate Change Committee: Evidence
Thursday 9 May 2013
Members present:
Mr Tim Yeo (Chair)
Dr Phillip Lee
Albert Owen
Sir Robert Smith
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
for coming in. As you know, there is a lot of interest
in this inquiry—although perhaps not intellectually in
your session—and when we had the energy companies
in the other day there seemed to be a particular
amount of interest, for some reason; I cannot quite
work out why. Perhaps you could start off by telling
us whether you think the Government is on track to
eliminate fuel poverty by 2016.
Professor Hills: I don’t think the Government is going
to eliminate fuel poverty by 2016, however you
measure it. Those of you who have seen the summary
of or read the whole of the report I wrote last year
will see that, in the way that I suggest that fuel poverty
might be measured, and with the focus on the measure
which I think captures the scale of the problem best,
which I call the fuel poverty gap, given the central
forecast that DECC was producing for fuel prices over
the next few years—some of those increases have
already happened—I was suggesting that that measure
of the scale of the problem would increase by as much
as half, from where it was back in 2009, by 2016,
rather than being eliminated. As you will have seen
from the report, I thought that was a profoundly
disappointing projection.
Dr Eyre: No, I don’t think the Government is on track
to eliminate fuel poverty by 2016. I don’t even think
it is on track to do so as far as is reasonably
practicable, which I think is what it is obliged to do.
Q296 Chair: Why do not you think it’s doing that?
Dr Eyre: Because it is reducing the amount of
resources that are being committed, particularly
through Government funding—for fuel poverty
measures for England—and the affordable warmth
programme in no way substitutes for that and the parts
of CERT devoted to low-income customers.
Jan Rosenow: I would agree with the previous
speakers. I think ECO is going to take about 125,000
to 250,000 households out of fuel poverty; these are
the DECC projections. I think, currently, we have
about 5 million households in fuel poverty; with a new
definition it is a bit less than that, but it is still
nowhere near the figures that DECC are projecting for
this. I agree with Nick. The fuel poverty spending,
according to ACE—the Association for the
Conservation of Energy—has been reduced by about
29% from previous fuel poverty budgets. So there is
a quite significant cut.
Q297 Chair: Professor Hills, if the Government
adopted your new definition of fuel poverty, should
they set a new fuel poverty reduction target?
Professor Hills: That is for Government and
Parliament—given that the original Act originates
from Parliament—to make those decisions. I think
that giving people clear objectives to deal with serious
national problems can be a helpful device.
Q298 Chair: Of course it is for the Government and
Parliament, but what would your advice be about
whether we in Parliament, whether we as this
Committee, should recommend that they do that?
Professor Hills: 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.” If you look at the history
of the child poverty target, which was originally
announced by the former Prime Minister, Mr Blair, as
having the objective of eliminating child poverty, that
language was modified to talking about becoming
among the best in Europe, for instance. We do not
have that kind of comparator as far as fuel poverty
is concerned.
To be honest, what matters is what happens over the
next five or 10 years and the scale of action. 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 or whatever it is. When we get closer
to it, I am very happy to argue about whether we have
eliminated the problem, or reduced it to extremely low
levels, which is what I think the objective should be
in practical terms. We are so far away from that at the
moment, that I am not sure that it matters. We are
going in the wrong direction and we need a scale of
action that takes us in the right direction.
Q299 Sir Robert Smith: I should probably declare
that I am an honorary vice-president of Energy Action
Scotland, which has argued that your new definition,
Professor Hills, makes it much more complicated to
work out whether a household is to be classed as fuel
poor because it requires a great deal of data to be
gathered on an individual basis. Is that a fair point?
Professor Hills: Well, the proposal I put forward for
measuring the scale of the problem is based on
precisely the same data as are used to create the
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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
tweaks to that, which, in terms of the use of the
surveys, could improve the way in which we allow for
particular household situations, but it basically uses
exactly the same information that we have at the
moment. There is a big difference between the
information you use to see how you are doing
nationally and whether you are going in the right
direction, and the information you use on the ground
to see which households need assistance and action
fastest. The existing measure is not that helpful on the
ground. It requires quite a lot of information about
people’s income, and to measure it precisely would
require a full survey of the house, in the same way
that the sample properties are done.
I actually think that the reverse could be true. The
way I suggest we focus on the problem—as the
original Act suggested, we look at households that
have low incomes and high need to spend on energy,
and we look at the way that that creates the worst
problems for the people who are furthest away from
being out of fuel poverty, the ones who have the
biggest fuel poverty gaps—allows you to think about
the characteristics of the people themselves and also
of the houses they live in, which you can then use as
some form of proxy. You do not do a full survey of
every house in the country; that would be
prohibitively expensive.
However, we do know—I set out in the report the
information that I had available to me then, and I hope
the Department has done more work since. That
information allows you to say what proportion of the
problem is accounted for by particular kinds of
houses. It is that information—looking at people who
are off the gas grid or people who are in pre-1940s
properties and so on—that allows you to home in on
the people you want. It is that kind of information that
matters, rather than the precise calculation that is used
from the sample service, either now or possibly in
the future.
Q300 Albert Owen: In the remit you were given by
the Government, did they say that the original
indicator was too crude and that you should look
deeper into it? What was the remit that you were
given?
Professor Hills: No. The first part of the remit was
to ask whether fuel poverty was actually a problem
because, after all, there are all sorts of other aspects
of hardship for people on low incomes and we do not
have particular targets or measures for those. The first
part of my remit was to look at that, and I reached the
firm conclusion that fuel poverty is a serious national
problem.
The second part of my remit was to look at the
existing measure. I was not given any instructions as
to what conclusion I should reach. I wasn’t pushed in
any particular direction, but looking at the way in
which the existing 10% indicator works it seemed to
me that it had some problems and led to misleading
identification of who the priorities for action should
be. It also gave some misleading impressions that in
the past led to complacency in what the trends were
in the scale of the problem. That was my own
conclusion, and I then thought through different ways
of trying to get at the problem as it hits people in
terms of hardship, health and climate change, and
came to the conclusions I did.
Q301 Albert Owen: I respect that. I asked the
question because Ministers indicated to us that it was
too crude, and used the headline that multimillionaires, including the Queen, could be described
as being in fuel poverty. So there was no pressure put
on you to look at that because of the circumstances
and the crudeness?
Professor Hills: I don’t remember anyone using the
word “crude” to describe the existing measure. Many
aspects of the way it is calculated are sophisticated.
The conclusion I reached was that it did not deliver
what people thought it delivered. You have mentioned
the potential for people on high incomes to be caught
by it sometimes. That is true, and obviously you
would not normally expect a measure of fuel poverty
to capture people—you quoted the Financial Times
story about the Royal Household—
Albert Owen: I’m repeating what Ministers said.
Professor Hills: I think they’re probably repeating a
line I have repeated from a front page of the
Financial Times.
That is just not helpful because it leads to
conclusions—as some assessments of the Warm Front
programme did, for example—that a lot of money was
going to the wrong people. That happened because the
assessments were being done at a time when energy
prices were particularly low, and the effect was that
apparently we had almost licked the problem.
According to the official indicator, the problem had
fallen by three quarters between the late 1990s and
2003 or thereabouts. None of the people I spoke to—
I did quite a lot of consultation for my report—
believed that the underlying fundamental problem had
been reduced by three quarters over that period, yet
that is what the numbers were saying and I think that
fed some complacency in Whitehall about the overlap
period. Those sorts of problems led me to think that
we were possibly not using the data we had to capture
the problem in the right way.
The second thing that struck me was the focus. It is
very nice to have a single number to focus on—the
number of households—particularly if you are
lobbying on something. It is particularly nice to have
a number that is going up rapidly, but that focus on the
number of households caught, which moves around
rapidly with energy prices, can lead to you thinking
that some people are out of target when they should
be in it, and others are now a problem when they
shouldn’t be, and also possibly to focus on action that
tips people just across the line, because the easiest
thing to do is to give someone who is just on the edge
a bit of loft insulation so that they are on the right
side, which reduces the numbers.
The problem is the people on low incomes who have
to pay £800 or £900 a year out of their very small
incomes over and above what a typical household has
to pay for their energy bills. Those are the people we
need to focus action on—the people who are furthest
away from the line—and that is why I suggest a focus
on the fuel poverty gap, and that the depth of the
problem is the best thing to focus on, however you
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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,
because that will focus your energy on using your
resources to make the biggest difference.
Q302 Sir Robert Smith: You mentioned that the
swing in energy prices made a huge difference to the
statistics. Do you think that it goes too far, though, to
ignore energy prices as part of the problem?
Professor Hills: I think, if you look carefully, that that
is not what the framework I have suggested does.
There are two different aspects to that. One is that as
energy prices rise, more people are pushed into a
position where the income they are left with after
paying necessary fuel costs would push them into
poverty. Some people are dragged into poverty by the
particularly high level of their fuel prices, because the
retail prices index or the consumer prices index does
not capture the cost of living to them as their energy
prices are so high.
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. I can give you a copy of
the summary of the report, if it will be helpful. You
will see from the graphs in the report how that
measure of the seriousness of the problem has gone
up and down. That is why I project that the problem
will worsen over the next few years as energy prices
rise.
Q303 Sir Robert Smith: Another statistical concern
is that using the median figure means that you would
never be able to eradicate fuel poverty.
Professor Hills: I don’t think that is strictly true, but
it is certainly very difficult. We are using the figure of
median costs for the whole population, that is, “What
does a typical household have to pay to keep warm to
a certain degree?” We are then focused on low-income
households who would have to pay more than that to
keep adequately warm. It is possible—it would be
very hard—to ensure that everyone on low income
was below the level. You cannot get the whole
population below the median, even in Lake Wobegon,
where, if you remember, all the children are above
average. You could theoretically get all people on low
incomes below it, but that is not the issue.
The issue is whether you can get most people on low
incomes below that level. After all, people on low
incomes live, by and large, in smaller houses than
people with higher incomes. Then, when we get there,
we can have an argument about the people who are
left near the line and are just above those median
costs, but we are so far from that at the moment. We
have so many people who have costs way above that
level. It would be very nice to have that argument in
10 years’ time—I would welcome it—when we have
got the problem down to the level where some people
on low incomes have costs that are still £50 or £100
higher than the median, but let’s get close to that level
before we worry about that.
Q304 Dr Lee: How much equality do you want to
see, Professor Hills?
Professor Hills: In what respect?
Dr Lee: Equality means equal. I notice that you
chaired the National Equality Panel. Human beings
are not equal, and I am trying to understand what your
definition of equality is.
Professor Hills: Oh, well, you could have a definition
of equality, and someone could set an objective that
everyone in the country should have the same income,
the same energy costs and wear the same suit or
whatever.
Q305 Dr Lee: Is that your objective?
Professor Hills: It is certainly not my objective. I
cannot think of any political philosophy, apart from
the most extreme, that would set that objective.
Q306 Dr Lee: My point is that your judgment of
equality is subjective, is it not?
Professor Hills: I think my job as an academic is to
try to report on the extent to which, as a society, we
vary from that position.
Q307 Dr Lee: And what is an acceptable amount of
variance?
Professor Hills: I think that is something that society
makes decisions about, and politicians like yourselves
make decisions about what you feel is acceptable and
right. Different countries make different decisions,
and at different points in time we have been a more
equal society than we are today, but that is—
Q308 Dr Lee: But you keep saying “more equal than
before”. I am trying to bear down on what is an
acceptable level of equality. Equality for me is that I
should be the same as Alan, the same as Albert and
the same as Tim. Equal is equal; two equals two. If we
are getting into the realms of subjective assessment of
what equality is, and indeed what reasonable is—I
notice your definition is “reasonable costs”—I wonder
what it is. The 1980s are blamed for the gap between
rich and poor, but not much difference occurred, I
notice, under the previous Government. There has
been a problem between the richest and the poorest,
but it is a subjective judgment about what is an
acceptable difference between the rich and the poor.
I am not saying that there is not a problem between
the rich and the poor; I am just trying to work out
what you think. Underlying your report will be a sense
of grievance: “I don’t think it’s right that the top 10%
have x amount more than the bottom 10%.” The same
applies to fuel costs. Unless we come up with some
wonderful invention in the next 10 years, fuel costs
will continue to go up, so by definition, the proportion
of people’s income being spent on fuel will go up.
Does that mean that they are increasingly becoming
fuel-poor, or does it mean that they will have to make
decisions about what they spend their money on in
future as a result of the changed reality?
Professor Hills: Can I separate that out into two
issues? I will be very happy to talk to you if the
Committee wants to carry on talking about equality
in general, income inequality and wealth inequality. I
would be very happy to do that, but in fact, given
what the issue of fuel poverty is about, what happens
to the top 10% is completely irrelevant. The reason
why I suggested that if one is taking a threshold, it
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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
household is doing, is that that number is not affected
by what plutocrats are doing with their large ranches
or multi-million-pound residences. I am looking at the
position that people with low incomes are in by
comparison with the mainstream of society.
The issue, then, is whether we think it is acceptable—
you may or may not—that somebody who has a low
income would face very high costs to keep their home
at a temperature that allows them to protect their
health. The evidence I reviewed in the interim report
suggested that there are good reasons for thinking that
living at low temperatures damages health, and that
the scale of the problem is such that people who are
already facing hardship in different ways will have
that hardship exacerbated by what they must spend to
try to keep warm.
You say it is inevitable that fuel poverty will rise. I do
not think that is true. What one is looking at is a
product of both energy costs and the energy efficiency
of the building that they live in, and that is something
that they can make a difference about. One of the
conclusions of my report was that when you look at
the evidence on what happens if you invest money in
energy efficiency measures in the homes lived in by
everybody, but particularly people with low incomes,
there are measures you can take that are very good
value for money according to the kind of cost-benefit
analysis that the Treasury, for instance, does. It is a
good national investment, and that is the focus of the
report. That has nothing to do with what has happened
to the incomes of, the top 1%.
Q309 Dr Lee: Following on from that, one short
question. I have long thought that the winter fuel
allowance should be scrapped. Would you agree that
we could invest that money in social housing that is
energy efficient, with insulation and everything else?
We could take that money and perhaps add to it. One
thing Government could do is get rid of the tenement
blocks that John Robertson often goes on about, which
cannot be insulated. If they were to decide to invest
in and build new social housing, that is probably the
most that a Government can do to address fuel poverty
in the way you have defined.
Professor Hills: Again, there are several things there.
First of all, you will see in the analysis that we did in
the report, using the framework I set out, that
spending more money on the winter fuel allowance is
one of the least effective ways of tackling this
problem. There are many other reasons why you
might want to have a winter fuel allowance, and the
current Government are committed to keeping it, but
with those resources there are more effective ways
you could spend that money that would deal with fuel
poverty. That is the very clear conclusion of the
report.
There is then a second issue that you brought up,
which is precisely what you do with it. The one point
I would make there is that my biggest priority for
action would be taking measures with existing
property—retrofitting existing property. The centre
that I am part of recently published a report, which
you might be interested in, called “High Rise Hope”,
about the programme that has been insulating a series
of energy-inefficient tower blocks in west London and
how that has worked out. I think examples of that kind
show what can be done, rather than using a great deal
of resources to demolish something and then rebuild
it. 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. It seems to me that using the money we
have got in the most effective way, whether it comes
from abolishing the winter fuel allowance, or from
somewhere else, is the top priority. There is a lot that
can be done at very good value for money.
Q310 Dr Phillip Lee: You could say that, but I am
just saying that the winter fuel allowance is actually
in place to try and prevent fuel poverty. My point is
that, if you are going to try and prevent fuel poverty,
or address it, I do not think it is—
Professor Hills: If you look in detail at the report—
Dr Phillip Lee: I have not read the whole report.
Professor Hills: I can point you to the precise pages
where we make a comparison between the different
measures. I am afraid that the winter fuel allowance
comes out very badly on all those grounds.
Q311 Chair: I should disclose an interest, as I am old
enough to receive the winter fuel allowance myself.
I have never expressed a view on its desirability or
otherwise. I have listened to the arguments with great
interest and the attack by my colleague.
Jan Rosenow: If I may chip in, there seems to be
a difference in the principle of how you address the
problem. One is a long-term investment, where you
invest in energy efficiency measures, and the other
one is short-term help with rising energy prices. From
a long-term perspective, the former—the long-term
investment—seems the wiser investment. That is my
view on whether we should invest in short-term
financial help or long-term energy efficiency
measures.
Q312 Chair: Moving on a bit, do you agree with the
NEA that environmental and social levies are
regressive?
Jan Rosenow: I do agree that the revenue-raising side
of social and environmental levies, if raised by energy
prices, is by definition always regressive. However, on
the spending side, the provision of measures can be
progressive, and CERT and CESP have made attempts
to deliver a large proportion of the measures to lowincome households, to offset some of the
regressiveness on the revenue-raising side of things.
So I think you have to distinguish between the
revenue-raising side, which will always be regressive
in the current system, and the spending side, where
you spend the revenues on energy efficiency
measures. But broadly, I would agree with the analysis
that NEA put forward.
Q313 Chair: Age UK suggested it would be better
to levy those costs on a per unit, rather than a per
household, basis. Would that be better?
Jan Rosenow: We had a discussion yesterday between
the two of us and the standing charge for electricity
is, I think, about £15, probably, for most households,
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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
per year. 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. On
average, we would probably agree that putting it on a
per unit or per consumption basis is less regressive.
However, there will be fuel-poor households who
consume quite a lot. For example, elderly people who
live at home 24/7 need to heat their homes. So I think
you have to be quite careful with these sort of
proposals.
Dr Eyre: Can I just add something? I think that what
you quoted was about environmental and social levies
in general. It is important to distinguish those levies
that support energy efficiency and fuel poverty, and to
look at whether it is possible, as Jan has explained,
for revenues that are raised in a regressive way to be
used in a progressive way and for the overall balance
to be positive, both in being generally progressive
and, in this context, in actually addressing fuel
poverty. That is not generally true for all
environmental levies. Where we are raising
environmental levies to fund new low-carbon supply,
for example, with proposals to put very significant
amounts of money into contracts for difference, which
are laid out on the same basis, you are going to get
all the regressive effects and none of the progressive
ones. I sometimes find it a bit odd that this debate
focuses on the levies for energy efficiency and not on
the levies for nuclear power, for example.
Professor Hills: Could I add to that? There is a
tension. If the costs are passed on per kilowatt-hour,
or whatever, that will be less regressive in general. It
will hit lower-income households less hard, because
on average they use less energy. However, the cost of
that is that the people with the worst problems—the
most fuel-poor—will be the worst hit. It seems to me
that that then makes the case for a dual strategy: yes,
you probably would rather have more emphasis on the
per-unit side than on standing charges, for
environmental reasons as well, but the corollary is that
you absolutely need to be taking action to help
eliminate the problems of people who have low
incomes and are living in G-rated or F-rated
properties, because they will be hardest hit by that.
The other side, which follows on exactly from what
Nick has been saying, is that it depends entirely on
how the revenue is used. It makes it very important
that a large slice of the action comes back to people
on low incomes, and it makes the case for a large
scale of the affordable warmth component, for making
sure that the CSCO part of the ECO is hitting the right
people and that we are not in a position where people
on low incomes are paying higher fuel bills in order
to subsidise the energy efficiency of people on high
incomes.
Q314 Chair: Could we use rising block tariffs to
address this problem?
Dr Eyre: You could do, but that would mean
regulating prices. That is the caveat that I always put
on that. Yes, if you are prepared to tear up the whole
of the liberalised energy market, which I might be
prepared to do, that could be made to work. However,
people should go into talking about rising block tariffs
with their eyes open in that way.
Professor Hills: And you should also be aware of
exactly the problem that we were just talking about—
the people who would be hit hardest would be the
people paying the very high unit costs who had the
worst problems to start with. There is a little bit of a
chicken-and-egg situation here. At the moment, we
have these people with low incomes with very energyefficient homes who would be hard hit by that, even
though in general people on low incomes would
benefit from RBT.
Q315 Chair: It depends how you do the formula,
surely. If you had a free allowance, someone living in
a very energy-efficient home might be getting their
fuel for free.
Professor Hills: But only up to a certain level.
Chair: Well, up to the level that a two-person
household would need. I can see the difficulties of
designing the formula, but I cannot see that the
concept is open to the objection that you have put
forward.
Professor Hills: The problem is that couples live in a
vast variety of properties.
Chair: Yes, absolutely. That is their choice, of course.
Professor Hills: Well, it may be a choice, but they
may not easily be able to do something about it. If
you are living in a rural area, off the gas grid, in an
old property, in theory you do have an option of
moving into somewhere small in town, but that is a
very costly option in terms of the disruption of your
life and abandoning the property you leave behind.
Q316 Chair: It is always easy to find an extreme
example that about 0.01% of the population might
encounter and say that that is a reason for not doing
something that is generally desirable.
Professor Hills: Unfortunately, it is not 0.01% of the
population who are living in extremely energyefficient properties at the moment.
Dr Eyre: The broader point is that a rising block tariff
is essentially trying to use the price mechanism to
dissuade people from using large amounts of energy,
and they may be people who are more or less poor, as
John indicates. If you are going to charge people more
than the marginal cost for high uses, the real trick is
to use that revenue back in direct energy-efficiency
programmes rather than simply relying on the price
mechanism. Marginal block tariffs will financially
achieve something, but it is much better to invest
where you need the investment.
Q317 Dr Whitehead: One of the enduring issues of
the whole fuel poverty debate is that all the figures
are based on extrapolation of the household condition
survey, which I think covers about 8,000 homes. We
have never known where anyone in fuel poverty
actually is, yet we have a system of effectively
requiring energy companies to find out where people
are and then lavish devices on them to alleviate fuel
poverty. As Citizens Advice pointed out to us recently,
people may not be aware that energy companies are
about to lavish goods on them. Indeed, last year, £50
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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.
Bearing in mind that that is what we are stuck with,
what lessons might be learned for future policy from
that record of identification and take-up concerning
fuel poverty?
Professor Hills: Could I say two things on that? First,
reiterating the distinction between how we measure as
well as we can the scale of the problem at national
level, whether we are going in the right or wrong
direction, and what we do on the ground, I think the
trick is to take one’s best understanding of how you
would measure the problem if you had perfect
information, and then translate that into relatively
simple-to-measure indicators on the ground that you
know capture most of the problem, with the important
proviso that this is an area where we probably do not
mind if we get it a bit wrong to start with. If you think
about it and take seriously the carbon budget, climate
change and where the country must be by 2027 or
whatever it is, we must go round most of the housing
stock. That is one of the most important things we can
do to tackle climate change.
In a sense, we are talking about the order we do it in.
If we do someone a bit early when we would have
had to do them later on, that’s not such a big problem.
If you are treating stock where someone has an
income that is a bit above the poverty line, incomes
vary and people move between properties. We must
work our way round the whole housing stock
eventually, so I would not be too nice about exactly
how we set the objectives on the ground. 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.
Q318 Dr Whitehead: But that is a bit of a “which is
to be master” problem from “Alice in Wonderland”.
You may consider tackling all properties on the basis
that they should be energy-efficient and thereby scoop
up people who are in fuel poverty and eradicate fuel
poverty. Alternatively, you may target those in fuel
poverty and incidentally make considerable strikes
towards the energy efficiency of properties.
Professor Hills: You do the best you can, but you
don’t get too hung up if somebody turns around
afterwards and says, “Well, that person wasn’t really
in fuel poverty,” because their income was £10 too
high or their property was not quite as bad as
somebody else’s. We will need to get there eventually,
but yes, you do want to set a priority order, and you
want to look at anybody on a low income who is
living in a property with an energy efficiency
certificate rating of E, F or G. Those properties need
to be brought up to standard. You do not need to do a
lot of calculation to see whether somebody fits those
characteristics.
Q319 Dr Whitehead: But previous schemes missed
by 40% or 50%.
