Examination of Witnesses (Questions 402-419)
MR DUNCAN
SEDGWICK AND
MR RUSSELL
HAMBLIN-BOONE
29 NOVEMBER 2006
Q402 Chairman: Could I first welcome
on behalf of the Energy Retail Association, Mr Duncan Sedgwick,
their Chief Executive, and their Head of Corporate Affairs, Mr
Russell Hamblin-Boone. Could I apologise, gentlemen, that we have
kept you waiting a little bit beyond the advertised time, but,
as you were kind enough to sit in on the earlier session, you
will know that our time has not been wasted on our voyage of discovery
in understanding this particular area and, hopefully, you have
got an idea of some of the lines of inquiry the Committee wants
to take. You represent what I call the trade end of the business,
you are the sellers of power, heat and other products in the energy
field. Would I be right in saying that over the last 12 months
some of the people that you represent have seen a very steep increase
in their profitability at a time when energy prices have been
rising. Is that correct?
Mr Sedgwick: No, that is not correct.
In the retail end of the market none of the retailers at this
moment are making any form of significant profits at all. Any
profits that are being made are in other parts of the businesses.
Q403 Mr Drew: Can I ask where?
Mr Sedgwick: A number of the companies
have different parts of the groups so some of them, for instance,
have energy networks so those are regulated businesses so they
will be able to make a return on those.
Mr Drew: Can you spell it out absolutely.
Which part of the energy business is making money out of this,
because that is quite important to us?
Q404 Chairman: I just ask that because
I see from the introduction to your evidence it says here: "All
the main energy suppliers operating in the domestic market in
Great Britain are members of the Association. British Gas, EDF
Energy, npower, Powergen, Scottish Power and Scottish and Southern
Energy". Some of the results of these companies that I have
seen in the public print do indicate that in overall terms they
have been increasing their profitability at a time when the price
of power has been going up. Are you telling us that is not correct?
Mr Sedgwick: In overall terms
if you look at their group results a number of them are continuing
to be profitable, some of them have increased their profits. Those
profits are not coming in the bit of the market that I represent
them on, which is on the retail side. Where they may be doing
okay is, as I said, in the networks businesses which are regulated
businesses or, alternatively, in some of their businesses where
they have generation assets some of those generation businesses
are certainly continuing to make returns. That is a sizeable change
over the course of, say, the last five years because if we had
been sat here five years ago as far as the electricity generating
businesses were concerned they were making next to no profit.
One of the difficulties with that, of course, is that you are
not making profits such that you can invest in new equipment and
new plant for the future. Certainly as far as the bits of the
businesses that I represent them on they are not making increased
profits.
Q405 Chairman: For the avoidance
of doubt, would you like to define what "retailing"
in this context means?
Mr Sedgwick: Retailing as far
as we are concerned is the buying and selling of gas and electricity.
What happens is that my members have to buy that and they then
sell it on to the end customer.
Q406 Chairman: I think from the public's
point of view they may not necessarily make that important distinction.
Mr Sedgwick: I do understand that
and we accept the fact that there are issues like that. For instance,
if we look at gas, if I go back over three years, on average retail
prices that we would pay as end customers for gas have increased
by something on average just below 100%. As far as wholesale prices,
which are the prices that my members have to pay in order to buy
the product, those have gone up on average by something like 170%.
There has been a considerable increase in those wholesale prices
which has not been passed onto the end customer.
Q407 Patrick Hall: Do you know what
the networks are that Mr Sedgwick referred to, these are the profitable
aspects of the business?
Mr Sedgwick: The networks businesses
are regulated so they are restricted.
Q408 Patrick Hall: What are they?
Mr Sedgwick: That is the wires,
the cables and the gas pipes that go under the road or in the
air as far as infrastructure.
Q409 Patrick Hall: The infrastructure?
Mr Sedgwick: The infrastructure,
yes.
Q410 Chairman: In your evidence in
section 2(ii) you talk about: "The energy retail industry
has already spent £800 million on energy efficiency measures
over the last three years...", with a commendable saving
of 15.5 million tonnes of carbon emissions. However, there was
evidence that we received at our last session, I think it was
from Ofgem, indicating that the pricing mechanism effectively
meant that the customer had paid for that energy efficiency saving
because the cost of that was incorporated into the price of the
power that they bought. Is that correct?
Mr Sedgwick: Yes. What happens
is that approximately £9-£10 per fuel is added on to
a bill so £9-£10 for gas, £9-£10 for electricity,
and that is collected from the customer and those monies are then
spent by the companies through the EEC mechanism, the Energy Efficiency
Commitment, and those are spent on energy efficiency measures.
