Memorandum submitted by the Office of
Gas and Electricity Markets (Ofgem) (CIT 08)
1. Ofgem is the regulator of gas and electricity
industries in Britain. Ofgem's principal objective is to protect
the interests of present and future gas and electricity consumers,
where appropriate by promoting effective competition. We also
have important duties relating to the environment, sustainable
development and security of supply. Ofgem welcomes the committee's
inquiry and our response to the questions in the call for evidence
is set out below.
BACKGROUND
2. There is considerable scope for individuals
to contribute to tackling climate change. Domestic use of energy
accounts for 27% of emissions and there are a number of measures
that householders can take to reduce this impact. The measures
include behavioural change (eg turning off unwanted lights and
not leaving equipment in standby mode), alterations to the fabric
of buildings to reduce energy consumption (eg insulation) and
improvements in the efficiency of appliances.
3. A range of incentives can be used to
deliver these changes in households. These can include:
— the provision of better information
on energy consumption, through appliance labelling, home energy
performance certificates, better metering and billing;
— fiscal incentives through council
tax or other taxes;
— education, awareness and promotional
campaigns;
— price signals through the impact
on gas and electricity prices of the EU emissions trading scheme;
— specifically targeted programmes
such as EEC which create obligations on certain market participants;
and
— innovative market initiatives
including energy services.
4. Many of the changes that householders
can make are already available at low cost, or are subsequently
offset by reduced energy costs. This suggests that price incentives
alone may not be sufficient to deliver substantial changes although
there is increasing evidence that rising energy prices are increasing
domestic and business customer awareness and interest in energy
efficiency.
5. There is an opportunity for the market
to provide innovative offerings that meet the needs of customers.
This could be through energy services contracts that provide packages
of energy and energy efficiency goods, simpler arrangements that
provide metering devices, and billing that allow consumers to
manage their energy consumption better. We consider that energy
suppliers should be encouraged and supported in efforts to improve
the range of products available to consumers. Such an approach
may be more effective in many cases than imposing new regulations.
6. Different customers will respond to energy
service packages in different ways. For some customers, investment
in time-of-use metering may be justified so that more sophisticated
tariffs can be offered; for others, simpler and cheaper measures
to raise awareness of their energy consumption may be more cost
effective and convenient. Suppliers have the best information
about their customers' needs and we expect them to use that knowledge
to determine the best ways to meet their needs.
ENERGY EFFICIENCY
PROGRAMMES
EEC
7. Ofgem administers the Energy Efficiency
Commitment (EEC) on behalf of the Department for Environment,
Food and Rural Affairs (Defra). The EEC obliges domestic electricity
and gas suppliers to deliver energy savings from domestic customers.
Half of the energy savings must come from priority customers who
receive certain income-related benefits or tax credits. The third
annual EEC report was published in August 2005 and showed that
suppliers had installed, or provided, energy efficiency measures
which would result in an energy saving of 86.8 TWh, or 140% of
the total target of 62 TWh.
8. The total savings made under the EEC
are greater than its costs. Furthermore, energy efficiency measures
are an economic way of achieving carbon savings because they can
enable consumers to reduce their consumption in the long term.
However, the benefits of the programme are focused on a limited
number of consumers, whilst the costs are borne by all. In addition,
the Department of Trade and Industry (DTI) estimates that every
1% increase in fuel bills pushes 40,000 households into fuel poverty.
It is therefore conceivable that an increase in the scale of the
EEC could potentially push some consumers into fuel poverty. However,
if energy efficiency measures are appropriately targeted they
are the most sustainable way of alleviating fuel poverty.
9. Any decision on the scale of the EEC
needs to be considered in conjunction with changes to other policies
arising from the Energy Review. Before any increase is agreed
it is important to consider the equity issues arising from the
programme and, in particular, the implications of directing different
levels of activity to the priority low income group.
Supplier cap-and-trade scheme
10. Despite the scale of the EEC, the demand
for energy has continued to increase and consequently so have
carbon emissions from the domestic sector. The Energy Efficiency
Innovation Review, sponsored jointly by Defra and HM Treasury,
suggested that the EEC could be changed to a cap and trade scheme:
a scheme that would impose a limit the amount of electricity and
gas each supplier would be allowed to supply or on the emissions
arising from that supply. This could be seen as a desirable way
for the programme to develop as it would focus the suppliers'
activity on the key output, namely to curb carbon emissions.
11. There are, however, a number of issues
that would need to be considered in implementing such a scheme.