Jan Rosenow: Yes. If you look at the proxies that
have been used under CERT, they are mainly income
and age. The same will be the case under Affordable
Warmth, like many income and means-tested benefits.
Only about 30% of households on means-tested
benefits are actually fuel-poor under the current
definition, and only 19% of all pensioners. The
proxies we are using to identify fuel-poor households
are not that precise. I think, however, that Affordable
Warmth is more targeted than previous schemes. I
have seen some analysis from York university saying
that about 37% of all the beneficiaries will be fuelpoor households under the current definition,
compared with about 20% to 25% under the CERT
priority order.
So it is an improvement, but we are still quite a long
way off. The main reason for that, as John pointed
out, is that we are not looking at the energy efficiency
of the property under the current indicators. We are
focusing on income, benefits and age, but not the
actual properties and their energy efficiency ratings.
Q320 Dr Whitehead: I am trying to get a better feel
for this. Is it effectively being suggested that that level
of inaccuracy is okay for future schemes, inasmuch as
that is about the best you can do?
Jan Rosenow: I don’t think it is. I think area-based
approaches achieve a higher targeting efficiency if
they are done properly, not just by focusing on
income. I think CESP was also based on income,
looking at the bottom 10% of the income deciles.
Again, that doesn’t achieve a very high targeting
efficiency. I think you have to design area-based
approaches in a way that captures low efficiency and
low income. By that you achieve a very high
targeting efficiency.
Dr Eyre: I think that is in the spirit of what John was
saying about doing well rather than perfectly. Ideally,
we would know the fuel poverty status of every
household and go through them in order, starting with
the deepest, but in practice, we are not going to be in
that position. Rather than looking for low-income,
high-cost households, looking for low-income, lowefficiency areas is probably a reasonable way to do it,
and it has the outcomes you suggest. The targeting is
not perfectly efficient, but it is better than a nationally
based approach.
Q321 Sir Robert Smith: If it is area-based, does it
also make roll-out and delivery more efficient?
Dr Eyre: Certainly, for some measures like external
wall insulation. If you could go up my street and do
a block of 30 at a time, it would be more effective. It
also says something about the delivery agent. Large
multinational energy suppliers actually don’t know
very much about the housing stock. That is one reason
why they have struggled with parts of CERT, I think;
they don’t know much about their customer base in
terms of its income characteristics, or about the
housing stock in particular areas. That would indicate
that we should be looking to more trusted and more
local organisations for delivery, whether that is local
authorities or the third sector.
There are many options open. I am not convinced that
fuel poverty is best done through the big six energy
companies, and I actually think the big six are not
convinced it is best done through them either. There
is perhaps a degree of agreement that often does not
exist on these issues.
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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
example, a central register or clearing house agency
to match customers and presumably allocate them to
energy companies in some way. Would that work
better? Would that work?
Dr Eyre: Well, if you’re going to do it through an
energy company obligation, yes, you need some
mechanism like that. I guess I am saying that in the
longer term, maybe an energy company obligation is
not the right way to address fuel poverty delivery.
Professor Hills: In terms of delivery, I think there
is an opportunity here, which I think some housing
associations are taking up, but one of the great unsung
success stories of the recent period has been the huge
improvement in the energy efficiency of the social
housing stock and the success of the decent homes
programme, under the last Government. But what that
means is that social landlords have actually got
experience of doing this stuff in their own property—
they need to do more; we need to push further on
that—and they also have local knowledge. Some of
them are quite dispersed and quite large, but a lot of
them do have local knowledge and, to some extent,
are those trusted agents. It seems to me there is a big
opportunity here for social landlords who have been
doing this to become—whatever mechanism you have
for financing—the intermediary that helps people do
all of this. I hope that is something the sector takes up.
Q323 Dr Whitehead: Returning to Nick’s point
about ECO and the way that might take up the torch,
certainly there is a fair amount of evidence suggesting
that, as far as the individual approach is concerned,
energy companies, in discharging their obligation, are
not likely to go for people in fuel poverty living in
solid wall homes and would perhaps prefer to do a
partial arrangement with a “better level” of customer,
who would be partly taking the green deal up and
partly doing ECO.
Dr Eyre: Yes, I think it is important to distinguish—
ECO is essentially there to replace both Warm Front
in England and the CERT super-priority group
approach. It is actually two things. It is important to
distinguish between the affordable warmth bit of ECO
and ECO in general. I am sure you are right. For
ECO—the ECO carbon saving—the energy
companies will be looking to factor in Green Deal
money or customers’ money generally. That is the
only way they are going to deliver that costeffectively. Affordable Warmth, I suspect, will look
more like the CERT super-priority group approach.
Q324 Dr Whitehead: Yes, but that will be one way.
An energy company will go to a local authority and
say, “Can you please discharge x percentage of our
obligation by doing up all your system-built homes?
Thank you very much. We will then leave the area.”
Dr Eyre: I think that is our best guess at the
moment, yes.
Professor Hills: Affordable Warmth itself I don’t
think applies to social housing. Others will probably
know better than me on that. CSCO probably could
cover it, but the Affordable Warmth part does not.
There is clearly a crucial issue in the administration
of all of this, which is that the potential of there being,
effectively, a market in all of this through ECO is that
you get the most cost-effective delivery. So you do
want people to be catching the low-hanging fruit and
to be doing this in the most cost-effective way. You
then get more done for the money that is being put on
people’s bills or, if it was tax-funded, from people’s
taxes—but in this case through their bills—but the
rules and the monitoring of those rules have to be set
up in a way that does not allow the energy companies,
or the people who have the obligation on them,
effectively to cheat by doing things that don’t really
meet your objective.
I have, still sitting in a drawer, a whole load of light
bulbs that a former energy company sent to me—not
even one I was still using—because it met one of their
obligations. That kind of extreme game playing has
been ruled out, but it will be a continuing tension all
the way through—and this is maybe Jan’s area in
particular: making sure that the rules that apply to the
obligation are in line with, and can only be met by,
measures that really achieve your objective will be
crucial.
Q325 Dr Whitehead: But are we not back to the
“who is to be master” problem? Let us say you are
doing an area envelopment scheme and you are keen
to get value out of that, obviously, in terms of
reducing the unit cost, and you might then deal with
a lot of properties in an area. You might then,
depending on what part of ECO you are working with,
work with a housing association and go out into
private properties in the area and get the whole
scheme working, at which point you have completely
gone off the question of the extent to which fuel poor
households might in any way be identified. The DWP
is increasingly sharing data, is it not, on identification?
Are there ways in which that DWP data sharing could
be allied with those schemes to target better? If the
target were better, would that be at the cost of the
efficiency of the operation?
Jan Rosenow: I think the response rate to the letter
that the DWP sent out was very low. They sent a letter
to all eligible households, but few of them responded
to that. It is a problem of self-identification, I guess,
and people voluntarily saying, “I would be interested
in receiving measures.” There might be some data
issues with the DWP providing energy companies
with those data. That is why it sent out that letter, but
the letter did not lead to the desired response rates.
There is an issue about data protection and about
getting uptake from eligible householders who are not
responding to the offers.
Professor Hills: We have two problems. One is that
with the warm home discount there is matching of
data between the DWP and the energy companies.
Some people get a reduction off their bill if they opt
in. Obviously, a lot of people in that kind of situation
do not take it up, so you miss some of the people who
you want. There is also a problem that not all of the
people on low income who you are worried about are
receiving means-tested benefits. There is a group that
you are worried about that the DWP does not even
know about. The people you are most worried about
are those who are entitled to means-tested benefits of
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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
they are the ones left furthest below the poverty line.
Again, you would not want to have a system where
you counted it as a failure that you had not reached
some households who had low incomes—you do not
have a good way of measuring that—but were not
claiming benefits, because it is another of these areas
where your targeting is inevitably fuzzy. It is never
going to be completely precise. You can monitor on a
national scale how well you are doing, but unless we
have vast amounts of data sharing and households
reporting more of their circumstances to authorities
than they do at the moment, we will never have
anything that is perfect. The idea that what you want
is something that is good, rather than perfect, is
important.
Jan Rosenow: May I add to that? The question you
raised is very important: how much of the ECO
funding will go to fuel-poor households, especially
with the carbon saving obligation, although not so
much with the Affordable Warmth scheme? The
impact assessment that DECC put out last year
suggested that most of the activities would focus on
the larger properties—wealthier households—and
there is a big question mark over whether the privaterented sector will benefit. Under CERT, I think 5% of
all the households that received benefits were
privately rented, but nationally 13% to 14% of
households are privately rented. It was the same with
CESP. There is a question mark as to how this
important sector for fuel poverty will benefit from
the obligation.
Q326 Albert Owen: You have touched on many of
the points I was going to raise, but I wanted to recap
on ECO. There will be less funding for ECO than
for the previous Warm Front scheme. How can we
maximise that ECO? Are you suggesting that we
move away from targeting individual households and
go to community-based schemes? Is that the general
view of the three of you?
Jan Rosenow: It is certainly my view that that would
be a more cost-effective approach. There would be a
higher targeting efficiency by doing that. How exactly
you design the scheme is complex. One would want to
look into it. In general that would be a better approach
compared with what we are doing now.
Q327 Albert Owen: It would be less hit and miss in
terms of individual households and the data available.
Is that what you are suggesting?
Jan Rosenow: Yes, I think looking at the individual
household is a strategy that proved quite difficult
under the super-priority group in CERT. Suppliers
found it quite difficult to identify households. Also,
the targeting efficiency of doing that was quite low.
We have seen that 30% of SPG customers, or maybe
a bit more, were in fuel poverty, so an area-based
approach might be more desirable to increase the
targeting efficiency and to make delivery more cost
effective.
Dr Eyre: I broadly agree with that. It is important to
bear in mind that there will be households with a big
fuel poverty gap who are not in the areas that would
be targeted, so keeping a balance between individual
entitlement and an area-based approach is probably
the right way forward. That is essentially what is
being proposed in ECO, and when we see the final
evaluation of CESP we may know a bit more about
the relative strengths and weaknesses. I do not have a
problem with ECO having its different elements; the
biggest problem is that it is not big enough.
Q328 Albert Owen (Ynys Môn) (Lab): But you did
touch on this earlier: will it be a problem that there is
less funding available for schemes per se?
Dr Eyre: Yes.
Professor Hills: I would agree that you are trying to
achieve different things, and you therefore probably
need all three elements. I would not put all my
resources into community-based schemes. Our
analysis based on the measurement framework I
suggested did not show such a high hit rate on fuel
poverty, if you target it by area of deprivation, for
example. You have to have some other way of
targeting, such as when a property was built and what
sort of property it is, otherwise you might be doing a
lot of good, but your hit rate of fuel-poor households
will not be so large. Unfortunately, the problem is
quite scattered, so some people will always be outside
any of the areas that you identify, which is why it is
right to have both kinds of targeting.
You want to remember that there is another
objective—carbon saving in general. If the carbon
saving part of ECO achieves that, well and good. The
royal household has very leaky palaces and we should
be doing something that anyway, but it is just a
different problem from fuel poverty. The issue is the
balance between three different parts of ECO, and I
think you have to look at the evidence of how well
you can use either an area approach as your proxy for
getting to the people you are trying to get to, and
probably at lower cost because you can envelope
things, or—
Q329 Albert Owen: You indicated earlier that you
felt that local authorities were better placed to deliver
it. Yes?
Professor Hills: They are not the only people, but
many social landlords have experience of doing that,
and they have knowledge of the areas they operate in
and are more trusted agents than some of the
alternatives. As part of the delivery pattern, I hope
they will play a big role.
Q330 Albert Owen: A large number of people, as
you indicated, are off the gas grid. They may have the
most energy-efficient houses in the country, yet they
have to pay a lot of money for LPG or oil to cook and
to heat their properties. How do we deal with them?
Would it be better to spend money in those areas on
ground source heating and the extension of gas mains,
so that they have a more level playing field for their
fuel prices?
Professor Hills: You have to look at the value for
money of any intervention. I have not done enough
detailed work on that.
Q331 Albert Owen: But there will some very
energy-efficient households that are—
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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
houses, the problem may not be large, even if they are
off the gas grid. The ones I am really worried about
are those in leaky old properties that are off the gas
grid. There will be cases where different kinds of
investment will be more valuable, but that will be on
not a case-by-case basis but a type-by-type basis.
Q332 Albert Owen: Do you think there should be a
special taskforce for rural fuel poverty?
Professor Hills: It’s an interesting idea.
Albert Owen: I think you will find that the evidence
is there to show that most fuel poverty is in peripheral
and rural areas.
Professor Hills: I’m not sure that is quite true. I
haven’t revised the numbers in the last few days, but
I think you will find that the problem is spread
between rural and urban areas. What is important is
that it is different in different places, so in some areas
it is about being off the gas grid and having very high
costs, but there is also a very large urban problem.
Some people living in tower blocks are not on the gas
grid because of restrictions on gas supply.
Q333 Albert Owen: But many have the choice of
switching to dual fuel, which those in rural and
peripheral areas do not have.
Professor Hills: Some do and some don’t. The people
we are most worried about are people who do not
have the resources to make the capital investments
that can deal with these problems. That is one reason
why fuel poverty is a particular problem. Those of us
who are in a less energy-efficient property than it
might be can afford to make investments that pay for
themselves—the green deal, and so on, is supposed to
help us do that—but giving somebody a low-interest
loan, or a 6.9% interest loan, to deal with a problem
when they do not have the money to pay the loan at
all does not help. That is one of the reasons why fuel
poverty is a particular problem.
Q334 Albert Owen: That is important. Regarding the
funding being decreased, through ECO, to previous
schemes, you are indicating that the green deal is not
the panacea to help with that. What else can we do?
What other funding streams and extra money can be
used to help these people?
Jan Rosenow: One of the proposals that have been
put forward—I am sure you are aware of it—is an
energy bill revolution, recycling some of the EU ETS
revenues and directing them into energy efficiency
programmes. Broadly, that is an interesting idea that
one should look at. But there are, generally, three
funding streams that are available. One is Exchequer
funding; one is looking at—
Q335 Albert Owen: Sorry, but how would that work
in practice? It is all right having these headlines, but
what can the Exchequer do that will help fuel
poverty tomorrow?
Jan Rosenow: Warm Front is a prime example.
Q336 Albert Owen: So it was wrong to abandon
Warm Front. More money should have been put into
it and it should have been more targeted.
Jan Rosenow: That is one option. Warm Front
became more targeted in the later stages. They
introduced a SAP rating as one of the requirements
in April 2011, if I remember correctly. The targeting
efficiency for the proportion of fuel-poor households
that received benefits from Warm Front was high—it
was more than 70%, if we believe the models. So yes,
in theory, that would be one of the approaches that
could deliver more on fuel poverty, but based on the
proposition that you actually have Exchequer funding
for that programme.
Dr Eyre: I think there is a case for looking, as Jan
said, at the ETS revenues in particular. We all know
it would be heresy with HM Treasury, because it
counts as hypothecation, but actually these revenues
have been raised in a particularly regressive way on
people’s energy bills and there does seem at least
some intuitive logic in applying them back to
addressing fuel poverty issues.
Sir Robert Smith: I suppose the problem is they are
probably being spent at the moment.
Dr Eyre: We all know there are problems with the
public finances, yes.
Q337 Sir Robert Smith: Just one thing. It is fairly
obvious to those involved directly, but for those
outside, a measure designed to reduce carbon
emissions is probably not so effective in a fuel-poor
household, because the fuel-poor household, by
definition, is living in a cold environment. If you make
the house more energy-efficient, they will use what
money they have to continue to buy their heating to
make better use of it. So you don’t reduce carbon, but
you improve their health and lifestyle.
Dr Eyre: You do not reduce carbon as much in the
short term. In the long term, I would hope that
everybody would live in a decently heated house and,
therefore, in the long term it saves just as much carbon
as doing the house that is properly heated now.
Professor Hills: I would add that if we do not take
action about people with low incomes living in energy
efficient homes, we will then get a huge barrier to
any measures that use the price mechanism to try to
encourage better use of carbon. You have always got
this group of people who are, as it were, in the front
line and will be the people who suffer most from
higher prices. So if you think that having a carbon
price, or things that proxy for a carbon price, is part
of how we meet carbon objectives in the long run,
you have to deal with the problem of people with low
incomes who are then hit by that.
One of the biggest things that we can effectively do
something about is energy efficiency, both in delivery
of people’s energy and the energy efficiency and
insulation of their home. Those two things go
together. I do not think that fuel poverty is a separate
problem from dealing with carbon. Dealing with fuel
poverty is a necessary part of also being able to do
things about carbon.
Q338 Sir Robert Smith: Just one other thing that
came up. You mentioned people who do not claim
benefits. In effect, one of the quickest wins in trying
to get people closer to being out of fuel poverty is to
have benefit take-up campaigns and to make sure that
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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
the benefits.
Professor Hills: Absolutely, and more generally,
things that reduce the level of poverty will reduce the
level of fuel poverty, so there is a whole series of
measures. One of the suggestions that comes through
the framework that I put forward is that we have
traditionally thought of fuel poverty as being a
problem of the elderly; but when you look at it in
detail you see there are also quite a lot of workingage families with children who are facing very high
costs compared with their income, and compared with
the costs that other families face. If those families
were out of poverty, the problem would be smaller.
For each individual pound tackling this particular
problem, energy efficiency is your best buy, but
anything you do in general to reduce poverty and the
extent of low incomes—getting people into work, or
whatever—will also help.
Jan Rosenow: These tensions, I think, go back quite
a long way, back to 1994, when the first obligation
was introduced. People were discussing exactly that:
if we just have a market-based instrument that focuses
on carbon and low cost, what will happen to lowincome households? That is why Ofgem—at the time,
it was Offer—put in provisions for targeting
vulnerable customers. Those tensions will never go
away with an instrument that is market-driven and at
the same time raises revenues via prices. There are
certain tensions built into that instrument that you will
always have to deal with.
I think what is interesting is that for the first time we
are actually using the obligation as a deliberate fuel
poverty policy, whereas with CERT, EEC and EESoP,
as they were called previously, they always said, “We
have these provisions in there as social equity
provisions, not necessarily in order to target fuel
poverty.” Back in those days the Government were
quite explicit that this was not a fuel poverty policy,
whereas now they say exactly the opposite: it is a fuel
poverty policy—and it is probably the most significant
one after we terminated Warm Front in this country.
So I think it is quite an interesting transition that we
have seen, from a carbon market-based mechanism to
a fuel poverty policy.
Q339 Dr Whitehead: Where do you think the £1.3
billion that is being regarded as the amount that they
will come to each year came from?
Jan Rosenow: Do you mean, where did that figure
come from?
Dr Whitehead: Yes.
Jan Rosenow: That is the figure that I have seen in
the impact assessment that DECC produced, which
is based—like previous obligations—on a list of the
various measures that are likely to be taken up, and
then the cost per measure.
Dr Whitehead: I appreciate that it was in the impact
assessment, but where did it actually come from?
Jan Rosenow: I think this has been modelled within
DECC, using various models, and they make
assumptions—how many solid walls will we insulate?
What is the cost per solid wall insulation? That is how
they have come up with that figure.
Q340 Dr Whitehead: Yes. The general wisdom,
particularly in thoughts from energy companies, is
that bearing in mind that that £1.3 billion is explicitly
not capped in the levy control framework, costs could
spiral up to more than £2 billion, perhaps £2.3 billion,
in order to discharge obligations fully.
Jan Rosenow: Yes.
Dr Whitehead: Is that your view? That surely would
represent a very serious impact, for example on the
extent to which that cost gets carried over to bills.
Dr Eyre: I think it is difficult to tell. I am wary of
taking energy company judgment on this. They have
a long history of telling us that obligations would cost
more than the Government said, and then
miraculously delivering them for less than the
Government said. But I also think we need to be
careful that they may not simply be crying wolf—
the nature of ECO, with new and relatively expensive
measures, is that actually nobody is very sure how
much it will cost to deliver them. So there is a risk
that the costs will be substantially higher than £1.3
billion, yes, but I don’t think you will find anybody
who knows the answer to that question.
Q341 Dr Whitehead: Will the competition between
energy companies help to keep that cost down, with
competing companies knocking on the doors of local
authorities, saying “I can do all your system-build
houses at half the cost of the other guys”?
Jan Rosenow: Of course it will. I think it always has
had that effect. That is one of the benefits of having a
system with competition; energy suppliers will offer
different prices for different measures and different
contributions, so I think that it will help. However, I
agree with Nick that there are huge uncertainties.
DECC itself pointed out that there are uncertainties,
ranging from £0.5 billion up to £3 billion per year—
that was in the same impact assessment. I could not
say where in that range the real figure lies—nobody
can—but there are uncertainties attached to this. I also
agree with Nick that we have seen that previous
obligations have been delivered much more cheaply
than the Government thought. I think they were about
20% cheaper than was initially modelled. The honest
answer is that we do not know exactly how much it
will cost, but there are risks.
Q342 Dr Whitehead: The Committee on Climate
Change has suggested that one way forward might be
to put a cap on individual treatments, so you would
say, for example, “You cannot treat a solid-walled
property at greater than x cost.” Would that be selfdefeating, or would it be a way of maintaining costs?
I have to say, first, that I am a little alarmed that
nobody knows what the real cost is going to be;
secondly, the £1.3 billion figure appears essentially to
be made up. Thirdly, what we do know is that since it
is an obligation, it will go on bills and will then be
capped one way or another if the alarming truth comes
out that we really do not know how much this is going
to cost over a period of time. Are there ways in which
that might be done less, rather than more painfully? Is
the Committee on Climate Change on to something
that might work?
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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
about that, because the way you would expect costs
to work for newer measures, such as solid wall
insulation, is that the costs would come down as the
experience of delivering them goes up. You would
expect the cost to be lower at the end of the obligation
than at the beginning. So, if you capped at quite a low
level, you risk nothing happening. You would then
have to ask whether it is a quantity obligation or a
price obligation. I do not think you can do both very
easily. My worry would be that you would be telling
people that they have to do something, but that they
cannot do it at the cost for which it is available in
the market.
Professor Hills: You would also have to be a little
careful about whether that would then become the
norm. You put a cap on, at £10,000 or £8,000 or
whatever—I don’t know what figure you or they are
thinking of—and that becomes the standard.
Dr Whitehead: It becomes a tariff.
Professor Hills: Yes, and that could be very
inefficient; but I don’t know.
Dr Eyre: You would have to differentiate between
different types of property and different types of
insulation. I am not saying it’s not possible, but it
would be a little more complex than saying, “It’s
£5,000. That’s the answer.”
Jan Rosenow: To some extent it will be driven by the
golden rule of the green deal. You have cross-funding
whereby part of the solid wall insulation is basically
funded by the green deal, so the contribution the
energy suppliers make will be determined by how
much of the cost is funded by the green deal in that
instance. To some extent, it is not a cap on the total
cost, but the contribution will be determined by the
golden rule, which has been built into the green
deal—if that makes sense.
Professor Hills: I think there is an issue of timing.
My report was completed in spring last year; I think
that most of the work on the ECO had been done by
then. I very much hope that the Department has been
paying attention to the analysis that we did in the
report and that, as ECO evolves, they will be able to
use the kind of framework that I put forward to help
them design it. Given that I hadn’t written the report
before the Department was doing the ECO and that
they didn’t tell me what to write, it would have been
quite hard for them to have taken account of it; but I
hope they are now doing so.
Q344 Dr Whitehead: Do you think they should do
that in any specific ways? I guess this is a question of
redesign rather than design.
Professor Hills: Of ECO?
Dr Whitehead: For example, in terms of the in-depth
fuel poverty cohort.
Professor Hills: Whatever action is taken, through
whatever form, I hope that what I think is an insight
in trying to identify people who have got the worst
problems, and trying to think through how you
actually find them on the ground, could be helpful to
them. I hope that, in the last year, since I did all of
this, that people who do that kind of analysis have
been pushing it further and that their work on the
promised fuel poverty strategy will be informed by
that and will be better informed than my report was.
