Examination of Witnesses (Questions 240-259)
MR ALISTAIR
BUCHANAN AND
MR STEVE
SMITH
22 NOVEMBER 2006
Q240 Chairman: Energy Watch are very
much concerned with the price, are they not, and to encourage
a competitive marketplace by consumers altering their supplier?
Mr Buchanan: Yes.
Chairman: To come back to a very important
question which Mr Drew raises, how does the citizen make the decision
as to what is the optimum route, bearing in mind some consumers
cannot afford to do everything? They have to optimise the use
of their resources. Going back to British Gas—and I will
name names—I sent off for the British Gas energy saving
pack and along came the box and it had two energy saving light
bulbs and a leaflet. The main thrust of the leaflet, from what
I can recall—and I apologise to British Gas if I had got
it wrong and they will no doubt write and tell me if I have not
got it right—seemed to be more about selling me a new boiler
than it was about lots of practical things to do in the house.
I do not mind them doing that.
Lynne Jones: It is expensive, even with
the discount!
Chairman: Thank you for that. Sorry about
that, British Gas, if you are watching! The interesting question
is—and this is a very real one—one of the things in
the evidence which we have had clearly talks about the benefits
of condensing boilers. Now, it is a major investment decision
to buy a new boiler. How does the consumer have the range of options
to pay in excess of £2,000, for example, for a new condensing
boiler versus a whole range of other options to minimise their
carbon footprint? Where do they get the kind of definitive advice
to make that kind of quite complex investment decision?
Q241 Mrs Moon: Could I just jump
in there, Chairman, because one of the things which concerns me
as well is that you made a choice to change and no doubt contacted
the supplier you used and said, "Right, I want to move."
An awful lot of people get contacted through cold calls and there
is a major distrust in this country of people making cold calls
and trying to allegedly give you advice when often what they are
doing is trying to sell. It is a bit like your box with two energy
bulbs in, but really they are trying to sell you a new boiler.
How do we also get over that need to give people information that
they can trust and can also feel is not just from someone coming
from the position of you as a captive audience, trying to sell
you their product, that what they are doing has some sort of rating
of approval which lets them trust that that is the product they
want to sign up to?
Mr Buchanan: I would like to add
my own concern to yours and then I will try and break it down
in terms of some answers, because the third issue I was going
to mention under financial was the potential for what I almost
might call governmental subsidy clashes. One which strikes me
is that under EEC, as EEC progresses, one of the ways the companies
are seeking to—
Q242 Chairman: Eek is a noise that
a squeaky door makes! Would you like to spell out what it is for
the wider audience?
Mr Buchanan: The Energy Efficiency
Commitment. Under the Energy Efficiency Commitment companies are
effectively being incentivised to get traditional boilers more
and more efficient. I find this quite an interesting proposition,
that there is a subsidy helping you to make your traditional boiler
more and more efficient—that is good stuff—but at
the other point we are looking towards CHP fuel cell developments.
Therefore, are you actually just creating a bigger gap there?
I think there is quite an interesting issue there for me. Equally,
just the final point of potential subsidy clashes, under the Lazarowicz
Bill Microgen is going to come into the Energy Efficiency Commitment
(EEC). Again, I think one of the interesting things here is that
potentially you will get Microgen under EEC and then the Microgen
consumers can effectively aggregate and get the ROC as well. So
you are then going to get two dollops of subsidy within that.
So not only potentially is there some confusion to the consumer
coming in to find out information, but I am not entirely sure
there are not layers of confusion now being added on top of that
in terms of what are the messages that we are wanting to send
about which boiler you should use, what the subsidy is going to
be for different forms of—
Q243 Chairman: Who should try and
bring clarity?
Mr Buchanan: I am hoping that
the Government will bring clarity—
Q244 Chairman: But which bit of Government?
Mr Buchanan: In Defra for the
energy efficiency and for the renewable certificates, which is
DTI, the policy lies squarely with them. Ofgem is the administrator
in terms of products.
Q245 Chairman: Is it possible, do
you think, within the existing mechanisms of government to get
such a clear and coherent series of actions to be coordinated,
to remove if you like the muddle which you have just described?
Mr Buchanan: I am sure a Committee
such as yours will have a very great influence on them trying
to work their way through this.
Q246 Chairman: But are you as an
organisation which, if you like, is on the official side of things,
sending out that kind of message to Government about clarity and
coordination of policy in this area?
Mr Buchanan: Indeed we are.