For example, a target of curbing annual carbon emissions may provide
only short term incentives. It may push suppliers to consider
measures, such as attempting to change consumer behaviour in the
immediate future, as opposed to focusing their activity on measures
that improve the fabric of the housing stock. If such a cap and
trade scheme were ever to be discontinued there may be little
lasting benefit because consumers tend to revert to their old
behaviour patterns, whereas with the installation of insulation
measures there is a long term effect on consumer energy consumption.
Under a cap and trade scheme, for suppliers to consider installing
higher cost measures that have longer term impact, such as insulation
in domestic properties, they would need to be certain of capturing
the benefit from curbing that consumer's consumption. The only
way that would be possible would be to lock consumers into long
term arrangements. This would potentially reduce competition in
the domestic energy supply market.
12. The way the target is set is also a
key consideration—whether it would be based on the absolute
amount of electricity and gas supplied or whether it would be
based on the number of consumers each supplier has. If the cap
were to be based on an absolute level this could have implications
for the competitive market. Additionally, proposing a cap on the
amount of electricity and gas that could be supplied could have
welfare implications.
13. Any decision to move to a cap and trade
scheme should focus on capping carbon as opposed to energy demand.
There is genuine concern about restricting domestic consumers'
energy demand as this might have an adverse effect on consumer
welfare, particularly for people such as pensioners who may be
in their homes all day. A cap and trade scheme would require suppliers
to meet an obligation in something over which they have little
influence.
MICROGENERATION
14. The Government's Microgeneration strategy
and the passing of the Climate Change and Sustainable Energy Act
earlier this year have raised the profile of microgeneration.
The Energy Review Report, published on 11 July, also highlighted
its potential and that of other decentralised energy sources as
potentially significant contributors to our energy mix.
15. In line with our statutory responsibilities
to consumers and to the environment and sustainable development,
Ofgem is working to ensure that there are no undue barriers to
the development of microgeneration. In addition, we fully consider
microgeneration in policy development across all areas of our
work, including the review of the electricity supply licence and
measures to promote innovation in metering.
16. The resolution of issues surrounding
the arrangements for the sale of exports from microgeneration
remains one of the key pre-requisites for the greater penetration
of microgeneration in the market. This has been drawn into sharp
focus by the incentive for action placed on suppliers by the Climate
Change and Sustainable Energy Act (CCSE) 2006. Ofgem is supporting
and participating in a project under the auspices of the Electricity
Networks Strategy Group to address this issue.
17. We agree with the Government that suppliers
are best placed to provide leadership in this area and we look
to them to develop initiatives that will allow the market to develop
without the need for regulatory intervention.
18. The potential for microgeneration can
be further enhanced by measures under the government's environmental
programmes administered by Ofgem, the Renewables Obligation and
the Energy Efficiency Commitment. Recent legislative changes including
the CCSE Act, have improved the potential access for microgeneration
to assistance under these programmes. We are working with Defra
and the DTI to implement these changes, and also to ensure our
administrative procedures are as easy to use as possible for non-expert
generators.
SMART METERING
19. Following consultation, we published
in June a report entitled "Domestic Metering Information—Next
Steps". This document contains our conclusions on the case
for smart meters in people's homes and how best to promote them.
[1]
20. There is a range of smarter metering
technologies available. Simple devices consist of displays that
can be connected to existing meters and can provide customers
with information on out of how much energy they are using and
what it is costing. More sophisticated and expensive options allow
displays; a record of the customer's energy use every half-hour,
thus allowing suppliers to vary their prices across the day; remote
reading of energy use; and the ability to limit the customer's
energy use in an emergency.
21. Based on our analysis and responses
to our consultation, we maintain our position that a competitive
market in metering, rather than a standardised approach imposed
by regulation, is the best way to deliver metering innovation.
22. Given our duties to protect consumers'
interests and to promote sustainable development, we see a role
for Ofgem in providing leadership and direction to help make smart
metering a real option for domestic customers. We intend to remove
barriers to smart metering as part of a package of measures which
acknowledges that while the onus is on suppliers to deliver smart
meters, the regulatory framework needs to encourage new products,
innovation and investment. There are three major areas where we
can help.
— We will work with the industry
to agree common standards to provide for interoperability of smart
meters;
— Ofgem's supply licence review
will identify and remove any barriers in the supply licence; and
— we will managing the trial that
government is funding with the industry to collect evidence on
how customers respond to a range of metering technologies.
23. This work will supplement other work
in which Ofgem is already engaged. This includes providing clearer
guidance to suppliers seeking accreditation under the EEC for
smart meters and ensuring that settlement rules can accommodate
smart metering.
24. Ofgem would be happy to provide oral
evidence or any further briefing if the Committee would find it
helpful.
Ofgem
August 2006
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