So I hope that what we have given DECC—not just
DECC, but other parts of Government as well—is a
tool that they can use to get on with it and deal with
this really pressing national problem.
Chair: Thank you very much indeed for that
interesting and useful session.
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
along and helping us address some of the more
complex issues that this inquiry is covering.
Could I start generally? The background, in looking
at the accounts, is a level of public distrust now of
energy companies, some of which is possibly
justified—they have sometimes contributed to it by
things they have done—and some of it may just be
based on people’s difficulty in understanding the
information that is available. Were there particular
recommendations in the BDO review that you think
would have addressed that issue of distrust and would
have genuinely improved the transparency of
accounts?
Gervase MacGregor: Yes, but with time. Shall I give
some context as to our approach to this?
Chair: By all means, yes.
Gervase MacGregor: Obviously, I am an accountant
and accountants love figures and data, and if we are
trying to make some sort of comparison between one
company and another, one wants that data to have a
level of consistency across the companies you are
trying to compare. The other thing is that you cannot
fix something like this in one year—one set of
financial statements or one set of CSSs—you have to
look at it over a period of time.
The recommendations that I put to Ofgem in view,
had they been implemented, over a period of time
would have led certainly to more transparency over
the performance of the six companies. Of course,
more transparency and more data—first, making
comparisons and, secondly, looking at how things
changed over time—may well have led to more
questions. I think that is probably inevitable. But over,
say, probably a three-year period at the very least, you
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Energy and Climate Change Committee: Evidence Ev 63
9 May 2013 Gervase MacGregor
would have got more information out of it, and
possibly—probably—a greater understanding of
people who read these things and what is going on.
Q346 Chair: Who do you think does read these
things?
Gervase MacGregor: Analysts, I am sure; people like
yourselves; probably, people like the gentlemen who
have been speaking before. I appreciate that there is
an interest in the financial performance of the energy
companies, and that people trying to understand that
will reach a brick wall when it comes to trying to
interpret what, these days, are relatively complex
documents—financial statements. They become even
more complex when you have businesses which are
undertaking a number of different activities:
generation, trading and supply.
Q347 Chair: Ideally, we would like a world in which
these sorts of statements are accessible for consumers
to understand as well. I am sure the average electricity
or gas consumer does not plough their way through
the various notes to the accounts of the big six
companies. Is there a way in which these statements
can be made more accessible and understandable to
consumers, rather than their having to go through
some intermediary such as the Daily Mail?
Gervase MacGregor: At the moment it is very
difficult. I think, as far as any set of accounts is
concerned, this is a debate about education and the
extent to which individuals in this country get
properly educated in respect of financial matters.
Unless you can understand the most basic set of
accounts it is quite difficult to understand a set of
sophisticated accounts, which means that you are
reliant on an intermediary. I don’t know about the
Daily Mail—well, it probably is the Daily Mail and
some of the other newspapers that look at these things
on an informed basis.
Chair: I’m one of the few members of the Committee
who started life as an investment analyst, and even I
find the accounts quite difficult sometimes to
penetrate.
Gervase MacGregor: It hasn’t got any easier. A lot
more information is provided these days in respect of
business in their financial statements. It hasn’t got a
lot easier to understand what’s going on.
Q348 Chair: Is there any way that we can make the
bills for domestic and non-domestic consumers a little
more instructive and informative about the profits of
the companies?
Gervase MacGregor: That is an interesting question.
A lot of people read their bills with horror, rather than
anything else, these days. Putting more financial
information on those things would probably scare
people off. I have read some of the evidence that some
of the big six gave on the transparency of bills and
the various regulations that they try to meet when they
put information in there. If you want something that
fixes it for everybody, it is just not there. I’m afraid
you have to do a bit of work to understand what’s
going on in these things.
Q349 Chair: Ofgem suggested some time ago that
“retail prices do not always track wholesale costs
closely, partly because retail margins act as an internal
hedge for generation profits.” You could argue,
therefore, that both generation and supply are part of
the same overall market strategy, and should be
considered together when you are evaluating whether
the big six prices are fair and justified.
Gervase MacGregor: One could look at that, but then
you would have to put trading in the middle. You left
out trading, there. Trading, to the extent that it is not
included within the financial statements of companies
operating in this country, is quite an important part of
their overall business model.
Q350 Albert Owen: You mentioned your review and
Ofgem’s response to it, and you identified eight
recommendations. After consultation, Ofgem
effectively decided not to take them forward in the
original form. Why do you think the BDO
recommendations were not taken up?
Gervase MacGregor: I am going to start by saying
that you will have to ask the individuals at Ofgem
why that was the case. My view, based on our
discussions with Ofgem, is that there was a concern
about the ability of the companies concerned to adjust
to some of these changes, and perhaps a concern about
the costs that would be incurred. I have a particular
view about that, but I think that was probably driving
some of the thought there. I have some sympathy with
that, but not a lot. I saw in one of the companies’
letters in response to the consultation that they
welcomed the fact that there was not going to be an
independent auditor crawling all over this, because
they didn’t see why they should pass on the cost of
the audit to the customer. That seemed to be a strange
way of looking at a way of dealing with something
like this. I doubt that is the case at all, actually.
Q351 Albert Owen: So you think it is to do with the
costs? Could you explain to the Committee what the
costs and benefits of your recommendations are?
Gervase MacGregor: In respect of each of the eight
recommendations, I went through and identified what
I thought—I wrote the recommendation relatively
clearly, and then went through them saying what the
benefits are. They are principally what I have talked
about before: transparency, consistency and
comparability—to give a better insight into what is
going on as far as these businesses are concerned.
On costs, the first recommendation, which seemed
relatively sensible, was about each company having a
coterminous year-end, or at least producing their CSSs
on a coterminous basis because the business is
seasonal. If you have one—you used to have two—
with a March year-end and the other four with a
December year-end, it makes comparison a little
difficult. You only have one now, and moving SSE to
a December year-end will have a one-off year cost.
That is how I identified the benefit. The benefit there
is greater comparability between companies, and the
cost is the cost that one of them has in producing 12month information to December or changing its
accounting reference date.
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Ev 64 Energy and Climate Change Committee: Evidence
9 May 2013 Gervase MacGregor
Q352 Albert Owen: In pounds, how much would it
have cost the big six to follow your
recommendations?
Gervase MacGregor: I don’t know; I didn’t cost that.
I don’t know, for example, how much it would cost
SSE to go from a March year-end to a December yearend. It would have to accelerate one year’s audit and
financial preparation. Scottish changed its year-end
not long ago from March to December, and you could
probably find out from it how much it cost. I doubt
that it cost a lot given the overall size of such
businesses.
Q353 Sir
Robert
Smith:
One
of
your
recommendations was an independent audit of
statements, and Ofgem came up with the idea of
independent opinions. What is the difference between
auditing and an independent opinion?
Gervase MacGregor: What it got is a review. That is
what it ended up with. The Ofgem recommendation
said: “We propose obtaining an independent
opinion…but not necessarily from an auditor”. It has
ended up with a review. 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. In some respects, it is the sort of thing that
any of us who are suitably qualified could do. What
you get is not an assurance certificate from the
accountant doing the work but, in technical terms, an
agreed-upon procedures report with a series of tests to
make sure things add up and that there is a
reconciliation, and reciting that that is what has been
done. It does not give an assurance.
Q354 Sir Robert Smith: How often would you have
had the audit done?
Gervase MacGregor: Once a year, at the same time
as the CSSs came out.
Q355 Sir Robert Smith: So it’s all about giving the
wider consumer market confidence in the information.
Gervase MacGregor: Yes, it is. If you look at the
work that was done by the independent accountant, it
identified issues around—I am sorry to be technical
again—differences in GAAP between groups of
companies that are essentially non-UK and those that
are essentially UK-based. There were issues in trying
to do those reconciliations. There was no overall view
of the six as a whole to try to work out whether there
was any comparability. Essentially, you continue to
have six CSSs which you can only really read on a
stand-alone basis, and six separate reports by the
independent accountant on those six CSSs.
Q356 Chair: On trading, which a lot of people are
suspicious about as a way of—well, it reduces
transparency and gives companies some flexibility
about where they move their profits to, and so on.
Your recommendation was that trading activity should
be included in the segmental accounts.
Gervase MacGregor: Correct.
Chair: Ofgem did not require that. They have this
checklist. Do you think that their checklist is
satisfactory?
Gervase MacGregor: No, not at all. 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.
Q357 Chair: Why would the companies resist this?
Why wouldn’t they do it voluntarily?
Gervase MacGregor: Companies don’t necessarily do
things voluntarily if it requires more work or if it
means putting out information into the market. Why
would a company do something if it doesn’t need to
do it?
Chair: I was trying to work it out—okay, on the cost
factor, you might not think it was an enormous cost
to separate that out.
Gervase MacGregor: I very much doubt that the cost
of producing trading information is that great.
Chair: Exactly.
Gervase MacGregor: Just think about it. One
independent trading entity had, I think, turnover in
2011 of €175 billion. That seems to me to be an awful
lot of trading and a lot of positions being taken during
the year. I would be astonished if those companies did
not have pretty granular information about those
trades during the year, and if they did not, I think we
should all be a bit worried.
Q358 Chair: So we can eliminate cost as being a
genuine reason for not doing this. It seems to me that
their reluctance to do so voluntarily is only going to
reinforce the suspicion that this is an activity which
can be used to confuse the whole picture—to obscure
what is really going on.
Gervase MacGregor: I can certainly see why people
would take that view; it is a natural suspicion. I have
to say that when I spoke to them—I spoke to a number
of the finance directors of these companies in a
relatively informal way, as part of the review but just
to try to get their views on things—I came away with
a sense of their willingness and desire to improve their
transparency and to engage properly on these things,
but not really knowing how to do it. You cannot
expect just one of them to do it. It probably requires
a direction that all of them have to do it, otherwise
any single one is not going to take that decision.
Q359 Chair: Yes. But taking EDF as an example:
they have EDF Trading—a subsidiary of the French
parent company—which made £513 million in 2011.
I am not sure it is the same year, but there was a big
inter-company loan. The opportunity to move profits
around, if you’ve got a trading company, is
considerable, is it not?
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Energy and Climate Change Committee: Evidence Ev 65
9 May 2013 Gervase MacGregor
Gervase MacGregor: Just a couple of things. As far
as that inter-company loan is concerned, all the
information which I have been looking at is on a preinterest basis: EBIT—earnings before interest and
tax—and EBITDA, which is earnings before interest,
tax, depreciation and amortisation. So really, the CSSs
do not go down to that interest level; that is the first
thing.
The second thing is that, if there is a loan from the
holding company, under the normal rules you cannot
be taking penal rates of interest out of one company—
one jurisdiction—and sticking them into another
company, because the Revenue services are going to
challenge that. I have no doubt about that. 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.
Q360 Chair: It seems to me that if Ofgem had
accepted your recommendation on this particular
matter, that would have been at least a step in the
direction of greater transparency and improving the
trust which is, at the moment, conspicuously absent.
Gervase MacGregor: That’s why I recommended it.
It was all about improving the quality of those CSSs
and the reporting, and that is why I recommended that
trading be put in.
Q361 Chair: Is the trading done like an investment
bank just trying to make money on the market, or is
it done as a genuine hedge to reduce the risks that
these businesses are facing?
Gervase MacGregor: I think it’s quite complicated,
actually, what you are doing. On one side, you have a
generation business; on the other, you have a retail
business. My understanding, from going through how
the trading is undertaken by each of the companies,
is this.
First of all, on the amount of speculative trading—
that is, taking vast positions simply by betting that the
gas price will go up or down, depending perhaps on
the weather—for all intents and purposes we can put
that to one side, because not much of it goes on. But
we are not talking about that. 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.
Q362 Chair: In terms of their reluctance to make
these disclosures, if they are all required to do it,
there’s no commercial reason why they shouldn’t
disclose the possibility of trading activity separately,
is there?
Gervase MacGregor: No, not at all. The problem
would be if they were required—if I recommended
something like this, I think I would get in trouble with
the Competition Commission—to disclose their future
strategy regarding the market. I am sure that any one
of them would like to know what the others, in
particular one of them, is doing as far as its future
purchases are concerned. That would be
uncompetitive, so I am not in any way
recommending it.
Chair: I don’t think anyone who reflects on it would
suggest that; but that objection, of course, does not
apply to historical activities.
Gervase MacGregor: No.
Q363 Dr Whitehead: In the report you not only
mentioned concerns about transfer pricing but
suggested that further work should be done on that.
What sort of further work did you have in mind, and
what
particular
concerns
motivated
your
recommendation?
Gervase MacGregor: I am going to come back to the
trading point on this, and explain why. My concern is
not about transfer pricing as a way of shifting profits
between taxing jurisdictions, because actually, when
you look at the ownership of these groups—UK,
Germany, France—if you are worried about transfer
pricing as far as moving profits away from highertax jurisdictions is concerned, they wouldn’t do that,
because the higher-tax jurisdictions are France and
Germany. My concern is not about tax revenues being
shifted around to minimise tax; my concern is much
more about trying to understand the agreements which
have been entered into with trading, and trying to
work out, particularly where you have brokerage
arrangements, whether the price being charged in the
centre by the trader is a fair reflection of the risks
being borne by that trader, as opposed to the risks
which go with the generation and retail sides of the
business.
Q364 Dr Whitehead: So the fair apportionment of
risk down the line where a company is essentially
trading with itself?
Gervase MacGregor: That is absolutely right; so, if
you think about it, the least risky part of the business
shouldn’t be paying a risk premium at all in respect of
any transaction; they should be receiving something,
whereas it is the other way round for the most risky
part of the business. It was really about trying to go
much more in depth—and I didn’t get into this at all—
to get into some sort of detail as to how that was
working in respect of the companies and their trading,
what benchmarking they were using, and whether the
apportionment of risk was fair.
Q365 Dr Whitehead: The relationship between
hedging strategies, buying long in the market and
churning trading over on a number of occasions—
coming up to the day-ahead market, for example—
appears, certainly to the outside observer, to give a
number of opportunities, shall we say, to transfer price
and risk, particularly the three or four churns in
trading that may take place between the long position
and the—
Gervase MacGregor: That is precisely my point—to
try to understand the transfer pricing arrangements, to
see exactly what is going on, to see whether there is
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Ev 66 Energy and Climate Change Committee: Evidence
9 May 2013 Gervase MacGregor
a fair apportionment of risk. Now, as far as that
trading over two to three—
Q366 Dr Whitehead: It is not just about risk,
though, is it? It is about the question of the extent to
which, as it were, you are buying ahead because of
your dominant position in the market. You can then
retrade as you get closer and closer to day-ahead,
possibly on a transfer basis or conceivably to your
own or the collective advantage.
Gervase MacGregor: Yes, there are two very good
points there. First of all, there is nothing suspicious
about trading and hedging itself, and thinking into the
future. It is a perfectly rational business activity,
especially for these businesses. It is completely
seasonal—the sun’s out, the sun goes in, that sort of
thing—and allows them to try to work out what
demand is. Of course, your view of demand is going
to change over a two to three-year period. The great
thing about being able to forward-buy and forwardsell is that you can change your mind as many times
as you want up until the point when you actually have
to buy something and deliver something. I don’t
necessarily have a problem with a company wanting
to change its forward-buying on a regular basis if it
just starts reading the market differently, which of
course it is bound to do.
On your other point, about the dominant position, that
is a big competition issue, really, isn’t it? I have to
say that you have got one very big buyer and retailer
of gas. I am sure that everybody else would like to
work out what it is going to be doing as far as the
market is concerned, because by definition if you are
that big a player in gas of course you are going to
have some effect on future prices. It must be the case.
Q367 Dr Whitehead: So the big six, collectively,
make the market as well as deal with the market, as
it were.
Gervase MacGregor: They do, but they don’t act,
really, as a coherent group. I think what is probably
happening is that each of them is trying to guess what
the others are doing and five of them are trying to
guess what Centrica is doing, just because of its
market position.
Q368 Dr Whitehead: You also have the
development within some companies that are
effectively offering their service as a wing under
which smaller companies can shelter. The small
company effectively takes on the trading
arrangements of the larger company, perhaps from an
efficiency point of view buying into its services so
that it doesn’t have to do it. Is that something that has
an effect on that market dominance, or is it a wholly
rational device from which everyone benefits?
Gervase MacGregor: It is not something I have
looked at, but from that description, and from some
of the transcripts I have read of previous sessions, I
would say that you have a market, which is made up
some very big players and some big players. It then
gets down to smaller and smaller parts of the market.
In a market, you like to have smaller and larger
players, so that the market works properly and you
have an ability for somebody to take on power, just
as others have small amounts of power and just as you
have the ability for small generators of power to come
into the market and provide it when it is necessary.
Q369 Dr Whitehead: But in this market you do not
have smaller and larger players. You have very, very
large players and very, very small players. The
concern that I was raising was that the very, very
small players would have to undertake an entire
market operation—the whole lot—were they to trade
entirely independently. Actually, they come in under
the wing, as it were, and track the large company’s
trades, a little like the Costa Rican economy running
on the dollar. In fact, that company is effectively
trading for them and then giving them the benefit of
that for their subsequent operations. That seems on
the one hand to be of benefit to that very small player,
but on the other hand it is further consolidation of the
way the market works.
Gervase MacGregor: It is not something that I know
about in detail, but it may well be that small players
coming in and doing that essentially means nothing
more than that they are acting almost as agents of
the big players. Therefore, as you say, there is big
consolidation. Why are the large companies doing this
for the small companies? There will be some
rationalist, capitalist reason, even if it is just
responding to regulatory and media pressure.
Q370 Sir Robert Smith: You identify that the EU
emissions trading scheme allowances were treated
differently in the different segmental accounts. What
does that do to the overall presentation, and do you
have any thoughts on why it has come about?
Gervase MacGregor: 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. 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.
Q371 Sir Robert Smith: So would you treat them in
the same way as trading.
Gervase MacGregor: Yes. I would treat them so there
was consistency across the piece and so that when one
looked at the CSSs, one could see how, on a company
by company basis, one could make a valid
comparison.
Q372 Chair: In the review that Ofgem did of the
2010 segmental accounts statements, it noted that four
of the big six had made significant accounting
adjustments—in one case, £340 million—which had
the effect of reducing the stated profits. Do you think
that there should be a good method of presenting
exceptional items, so that they cannot apparently be
used to reduce profitability?
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Energy and Climate Change Committee: Evidence Ev 67
9 May 2013 Gervase MacGregor
Gervase MacGregor: It is one of the things that
Ofgem did take up in terms of getting a consistent
approach as far as exceptional items are concerned.
As far as reducing exceptional items is concerned, you
are going to have, company by company, events that
give rise to these sorts of things. They are not
necessarily bad things. If you have a massive
impairment charge because something has happened,
of itself that as an exceptional item is not a bad thing,
but you do need the ability to strip it out of the
ongoing activities so you can understand what the
underlying financial performance has been.
Q373 Chair: The existence of exceptional items does
make it slightly harder to make consistent
comparisons across the industry, doesn’t it?
Gervase MacGregor: It does. It is certainly true that
some companies are a bit more free with their use of
exceptional items than others, depending what it is
they are trying to show as far as their level of
profitability is concerned. One wants to be able to
adjust to that. If it has not been stripped out or if it is
something that was an exceptional item where perhaps
there was an element of judgment over it and it should
not have been, you need to be able to adjust for those
things across the companies to aid comparability.
Q374 Chair: An accounting adjustment is effectively
a paper transaction, or a paper calculation by the
company. It does not necessarily have any bearing on
how much cash the business has generated from one
activity or another.
Gervase MacGregor: Well, it might do. Your big
impairment charges obviously do not have any cash
effect at all. If you are going through some sort of
reorganisation and you are paying out genuine money
to restructure something then that may well have—it
probably will have—a cash impact.
Q375 Chair: Is there anything else you think we
should have asked you that you have not told us?
Gervase MacGregor: No, it has been very
comprehensive. Thank you for the questions.
Chair: Thank you for coming in. It has been very
useful for us.
Gervase MacGregor: Thank you.
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Ev 68 Energy and Climate Change Committee: Evidence
Tuesday 21 May 2013
Members present:
Mr Tim Yeo (Chair)
Dan Byles
Barry Gardiner
Ian Lavery
Dr Philip Lee
Mr Peter Lilley
Albert Owen
Christopher Pincher
John Robertson
Sir Robert Smith
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
Committee. Thank you for coming in. As you know,
there is quite a lot of interest in this particular subject.
I wonder if I could start by asking why Ofgem decided
not to act on the recommendations from BDO, which
you commissioned to review the consolidated
segmental statements.
Andrew Wright: Yes, good afternoon. First of all,
thank you very much to the Committee for the
opportunity to give evidence today. It is probably
worth taking a step back. Around about three or four
years ago, when we were conducting the energy
market probe, I think only one company published
separate accounts for its retail business in the UK.
That was British Gas. All the other companies either
combined those accounts with other businesses in the
UK or, in some cases, other businesses internationally.
We thought it was important that consumers, for
reasons of confidence, had sight of these accounts; so
we put in place a licence condition requiring
companies to publish separate segmented accounts for
generation and supply, supply divided into gas,
electricity, domestic and non-domestic. That is a
significant improvement in transparency.
When we did the RMR, I think there were some
concerns about the comparability of these accounts,
the approaches companies took to transfer pricing, and
we asked BDO to help us look at ways to improve
these segmented accounts. We didn’t have to do this.
This was something we asked them to do because we
wanted to make these accounts as useful for
consumers and indeed for competitors, as possible.
BDO put forward eight recommendations. We
accepted, pretty much completely, five of them. We
had good reasons not to accept the other three. Just to
be absolutely clear, we are the decision-maker here. It
is for us to decide whether or not the changes are
necessary, proportionate and whether they meet our
cost benefit requirements. As for the three that we did
not include, one was to require the companies to
publish trading profits; one was to requiring all
companies to publish on a common year-end; and I
think the third one was to do further further work on
transfer pricing, looking at the implications of our
approach of requiring the companies to look at
transfer pricing based on current wholesale prices. If
you like, I can go into each of them in turn. Generally,
we did not accept those three recommendations
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.
Q377 Chair: On the question of trading activities,
though, the costs would not be very great. These
activities must be recorded in the books of the
companies and audited. I am not quite sure why the
cost point comes in there. “Not including trading
activities” means we do not have a complete picture
of what the companies are doing.
Andrew Wright: I think this is the one that is gaining
the most attention out of these three recommendations
that we didn’t accept. First and foremost, I would say
that BDO have said that there is no reason to expect
that the companies are not giving a fair picture of the
profits in the segmented statements and there is no
evidence to support the view that profits are being
taken out into trading businesses. Having said that,
because we do not necessarily have a full picture of
all the relationships between the licensed businesses
and the trading businesses, we accept that there is a
possibility there are some missing pieces of
information. If we were to require companies to
publish their trading figures, there would be two ways
of doing that and BDO highlighted this. They talked
about a narrow approach that would require us just
to look at the trading profits associated with the UK
businesses and not to inquiry any further than that.
BDO themselves said that would be of marginal value
and potentially confusing.
The other possibility is a more in-depth and detailed
approach, which would require the companies to
disclose trading profits associated with businesses
outside of the UK and to divide those trading profits
into proprietary trading, speculative trading and
trading associated with hedging and procurement.
BDO themselves accepted that that information would
be difficult to get hold of. There is a question of
whether companies overseas are required to give us
that information and it would be quite intrusive in
terms of requiring companies to do a lot of analysis.
We agree with that and our view is that in order for
this information to be useful to customers, it would be
significantly intrusive and even then, there would be
question marks about whether companies had
correctly allocated between speculative and hedging
and whether or not there were cross-border contracts
that we did not have sight of, because we would not
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Energy and Climate Change Committee: Evidence Ev 69
21 May 2013 Andrew Wright and Sarah Harrison
necessarily have the power to make companies
disclose profits they were making overseas, for
example. So all of these questions would still arise.