Q247 Chairman: I would like to take
you on, because your presentation has stimulated questions on
a whole raft of things, but the Energy Efficiency Commitment,
in certain cases, has exceeded its targets. Do you think that
in order to try and stimulate activity in that area there should
be a sort of carbon credit ability to trade gains through the
Energy Efficiency Commitment, to perhaps put more money back into
it in the future to drive it forward? In terms of the way it is
currently configured, the Government is calling the shots about
where the emphasis should be. The current focus is on fuel poverty,
but some of the evidence you have put forward suggests that it
might have the perverse effect of actually making more people
more fuel-poor, which seems to be and odd way of going about it,
and because of the current emphasis there is also no focus on
all the other possible ways in which the Commitment could work
to reduce energy consumption in other domestic situations. Has
the Government got it right in defining it, and could it be made
a bit more sophisticated if it does better than its targets in
getting some carbon credits?
Mr Buchanan: I will start and
then Steve, if he wants to be more radical than me, can follow
that through. I think you are asking the fundamental question
about the Energy Efficiency Commitment, which is, what is it for?
Is it for the fuel-poor, or is it your primary government vehicle
on attacking carbon? If you look at the costs, it stands very
favourable comparison—
Q248 Lynne Jones: It is only 1%.
Mr Buchanan: Indeed, but I think
it is quite interesting as to what it is there for. Oxera analysed
EEC for the NAO and looked at those who were receiving the EEC
and 20% of those people who were receiving it did not need it.
They would have done what they were going to do anyway without
EEC. So it is a vehicle which is becoming more expensive. You
are effectively moving from the last phase of the scheme costing
about £480 million. This phase is going to cost about £1,200
million. So you have a scheme which is becoming more expensive.
It is not entirely clear whether it is driving towards fuel poverty
or whether it is driving towards energy efficiency. In fact it
is probably doing both at the moment and if you look at it from
a cup half full point of view, it probably is doing both, but
could it do better if it actually more narrowly focused potentially
away from fuel poverty? What we are trying to do, because it is
one of the vehicles towards fuel poverty, is to argue with Defra—it
has been out position—that they should maintain a large
proportion towards 50% of EEC, towards the fuel-poor priority
group.
Q249 Chairman: Can I just be clear,
when you quote £480 million and then £1.2 billion, that
is the cost to the energy industry?
Mr Smith: It is exactly the same
as the ROC scheme, so the supplier has to meet the obligation.
The cost in meeting that obligation it will recover through bills.
This is why you get the inequality in that they are likely to
recover that on a customer basis and so it hits poorer customers
harder. So every customer is paying a set amount—
Q250 Chairman: It is a form of cross-subsidy
from the energy user to pay for the efficiencies of the people
who the beneficiaries of EEC?
Mr Smith: Absolutely.
Q251 Chairman: So from the generators'
point of view, it is a zero cost to their operation?
Mr Smith: Well, the only slight
wrinkle on that is obviously to the extent suppliers compete,
if one supplier is able to meet its commitment for slightly less
because it does it better than another supplier—
Q252 Lynne Jones: It makes a better
profit?
Mr Smith: Yes. It has the choice
then to charge its customers less. So there is some slight dynamic
in there.
Q253 Chairman: In terms of pain for
gain to the energy sector, when I looked up, for example, Shell
Oil, I think their earnings were $26.9 billion. I was trying to
get some sort of context to the size of the sales of energy in
the United Kingdom to the amount of money which was being expended
on efficiency. You are not able to help me with those numbers,
are you?
Mr Smith: I would have to take
it away and perhaps—
Q254 Chairman: My intuitive feeling
is that one is a very big number and relatively speaking one is
a very small number.
Mr Buchanan: I think the only
thing you need to be careful of there is that obviously we have
focused exclusively on domestic, so around about a third of electricity
and gas consumption. There is an awful lot of money being spent
in the industrial and commercial sector without the need for government
involvement and subsidy. We could definitely write to you on that,
but I think you are right in terms of the sums being spent in
domestic versus the total value—
Q255 Chairman: I suppose the supplementary
question is, should the energy companies be using more of their
own money to achieve efficiency, whereas at the moment it is the
consumer who is paying the cost of recycling money for these entirely
correct and laudable purposes, but it is not really hurting the
bottom line of the energy companies.