To get to the bottom of it absolutely we would have
to require the companies to run their businesses
differently. I think the view we have always taken is
that is not appropriate in a competitive market where
companies should be free to organise their businesses
as they see fit.
Q378 Chair: The problem is that that fails to address
the fact that there is now a complete breakdown of
consumer confidence in the trustworthiness and,
indeed, the integrity to some extent, of these
companies who have a very dominant position in the
market. It is very hard for smaller companies to get
into this business and, therefore, at best it is an
oligopoly. All the evidence we have shows
considerable consumer suspicion about the way they
are treated by the Big Six in particular. You will be
aware that the performance of Ofgem has come under
scrutiny, particularly from the Opposition. Given that,
I would have thought that it would be a pretty obvious
thing to get the information. It is an incomplete
picture. Of course it may be complex to get to the
bottom of it, but that seems to be all the more reason
for making a good effort at doing so. We have
companies that are operating in all aspects of the
industry as generators, retailers and traders. The scope
for them to continue at least appearing to pull the wool
over people’s eyes remains almost unchecked.
Andrew Wright: I can understand that any possibility
of a gap in this information is unsatisfactory.
Companies organise their businesses as they see fit on
an international basis, they combine their procurement
activity and their trading activity and take all of their
optimisation of their generation portfolio and their
supply position through the same trading book—that
is arguably an efficient way of running these
businesses. Unless we prevent them doing that and
require them, as indeed we do in our regulated
business, to run separate ring-fenced supply
businesses in the UK and prevent them from
benefiting from those types of synergies, it is difficult
to see how we can get to the bottom of it.
We could ask them to provide more information on a
tokenistic basis, but I don’t think it would actually
shed a great deal more light on what is going on. Just
to come back to it, the situation is an awfully lot better
than it was three years ago and you can thank Ofgem
for having made those changes. BDO made it very
clear that they had no evidence that the companies are
doing anything untoward in terms of moving profits
out of the UK regulated businesses into other
businesses, certainly not in a systematic way. I think
it would be wrong for us, just for the purposes of
show, to make changes that impose costs on the
industry.
Q379 Chair: This is not for show. There are no
grounds for complacency at all. Until this Committee
started taking an interest in the matter and the Trading
Standards Department of Surrey County Council did,
customers were being mis-sold tariffs. They were
being lied to by the representatives of the companies.
I am afraid Ofgem did not intervene very successfully
in that area. Until very recently consumers have been
confused by an extraordinary array of tariffs. Again,
sometimes there is a suspicion, at least, that those
tariffs have been organised in a way that is more for
the benefit of the companies than for their consumers.
To say this is going to be done for show is ridiculous.
There are genuine concerns about the way in which
these companies can continue to conceal from public
view their activities and the profits they generate from
different parts of those activities. It is unsatisfactory.
You commissioned some experts to review all this.
You then ignored half of their recommendations and
it is no great surprise that consumer confidence
remains very low.
Andrew Wright: I don’t think we need to apologise
for our achievements in this area. Certainly the
Committee has done, as you know, an excellent job in
holding us to account and indeed the industry to
account. We identified issues around mis-selling in the
probe in 2008. We put in place new licence
conditions. We have enforced those licence conditions
vigorously. As a result the selling on the doorstep is
now a thing of the past and I think consumers have
benefited from that. They no longer need to live in
fear of being tricked on the doorstep by energy
suppliers. I think we have acted robustly in these
areas.
We have a duty to regulate these companies in a
proportionate manner, not imposing unnecessary
regulatory burdens on them. If our conclusion is that
requiring additional information from them does not
add any value to consumers then it is right for us to
act in that way. You may disagree on that but that is
the judgment we came to, partly on the evidence that
BDO supplied, that what we could reasonably do
would be potentially confusing and would be of
limited use. What we would need to do in order to
make it useful would be difficult to realise and costly.
Those were BDO’s own conclusions as a part of
their recommendation.
Q380 Chair: The BDO witness we heard from said
he did not see the value of the checklist that you
produced regarding trading activities. They
recommended an independent annual audit of the
consolidated segmental statements, but you have
chosen to produce an independent opinion. They
highlighted differences in accounting treatment across
the companies. We are still lacking some information
that would be quite valuable.
Andrew Wright: Firstly, I think the independent
checklist adds value. It is worth saying there are other
bits of information of value to understanding trading.
The companies do publish their trading profits. We
do require the companies to reconcile their segmented
statements with their published accounts, so it is
possible to look and see where the trading profits are.
Sometimes these are published on as pan-European
basis but that reflects the reality of how these
companies organise their businesses so it is not as if
there’s a complete absence of transparency in this
area.
As far as the independent audit is concerned, actually
BDO recommended that an independent auditor
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Ev 70 Energy and Climate Change Committee: Evidence
21 May 2013 Andrew Wright and Sarah Harrison
provide an opinion, which is what we implemented
through PKF. They provided an opinion on how the
changes we had made had been implemented and any
further
recommendations
to
the
improved
comparability. So we did implement that. We did not
commit to doing it annually. We will be doing it again
until we are comfortable these accounts are settled
down and there is no room for further improvement,
but we did implement that. It is not the case that they
asked for an audit, which would be quite an extensive
and intrusive thing to do to companies that are
already audited.
Q381 Chair: One thing that would not cost very
much is if they all have the same year-ends. It is a
one-off small cost to change from one quarter to
another to have the year-end. You did not want to
proceed even with that recommendation.
Andrew Wright: Once again, I respectfully disagree.
First of all, it is of limited value. The year-end of
Scottish and Southern Energy and the other five
companies is just three months apart, so the numbers
are quite comparable. There may well be differences
over that three months, but it is not going to be huge.
Secondly, if you are going to require Scottish and
Southern to change its year-end, you are going to
require it to release into the financial markets
information that it does not currently provide or you
are going to require it to change its financial reporting
year-end with all the implications and costs of that,
and you may end up having to delay the release of
information from all other companies because you
have to wait until that financial information is released
into the market and properly audited, which SSE does
not do until 31 March.
Finally, although the costs overall may not be large,
there are significant costs on one party. 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.
Q382 Sir Robert Smith: I had better remind the
Committee of my entry in the Register of Members’
Interests to do with oil and gas, in particular a
shareholding in Shell. The Big Six have raised
concerns about the supply market indicator and your
assumptions about the amount of fuel they sell and,
therefore, it may be exaggerating their profits. They
also suggest your model has an oversimplified
hedging strategy. How do you respond to that
concern?
Andrew Wright: 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 these companies are making. 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. The companies themselves
are not even able to do that because unexpected things
happen. For example, you had Centrica in here earlier
talking about the increased demand over the April
period, which you can’t necessarily predict. Then
there is the higher cost of meeting the CERT and
CESP obligations. These are all changes that you can’t
predict. So inevitably, because we do not have a
crystal ball, there are going to be differences between
our supply market indicators.
Also, 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.
The particular accusation on consumption I think we
accept. We change our definition of a typical
customer; we last did it in 2009 and there is a lot of
evidence that since then consumption levels,
particularly in gas, have fallen considerably and we
need to take that into account. We have just initiated
a review of consumption levels, both for the use in the
supply market indicator and the average consumption
levels that are tended to be used in the media and
elsewhere when quoting the size of a typical bill. This
work is underway now and we will update the
consumption assumptions, which should make the
supply market indicator more reflective of a typical
customer.
Q383 Sir Robert Smith: In 2010 when the
segmented accounts suggested an average profit
margin on electricity of 0.3% supply, the supply
market indicator suggested a margin around 6%.
Andrew Wright: First of all, we have done the
exercise of calibrating or checking our supply market
indicator against actual results and it performs fairly
well. As I say, there are a couple of adjustments you
have to make; the most obvious one being that we do
not take account of discounted tariffs in the supply
market indicator. We are looking at the profitability of
a typical dual fuel customer on standard tariffs.
Sir Robert Smith: CSS is coming up at 0.3% and the
SMI at 6%.
Andrew Wright: As I say, you need to compare like
for like. Hopefully, I can provide the Committee with
calibration work that we have done on this, if I can
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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
whether or not there is broad consistency between the
supply market indicator and the published numbers.
We look at it line by line in terms of what the cost of
fuel is and so on. We see where the differences are
that we understand. They are not identical because
they are looking at different things, but we were
broadly comfortable that the two were consistent. I do
not recognise those exact numbers but, nonetheless,
we have gone through that exercise and we satisfied
ourselves that there was nothing suggesting that the
methodology we were using in the supply market
indicator was grossly wrong, recognising that it is a
simplification for good reasons.
Q384 Sir Robert Smith: In answer to the Chair
earlier you were saying how you would not want to
tell them how to run their business, but obviously
when it comes to the retail tariffs you are going to be
telling them quite a lot about how to run their
business. What restrains you from feeling you should
be telling them?
Andrew Wright: Our responsibility as an economic
regulator is to ensure the market works effectively.
Where it is necessary to require the companies to
behave in a certain way in order to get a more
effective market, either because we feel the consumers
are finding it difficult to engage in a complex market
or that the companies are providing misleading
information, for example, then it is appropriate to put
in place licence conditions to deal with that. I do not
see any inconsistency. I think what we are talking
about is that in a competitive market in general you
want companies to compete for different suppliers,
organise themselves and organise the way they run
their business as they best see fit in order to compete
in the market. That is what we want to achieve.
Q385 Sir Robert Smith: I suppose the bottom line
is that, if it is a working market, if the company is
more efficient, then the consumer should get a share
of that.
Andrew Wright: If it is a working market then
absolutely, but, similarly, if a company is more
efficient and has a competitive advantage over other
companies you will also expect them to make more
profit. That is also a part of the incentives of getting
companies to compete in the market.
Q386 Sir Robert Smith: You mentioned quite a lot
of them have overseas markets. Is there perhaps a
need for international co-operation on creating some
more transparency in the trading figures?
Andrew Wright: Possibly. I think that is an interesting
question. Certainly in the wholesale markets there has
been a lot of Europe-wide initiatives on transparency;
for example, about the amount of gas in gas storage
and about flows in gas pipelines and REMIT, the
market abuse directive. So there have been a lot of
initiatives to improve transparency, particularly in the
wholesale market. It is an interesting question about
whether or not that could be extended to retail markets
and certainly one worth thinking about. But generally,
for good reasons I think, the focus of European
Commission activity has tended to be on wholesale
markets.
Q387 Barry Gardiner: Back to vertical integration,
surely the problem here is that it allows, as a business
model, companies to cross-subsidise different
activities and to distort the market. Until there is a
real attack on the ability of the companies to adopt
a radically-integrated model then all the problems of
transparency and trust are not going to go away, are
they?
Andrew Wright: No. I think you are right. Vertical
integration could have an adverse effect on
competition if it allows vertically integrated players to
foreclose the market. Generally, in competition terms,
that would need to be some form of collusion,
otherwise competitors would gain market share at the
expense of each other or dominance associated with
that. We have focused on trying to generate sufficient
liquidity to enable new entrants, both independent
generators and independent suppliers, to compete on
level terms with the vertically integrated companies.
That is where we are focused.
Once again, we think that is a proportionate
intervention given the scale of the issue and I think
we have had considerable success in that. There is
significantly greater liquidity on the short-term
markets, on the near-term markets, and there is lots of
evidence the smaller suppliers are now finding it
easier to get hold of the products that they need, and
we are seeing significant growth in the market share
of small suppliers, albeit from a very low base. So
there are signs of improvement but we are not satisfied
with that. We are proposing to put in place obligations
on companies which will have the effect of increasing
liquidity, particularly along the forward curve where I
think the progress has been disappointing.
Q388 Barry Gardiner: Mr Wright, you say that you
are trying to get competition into the market and
smaller companies in to break things up. The other
day I watched as a magpie had taken an egg from the
nest of a goldfinch. I watched the goldfinch for about
150 metres chase that magpie. Right? The magpie still
obtained the egg. The idea that small companies are
going to be able to come into the market here and take
away from the big companies in the manner that you
indicate you believe they could, is very unlikely. They
are so small by comparison and their power-to-weight
ratio is so poor by comparison that I cannot believe
that you believe that that is a sensible short-term
solution.
Andrew Wright: I am not being naïve here. I think it
would be wrong to say that smaller suppliers are yet
at a stage where they are maintaining a consistent and
credible threat to the Big Six. Having said that, they
are making considerable gains. Some of them are now
getting to the scale where I think, in terms of the
customers—
Barry Gardiner: They were bought out by the Big
Six. You know what is going to happen with one of
them in the near future. They try to grow themselves
to the size but they then get bought out the moment
they become a threat.
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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
small suppliers in changes of supplier, albeit that
leaves the big lump of disengaged inactive customers
where they are, but if you look at the active part of
the market, the small suppliers are more significant
than their market shares would suggest. Certainly
concerns that some of the big companies are raising
about the small suppliers not being subject to some of
the environmental obligations suggest to me that they
are starting to feel the pain from competition from
small suppliers.
I don’t think we are there yet. I am not at all satisfied
that we have sufficient competition from small
suppliers. There is also the independent generation
sector that has the prospect of undermining the
vertical integration in the industry as well. You should
not just focus on suppliers.
Q389 Barry Gardiner: What about introducing a
self-supply restriction? E.ON have recommended
clear and consistent prohibition of cross-subsidy.
Now, of course, at the moment it is very difficult to
know whether that is taking place or not between
generation supply activities. Wouldn’t those sorts of
measures help to improve transparency?
Andrew Wright: We are going to be putting forward
our proposals on liquidity in the next couple of
months, certainly before everyone goes away on their
summer holidays, and I will be happy to come back
and answer questions on them. We have already set
out the shape of that, which we have talked about as
secure and promote; in other words, to put in place
obligations to secure the gains that have been already
made and to promote further liquidity where we think
it is necessary, which is predominantly along the
curve.
The important thing is that people who want to trade
are able to trade at fair prices. A self-supply restriction
has many of the same challenges as a mandated
auction or a mandated market maker, which is, first of
all, how do you enforce it? The self-supply restriction
is only part of the issue. You want to make sure that
the rest of the power is supplied into the market. In
doing that you need to make sure that it is done in a
way that benefits people who want to trade. You have
the same issues about preventing companies from
trading with each other, making sure that the trades
are genuine, and I think there are real challenges with
a self-supply restriction.
I am not saying it is any better or worse than the
mandated auction or other approaches, but many of
the same challenges exist. I don’t think it is a panacea.
We will be coming up with what we think is the best
and most appropriate solution to this issue, given the
progress that we have already made in the short-term
market.
Q390 Ian Lavery: Just continuing on the theme of
liquidity and competition in the energy markets, you
have been working on improving wholesale liquidity,
particularly in the electricity market, since you
identified the problem in 2008 and further measures
will be introduced as part of the Energy Bill. Can you
briefly explain what you have achieved so far and
what impact the Energy Bill provisions will have?
Andrew Wright: Yes, gladly. First of all, you are right
in saying this was an issue first identified in 2008 as
part of the energy supply probe. I suppose we have
been using a mixture of carrot and stick. We have
been trying to encourage industry initiatives that were
already in train in 2008 to deliver and, to some extent,
the reason we have taken a long time in getting to
where we are is that we wanted to give industry the
opportunity to respond to the challenge. In part they
have done that.
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
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.
I can’t say there are no complaints about this anymore
or they are completely happy, but it is a significantly
improved situation. You heard recently about Scottish
and Southern, for example, providing collateral-free
trading opportunities for small suppliers up to a
certain size. That is just one example. There are a
number of others around the industry. We have made
significant progress and we have been developing our
proposals and I think we have now come to the end
of that process. We can no longer wait for the industry
to solve the issue by itself and we have to plug the
remaining gap that exists, but I think, in doing that, it
is far better that the industry steps up and solves this
problem itself rather than responding reluctantly to
rules that we put in place.
Q391 Ian Lavery: You mentioned Scottish and
Southern. They suggested that a division of a trading
day into 48 half-hour chunks meant that liquidity in
the electricity market was very granular. Is granularity
an issue and, if it is an issue, why is it an issue?
Andrew Wright: Granularity is a fact of life and, if
anything, the more granular it is then the more cost
reflective and the more efficient the market is likely
to be. I think we would not want to remove the
granularity of the market in the near term because it
means that generators can respond to price signals in
real time in an effective and efficient way. Electricity
is a product the the price and value varies quite
sharply over relatively short periods of time. That
does make it fairly difficult as far as liquidity and
trading is concerned. Having said that, as I say, the
day-ahead auctions, which are in half-hour chunks, are
reasonably liquid and it is not where we see the
problem in the market today. I do not think granularity
is an issue and, if anything, it would be nice to see
even more granularity because that provides a greater
role of the market and reduces the role of the system
operator.
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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
granularity, do you think in any way, shape or form it
can be improved?
Andrew Wright: Certainly. We are undergoing reform
of the balancing mechanism and cash-out at the
moment, the so-called significant code review of the
balancing mechanism, and we are looking to improve
that balancing mechanism in a number of ways. We
are not looking to change the half-hourly settlement
period, and partly for some of the reasons you talked
about in that liquidity may be not enough to justify it.
We are not looking to change that, but we are looking
to change the way prices are formed, to make sure
security of supply is properly reflected, potentially
moving from a dual cash-out to a single cash-out.
Those things are not directly affecting liquidity but
improving the operation of the balancing mechanism
will help liquidity. It will give people increased
confidence in the market.
Q393 Dr Whitehead: If you are a very large
company trading you may well, as now appears to be
the case, buy way down the curve, well in excess of
what you know that you are eventually going to have
to produce for the purposes of balancing, and you will
then buy and sell, repeatedly, some of that in order to
balance off what you have when you get to day-ahead
and closure. You may then take on board small
companies in the process of buying and selling down
the line and, indeed, you may take small companies
under your wing and offer them facilities to trade as
if they were you. Now, this is a rather different
process to trading with yourself but, nevertheless,
comes to the same result, which is the effective
making of the market in favour of particular very large
suppliers and, effectively, the capturing of small
companies so that the terms they are on are no better
ever than whatever it is you are offering them as part
of that wider process. Is that something that concerns
you or is that a development that you think is okay as
far as liquidity is concerned?
Andrew Wright: You may need to clarify what you
mean about the relationship with the smaller
companies. As far as the practice of companies buying
large blocks of power, base load for example, a long
way out and then refining and sculpting their positions
as they get closer to the time, then that is exactly how
I would expect the market to work and that sounds to
me like a description of an effective market. As they
sculpt their positions they will be trading in different
times of the day, different days of the week, different
half-hour blocks and, in doing that, I would guess that
would then enable them to make available to smaller
suppliers the shaped and sculpted products that they
may well need. If that is what is happening, I would
see that as an efficient and well-functioning market. I
am not sure I have any particular concerns unless I
am missing your point, which I may be.
Q394 Dr Whitehead: It is rather like if you are
supplying cucumbers to Tesco’s and Tesco’s take your
entire supply of cucumbers year one and year two.
Having given your entire supply of cucumbers to
Tesco, they will then come back with an over-rider to
say that you must supply your cucumbers to us,
Tesco’s, at 10% less in year two, at which point you
have no option but to supply your cucumbers to
Tesco’s because you have gone under their wing as
far as your entire supply is concerned.
Andrew Wright: This is for generating you mean, or
supplier?
Dr Whitehead: If you are a small company seeking
to purchase and you went under the wing of a large
company, at some stage in that process of sculpting
are you not effectively—
Andrew Wright: You are effectively talking about
companies, I suppose, cornering the market by buying
up all the power a long time ahead and then dropping
the terms of it. That would—
Dr Whitehead: That would come under the sculpting.
You are then captured, are you?
Andrew Wright: Yes, that would be a concern. To
some extent, that would be foreclosing the market
against smaller suppliers and new entrants. I
personally have not seen a great deal of evidence or,
indeed, any evidence of that type of behaviour. We
know the companies buy in large chunks of power a
long way out because that is the nature of the market.
As you get further out you lose the granularity, so you
tend to be only able to trade, for example, in baseload power or maybe peak power but not in the
discrete chunks in times of day. You would expect
that, but I have not heard those accusations. Certainly
if people are making those sorts of accusations, they
should come to us and we will listen to them.
Q395 Dr Whitehead: You have not looked at, say,
trading well down the curve; the extent to which that
relates reasonably to the amount of purchases that
may be necessary in order to deal with obligations or
whether there is a wide margin between them?
Andrew Wright: No, we haven’t, only in that
generally the trading positions the companies take are
confidential. We will have to make specific requests
to get that information, which we would not do unless
we had suspicion that something was awry. Apart
from the general concerns about vertical integration
and the effect of that, which we have already spoken
about, we have not seen any more general evidence
that companies are foreclosing the market by
purchasing power a long way in advance, in excess of
their needs. If anyone has such evidence they should
bring it to us.
Q396 Sir Robert Smith: On vertical integration,
how much of it is a natural product for investors
wanting to be on both sides of the risk so that if
generators are doing well, suppliers do badly and if
suppliers are doing well it is probably generators who
are doing badly and therefore, while it is not quite so
exciting, it is more secure?
Andrew Wright: That may well be a significant part
of it. I do not think that is particularly surprising. You
could expect companies to look for efficient ways of
managing their exposure to the market and having a
vertically integrated business is one way of doing that.
Arguably that is an efficient way of running your
business. It reduces transaction costs and reduces the
risk premium and could lead to a better deal for
customers, provided you can be satisfied that there—
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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
difficult for people to operate who are not vertically
integrated?
Andrew Wright: Yes. There may well be competitive
advantages to being vertically integrated and some of
those may be legitimate. Some of them might be the
products of the balancing mechanism and we are
looking at reforms of the balancing mechanism to see
whether that can be improved. I suppose there is a
risk that that could be anti-competitive, but, as I say,
we are looking to improve liquidity to try to ensure
that new entrants can compete on a level playing field.
Nonetheless, once again it comes back to the same
view that if companies want to organise their
businesses in an efficient way we should not be
discouraging them from doing that.
Q397 John Robertson: You mentioned SSE a while
ago, about the free credit to small suppliers. Has
Ofgem considered requiring or incentivising the Big
Six companies to do this?
Andrew Wright: We have considered whether there is
anything that we ought to put in place on suppliers by
way of an obligation to provide free or cheap
collateral. We took the view that it was not
appropriate, that collateral is a normal part of doing
business and that would, in effect, be requiring these
companies to cross-subsidise. Having said that, we
welcome this initiative and we would encourage
others to look at this and other initiatives that may
make it easier for new entrants to come into the
business, but it is probably right that companies do
that themselves.
Q398 John Robertson: I know what you are saying,
that it is a good idea to do these things. To be honest,
they could all do a lot more, but you as a regulator
should be taking some kind of lead in this. You should
be saying, “Okay, this is a good idea and SSE have
thought of it. So let’s go to Scottish Power and tell
them to go out and do this. We want you to do this”.
Why not?
Andrew Wright: We have. Throughout the long time
that we have been trying to encourage greater liquidity
in the market, part of that is getting people to trade
more, particularly in the short-term market, but part of
that is ensuring companies treat small suppliers fairly.
Partly through stick and partly through carrot, we have
been doing a lot of encouraging. A lot of the
improvements that you have seen across the industry
are down to the pressure that we have been applying
on the industry to treat small suppliers better. We do
not think it is enough, by the way, and that is why we
are likely to bring forward obligations that will
reinforce and strengthen that.
Q399 John Robertson: I am trying to tell you that,
“you are not doing enough” is an understatement. We
have here the Independent today where it says, “SSE
prepares to announce a 30% jump in profits in its
division by supplying gas and electricity.” This goes
back to December 2010, when they put the prices up
for gas by 9.4%. In September 2011, gas went up 18%
and electricity 11%. They did bring it down in March
2012 by 4.5% but, lo and behold, we get to October,
9% gas rise and 9% electricity rise. They are having
a laugh, are they not? What are you doing about that?
This is ridiculous.
Andrew Wright: It is worth taking a step back. We are
the economic regulator responsible for ensuring that
markets work effectively. Companies set prices and
they—
John Robertson: You are the regulator, regulate.
Andrew Wright: No. The framework of competitive
markets has been established by Government since the
early days after privatisation. For more than 20 years
this is the framework in which we operate. I have not
heard anything from the current Government to
suggest that has changed. Indeed, it is set out in
European law that there should be competitive—
John Robertson: We will talk about European law in
a minute. You said things were better than three years
ago. I have just given you a lot of figures that say it
is not.
Sarah Harrison: If I could come in here, you are
absolutely right; in a competitive market, which is the
framework in which we are operating, there is a place
for regulation. There is regulation, the first part of
which we announced the introduction of last week, to
put in place new standards of conduct to protect
customers.
John Robertson: Last week? Every single one of
these companies has been putting their percentage up
within months of each other for all those years and
you are telling me things are better. How are they
better?
Sarah Harrison: 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. We have been on to this. We have a
package of reforms coming in and I think the other
test of this is not just about waiting for the regulation.
It is how the industry is reacting. We have seen
companies, like SSE and others, coming forward and
saying, “Yes, we got it wrong. We need to do things
differently”. We are seeing the effects of some of that,
but that does not meant to say there is not a place
for regulation.
Q400 John Robertson: What effects? A 4.5% rise
over three years and, according to newspaper reports
today, tomorrow they will announce they have
increased their profits 30%. They have upped the
prices every year—30% profit and they up their prices
by 9%. That is outrageous. Come on, that is
outrageous.
Andrew Wright: In a competitive market it is for the
companies to set their prices. We are doing everything
we can to try and make this market as effective as
possible, including some of the most dramatic
interventions or the most dramatic interventions since
liberalisation to make it easier for consumers to
engage in the market and hold companies to account.
The level of profits the companies are making—
John Robertson: Who is holding the companies to
account here, by the way? I must have missed
something. If it was not this Committee, who brings
them to account? I must have missed you doing
something.
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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
question that more needs to be done and what Ofgem
is putting in place in the retail market is doing that.
John Robertson: So are the—
Sarah Harrison: But it is also about making sure that
when the companies foul up, and they have done, that
we are there to take the action and to put in place the
financial penalties and to make sure that their action is
drawn to wider public attention. The impact on these
businesses from a reputational point of view is
significant when the regulator intervenes and, quite
rightly, we see those companies standing up and
accepting when they get things wrong.
Q401 John Robertson: Hang on a second, these are
the same companies who have talked about 2% and
3% profits on the retail side and yet on the generating
side they are making 17%, 18%, 19%, 20% profit.
You said earlier on, “Forcing companies to publish
figures is difficult and we will not look at it”. You are
the regulator.
Andrew Wright: No, we—
John Robertson: Hold on a second. You talked about
Europe as well. Customer Focus drew attention to
powers under the EU Electricity and Gas Directives
that Ofgem could use to force suppliers to disclose the
relevant data. Why are you not using these bodies and
these powers?
Andrew Wright: All right, let us—
John Robertson: Is that not a help? I have to tell you,
I still have a real problem. When those companies
gave the dividends out to the shareholders, I asked
them whether they included the generation and the
retail profits. They said yes, they put them out
together. Well, if they can put them out together and
give dividends to the shareholders in the United
Kingdom we should be able to find out exactly how
much money is involved.
Andrew Wright: All right, let me go back to the first
of your comments. We have done more than any
comparable regulator to increase the transparency of
these companies and to make it clear where they are
making money, in the generation business, the supply
business, in a consistent and fair manner right the way
across the whole Big Six, whether they are
internationally owned or UK owned. We are having
this discussion today partly because we have made
that information available. I think we have a strong
commitment to greater transparency in this market.
It is for the companies to explain their profits and to
explain their prices. Our job is to make the
competitive market as effective as possible and we are
not apologists for this market. We are on record,
through the retail market review and the probe, in
saying the competition is not as effective as we would
like and we are putting in place radical measures to
simplify the market—once again, probably more
radical than any comparable sector—to try to make
that work more effectively. If you wanted, there could
be a legitimate public debate about whether
competition is the right way to manage this sector, but
this has been UK policy—
Q402 John Robertson: Hang on a second, to get the
gist of it, you have to get people come and give us
the information. We are not getting that. You did say
you had done an investigation into the alleged
manipulation of gas prices and you reported that
September last year. Eight months down the line, what
has happened?
Andrew Wright: We have been working hard on this
investigation, working closely with the FCA.
John Robertson: Eight months.
Andrew Wright: The investigation is still underway
and it is our policy not to comment on the progress of
current investigations that could lead to enforcement.
John Robertson: Are we likely to get something
this year?
Andrew Wright: I am not going to comment on how
much longer it is going to take.
John Robertson: This is getting worse.
Andrew Wright: No, it is what we have to do. It is
appropriate that we do not comment on ongoing
investigations that could lead to enforcement. That is
important in enabling us to do our job properly.
Sarah Harrison: It is important for the simple reason
that at the moment when you are conducting
investigations, you want to create a climate that allows
people to come forward with information. By being
open and transparent, as attractive as it might be, you
might compromise your ability to be able to do that.
So there is a reason behind this. That is not to say,
though, that we are not obviously committed to
progressing this investigation and I can assure you
that Ofgem is putting the priorities and resources in
place to do that, but also in this case working very
closely with the Financial Conduct Authority which is
a key other regulator in respect of these market
manipulation allegations. We are also doing so in the
context of looking forward to receiving new powers
that will be given to us by Government as part of the
implementation of the directives put in place to tackle
the market manipulation, abuse and insider trading
that, if you like, are the subject of some of the
allegations that you have referred to.
Q403 John Robertson: Part of the problem is—
Mr Lilley: So you are stalling—
John Robertson: Hang on a second, Peter. Let me
finish and then I will let you in.
Part of the problem is how long it takes to get your
judgment and while we wait people are having to pay
the increased prices and are wondering whether they
can actually pay their bills. We know that people do
die of hypothermia in winter and we have had a rather
cold spell. If we do not allow these people to get as
cheap as possible fuel and energy then we have not
done our job. You take too long to do it. You are
effectively closing yourselves down. The Opposition,
which I am part of, have already said they will close
you down. So my question to finish off is: can you
afford not to have increased powers and to use these
powers to bring these companies to boot?
Sarah Harrison: Absolutely we need the right
powers. To be clear, when we have found ourselves in
a situation where we don’t think we have the right
powers we have been the first to seek them. Two
examples: the powers to be able to award financial
redress to customers when, for example, they have
been mis-sold to, is a gap in our armoury. We are
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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
those forward.
Q404 John Robertson: Are you using the EU as
well, because you have not done that? Will you go to
the EU and use the EU REMIT to try and bring these
companies to boot?
Sarah Harrison: This is in relation to wholesale
market transparency and pricing?
Andrew Wright: Yes, exactly. First and foremost—
John Robertson: You are a bit reticent to do it?
Andrew Wright: No. There are two things. First of all,
the Government is in the process of putting in place
the powers that we need to investigate and enforce
under REMIT, which will enable us to get access to
the information that we need to be able to do that. On
top of that, the European regulatory agency, ACER,
will be routinely collecting all the trading data across
the whole of Europe, which will make a huge
difference to our ability both to monitor and to enforce
and indeed speed up our enforcement because we will
have access to that data immediately without having
to go to market participants to ask for it.
John Robertson: Sorry, Peter.
Q405 Mr Lilley: No, I just wanted to reinforce your
point because it seemed Ms Harrison was saying that
you are deliberating stalling until you get more
powers. Did I correctly interpret that?
Sarah Harrison: No.
Mr Lilley: You gave that as a reason for taking a long
time, that you were going to get—
Sarah Harrison: No.
Mr Lilley: So it is not a reason?
Sarah Harrison: No, I think it is important to know
that investigations like this take time and—
Mr Lilley: Why did you mention the fact that you
were going to get more powers in future?
Sarah Harrison: Because the REMIT regulations, the
directive, has been established to give national
regulatory authorities like Ofgem and others in other
member states the powers to be able to—
Mr Lilley: So it is not a reason that it is taking more
time?
Sarah Harrison: But the point is—
Mr Lilley: I am just trying to establish that fact. Do
not bother to answer any other questions that I
haven’t asked.
Sarah Harrison: No, of course. I am telling you—
Andrew Wright: The absence of that power means it
does take longer to get hold of the information that
we would otherwise be able to get in a straightforward
manner. This is potentially a long and complex
investigation and we may not have reached a
conclusion by now in any case, but that is a fact of
life at the moment.
Q406 Mr Lilley: Just pursuing the point of my
colleague, Mr Robertson. He is of the opinion that this
is not a competitive market and you are saying, “Oh,
we are assuming it is a competitive market”, in which
case it is not quite clear why you are carrying out an
investigation. Surely it is supposed to be competitive.
You are looking to see whether it is operating as a
competitive market or as an oligopolistic one. The
symptoms of being an oligopolistic market and of
oligopolistic power being exploited would be
abnormally high returns on capital and abnormally
high profits. Now, have you established whether or
not they exist? It can’t take eight months.
Andrew Wright: That is two questions. First of all, it
is quite possible to get individual instances of market
manipulation and insider trading and market abuse in
competitive markets. That is a separate issue.
Secondly, we are not apologists for the retail market.
We have been clear that we think this market is not
competitive enough.
Mr Lilley: Sorry, I just asked a simple question. Have
you tried to establish whether there are excess profits?
Andrew Wright: In retail or in wholesale or—
Mr Lilley: In this market.
Andrew Wright: In the retail market we have done a
lot of work looking at the competitiveness of the
market, including looking at profits and whether or
not companies raise their prices more quickly than
they drop them, whether they are making excess
profits, comparing that against other sectors. We have
done a lot of that sort of work, yes, and that is all in
the public domain.
Q407 Dr Lee: If they are buying and selling to
themselves they can make the profits less in retail and
more in the generation sector. You have to look at the
total profit across the entire company. You can’t just
do it in retail.
Andrew Wright: I do not want to be complacent
enough to give any of the markets we look at an
absolute clean bill of health. In the generation market,
the power stations that are at the margin, the gas-fired
power stations, appear not to be making any money at
all at the moment. Companies are closing those
stations and mothballing them because they are
making insufficient profits. That does not look to me
like a market where the competition is not sufficient.
Having said that, we continue to monitor the market.
We look for individual instances of market abuse and
we look for evidence of anti-competitive behaviour
and problems with the market. We do that all the time.
Chair: We have the Secretary of State outside, so we
will just finish up with one final question.
Q408 Dr Whitehead: When you did your retail
market review in October last, you proposed a pilot
scheme for vulnerable and sticky customers and you
said that you would set up a working group and
undertake pilots, possibly. How is that coming along?
Andrew Wright: Yes, we have started that. We are
focusing very much on getting the statutory
consultations out on the retail market review at the
moment, but we have already sent out the initial
letters to establish that process. Do you have a
timeframe, Sarah?
Sarah Harrison: Yes. The workshops met for the first
time and it is worth bearing in mind that what this is
about is trying to look, as you say, at those particularly
sticky customers who are the least engaged and who
are going to find it more difficult to engage in respect
of the reforms that Ofgem is putting in place.
One of the proposals on the table is something we
have called the Market Cheapest Deal, which is a
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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
bills information about the cheapest deal available in
the market, even if it were not from that particular
supplier. The workshops are about trying to work
through the mechanics of that as an option, but also
to look at, if you like, what sits behind that idea. That
is about trying to provide an “at a glance” solution to
make it easier for customers who struggle to really
engage in the market to be able to see very readily the
best deal in the market.
I think it is interesting to note that, despite some of
the initial opposition, let us call it, from the industry
to that idea, nonetheless we have seen evidence that
some suppliers are beginning to move into that space.
It is interesting to note that EDF Energy’s Blue Price
Promise commits to notify its customers of any
supplier deal that is more than £1 cheaper a week than
its own deal and not put in place any termination fees
if the customer then wants to switch to that deal. I
think this is an important area of the concept of never
knowingly being undersold that we will want to
explore now that our working group is up and running
not just with the industry but, critically, also with
customer groups who have some very good thinking
and ideas about this.
Q409 Dr Whitehead: You also said to us a little
while ago that you thought increased data-sharing
would help identify affordable warmth group
households, for example, under ECO. What steps are
you taking to advance data-sharing among
companies? Are you considering an obligation on
data-sharing or similar?
Sarah Harrison: Two things I suppose. In terms of
sharing information, for example, about customers
who might be in receipt of certain benefits, we are not
in the lead on that but what we have observed, in
particular through the conclusion to the CERT and
CESP schemes, was that suppliers and generators
were able to match and verify their information
against DWP data so that they could be assured that
the measures were actually being installed in the
households for whom they were intended. Of course,
the value of having access to that is it reduces the
search costs associated with targeting these measures.
We are supportive of working with Government to the
extent we can to see further progress in that respect.
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 priority
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, 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.
Chair: Thank you very much. That has been very
useful for us.
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
Committee. Delighted to see you as ever, but we are
disappointed not to see the Minister of State.
Mr Davey: I do not think there is any particular reason
why he should not be here, but I am not quite sure
where he is today. I am sorry if I am not good enough
for you.
Chair: No, I was not casting any aspersions on you
at all. I am sure you will answer all the questions we
have very fully, but it does seem to reinforce the parttime nature of the Minister’s role if, on his first
scheduled appearance at the Select Committee, we get
a last-minute message saying he is not coming.
Mr Davey: I did not realise it was last-minute. It has
been in my diary for some time. I have to say, I think
Michael is already making a big contribution to the
Department and I am sure you will see that when you
do meet him. I think the links he is able to bring
between DECC and BIS are a positive thing. As he
has already remarked on a number of occasions, the
companies he is seeing in his role as Energy Minister
are many of the ones he was seeing when he was BIS
Minister, so that is getting a very good message out.
Chair: So, the fact we had a full-time Minister of
State for the previous two and three-quarter years was
an unnecessary waste of ministerial time.
Mr Davey: No, I would not say that. I think a huge
amount of progress has been made in that period, but
Michael is a Minister with exceptional talent.
Q411 Chair: Right, okay. We are on our third
Minister of State in about nine months. You have lost
two of your most senior officials in the last few weeks.
Ben Moxham has left No. 10. We noted that the Bill
took four months to appear after we had commented
in detail on the draft. We note that a further four
months has elapsed from the completion of the Bill’s
Committee stage before it returns on Report next
month. Would you say this is a sign of a Department
that is functioning smoothly?
Mr Davey: If you don’t mind my saying so,
Chairman, if those same facts were described in a
slightly different way, you would reach a different
conclusion. For example, the Energy Bill and EMR is
on target, if you said that, which is true. It is on
schedule, as we originally said it would be. We have
kept to the timetables, as we originally said we would.
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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
and is only going to come back to the House after the
recess is because it was always a carry-over Bill. You
have to do the final stage, as you know, in the
Commons in the following session of Parliament to
meet the carry-over procedure rules. It might have
been taken this week, but there was a desire to have
the Marriage (Same Sex Couples) Bill debated. After
the recess, it is the next Bill scheduled to complete its
final stage in the Commons. It seems to me the
legislation is very much on track as always planned.
As for officials, I have to say I cannot speak for Mr
Moxham at No. 10. I know there is already a
replacement there, but for my own officials, the
particular individuals, movement is a normal part of
their career development. There is nothing unusual
about that. Senior officials come and go. With our new
Permanent Secretary, Stephen Lovegrove, I think we
are in an extremely strong position and the morale in
the Department is very high.
Q412 Chair: When you meet people from the energy
industry, do they not sometimes say to you that they
are concerned that some matters, including the Bill,
are progressing more slowly than they would like
from the point of view of making new investments?
Mr Davey: The industry and investors always say they
want the next bit of the picture. I think the question
to which we should be held account is whether or not
we are giving that information at the time we said we
would. The issues now when you talk to investors are
not the issues that you were raising with me when I
first came before you because they have all been dealt
with. The issues now are things like the draft strike
prices for the contracts for difference, which we said
we would publish in July and we are on schedule to
publish them. That obviously is a critical part of the
next stage. Most of the investors I talk to are now
focusing their minds on that.
Q413 Chair: Why do you think so little investment
is taking place in new generating capacity?
Mr Davey: There was inevitably going to be a bit of
a hiatus as we changed the legal framework. While we
got the renewable obligation certificates and banding
review done last July, which has helped and we have
seen some investment as a result of getting that
decision, clearly those investors who are looking to
the first contracts for difference when the new
obligation band certificate system closes are waiting
for the draft strike prices, as I have mentioned.
I would say that we have structured the process so
that there are go-early options for investors. They do
not have to wait until the Royal Assent. That is why,
when we set the draft strike prices in July, companies
who want the final investment decision enabling FiT
CfDs, the core investment contracts, in the Bill will
be able to start talking to the Department to sign those
and in March we published the criteria that we would
use to judge those. I think we are going to see the
investment chain really get going at this juncture,
which is frankly when one would have expected it to
start getting going.
Q414 Chair: One could summarise the current
situation as saying nuclear negotiations stalled;
investment in coal obviously unlikely until we have
CCS; the gas investors are all holding back to see if
they can make more money out of the capacity
market; and a lot of the renewables are waiting for the
strike prices. At a time when there is increasing
concern about the overall capacity available in the
remainder of this decade, it is a bit worrying that there
is so little new investment happening, isn’t it?
Mr Davey: You could describe it that way but I think
that would be inaccurate and unfair. First of all, we
are seeing investment under the renewable
negotiation. We are seeing at least one gas plant being
built in Carrington. The nuclear negotiations are not
stalled. They are intense and lively and, I certainly
believe, near a conclusion. This will be a remarkable
thing because no previous Government for a long time
has arrived at that position. Rather than the negative
spin you put on it or interpretation you put on it, I
think the reverse is the case. With CCS we are at the
preferred bidder stage with both the Scottish
Aberdeenshire project and the Yorkshire project to go
ahead with probably the biggest CCS projects in
Europe. Again, progress. I am not apologising for
keeping to my timetable for draft CfD prices.
Q415 Chair: The spin I was putting on it was not
negative so much as concerned that, at a time when
we are anxious about the availability of supply, the
Government’s position seemed a bit complacent about
not really worrying about the fact that very little is
actually happening.
Mr Davey: Can I say we are absolutely not
complacent. We are engaging with Ofgem and
engaging with National Grid. We are looking at the
projections and I think you will see in some of the
announcements we will make in due course that we
have a very clear strategy, on which we have been
consulting and working with industry and across
Government.
Q416 Chair: We have arrived at a situation now
where the Treasury seems to be leading on the
nuclear negotiations.
Mr Davey: That is not true.
Chair: The gas strategy was announced by the
Chancellor of the Exchequer. The changes in tariff
policy regulations were announced by the Prime
Minister at PMQs on a day that DECC had not been
informed about. Does DECC have any role in energy
policy these days?
Mr Davey: I am delighted that so many people across
Government are so helpful, but I do think, again, the
way you characterise things is slightly inaccurate.
First of all, we are in charge of the nuclear
negotiations. We are working closely with the
Treasury, as you would expect. Would you seriously
think we should not work with the Treasury on
something as important as this? But we are very much
leading them, so it is not the case with nuclear that
the Treasury are leading.
As for the gas generation strategy, we developed it.
We had the pen. It was agreed with the Chancellor
that he would announce it at the time of the Budget.
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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
agreement ahead of the Budget. The position the
Prime Minister took at Prime Minister’s Questions
was in response to a question. I would point you to
the fact that Ofgem were announcing their conclusions
for the retail market review a few days after that
session of PMQs and the proposals that are going
forward for tariff reform are based on the retail market
review done by the independent energy regulator. I
think those facts as I have just described them slightly
jar, again, with your interpretation.
Q417 Chair: Is the Government still serious about
its energy reforms and the need for more low carbon
investment or is it now pinning its hopes on the good
burghers of Sussex allowing their county to be dug up
to discover lots of shale gas and we are going to have
an almighty dash for gas?
Mr Davey: Our low carbon investments are very
strongly committed to by all people across the
Government. They are central to our energy strategy.
We have the levy control framework that was agreed
last year. We have a tripling of support for low carbon
to £7.6 billion by the end of this decade. We have the
Energy Bill that is reforming the electricity market to
provide the world’s first ever low carbon electricity
market. This is not a sign of a Government reneging
on its low carbon agenda, far from it. I think the shale
gas agenda is extremely exciting, too. These are not
mutually exclusive. Although we need to invest in a
lot of low carbon, whether it is renewables, new
nuclear or CCS, we will still need an awful lot of gas
over the next two decades, three decades or more. All
our analysis for decarbonising our economy and
society shows that, including our detailed carbon plan.
There is this myth that it is low carbon or gas. It is
low carbon and gas and the question people have to
ask themselves is, “Do we want to increasingly rely
on imports of gas as production of gas from the North
Sea declines or does not increase to what it used to be
and we have to import a lot more or, if there is a
potential opportunity for onshore gas being produced
from fracking, do we close down that option?” I think
we must keep it open. I think we must explore that
option. We are doing that vigorously, though there are
other people who disagree with the vigour with which
we are going about this. We are doing it to make sure
that it can be done in a way that takes the public with
us and can be done in a way that is acceptable and I
think we are leading Europe again in that.
Q418 Albert Owen: I just wanted to come in on a
couple of those points. Can I just go back to the role
of the new Minister of State and BIS? Who is his
boss? Is it your friend and colleague—
Mr Davey: It is the Prime Minister, probably.
Albert Owen: No, whose Department does he work
for? Does he work part-time in your Department?
Does he work for BIS and seconded over to your
Department? What hours do you expect out of him?
What duties do you expect out of him? Importantly,
the primary role of this Committee is to scrutinise
your Department and yet we have not had any clear
indication from you or your Department what
responsibilities that Mr Hayes had have been
transferred over to any other Minister. Is Mr Fallon
doing it part-time or have other Ministers been given
extra roles as well?
Mr Davey: If there are particular questions about the
ministerial response I am very happy to answer them.
The ministerial responsibilities for Mr Fallon are on
the website. They are not hidden away. They are
very transparent.
Albert Owen: Why have you not told us about them?
The question was to you, from us, why haven’t you
told us about them? We hear in the media that we are
going to have a different Minister of State. We hear
in the media that Mr Hayes has been promoted to have
an internal role within the Conservative Party. What
does that say about your Department and energy
policy?
Mr Davey: We have had the benefit of the work of
John Hayes, who took the Energy Bill through the
House of Commons, with some aplomb I should
add—
Albert Owen: With a what, sorry?
Mr Davey: With some aplomb.
Albert Owen: Right, okay. Is that what you call it?
Mr Davey: Then the benefit of Mr Fallon is I think
extremely good for energy policy. The fact that Mr
Fallon brings a wealth of skills from his previous
career as well as the benefits he has as a BIS Minister
is something to be welcomed. I have talked to many
people in the industry who think that is a good thing.
Q419 Albert Owen: You are comfortable as
Secretary of State for Energy and Climate Change that
you have a full-time Minister being replaced with a
part-time Minister?
Mr Davey: I think the question for me is can the work
that needs to be done get done. Everything that I have
seen from Michael is that it is getting done in a very
professional, very diligent way. He is an extremely
hard-working Minister.
Albert Owen: I am not judging Mr Fallon on his
ability.
Mr Davey: Therefore, I think this Committee and you,
Mr Owen, should be relaxed about that.
Albert Owen: I am very relaxed. I just need some
information from you. Are Mr Hayes’ responsibilities
going to be spread between other Ministers or are they
going to be taken over in a part-time capacity by a
BIS Minister?