Mr Buchanan: I think perhaps the
most blatant aspect of this was the free allocation of allowances,
and then not the full 10% auctioning of phase two of the EU Trading
Certificate Scheme. The recommendation we made within our energy
review—and I do not know how well it went down within government
circles—was that arguably if the UK wants to create its
own carbon trading scheme for concerns about the European scheme's
workability, or indeed its longevity after 2012, was to effectively
cull money from the generators because they have had free allowances,
give that to the Treasury to effectively act as the collateral
for the Treasury to be the middleman in a UK trading market. But
in addition to that, we also argued that this was a great opportunity
to take some of that windfall gain and feed it back into fuel
poverty schemes. I have to say that some of the noises I am hearing
around government would suggest to me perhaps that they are looking
at a form of UK trading scheme as well going forward. I fully
appreciate and understand, and you would expect an organisation
like Ofgem which has in its statute that we should be seeking
to protect, to promote consumers through marketing competition,
but we do not want to undermine in any way the European trading
scheme. Nevertheless, I think there is a groundswell occurring
at the moment that this might be an idea for the White Paper.
So to answer your question, we have certainly offered a solution
whereby you could take a large chunk of money away from the generators
and put it to good both with carbon and with fuel poverty.
Q256 Chairman: We are tiptoeing around
one of the subjects about the nature of the energy industry—and
it refers to a point which I think Mr Drew made earlier and other
colleagues mentioned—about who trusts whom, because the
argument crystallises out and should we in fact be looking at
an industry of energy services providers rather than just simply
energy suppliers? Is there any sign that the industry is moving
to embrace that concept or not?
Mr Smith: I would answer, yes.
I think in the early days the energy efficiency focus from the
companies was all about customers saving money. I think the carbon
and climate change agenda has moved that on. I think to begin
with if you were trying to sell energy efficiency it had to be,
you know, "Unless we can show customers they're actually
going to save money over the course of whatever we do for them,
we're going to struggle." I think now there is a clear appetite
amongst customers to say, "We're beginning to understand
the challenges of carbon and actually we might have to pay more
for our energy, and we're more interested in are we cutting carbon?"
Inevitably there will be a lag between that and the companies
actually getting out there and doing things, but I think you certainly
do see that change in attitude. Do not forget that with the high
prices we have seen over the last couple of years, gas demand
last winter was down about 8% when you account for temperature
differences year on year. So suppliers are having to work out
that with the carbon challenge and what that is likely to do with
prices, a business model based on just selling more and more energy
is not really a sustainable one, even from a narrow business perspective.
Q257 Lynne Jones: There seems to
be a problem in that the contracts can only be monthly contracts.
You have expressed concern about locking consumers into long-term
markets.
Mr Smith: We did make a change.
The industry came to us and said this and we used to have a rule
in our regulations called the 28 day rule, which said that customers
had to be able to walk away at 28 days' notice, and they said,
"We want to sell energy services products, we want to be
able to sell people long-term contracts where as well as their
energy supply we provide them with a new boiler or insulation
so their total energy costs came down." We took all of those
restrictions away in response to that. So we are in the game of
trying to break those barriers down. Where companies are trying
to do innovative things in this area, we are saying, "We
are not going to stand in your way and if there are things that
we have done because of trying to protect the competitive market,
then we'll take them away."
Q258 Lynne Jones: So now if people
sign up with a contract with British Gas, who have said, "We'll
provide you with a new boiler and you'll pay for it on your gas
bills," that is now possible?
Mr Smith: It is possible because
there is not this restriction which says the customer has got
to have this right to walk away, but obviously in terms of the
trialling of this we had to put some protection in place for exactly
the reasons you have alluded to about customer trust and making
sure that before anyone enters into that contract, because it
could be for a large sum of money, that they have properly been
given all of the facts, they have been given a cooling off period
and that we do not end up with people who have been mis-sold products
like that. But all of that is now in place.
Q259 Mrs Moon: Let us say I am a
newly retired person, I am going on to a fixed income and I want
to look at where I can get the best deal in terms of buying my
electricity and I want to know where I can get good, practical
advice in cutting my CO2 emissions. Where can I go to to find
that information that is totally independent, that is neutral,
not trying to sell me anything—because it does not seem
like I can come to you—that will give me a league table
which says, "These are the people who are doing extremely
well on price and these are the people who are doing extremely
well in terms of CO2 and, by the way, these are the offers they
have got in relation to insulation, energy saving and replacing
your boiler," or whatever? Where can I go for that independent
analysis of the market so I can decide what is my best option?
Mr Buchanan: I think on price
you are going to go to the providers of that particular product.
Again, I do not want to mention many companies but companies like
uSwitch, but you can also go to Energy Watch, but on the advice
you are after the Energy Saving Trust has a primary responsibility
for domestic consumers. Energy Watch is the interface with consumers.
It is not just solely interested with price, it is the all-encompassing
issues facing the consumer, and they will become the consumer
voice in March 2008. So I would say the Energy Saving Trust and
Energy Watch are the two parties I would recommend you to approach.
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