Mr Davey: There is some look at the ministerial
responsibilities that Mr Fallon has both at BIS and at
DECC to see if there are things that can be taken off
his list of things. We have already, for example, taken
off him, from DECC, the work that Mr Hayes was
doing with respect to the deregulation agenda and
Baroness Verma is doing that. I believe Dr Cable has
done similar things at the Department for Business,
Innovation and Skills. The ministerial responsibilities,
I stress, are on the website. If you would like us to
write them—
Q420 Chair: I am very sorry to interrupt you. Just
on that point, I have looked at your website in the last
two or three minutes. The last update on Mr Fallon’s
responsibilities was on 28 March and it said, “The
exact portfolio of the Energy Minister is still to be
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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
Michael Fallon in addition to his current role as
Minister in the Department of Business.”
Mr Davey: I beg your pardon. I assumed it was on
the website. It ought to be on the website. I will ensure
the website is updated.
Chair: Two months into his job—
Albert Owen: I am very relaxed but I am still not
clear. Do you know what his responsibilities are,
Secretary of State?
Mr Davey: Of course I do.
Albert Owen: Okay, so you will let us know in detail
what they are?
Mr Davey: Of course. They are not a secret. I am
sorry that they are not on the website.
Albert Owen: You did tell me they were on the
website.
Mr Davey: Yes, I did and I made a mistake. I
absolutely apologise—
Albert Owen: We all make mistakes.
Mr Davey:—that I do not manage my website on a
daily basis.
Q421 Albert Owen: One final point, Secretary of
State. You said that some of Mr Hayes’
responsibilities had gone to your colleague in the
House of Lords. For scrutiny purposes, it is going to
be difficult for us to scrutinise the responsibilities that
she has at DECC questions. Is Mr Fallon going to be
able to answer some of those questions or, indeed,
yourself?
Mr Davey: This is not a new thing, to have a
Minister—
Albert Owen: I am not saying it is new. I am asking
specific questions.
Mr Davey: Therefore, in terms of the previous
practices at DECC oral questions or, indeed, the Select
Committee, where you want to ask Ministers
questions about responsibilities of other Ministers,
you are very free to go ahead. Of course I am
responsible for all policies, so you can ask me any
question you like in the Department.
Q422 Albert Owen: Okay. On that one, sorry, just to
drill it down, what Mr Hayes had as a responsibility
has been transferred up to your colleague in the House
of Lords. You will answer for it in the House of
Commons or will Mr Fallon?
Mr Davey: I think it could be either Mr Fallon or
myself. When we, for example, are doing topical
questions you will have known from not just my
Department but other Departments that we often
decide at the last minute who is going to take a
particular question.
Albert Owen: Sure, but a specific question?
Mr Davey: If it was a written question, for example,
it almost certainly would be answered by Mr Fallon.
Q423 Ian Lavery: The general public are very
interested in the cheapest tariff proposals, which was
outlined by the Prime Minister at PMQs. Your frontline Minister, Greg Barker, stated that the detail of the
cheapest tariff proposals will be set out in secondary
legislation. I wonder if you could give an idea of how
the mechanics of forcing suppliers to put consumers
on the cheapest tariff will work in practice.
Mr Davey: As you know, the detail reforms have
come from the regulator, from Ofgem, who I know
you have been talking to just now. What we are doing
in the Bill is putting statutory backing to those
proposals, but it will be Ofgem who will take them
forward. I understand they will start implementing
them this summer and hopefully there will be full
implementation by March 2014. There are a number
of elements to it, which we could go through.
The element that you have particularly raised is that
there are some customers of some energy companies
who are on so-called dead tariffs, tariffs that are not
currently available in the market. They tend to be
uncompetitive, so those customers are paying
significantly more in some cases than they should be.
Under Ofgem’s proposals, which we strongly support,
those companies will have to move them down to the
tariff they have of that type, whether it is a variable
type or a fixed type. Normally, in these instances, it is
a standard variable tariff that has become a dead tariff
over time. That is one example that you mentioned in
your question but, of course, there are many other
aspects of the retail market review and the tariff
reform that Ofgem have put forward and which we
support.
Q424 Ian Lavery: How do you measure Ofgem’s
performance in delivery of policy objectives?
Mr Davey: In terms of the tariff reform or more
generally?
Ian Lavery: More generally.
Mr Davey: The Government when it came to power
did a review of Ofgem, had a lot of discussion with
the industry and consumer groups and so on, and we
decided that there were a number of things we needed
to do. The strategic policy statement, the SPS, is
probably the core of it in terms of the accountability
and the framing of what Ofgem does. There are
clauses in the Energy Bill to take that proposal
forward and it will set out in clear terms the different
roles played by the Department and particularly
Ofgem and how that will work. I think that strategic
policy statement is probably the core of how Ofgem
will be held to account by the Government, yourselves
and others.
Q425 Ian Lavery: In relation to Ofgem, it would be
interesting to hear how you, as the Secretary of State
for Energy, currently rate Ofgem’s performance. If
you have obviously scrutinised it, which I am sure
you have, what areas for improvement have you
identified as priorities?
Mr Davey: Let us start off by recognising that it is
very important that Ofgem has its independence in the
EU’s third energy package and I would support, as a
former Competition Minister, the importance of
independent regulators. It is important that people
recognise they have that. Because of investment and
because of consumers, it is important that there is
certainty there and that people do not think
Government is going to second-guess or interfere with
the regulator. Of course, we take an active interest in
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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
the efficient and fair running of our energy markets.
I could point to one or two things that I think are
welcome from Ofgem in recent times. First, the retail
market review we talked about. When we were in
Opposition we were arguing that we needed to have
less complexity in the tariffs. Ofgem, through the
retail market review, are simplifying the tariffs and I
think that will prove to be good for competition and
good for consumers. They have not yet told us their
conclusions from the consultation they have done on
liquidity in the wholesale markets, but we very much
welcome that they have said in their consultation
paper that they intend to intervene to improve
liquidity in the wholesale market. That is something
that I strongly support and one of the reasons we put
in the Energy Bill some reserve powers to make sure
that the changes that come from their deliberations
will actually happen. Those two examples of
improving competition in the retail market, improving
competition in the wholesale market, are welcome
developments and Ofgem deserves credit for taking
them.
Q426 Albert Owen: Can I just come in on Ofgem’s
role in particular? I understand what you are saying
about its independence and getting on with it. As you
know, there is an all-party group on the off-grid gas
supplies that has come up with a report that has been
debated and responded to by your Department. One
of their key recommendations is to enhance the
responsibilities of Ofgem to the off-grid. I asked your
predecessor about that. He said that it would be a
matter for Ofgem themselves to make the request.
When I asked the Chief Executive of Ofgem, he said
that is a matter for Government. Can I ask you, as the
representative of Government here, whether you
would welcome what the all-party group has done to
have equal regulation off-grid as they have on-grid?
Mr Davey: I am very happy to get back to you on
that, Mr Owen. I have not looked at that detailed
proposal. Again, it has not been made to me from
Ofgem and I am afraid I was not aware—
Albert Owen: No, just for clarity, from the all-party
group.
Mr Davey: I was not aware of the all-party group’s
recommendation. I apologise that I was not aware of
that, but I think it is worth reminding the Committee
that when we have considered increasing the powers
of Ofgem, we have acted. For example, for—
Q427 Albert Owen: With respect, can I just ask your
opinion on this? I obtained the opinion of your
predecessor, who said it was up to Ofgem and they
would be minded to take it on board if the regulator
made that proposal, but the regulator said very clearly
that it was up to Government. You do represent the
Government. What is your opinion, just your opinion
as the current Secretary of State?
Mr Davey: I am sure that we do not need Ofgem’s
permission to give them extra powers. We are the
Government. We can legislate to give Ofgem extra
powers if we so chose to. I can’t answer for what my
predecessor particularly said but I cannot see why, if
we chose to give Ofgem more powers, we could not
do that. We are doing it in a number of areas to
enhance protection for consumers. As for the
particular example that you have cited from the
APPG, I would have to study that.
Q428 John Robertson: I asked questions to Ofgem
about the connections with Europe. I know Europe
can be a bit of a problem for this Government, but
your wing should be okay in relation to using it. I
asked them Ofgem if they would go and use the EU
powers. It was Consumer Focus who drew to our
attention the EU electricity and gas directives, which
Ofgem seem somewhat reticent to use, and also the
EU REMIT and legislation as well to look at how we
can get more information on the Big Six to find out
exactly what are in their bills and why they are in the
bills. Ofgem seem to have a problem with using it.
What do you think? Do you think they should be
working with Europe on this?
Mr Davey: My understanding is Ofgem have been
working with Europe.
John Robertson: No, not in talking to them.
Mr Davey: In the development of the REMIT powers,
I thought both the UK Government and Ofgem had
contributed to the debate at European level. As you
will know, we are implementing the REMIT. We want
to be one of the first countries in the EU to transpose
that. Some of the powers that were in REMIT we
already had in our legislation, but there were others
that we needed to consult on. We have consulted on
them. Ofgem has been very much part of that, not
least because they will be powers given to Ofgem. I
am surprised, Mr Robertson, they said that because
they are involved in the transposing of those powers
because they will be powers given to Ofgem.
John Robertson: I am sure they have heard what you
have said.
Q429 Dr Lee: Moving on to wholesale energy prices
and the future of UK gas prices, we are likely to
become increasingly dependent on supplies of gas by
LNG as the contribution from the North Sea declines.
Won’t this make the UK increasingly exposed to
prices in Asian markets?
Mr Davey: One of our long-term concerns is to make
sure that we have a diverse energy supply, that we are
not over-dependent on a particular energy source and,
in this case, for our gas, which is going to be a very
important part of our energy mix, it is important that
we are not dependent on one particular source. But
we do have a very liquid gas market in the UK,
probably the most liquid in Europe if not the world.
Yes, we have gas supplies still from the North Sea and
we are doing an awful lot to enhance those supplies
because they have been declining. We want to halt
that decline if we can, but we also have pipelines from
Norway and from the continent as well as LNG. The
point I am trying to make, Dr Lee, is that we have a
variety of supplies and that is the right thing, but I do
not disagree with your point that we should not be
over-reliant on one form of energy because it exposes
our economy.
Q430 Dr Lee: Yes, that is all very well. The problem
is that the Asian economies need the energy at the
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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.
Their seasons are the same, so the likelihood is we are
going to need it as much as when they need it. If you
add into the mix the rather bizarre decision by the
German Government over nuclear and Fukushima in
Japan, the likelihood is we are going to be dealing
with higher prices. The tanker coming out of the Strait
of Hormuz, it is going to turn left, isn’t it? It is not
turning right.
Mr Davey: If you look at the recent flows you are
right to say that Japan has seen some very high hikes
in the gas price it has been prepared to pay and that
has attracted quite a lot of the LNG that has been
around. That does not mean there have not been
tankers from Qatar and other places that have come
to the UK. You are right, LNG is one part of the gas
market that is much more global by the very nature
that it is on ships, but my point to you back is that we
are not dependent on LNG. We have other forms of
gas from the North Sea, from pipelines from other
countries.
Q431 Dr Lee: Yes, but you said earlier that gas is
going to play a major part and we are going to need
significant amounts of gas. Fingers crossed, they can
recover further assets from the North Sea, and
fracking delivers whatever, but the reality is that we
are going to be increasingly dependent on gas as coal
switches off. That is true and, in view of the fact that
our gas we get from Europe, the Norwegians are
going to start—if the Germans start paying more for
it because they are having to import more because
they have switched off their nuclear power stations,
the chances are we have high gas prices ahead of us,
don’t we?
Mr Davey: You are right to say that if you look at
some of the forecasts by the International Energy
Agency and some of the market analysts, they do say
that gas prices are likely to stay high and potentially
to go higher. One of the problems, of course, in
working out where the future gas prices will be is
understanding the underlying demands in the three
regional markets that we have in the world; the North
American market, the Asian market and the European/
North Africa market. That has been complicated by
things in Germany and Japan, the nuclear switch-offs
that you have referred to. It has also been complicated
because we do not know how much unconventional
gas we are going to get from fracking, particularly in
Europe and North Africa. I hope that will be
successful but, again, it is one of these uncertainties.
Q432 Dr Lee: Sure, and also it would be further
complicated by increased renewables because on cold
windless days you have to underwrite every wind
farm with gas. Moving on to the winter gas storage
problems we also have, we have pretty limited
facilities. What plans do you have to develop seasonal
gas storage capacity?
Mr Davey: A number of new gas storage facilities are
being built, but one of the—
Dr Lee: Whereabouts exactly?
Mr Davey: I do not know. My colleagues are not the
experts in this area. We could give you the exact
details. Some of these are fast-cycle gas storage
plants, which are quite interesting because they are
different from some of the storage plants we have had
previously in the country, which have been more longterm storage. It is quite helpful because it can deliver
the gas more quickly. There are a number that we have
under way.
One of the misunderstandings that we have seen, not
least in the headlines a few months ago when we had
that cold period, was that people seemed to think that
we depended on the gas from these storage facilities.
Because we have a diversified supply of gas, we take
gas on any one day from a number of different
sources, including the pipelines we have with Norway
and the continent, including LNG and including the
North Sea. Sometimes people think that the storage is
a critical part of the supply of gas to the UK on any
one day. That is not the case. It is part of the mix, but
not the critical part.
Q433 Dr Lee: Yes, but, of course, having that
capacity would allow us some buffer against a closure
of the Strait of Hormuz event, for example, would it
not, which is not beyond the realms of possibilities at
the moment, is it?
Mr Davey: I would suggest to you that if the Strait of
Hormuz closed you might be more worried about our
imports and the world’s imports of oil rather more
than about gas.
Dr Lee: I know, but the problem is a lot of our longterm contracts with the Russians are fixed oil barrel
prices. So it does have an impact.
Mr Davey: The UK does not have very many longterm contracts with Russia, as you know.
Dr Lee: Yes, but if those countries have those
supplies, they are going to look elsewhere for their
supplies and thereby drive up the gas prices coming
from elsewhere, which we use from our diversified
base. The American shale gas, the Norwegian gas, all
those prices will be lifted up by the fact that the gas
price from Russia has gone up because the barrel price
has gone up.
Mr Davey: If, Dr Lee, you are interested in the—
Dr Lee: Do you accept—
Mr Davey: I would like to answer your question. We
do a lot of work thinking about energy security where
we look with colleagues across Government about
“what if”. What if the Strait of Hormuz closes? What
if a pipeline has some maintenance problem or a strike
so that the pipeline is not getting gas to the UK? We
look at scenarios where we take two or three things
happening and say, “Would we be secure for gas
supplies if this, this and this all happened suddenly on
the same day?” We do that type of analysis because
you would expect us to do that. There may be some
security issues, I am not sure how that would play, but
I am very happy to share with the Committee some of
that work.
Dr Lee: You do not have sleepless nights about it, is
that what you are saying?
Mr Davey: No, I do not. I think we do a lot of
preparatory work and, if anything, we have stepped
that up.
Q434 Dr Lee: Okay. Moving on to comparing gas
and electricity prices within the European Union, your
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Energy and Climate Change Committee: Evidence Ev 83
21 May 2013 Rt Hon Edward Davey MP, Rachael Crisp and Gareth Baynham-Hughes
written evidence states that UK consumers are paying
the lowest gas and among the lowest electricity prices
in the EU15 when tax is included. However, when tax
is excluded UK consumers pay a significantly aboveaverage electricity price and slightly above-average
gas price. Why don’t you use tax-exclusive figures
to give a fairer representation of UK energy prices
compared with Europe’s?
Mr Davey: We use the ones with tax because that is
what people pay.
Q435 Dr Lee: Yes, but when you are talking about—
Mr Davey: Well—
Dr Lee: No, hang on a minute. When you are talking
about wholesale energy prices, that is net. It is
irrespective of tax. The price is not set on the markets
based on what the VAT level is in various countries.
We choose to add that on top of that. In this context,
we are trying to work out whether we are paying
significant sums of money wholesale, separate from
tax. I am not on about how much it costs Mrs Bloggs
down the road because she is paying VAT. I am on
about how much you are paying Vladimir Putin for
your gas, and that is not subject to VAT.
Mr Davey: If you are saying that there may be more
room for increased competition to make sure—
Dr Lee: No, candour; not competition, candour.
Mr Davey: Sorry?
Dr Lee: Candour.
Mr Davey: Candour?
Dr Lee: Yes, as in let us be transparent; let us
compare like with like is my point.
Mr Davey: You were able to deduce from our figures
that we presented after-tax figures, so we were pretty
transparent on that and we always have been. I think
one of the reasons we have done that is that is what
people pay. I think that is quite understandable. People
obviously want what they are paying, understandably,
and I do not disagree with your line of questioning,
Dr Lee. It is a fair question to say, “Pre-tax, are we
getting the best prices?” We are getting, as you said,
around average, a little above, in electricity and that
suggests that there is room for more competition. One
of the obsessions I have in policy in both retail and
wholesale markets is to make sure we have as
competitive markets as possible.
Q436 Dr Lee: Building on that, we have not seen any
new companies of significant size entering the energy
supply market. What do you see as the main barriers
to entry to provide the competition that you seek?
Mr Davey: You are talking about the supply to retail
customers now?
Dr Lee: Yes.
Mr Davey: We have seen quite a lot of smaller
companies. They do not yet have big market share,
but I think the recent trends are in the opposite
direction to the one you described, Dr Lee. One of the
reasons I am very keen on collective switching, which
I have regaled the Committee about before—this idea
of bringing consumers together so they can purchase
together and increase their buying power—is not only
does it get better deals for those customers who see
the deal that is good for them after joining a collective
switch, not everyone will but many do, but the auction
of a large number of accounts promotes competition.
It has an indirect effect for all customers because it
enables smaller suppliers to gain access to a larger
number of accounts at relatively low cost. Winning
new accounts in the energy business can be quite an
expensive process, from knocking on doors, from
mailing and so on, but the auction process—collective
switching, which I have been really pushing, as you
know, as Secretary of State—opens up in one go large
numbers of accounts. We have seen as a result of that
some of the small suppliers increasing their customer
base. I think the trend on that side is such that while
I am not saying we are there, we are seeing more
competition, not less.
Q437 Dr Lee: Okay. Finally, a question on liquidity.
Contracts for difference proposals under the Energy
Bill will require a liquid market in electricity
contracts, and yet Ofgem has been striving to improve
liquidity since 2009 with limited success. Does your
Department have any alternative arrangements if
liquidity does not develop?
Mr Davey: It is something we have been doing a lot
of work on, but Ofgem equally have been doing a
huge amount of work on it. They have learnt from the
period that you described where they have done
analysis for a number of years but, as I said in my
remarks I think to Mr Robertson, the latest
consultation had some very strong proposals and I
understand that GEMA are looking at them to make
final decisions following that consultation next month
and we look forward to their conclusions.
We have made it clear that we want to see much
greater liquidity in the forward markets. That is good
for competition. It is good for transparency. I think it
will help independent generators not just get contracts
for difference for electricity market reform but,
anyway, enable them to manage their risk better. It
will be one factor in helping them get power purchase
agreements so they can grow and compete with the
bigger companies. I could not have been clearer over
a protracted period that that is the direction of travel
that I support.
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.
Q438 Sir Robert Smith: One of the concerns raised
with us about what is affecting bills is, of course,
some of the levies for social and environmental
reasons that are put on to the energy bills. In your
submission you talk about how bills are now 11%
lower or will be £166 lower in 2020 by doing what
you are doing than they would have been without your
intervention. How have you come to that conclusion?
Mr Davey: In order to make sure we are being as
transparent as possible, the Government every year
does a bills and prices report that analyses the impact
of all our energy and climate change policies for
consumer bills and business bills. It is quite a detailed
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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
Robert, come from that work. What that shows is all
the different impacts on energy bills. The biggest, of
course, is the rise in wholesale gas price. We have
seen in recent years a 60% rise. Given wholesale gas
is about 50% of the average dual-fuel bill, you can
see why that has been the big driver of higher energy
prices.
But in our bills and prices report we look at the other
factors. We look at the network costs. We look at
margins. We look at overhead costs. We look at taxes
and we look at Government policies that you referred
to. When you look at the average dual-fuel bill, 9%
of it comes from Government policies. In 2013 that is
£112. Yes, we have added to bills, but it is by no
means the biggest increase in the bills. That is far
outweighed by the increase in wholesale gas prices
and network cost rises. It is also important to
remember what that 9% is going on. Some people
think it is all on low carbon; far from it. The majority
of the Government-imposed cost elements are on
energy efficiency and measures to tackle fuel poverty.
That often is forgotten when you read these articles
that say it is the Government who are driving up costs.
Our measures are designed to help people save energy
long term and also to tackle fuel poverty.
Q439 Sir Robert Smith: Do you think there could
be a clearer breakdown of those impacts on the bill to
the individual consumer?
Mr Davey: Quite a lot of energy companies do break
down their bills. Obviously they may do that in
different ways. One of the reasons why I think it is
right that my Department publishes the bills and
prices report is—we put out the information there and
let people challenge it, read it and debate it—is so that
there is an authoritative position. 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 what they otherwise would have been.
When you then project forward to 2020, that saving
is greater. Overall, if you look at all our policies
together, which I think is the only fair way rather than
just taking a little slug as some people like to do, we
are trying to cushion consumers from these high gas
prices that Dr Lee referred to. It is a worry. We can’t
control global gas prices, of course we can’t, but I
think our job as a Government is to try to cushion
people from the effects of those. That is why we have
taken those measures that are behind that analysis and
it is why it is one of my obsessions to try to help
consumers who are feeling the pinch with high
energy bills.
Q440 Sir Robert Smith: One of the concerns is that,
of course, the poorer consumers are paying the same
big chunk as some of the better-off consumers and,
therefore, that method of raising funds is more
aggressive than general taxation. How is the debate
held as to whether something should be a levy on the
bill or funded through the general taxation?
Mr Davey: 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.
Although you make that point that there may be some
poorer consumers who are not getting the benefits of
CERT or now ECO, yet are paying on their bills—
and that is a valid point—I note that Professor John
Hills’ report into fuel poverty, when he looked at
different ways of funding energy efficiency
programmes to help the fuel poor, saw a case for the
levy-funded approach, not least I think because it
might force energy companies to be more effective in
rolling it out. I think I am right in saying that he
thought it was a better way of delivering those
programmes. Gareth, do you want to add to that?
Gareth Baynham-Hughes: Yes. There is an
assumption built into the Hills review about the types
of measures that would be delivered through
investment in energy efficiency if it were done by
suppliers or if it were done by Government. The
assumption that was in the review was that
competitive pressures and so on would encourage
energy companies to deliver a more cost-effective
package of measures. I think that is something we
would expect to see under ECO. If you look at the
amount of money that used to go into Warm Front,
for example, compared with a similar amount going
in under ECO, we would expect more households to
be reached through ECO because it is more cost
effective per measure.
Q441 Sir Robert Smith: One of the other
suggestions to maybe smooth the burden is to have a
protected block of the tariff that is not subject to the
levy and then levy on those consumptions over that
protected block. Is that at all attractive?
Mr Davey: I have not looked at detailed analysis, but
I will give you my first instincts and it is the issue
that the Chairman has raised with me before about the
rising blocks. He will recall that when he was Energy
Minister he received the same advice that I get,
namely that there are some energy users who use a lot
of energy because they are large households who are
very poor. If you restructure the tariff system in a
number of ways, in the way you described of
restructuring the levy system, you might have an
unintended consequence of putting more weight on
some of these large households who are fuel poor. I
am not saying that necessarily would follow from
your proposal because I have not analysed it, but that
might be the outcome.
Sir Robert Smith: I suppose another concern would
be those who are not on the gas grid and rely on
electricity for their heating would be similarly
penalised.
Mr Davey: If they were high consumers, yes.
Q442 Mr Lilley: You measure that element of the
environmental levies and so on that falls directly on
household bills. The rest falls on industrial energy
costs, but you would agree with me, I am sure, that
ultimately all costs are borne by individuals.
Companies do not exist. They are simply composed
of employees, shareholders and customers. Could you
tell us what proportion of the total cost of all these
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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
proportion goes through industrial bills?
Mr Davey: I do not have that figure to hand.
Mr Lilley: I did put down a PQ and I received a very
confused answer, but it seemed to say roughly a third
goes on household bills and two-thirds via industry. I
think it was designed to confuse.
Mr Davey: I am happy to look out that written answer
and see if there is any way we can make it clearer for
you. If you have a particular point you wish to come
back on, then we aim to try to make it clearer.
Mr Lilley: That is what I am doing now. If it is twothirds to one-third, that would mean that the total cost
being borne is three times the figure that you quote.
Mr Davey: Let us be clear. In our bills and prices
report that I referred to before, we do not just do it
for consumers.
Mr Lilley: You do it for industry, but industry does
not exist. It is employees, shareholders and customers.
Industry does not pay the bill. Employees,
shareholders and customers pay bills.
Mr Davey: I do not deny the instance that you are
referring to, but the point might well be that the
people who own those industries that you are referring
to may not be only domestic residents because, as you
will readily be aware, many industries are
multinational and they have owners who live all round
the world, so we get into quite a complicated system
of the distributional effects of these levies. Moreover,
they may be a smaller part of the population compared
with the analysis that you would do on distributional
effects for consumers. If you are suggesting that it is
somehow wrong to separate the two, I would disagree
with you. I do not disagree with the fact that, of
course, it is individuals who pay bills, but I do not
think it is true to say that there is a complete mapover with other analysis in terms of the individual
with economic interest in the industries that we are
talking about.
Mr Lilley: No, but it is incomplete to present
households as if they are the people who pay the bills
and industries as if that is something that does not
consist of—
Mr Davey: I would be interested in the methodology
that tried to merge the two. I think it would be—
Mr Lilley: It is quite simple. You take the total cost
and divide by the number of households and you get
an average figure.
Mr Davey: Yes, but I do not think it would be an
accurate figure.
Mr Lilley: It would be an average figure.
Mr Davey: It would not be an accurate figure for the
impact on the UK domestic consumer for the reasons
I have already given you.
Mr Lilley: Some of it might go abroad, as indeed
does a large slug of the subsidies we pay, most of
which end up in foreign households. You never take
that into account.
Mr Davey: I believe in open markets and global
markets. As someone who believes in free markets
and free trade, I think that is an inevitable
consequence. The people who do not believe in free
markets and free trade, I think, would undermine the
prosperity of our country. Our policies should not be
protectionist.
Mr Lilley: The idea that subsidies are a symptom of
free markets is an interesting one. I will just round up
and say could we have an answer to the question: what
share of the total environmental levies goes on
households and what share goes on taxpayers and
industries, if so called?
Mr Davey: Yes, I have already said I will provide it.
Q443 John Robertson: On company profits and tax,
today’s Independent has said that struggling customers
prepare to receive the announcement that the SSE are
going to have a 30% jump in profits in its division
supplying gas and electricity to the UK. Now, given
that SSE put gas and electricity both up by 9% back
in October, what do you have to say about that?
Mr Davey: To make sure that energy companies’
profits are reasonable ones but not excessive, the
Government need to ensure that we have proper
competition both in the retail sector and the wholesale
sector. It is absolutely critical that the consumer is
not ripped off and our best way of doing that is with
competition. Of course, when energy companies have
poor behaviour with mis-selling, as we have seen
recently, it is absolutely vital we have strong
consumer protection laws and Ofgem can levy the
fines, which we have seen. Poor behaviour can be
cracked down on, but competition is in many ways
our bulwark to make sure that profits are reasonable
and, let us be clear, there have to be some profits.
John Robertson: 30%?
Mr Davey: Let me just—
John Robertson: When you are talking about—
Mr Davey: That is why we may well need more
competition. It is what I have been talking about the
whole time. I am absolutely not complacent about
this, Mr Robertson. We have to act.
Q444 John Robertson: You say competition is great.
They have all put their prices up within months of
each other, to round about the same figure. The
highest was 10.8% and the lowest was 7%. They are
all the same. Where is the competition?
Mr Davey: I think the price rises were different and
one of the major reasons for the prices going up was,
regrettably, the rises in global gas prices that Dr Lee
was talking about. We absolutely have to make sure
that the energy companies feel the heat of
competition. It is one of the reasons why I am, again
in answer to Dr Lee’s question, so keen to make sure
that through things like co-operative energy buying,
through tariff reform, that that competition bears down
on the energy companies. I think they should expect
that and they should expect me as Secretary of State
and Ofgem as the independent regulator to be very
hard on making sure we have the most competitive
market.
Q445 John Robertson: Seriously, I think you are
missing the point; either that or you are not getting
the right advice. The Big Six will tell you that they
are only making 2% to 3% profit. As a matter of fact,
your own statement that we had in previous times said
3% profit, but that is retail. If you go to generation,
they are making between 17% and 20% profit. When
they pay their dividends to shareholders in the UK,
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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,
“We are only going to give you a dividend on the
2%”. They say, “We will give you the dividend on the
17% plus the 2%.” They are ripping us off and yet we
cannot get hold of the figures. We cannot get hold of
the books. That was the reason I asked you a question
earlier on about Europe, who seem to be part of the
way of getting some of this information. We hear of a
company, npower, who now want to consolidate their
accounts in Malta. With the best will in the world, this
is a company that does not pay any corporation tax in
the UK. Please, how are you going to support the
people in this country?
Mr Davey: We are determined to support the people
in this country, whether they are consumers or
businesses, and we do support and have taken
action—indeed, the last Government started this in
2009—to get greater transparency in the accounts of
energy companies. They are now required to have
segregated accounts and, although that is a recent
development, I think it has improved transparency.
There is a recent report by BDO for Ofgem to see
whether or not there are improvements to that new
system to make sure it is as transparent as possible,
so you and others and Government and the regulator
can have that information. That transparency is critical
to enable us to take decisions as we need to. If you
want to talk about tax I am very happy to talk about
that, but I do think the transparency in the accounting
regime that the energy utilities face is very important.
Q446 John Robertson: But this seems to be related.
It is not just about energy, I know. I have a rather
large letter kicking about here from npower, from a
Mr Paul Massara who gave evidence to us, pleading
poverty always. I have to say, I understand what you
are saying, he may not be breaking the law, but we
are doing nothing to hold these people to account. We
have two companies who pay corporation tax to the
proper amount. We have three companies who pay
some, and we have this company, which pays none.
That can’t be right. One of them can’t be right and the
other five wrong. There is something not right here.
Mr Davey: Mr Robertson, I am not going to go into
the details of an individual company’s tax affairs, not
least because, not surprisingly, I do not know all the
massive details, but I will comment—
John Robertson: I only asked a basic question,
without being fair to all the—
Mr Davey: Can I just finish my answer, though? I did
note from your previous proceedings that Mr Lavery,
I think it was, had asked Paul Massara a number of
detailed points on RWE’s tax affairs. While there were
some interesting exchanges there, it is worth noting to
the Committee that, in his reply to this Committee and
the reply that I was copied in on, the argument he
made was that npower had been investing heavily in
plant in this country. They showed that they had been
the largest investor of the Big Six over the last few
years and the reason why their tax bills were what
people have been saying at this Committee was
because they had used the capital allowances passed
in Finance Bills by the last Government, and
confirmed by this because they were making that
massive investment. The capital allowances are there
to give tax advantages to companies which are making
that investment. While I completely agree with you
that we need transparency and we need to make sure
that companies, and not just energy companies, all
companies, pay the tax that they should pay, if we also
want to promote investment and encourage
investment, it is important that when a company uses
capital allowances, as Parliament wanted them to do
so, I do not think they should be criticised.
Q447 John Robertson: Okay, but this is the same
company that can’t tell us what they are generating in
this country. If they can do that, surely they can tell
us exactly how much money is involved in the
generation of energy. Let me explain it to you,
because you obviously do not know. You have the
generators and you generate the power. You put it into
a central area of which, funnily enough, the same
companies come around and buy it back off
themselves and then sell it to the customer. That
generating side is the one where they make the most
money and the retail one is the one they say makes
the least money. Why do they do that? Because it is
all a part of trying to hide the money at the other end
that can be hidden within the European and the big
multinational companies.
Let me go on to another thing about your own
Department. I wrote a series of questions on 10 May
and basically the questions were: “So, as the Secretary
of State for Energy and Climate Change, how much
has the Department given in subsidy to RWE npower
in each of the last five years, and to what projects the
money was earmarked?” I asked that for each one of
the Big Six, and I received this extensive answer. “The
data is not collected in the format requested and could
not be provided except at a disproportionate cost,”
which said to me you have not a clue how much is
involved, and yet I can go down the Library and they
can give me figures of projects and money where the
Government has invested.
Secretary of State, it is not good enough. We have to
hold these companies to account, and I do not think
you are doing the job properly if you do not hold them
to account. It is all very well making excuses for them,
but we have people who cannot afford to pay their
bills and we need to support them, not these
companies. They can afford to support themselves. If
they can support themselves in tax avoidance, then
they can certainly support the country in paying some
of the taxes that they are avoiding paying.
Mr Davey: You are absolutely right that we have to
hold companies to account. They have to be held to
account for the way they behave in the electricity
market and the way they buy and sell energy. They
have to be held to account for how they pay their
taxes. But I am afraid I reject your conclusion that
that is not happening and I can cite very recent
examples of record fines imposed on UK energy
companies for mis-selling, and I would have thought
you would have welcomed that, not failed to
mention it.
John Robertson: Of course you did.
Mr Davey: Moreover, Mr Robertson, in the Energy
Bill we have increased the support for consumers
because we have said that, where an energy company
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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
to the Government and go to the consolidated fund.
They go to help those consumers who lost out. That
is action that this Government is taking to make sure
that consumers who are mistreated get proper
recompense, and I think you should welcome that. I
would have thought you would want to welcome that.
John Robertson: I gave you the credit last time when
I said how well you had done. This time I am not
going to do that, so you do not expect me to be nice
to you all the time.
Q448 Barry Gardiner: Secretary of State, I was
very glad that you mentioned the BDO report and that
you are aware of that. You will probably recall that
there were eight recommendations that BDO made.
Do you happen to recall the responses that Ofgem
made to those eight recommendations?
Mr Davey: As I recall, what BDO said was, overall,
the way the accounts had been presented and
segregated was fair and reasonable. So their overall
judgment—
Barry Gardiner: The trouble of just reading
executive summaries, Secretary of State—
Mr Davey: Let me finish answering the question, Mr
Gardiner. You did not mention this in your question,
but for the record it is important that the full picture
is painted. BDO said that the overall approach was
fair and reasonable, but they asked for some
improvements and then we get to the
recommendations. My understanding is that Ofgem
have accepted some of those recommendations, but
one or two they have not. I do not know—
Barry Gardiner: Not one in its original form.
Mr Davey: Well, I don’t know if Rachel wants to—
Barry Gardiner: “We do not intend to take forward
this recommendation. We propose obtaining an
independent opinion at least for the first year, but not
necessarily from an auditor. We propose to take
forward a variation of this recommendation. We do
not propose to take forward this recommendation. We
do not intend to take forward this recommendation.
We propose to take forward a variation of this
recommendation,” and then the final two, “As a result
of our amended proposals and recommendation, 3, 7
and 8 are no longer required in their original form.”
In your response to Mr Robertson you pleaded BDO
in aid, saying that this was an example of the way in
which these companies were going to be held to
account and you praised the BDO report, but the BDO
report’s recommendations have not been taken up by
the regulator. That is the problem; critical
recommendations.
Mr Davey: I start by going back to the key point,
which you did not make, which—
Barry Gardiner: No, but you had already made it.
Mr Davey:—was that BDO said that they were a fair
and reasonable approach. They found no evidence of
distortions of company profitability. Let’s start with
that basis. They did make some recommendations, and
Ofgem have not taken all of them forward and they
have not taken some of them forward in the way that
they were proposed.
Barry Gardiner: They have not taken any of them
forward in the form that they were recommended by
BDO. They varied or not accepted every single one.
Mr Davey: I think, and I have always said this, that
we should keep this type of thing under review. This
is a very new regime. It has only been going a few
years. It is a unique regime, to my understanding, and
therefore I think it is something that should be
celebrated and supported. If there need to be more
improvements we are certainly happy to consider
them, but this was a report to Ofgem, not to the
Government. Ofgem have taken the views that they
have taken.
Q449 Barry Gardiner: Secretary of State, unless
you had raised it in defence to Mr Robertson, I would
not have brought it up. I wanted to ask you about fuel
poverty and the Hills review. The spend on fuel
poverty overall, as you know, has been cut
dramatically. In 2010–11 it was £319 million. In
2011–12 it was £97 million. Five days ago you
released the latest fuel poverty report from your
Department and under both the Hills definition and
the old 10% definition, fuel poverty has decreased and
I want to give you credit for that. You will know that
under the old definition it has gone down by 9.5%,
and under your new definition it has only gone down
by 4.3%—but that is because, of course, the figures
are also smaller in the first place—but the fuel poverty
gap has gone up. That means that, for those who are
in fuel poverty, that poverty has become worse. In the
light of that, can you assure this Committee that you
believe you have allocated sufficient funds to tackle
the problem?
Mr Davey: First of all, I slightly disagree with some
of your interpretations of the facts. Let me explain
why. First of all, I think, if you look at the full
spending review period to March 2015, total spending
on fuel poverty programmes is being increased if you
take account of the levies like the Warm Home
Discount and so on. I do not accept that there have
been overall—
Barry Gardiner: Increased from where, from £97
million?
Mr Davey: Over the spending review period. I think
there is a slight difference in views, I am afraid, with
you, Mr Gardiner, over the amount of spend. Also—
Barry Gardiner: Sorry, I have just quoted two
figures. Let us be clear whether you agree that those
figures are accurate. That is all I did. I did not talk
about anything else. I simply quoted that £319 million
was spent in 2010–11, and £97 million was spent in
2011–12.
Mr Davey: I think you are focusing on taxpayerfunded schemes. In my analysis, I have included both
taxpayer and levy funding.
Barry Gardiner: It is overall fuel poverty spend. It
is both.
Mr Davey: Let me bring in the expert, but my
understanding is, if you add both taxpayer-funded and
levy payer-funded, the overall spending on fuel
poverty programmes has increased during the
spending review period.
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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
spending review. I gave you two specific years,
2010–11, and 2011–12 and I gave you the figures for
fuel poverty and the fuel poverty gap in those years
in accordance with your own report produced five
days ago. If you want to tell me they are wrong that
is fine, but it is your report.
Gareth Baynham-Hughes: I do not recognise those
figures on spending. I would have thought that total
spending on fuel poverty through taxpayer-funded
mechanisms that were in place at the time and through
levy-funded and other similar policies would be way
in excess of that. You are absolutely right, in terms of
the fuel poverty statistics, that they showed a fall in
the headcount under both the 10% indicator and the
low-income high-cost indicator and an increase in the
fuel poverty gap. The gap is the new measure
proposed from the Hills review that helps you
understand, precisely as you say, for those people who
remain in fuel poverty, what the impact is of changes
in incomes and changes in prices and so on. That is a
very helpful insight that we didn’t used to have under
the 10% indicator that shows you the depth of
continuing hardship for households that happen not to
benefit in a given year of the policies that are being
deployed.
Q451 Barry Gardiner: Thank you. Mr BaynhamHughes, you would agree with me that, under the
report that you released, the depth of fuel poverty for
those in fuel poverty, which under your own latest
figures is 2,570 households—under the old figure it
was 3,202 households—for those people, fuel poverty
has become worse. Let me clarify also, for the
purposes of the Secretary of State, that the figures are
from your Department’s audited accounts and are
what you actually spent, because of course it is not
about what you budget to spend. It is about what you
do spend and those figures are in your audited
accounts.
Mr Davey: We may have been taking different
periods, because clearly our fuel poverty spend over
the period with the Warm Home Discount is coming
on. Maybe they are not in the figures that you
presented but, to be fair to the Committee, I am giving
you the figures over the spending review period.
Can I go to the point that you were just focusing in
on? Sometimes you are damned if you do and you are
damned if you don’t. We published figures on fuel
poverty showing that, under the old definition, fuel
poverty was coming down. You welcomed that. I have
to say I think that is probably a temporary reduction
because we all know that prices have gone up and,
therefore, we should still be incredibly worried about
fuel poverty. Then you referred to one of the matters
that we are using, a new measure from Professor John
Hills’ review, which shows that depth of fuel poverty
has become worse. It is one of the reasons why we
needed to introduce that figure, because under the old
definitions we would not have known that. We would
not have known that. If you are going to tackle fuel
poverty, you have to measure it properly.
Okay, if there has been a worsening that is something
we should be worried about and I am worried about
it, but it is rather odd, is it not, that you get criticised
for measuring something properly, which other
Governments have not done, so that you can make
sure your policies are better targeted and better
focused? Fuel poverty, like much poverty, can be
grinding and with the depth of fuel poverty, just like
the depth of income poverty, it is essential that we
understand that better. The fact we did not in the past
is a bad thing. The fact that we are going to in the
future is a better thing so we can target our resources
more effectively.
Q452 Barry Gardiner: Secretary of State, I have not
criticised you for changing the way in which we
calculate it today. If you apply the Hills methodology
back to 2009, I think what you will find is that in
2009, under the Hills methodology, 2,697 people were
in fuel poverty. That came down in 2010 to 2,675.
The fuel poverty gap, which was 1,173, came down
under Labour to 1,130. These are your own figures by
the new methodology that you favour. What it shows
is that up until 2010 fuel poverty was coming down
and the fuel poverty gap was coming down; so the
depth of poverty, the extent of that poverty, was
decreasing. What your figures under your
methodology show is that, while the number of
households concerned has come down by 4.3%, the
actual depth of their problem has worsened. They are
worse off. What I asked you, which I still have not
had a response to, is are you confident that you have
allocated sufficient funds to tackle the problem or
perhaps I should say that you have spent sufficient
funds out of those that you have allocated in order to
tackle this problem?
Mr Davey: I think fuel poverty is a huge problem and
I think the figures that you show, that we have now
caused to be published, show the depth of that. You
are absolutely right to ask us whether or not our
strategies are sufficient to meet that challenge. It is
one of the reasons why we will shortly be publishing
a framework for our policies on fuel poverty, and we
will follow that up with the first fuel poverty strategy
to be published in this country for, I think, 12 years
or a bit longer than that. We are very much focusing
on that. I can’t prejudge the publication of the
framework or the strategy and the resources that are
going to go into that because we are working on that
with both our stakeholders and within Government,
but the fact that we are taking this so seriously, the
fact that we had the Hills review, the fact that we are
making sure that we, for the first time, measure it in
a better way, and the fact that we are coming forward
with a framework and a strategy does suggest to me
we are taking this very seriously.
Barry Gardiner: I am delighted to hear that you are
going to be publishing the new fuel poverty strategy
shortly.
Mr Davey: The framework shortly; the strategy comes
later because it enables people to respond.
Q453 Barry Gardiner: Can you give us any idea
about the timelines there?
Mr Davey: I think the framework is quite shortly. The
strategy will be towards the end of this year.
Barry Gardiner: That would be imminent and by the
end of the year?
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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.
Barry Gardiner: Thank you for that.
John Robertson: Which year?
Barry Gardiner: This year.
Mr Davey: Mr Robertson, this year, if it helps you
with marking of my—
Q454 Barry Gardiner: Professor Hills suggested to
this Committee that a system of rolling targets that
adapt to changing situations could be a better way of
tackling fuel poverty than an elimination target. How
effective do you think the current target is, and would
you consider introducing a different system such as
rolling targets?
Mr Davey: The proposal that Professor Hills comes
out with, which is this low-income high-cost measure,
in many ways is a more challenging measure because
it is not an absolute measure. It is more of a relative
measure. Therefore, it will be challenging to meet and
it has these two elements, not just the numbers that
are measured by this low-income high-cost measure
but also the depth that we have been talking about.
We have taken on board a huge amount of what
Professor Hills has said. I am not familiar with the
proposal of a rolling target. I am not sure where that
has come from.
Gareth Baynham-Hughes: I think it was something
he mentioned when giving evidence to the Committee.
Barry Gardiner: Absolutely. He said this to us, yes.
Gareth Baynham-Hughes: I do not have privileged
information. I was just here watching it. My
interpretation was that he was thinking about targets
that would allow you to incrementally improve the
situation of low-income, high-cost households.
Presumably you would set five-year targets, and you
would set absolute targets within that context, either
around the level of the fuel poverty gap or around
energy efficiency standards or something. I think that
was what he must have been thinking about. By
contrast—
Mr Davey: It was not in his report.
Gareth Baynham-Hughes: It was not in his report.
By contrast to the 2016 one-off target that has been in
place since 2000.
Q455 Barry Gardiner: Finally, under the Warm
Homes Act, Secretary of State, you have a statutory
obligation to do all that is reasonably practicable to
eliminate fuel poverty. In the light of end of taxfunded support for energy efficiency programmes and
the closure of Warm Front, how do you respond to
those fuel poverty organisations who doubt that you
are meeting that statutory obligation?
Mr Davey: I think we are meeting it because you have
mentioned things that are being phased out but you
have not mentioned things that are being put in. We
have a lot of policies, such the Warm Home Discount
that I have mentioned to you, which is targeting
supporting support on 2 million of the lowest income
consumers, £130 directly off bills, and that is 1
million of the lowest income pensioners directly
targeted through that. That is new. That was not there
before. Of course, we replaced CERT with the Energy
Company Obligation. We think it is a better approach.
It has elements that directly focus on fuel poverty with
the affordable warmth element, the carbon saving
communities obligation, and the second part of it, the
other chunk, is the carbon saving obligation. Many
people in fuel poverty will also benefit from that. We
assess that slightly over half of the Energy Company
Obligation will be going to the fuel-poor. Again, that
is a policy. We could talk about that we think the
Green Deal will be particularly helpful for the fuelpoor, but there are other measures as well.
I have to say that a full analysis of what we are doing
for fuel poverty, even before we get to the refreshed
strategy that I have mentioned to you, shows that we
are taking that obligation very seriously.
Q456 Sir Robert Smith: In identifying those that
could best benefit, it is becoming more difficult, as a
lot of houses have already been dealt with, to identify
those who are most in need of support to tackle fuel
poverty because of the data-handling of the situation.
Is there anything that can be done to overcome data
protection and privacy rights so that help can be more
efficiently targeted?
Mr Davey: The current legislation only allows us to
share pension credit data and we have been doing that
very successfully in the Warm Home Discount
Scheme I have just been talking about with Mr
Gardiner. Energy suppliers are able to use that data
to deliver further help, for example energy-efficient
measures, to low-income pensioners. They can use
that data for a number of things to help tackle fuel
poverty.
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.
Q457 Sir Robert Smith: Does universal credit help
in any way, because it tries to capture data on a
household basis and obviously it is the household that
is being affected by the condition of the home?
Mr Davey: It may well, but I think it is relatively early
days in universal credit. I think we should wait a little
while before that system is bedded in. The DWP
might think it is a step too far in their IT system’s
redevelopment for universal credit to want us to use
it for this purpose. As I said, we are not against and
certainly have not ruled out expanding the use of datasharing and that might be an option.
Q458 Sir Robert Smith: I suppose another way
around it is to try to identify areas that, on the whole,
would benefit from intervention because obviously it
is much more cost-effective to intervene on a
community basis than on an individual household
basis. Help could be targeted at those areas that are
most likely to benefit. Would that be a more—
Mr Davey: Part of the Energy Company Obligation—
in fact I tweeted when I came into office—was to
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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
worth £190 million per year and it does just what you
described. We do have within the ECO an area-based
approach to tackling fuel poverty.
Sir Robert Smith: Does it have any specific targets
or directions towards those in the off-grid, rural area?
Mr Davey: I think, from memory, about 15% is ringfenced for rural areas.
Gareth Baynham-Hughes: That is right.
Mr Davey: Yes, there is that.
Q459 Sir Robert Smith: You have already identified
that you see the energy companies as an important
part of delivery because of the efficiencies that could
come from that. Do you not think there is a role for
other trusted intermediaries like social landlords to
market or encourage people to take up these schemes?
Your energy company coming and saying “I am here
to reduce your bills” is still a counter-intuitive thing
for the consumer to accept.
Mr Davey: I am keen for lots of players to encourage
take-up of these schemes and to show people that
these are schemes they should take up. We announced
last week that we are spending just under £1 million
to create what we call the Big Energy Saving
Network. This is not some new bureaucracy, you will
be pleased to know. This is using existing advisers
from the CAB, from the national energy advisers and
so on, to use that network that exists already, that we
have seen in cases like Big Energy Saving Week, and
to create a permanent network of advisers who get
support with training and materials who can coordinate better so they can be a voice to promote these
types of schemes and help people know what is
available. Of course, anyone can ring the Energy
Saving Advice Service on 0300 123 1234.
Q460 John Robertson: Secretary of State, earlier
you replied to my question while I was ranting at you
about my written questions to Mr Fallon. I get the
feeling you probably thought they were just a fishing
exercise, but these questions were anything but a
fishing exercise. I do want to know what kind of
money this Government and previous Governments
invested in the Big Six—I want the figures for last
five years. I have a horrible feeling that they have,
shall we say, used the figures to mask their actual
investment in this country and what they say they
have invested. The fact of the matter is I think part
of the investment is money that the Government has
invested and probably you should be taking the credit
for it, rather than them. I want to know what kind of
money we are talking about because it is very difficult
to work out their books at the best of times, but at
least I can do an audit trail of your money to them
and spent in this country.
Mr Davey: Maybe I can look at the written answer
you received and the question to see whether or not
we could be more helpful for you, but the issue is this:
there will be some investments that these companies
will have made that are completely private-sector
transactions with no Government support and no
consumer support. There would be no impact on
consumer bills. For example, I think it was npower
which invested in the Pembrokeshire Gas Plant, which
was slightly over £2 billion, and that would not have
received any Government support. There will be
investments that are completely unrelated to any
support systems for low carbon. Of course, there will
be those energy companies who invested in onshore
wind and offshore wind and so on for whom the
consumer, once those plants are generating, will be
contributing under the ROC system and the contracts
for difference, but that is quite a transparent process.
People can see a wind farm. They know who owns it.
They know the regime, so it is not something that is—
Q461 John Robertson: If it is transparent, I would
not have thought it would be difficult to get the
figures. I have some figures from the Library and they
tell me that through the RO obligation we have given
them £251 million, which was up from £176 million
the previous year. I can track some money, and there
is £10 million that has been given from the Rhyl Flats
Offshore Wind Farm. There are figures there, but I
have a horrible feeling that they are using part of these
figures to make it look—because they come to this
Committee, as you are, and they tell us all about the
money they have invested in this country, and yet,
when I ask them the question, “How much of that
investment came from financing from the UK
Government”, they cannot tell me. Call me a cynic,
but I just think they are trying to hide something here.
If somebody can’t tell me a figure and I know it is
there and they know it is there and they will not say,
then they are hiding it and I would like to know why.
Mr Davey: I would have thought they would be able
to explain that, if they had made an investment in,
say, an offshore wind farm, the Government scheme
enables them to get money from consumers over the
lifetime of that scheme because that cost is passed on.
I can’t answer for them, but that is quite—
John Robertson: You have told us a figure.
Mr Davey: Indeed, but what I am saying is it is not
directly Government money going in to pay for the
wind farm. Okay? It is money that will come from
consumers who pay when that wind farm generates,
because that energy is slightly more expensive than
from other sources.
Q462 John Robertson: Exactly, and take the credit
for it and also perhaps hide an expense somewhere,
which allows you not to pay the tax you possibly
should be paying. There is a possibility, and I want to
make sure that I am trying to help them and make sure
that what they are doing is above board and correct. I
just have a terrible feeling that the letter I had from
npower would probably be a carbon copy of the letter
that was received from Starbucks, which was a carbon
copy of the letter received from Amazon. These
companies need to be looked at.
Mr Davey: I completely agree that companies who are
not transparent about their tax affairs need to be held
to account by their shareholders, their customers and
the jurisdictions that they operate in. The Prime
Minister and Deputy Prime Minister have been
extremely strong on this and at the G8 and at the EU
level the UK is leading the charge for greater
transparency in tax. The Prime Minister recently
wrote to some of the UK territories to try to make
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Energy and Climate Change Committee: Evidence Ev 91
21 May 2013 Rt Hon Edward Davey MP, Rachael Crisp and Gareth Baynham-Hughes
sure that they are being supportive of what the UK
Government is trying to achieve. I think there is a
real, strong direction of travel to make sure that
companies pay what they are supposed to pay and I
completely support that.
John Robertson: As we do.
Q463 Chair: There is a consensus that improving the
thermal efficiency of the housing stock through energy
efficiency measures is a particularly cost-effective
way to tackle fuel poverty, but minimum efficiency
standards in the private rented sector are not due to be
introduced until 2018. Could that not be brought
forward?
Mr Davey: One of the benefits of setting regulation a
few years away is it enables people to prepare for
that and invest ahead. Of course, there is always an
argument about whether a particular year is the right
year. Of course, there is bound to be discussion. There
is quite a lot of literature and empirical evidence that,
whether it is a car manufacturer and having to have
cleaner emissions or whether it is, in this case, energy
efficiency in the private rental sector, giving people
some time to prepare for that is a sensible way to
make sure you can achieve that without unintended
consequences and without negative effects. I am not
saying that there is a science to choosing 2018. I am
just saying that giving a bit of time for adjustment
does make sense.
Q464 Chair: Just moving on to ECO to finish up
with, your Department’s projections suggest that ECO
will take up to a quarter of a million households out
of fuel poverty, but that is only a relatively small
proportion of the estimated number of maybe 3
million or 4 million fuel-poor households, and only
around 50% of ECO will be directed at low-income
households. Given that ECO targets only a small
proportion of fuel-poor households, do you have any
plans to expand the scheme?
Mr Davey: I think we have an agreement on how we
take that forward to the end of the spending review.
Decisions beyond that will not be made immediately.
We want to learn from this scheme. It is in its early
days. I think there are many good signs already from
the scheme and I think we just need to get some more
experience. For example, there are parts of the scheme
that we have designed that did not happen before, for
example the brokerage, to make sure there is greater
transparency in prices and that other players beyond
the Big Six can come in and deliver so there is more
competition in the market. We have taken powers in
the Energy Bill to require more transparency from the
Big Six who have these legal obligations upon them
to make sure we get the proper cost information,
because that will help us learn to make sure we are
doing things in the most efficient way. I think we have
to learn some of those lessons before we decide what
comes next. I personally think the Energy Company
Obligation should have a long life, but we should
obviously see if it can be improved in the next
iteration.
I would say, though, Chairman, that it is not just the
Energy Company Obligation that we are using to
tackle fuel poverty. There are lots of measures that are
not just directed at the fuel-poor but will help the fuelpoor; the tariff reforms we have talked about. I come
back to collective switching, because one of the
reasons I set up the Cheaper Energy Together scheme
was to try to promote collective switching and energy
co-operative purchasing—one of the ways I did that
was to say that you could only get funds from
Government to help you set up these schemes if you
showed that your scheme was going to include the
fuel-poor. There is quite a bit of evidence that the fuelpoor were among the group who switched least and,
therefore, were not benefiting from competition in the
market. By trying to tie these energy-purchasing cooperative schemes to the fuel-poor was one of our
ways of trying to get extra help to the fuel-poor.
I have already talked about the Warm Home Discount.
There are quite a few measures there and I think,
while I agree with you that energy efficiency is the
best way of doing it, which is where you started from,
I do not think we can simply do it that way, not least
because it is going to take time to refurbish the whole
housing stock of the UK, even if you are just focusing
on those houses that are the most thermally inefficient.
We have to help people with bills. We have to help
people get the best deal from the market.
Q465 Chair: The energy companies are disputing the
Department’s assessment of costs of ECO. Do you
have any comments on that?
Mr Davey: They have been disputing that for some
time. It is interesting to note that, even in these early
days, some of their new figures are rather closer to
ours than closer to the ones they were publishing
before ECO started; so the direction of travel is in the
right direction. I hope that when Green Deal is in its
next stage that will also help reduce costs and, of
course, we are going to learn. No one wants to see
ECO delivered at a high cost. Of course not. When I
talk to the industry, I say, “Well, give us your ideas
about how we can achieve these objectives”, which
we have set out very clearly, “to reduce carbon, to
improve energy efficiency of housing stock at a lower
cost”. Doing it this way enables us to use competition
and to use the learning from the scheme so we can
achieve that.
I would hope we can come in at not just our estimate
of £1.3 billion per annum on these measures, but
maybe even lower. That would be an achievement. If
you look at the CERT scheme, I think I am right in
saying that the analysis of the CERT scheme was that
it came in lower than the Department had estimated,
even though the companies at the time had said that
the Department’s estimate was too low. These are
early days in ECO, but I think the evidence is coming
our way. Gareth, do you want to add to that?
Gareth Baynham-Hughes: I am not sure there has
been a final evaluation of the costs of CERT and
CESP, but certainly anecdotal evidence would suggest
that fears that it was vastly more expensive than
Government estimates were not true. I think different
supply companies would have slightly different
perspectives, but in broad terms you are absolutely
right.
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Ev 92 Energy and Climate Change Committee: Evidence
21 May 2013 Rt Hon Edward Davey MP, Rachael Crisp and Gareth Baynham-Hughes
Q466 Chair: I recognise that it would not be an
enormous surprise if some of the anxieties expressed
by the industry turn out to have been unfounded. Just
to clarify, if the cost did exceed what you estimate,
does that mean those costs would feed straight
through to consumer bills?
Mr Davey: That is certainly possible and that is one
of the reasons why I take them very seriously. We are
trying to reduce all the pressures on consumer bills,
particularly the ones we can control. We have looked
at this incredibly carefully and if there are more things
that we can do we will do them.
Q467 Chair: The Energy Bill Revolution Campaign
suggested that the receipts from the carbon price floor
could be used to fund energy efficiency measures. Do
you think that is possible?
Mr Davey: If it is a theoretical question, Chairman,
“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.
Q468 Chair: Just on the point about the carbon price
floor, it is, I suppose, now absolutely clear that it is
simply a tax-grab by the Treasury. It serves no
environmental purpose. It is a distortion in the market
that penalises sections of British industry compared
with businesses in the rest of the EU and there is no
energy or climate change policy justification for it at
all, is there?
Mr Davey: That is a little unfair. I think—
Chair: Only very slightly.
Mr Davey: It does give some signals for investing in
low carbon technologies, but the way I see the carbon
price floor is it shows how important getting Europe’s
carbon market working is. Clearly, if the carbon price
from the EU emission trading system was producing
a price above the carbon price floor, we would not
even be having this debate. That does show that
carbon prices are important for long-term investment.
If you talk to CCS developers, if you talk to renewal
developers and new nuclear vendors, they see that
getting a good carbon price will help us make this
transition to a low-carbon economy in the most
efficient way.
While I understand some of the concerns about the
carbon price floor, it is one of the reasons we have
introduced proposals to compensate energy-intensive
industries from the indirect costs of the EU ETS and
we are getting responses from the Commission on
those proposals while we have done that. I do think
the long-term approach is to reform the EU ETS. If I
make take this opportunity, Chairman, I think we need
to see the European Parliament voting on backloading before the summer recess and saying yes to
back-loading. It is quite a mild reform of the EU ETS,
but it is an essential first step and I was deeply
disappointed that Parliament voted—by a small
majority, but nevertheless it was a majority—against
back-loading recently, and I and my Department and
colleagues are trying to put the case for back-loading
and for getting Europe’s carbon market working
properly.
Q469 Chair: I am sure on that point you would have
the very strong support of this Committee and I
certainly regret that decision as much as you do and
regret the fact that some of my colleagues were
responsible for it. Thank you very much for your time.
We look forward to seeing you again before the
summer recess. We have a date, I think, in July to
have a more general debate, although you may think
we have strayed slightly beyond energy price reform.
We look forward to straying even further in a few
weeks’ time.
Mr Davey: I am sure my Minister of State is looking
forward to his appearance before you.
Chair: Thank you very much.
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Energy and Climate Change Committee: Evidence Ev 93
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
2
3
4
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
Office for National Statistics (2011) 2011 Annual survey of Hours and Earnings (SOC2000) and
Office for National Statistics (2012) Consumer Price Indices September 2012 detailed table http://www.ons.gov.uk/ons/
dcp171778_282923.pdf
Figure calculated using data on historical rates from http://lowpay.gov.uk
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Ev 94 Energy and Climate Change Committee: Evidence
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
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Energy and Climate Change Committee: Evidence Ev 95
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
7
A vulnerable household is classed as one containing children, the elderly, and/or someone with a long-term illness/disability
DECC (2012) Fuel Poverty 2012—Detailed Tables. Table 1.
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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
9
DECC (2013)—DECC Energy Price Statistics
www.sse.com/uploadedFiles/Controls/Lists/Reports_and_Results/SSE_ConsolidatedSegmentalStatement_31032012.pdf
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Energy and Climate Change Committee: Evidence Ev 97
—
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
11
12
www.sse.com/MarketOutlook/
DECC (2013)—DECC Energy Price Statistics
www.sse.com/MarketOutlook/
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Ev 98 Energy and Climate Change Committee: Evidence
—
—
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
14
15
www.energy-uk.org.uk/publication/finish/5/752.html
SSE (2013)—Reports and results—www.sse.com/Investors/Reports_And_Results/
www.sse.com/uploadedFiles/Controls/Lists/Reports_and_Results/SSE_ConsolidatedSegmentalStatement_31032012.pdf
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Energy and Climate Change Committee: Evidence Ev 99
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
17
www.pwc.co.uk/tax/issues/total-tax-contribution.jhtml
www.sse.com/MarketOutlook/
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Ev 100 Energy and Climate Change Committee: Evidence
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
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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.
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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
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Energy and Climate Change Committee: Evidence Ev 103
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.
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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
Turnover
EBIT
Margin
Volume
Sales ppu
Purchase cost ppu
Indirects
Customer Numbers (mill)
Cost to Serve per cust
Cost to serve per MWh
Domestic Gas
Turnover
EBIT
Margin
SP
£m
EDF
£m
EON
£m
RWE
£m
BG
£m
SSE
£m
Average
£m
1489
-128
-8.6%
1673
-44
-2.6%
2426
159
6.6%
1751
-34
-1.9%
3027
145
4.8%
2504
93
3.7%
2145
32
1.5%
12.4
120.1
78.2
209
3.1
£ 67.42
£ 16.85
14.7
113.8
57.8
315
3.6
£ 87.50
£ 21.43
20
121.3
61.8
326
4.5
£ 72.44
£ 16.30
14.9
117.5
57.3
352
3.8
£ 92.63
£ 23.62
25.6
118.2
58.7
377
6.8
£ 55.44
£ 14.73
20.8
120.4
66.4
240
5.1
£ 47.06
£ 11.54
SP
£m
EDF
£m
EON
£m
RWE
£m
BG
£m
SSE
£m
Average
£m
1026
117
11.4%
888
-80
-9.0%
1507
-81
-5.4%
1344
-22
-1.6%
4903
399
8.1%
1828
157
8.6%
1916
82
4.3%
303
4.5
£ 67.62
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Domestic Gas
Volume
Sales ppth
Purchase cost ppu
Indirects
Customer Numbers (mill)
Cost to Serve per cust
Cost to serve per therm
SP
£m
EDF
£m
EON
£m
RWE
£m
BG
£m
SSE
£m
928.2
110.5
53.6
155
1.5
£ 103.33
£ 0.17
865.6
102.6
60.0
190
1.8
£ 105.56
£ 0.22
1453
103.7
63.3
243
3.0
£ 81.00
£ 0.17
1239
108.5
57.1
293
2.4
£ 122.08
£ 0.24
4099
119.6
62.4
623
9.1
£ 68.46
£ 0.15
1552
117.8
64.3
196
3.5
£ 56.00
£ 0.13
Average
£m
283
3.6
£ 79.81
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
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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.
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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);
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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
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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
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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).
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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.
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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
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Energy and Climate Change Committee: Evidence Ev 113
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 nonstandard 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.
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Ev 114 Energy and Climate Change Committee: Evidence
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
(81)
OFGEM Earnings before interest/tax (as per our website)
145
(238)
12
(81)
22
(5)
(38)
(154)
64
(128)
(128)
(18)
(249)
(43)
(73)
117
233
272
(88)
Made up of
Generation
Domestic Supply
Non-domestic supply
220
£m
(135)
(73)
12
247
€M
2010
Items to be adjusted per OFGEM guidance
Out of scope (non-regulated) activities, mainly Cogen
One off item—coal station impairment (not tax deductible)
Other one off items
Other adjustments
Differences between International and UK accounting in 2009–10
Pensions—mainly deficit payment not in IAS P&L
Amortisation—“non-operational” so not in IAS operating profit
Operating result in GBP under UK GAAP (IAS for 2011)
Operating result of division in RWE AG group accounts in €
“Operating result” is earnings before interest, tax and non-operating amortisation
Operating result in GBP (but still under IAS)
2009
168
(56)
128
240
240
(50)
12
(33)
n/a
n/a
311
311
357
2011
RWE NPOWER RESULTS—RECONCILIATION FROM RWE AG ACCOUNTS TO OFGEM STATEMENTS
Table 1
31
440
£m
764
3-year total Notes
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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
21
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%)
Living on a Low Income. February 2012
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Energy and Climate Change Committee: Evidence Ev 117
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
23
English Housing Survey 2012
J Pett (2002) Affordable Warmth in “Hard to Heat” Homes: Finding a way forward, Association for the Conservation of Energy
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Ev 118 Energy and Climate Change Committee: Evidence
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
25
26
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.
“Retail Marker Review—Initial Findings and Proposals Report”, Ofgem, 2010.
Which? does not consider this level of engagement is ever sufficient to drive effective competition.
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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 verticallyintegrated 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
28
29
30
31
32
33
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
“Updated household energy bills explained”, Ofgem, January 2013
“UK Energy Policy and the End of Market Fundamentalism”, edited by Ian Rutledge and Philip Wright, Oxford Institute for
Energy Studies, 2010
“Ofgem Segmental Statements Review”, BDO LLP, January 2012
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
“Household Energy Bills—Impact of Meeting Carbon Budgets”, Committee on Climate Change, December 2011
Green Deal and Energy Company Obligation consultation, DECC, November 2011.
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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
35
36
37
38
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.
Electricity: “GB wholesale electricity market liquidity”, Ofgem, summer 2011 assessment. Gas: “Continental European Gas
Hubs: Are they fit for purpose?”, Patrick Heather, June 2012
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.
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.
“Retail Market Review: Intervention to enhance liquidity in the GB power market”, Ofgem, February 2012
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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-forlike basis.
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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.
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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
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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.
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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
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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.
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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.
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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
0–5 years
5–10 years
10–15 years
Over 15 years
Volume of Customers
2,556,475
1,016,537
632,614
679,624
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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
2003 to 2008
1998–2003
Pre 1998
3,740,947
3,697,294
1,211,951
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.
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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.
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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).
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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.
2006–07
2007–08
2008–09
2009–10
2010–11
2011–12
EON Asset ROC
Claims
Buy-Out Price
£/ROC
371,309
448,807
556,361
791,835
1,424,156
1,910,741
£33.24
£34.30
£35.76
£37.19
£36.99
£38.69
Recycle Overall ROC Value
£/ROC
£/ROC
16.04
18.65
18.61
15.17
14.35
3.58
£49.28
£52.95
£54.37
£52.36
£51.34
£42.27
Overall Benefit to
EON
£18,298,108
£23,764,331
£30,249,348
£41,460,481
£73,116,169
£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
Customer bill
Wholesale costs
VAT and other costs
Gross margin
Operating costs
Total indicative net margin for the next 12 months
Rolling net margin
Jan-09
Jan-10
Year
Jan-11
Jan-12
Jan-13
£1,215
£710
£395
£110
£125
-£20
-£20
£1,140
£520
£420
£200
£130
£75
£45
£1,155
£510
£460
£180
£130
£50
£30
£1,330
£625
£510
£195
£130
£65
£50
£1,420
£620
£550
£250
£130
£120
£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.
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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.
Supplier
British Gas
EDF Energy
E.ON
Npower
ScottishPower
SSE
Average
Domestic energy bills 2013
Current bill
New bill
£1,260
£1,202
£1,260
£1,244
£1,349
£1,235
£1,258
£1,336
£1,332
£1,370
£1,356
£1,368
£1,354
£1,352
Effective from
November16
December 7
January 18
November 26
December 3
October 15
2012
2012
2013
2012
2012
2012
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 nonmains fuel market were largely dismissed in a recent report from the Office for Fair Trading.
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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
Customer bill
Wholesale costs
VAT and other costs
Gross margin
Operating costs
Total indicative net margin for the next 12 months
Rolling net margin
Jan-09
Jan-10
Year
Jan-11
Jan-12
Jan-13
£1,215
£710
£395
£110
£125
-£20
-£20
£1,140
£520
£420
£200
£130
£75
£45
£1,155
£510
£460
£180
£130
£50
£30
£1,330
£625
£510
£195
£130
£65
£50
£1,420
£620
£550
£250
£130
£120
£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.
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Energy and Climate Change Committee: Evidence Ev 135
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.
Year
Number and % of fuel-poor households in England—1996 to 2012
Number of fuel-poor
% of fuel-poor
Number of vulnerable % of vulnerable households
households
households
fuel-poor households
in fuel poverty
1996
2001
2003
2004
2005
2006
2007
2008
2009
2010
2011
201240
5,100,000
1,722,000
1,200,000
1,200,000
1,500,000
2,400,000
2,800,000
3,300,000
4,000,000
3,536,000
3,500,000
3,900,000
26.0%
8.1%
5.9%
5.9%
7.2%
11.5%
13.2%
15.6%
18.4%
16.4%
16.4%
18.5%
4,000,000
1,416,000
1,000,000
1,000,000
1,200,000
1,900,000
2,300,000
2,700,000
3,200,000
2,830,000
-
30%
9.8%
6.6%
6.4%
7.8%
12.8%
14.6%
17.5%
20.7%
18.1%
-
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.
Year
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Trends in domestic energy prices in England from 2001
Fuel
Gas
Electricity
£293
£310
£320
£333
£386
£475
£537
£625
£708
£682
£749
£837
£246
£244
£245
£251
£281
£335
£376
£433
£443
£431
£469
£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.
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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.
Energy
efficiency
41
42
43
Expenditure on fuel poverty programmes 2009/2010 and 201343
Programmes 2009/2010
Expenditure
Programmes 2013
Warm Front
£370 million
Carbon Emissions
Reduction Target
£564 million
Expenditure
Warm Front
terminated January
2013
ECO Affordable
£302 million
Warmth
Case No: CO/3373/2008, Royal Courts of Justice, 23/10/2008.
Spending Review 2010, HM Treasury, 2010.
Table from The Impact of Fuel Poverty Budgets in England, Association for the Conservation of Energy, 2012.
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Energy
efficiency
Income
support
Energy price
support
Total
Expenditure on fuel poverty programmes 2009/2010 and 2013
Programmes 2009/2010
Expenditure
Programmes 2013
Communities Energy
Saving Programme
£101 million
Winter Fuel Payments44
£2.497 billion
Cold Weather Payments
£250 million
Voluntary price support
£132 million
ECO Carbon
Saving
Communities
Obligation
Winter Fuel
Payments
Cold Weather
Payments (estimate)
Warm Home
Discount
£3.913 billion
Expenditure
£164 million
£1.723 billion
£228 million
£237 million
£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