Q411 Chairman: If we had been writing
that paragraph with absolute pinpoint accuracy we should perhaps
have made it clear that the public were paying for this energy
saving programme which is represented by EEC. When customers get
their bills, are they aware that is what some of this money is
being used for?
Mr Sedgwick: No, it is not put
on as a separate line on the bill and that is certainly something
that we have had some discussions with Government about on the
current EEC mechanism which runs from 2005-08, that is the EEC2
mechanism, as to whether there should be a separate line and the
eventual decision was no, that would not be the case. Certainly
as far as what happens with EEC3, which will be kicking in in
2008, that may well be something that will happen and there will
be that separate line entry to show to every customer that they
are paying for energy efficiency measures.
Q412 Chairman: Do you think it is
right as a policy, therefore, in respect of EEC that the Government
should be the determinant of the way in which the customer's resource
is deployed given that up to now the Government has defined a
particular group of people who they want to see EEC have as its
priority target audience and not a wider community of users of
energy?
Mr Sedgwick: I think one of the
difficulties here is the push and pull approach. Would this be
happening if Government were not requiring this to occur? I think
what we have seen, and we have heard from earlier evidence, is
quite a changing marketplace in the course of the last 18 months.
I think in the last 18 months, certainly as someone with years
of experience within this sector, I do not think I have ever seen
so much either internal or external discussion about issues to
do with energy efficiency. My overall view would be that we should
be looking for customers to be demanding these things. I think
the EEC mechanism has done a very good job. Historically, it has
seen considerable improvements as far as energy efficiency is
concerned. I think that there is a lot more that can be done as
far as EEC3 is concerned in 2008 to start changing some of the
dynamics and some of the work that is done, but I do not think
I would wish to sit here and say that I believe that the approach
that has been followed in the past has necessarily been wrong.
I think the EEC mechanism can and certainly should be changed
now going forward because I think the fact that some of the dynamics
in the marketplace, for instance we have been hearing from B&Q
on some of the things that they are doing, I think that demand
from customers are now starting to come through.
Q413 Chairman: You are talking about
some of that demand and we heard from B&Q the difficulties
they are having in spite of some very clear messages about payback
on things like energy saving light bulbs. There is almost a sort
of reluctance, perhaps I might even use the word "apathy",
amongst the consumer to say, "Oh, it is all a bit too difficult
this really". When you look at the hard work, in fairness,
that some of your members are doing to try and promulgate the
message to their customers through publicity material and the
work of the Energy Saving Trust, how do you overcome this apathetic,
sluggish response from the bulk of the public to really get stuck
in on this particular challenge in terms of reducing emissions?
Mr Sedgwick: I think the EEC mechanism
has done some of that.
Q414 Chairman: But only in those
areas where it has been applied, particularly those which are
suffering from fuel poverty. I do not personally disagree with
that because that is a good policy objective, but it does mean
that all the others have not been touched by it.
Mr Sedgwick: Approximately half
the EEC money that is spent on that is not necessarily just spent
on that, 50% is spent on fuel poverty, it is spent in the priority
group which is not quite the same footprint as fuel poverty. For
the purpose of this, we can probably regard it as approximately
the same though. The other 50% is very much spent in the able
to pay. I think one of the challenges as far as EEC is concerned
is EEC is a really a dual tool that is looking at carbon saving
and also at fuel poverty. Our very strong view is that, although
it has achieved a great deal in some of those areas, this may
now be the time to divide that into two, to have a mechanism very
clearly focused on carbon-saving and another mechanism very clearly
focused on fuel poverty, because very often some of the work that
is done in order to take a home and a family out of fuel poverty
does not have the impact of saving carbon, for very good reasons,
because people take that saving in comfort and that type of issue.
I think going forward there is a strong case to divide those two
up. As far as what we have had in the past though, the tool has
been effective in making savings and in getting a number of properties
into a much better position than they were before. There continues
to be, if you look at fuel poverty, a much wider range of social-type
issues, income issues, quality of housing, et cetera. I
think for the first time probably in my 30-odd years in this sector
though because of the amount of debate and discussion we are now
having on how do we save energy, how do we educate people and
what is the method by which people understand that there are things
they can do, they do not necessarily have to go out there and
buy expensive wind turbines for £1,500 to put on their houses,
they can do things themselves, manufacturers can do things themselves.
We have seen—and you have briefly talked about—some
of the manufacturers' approaches. The white goods' manufacturers
have been encouraged to do a great deal as far as labelling and
that sort of thing. If we walked into an electrical store this
evening the labelling on white goods would be very clear, we could
see the efficiency ratings; look at brown goods, TVs and plasma
screens, you cannot really buy a TV based on how much energy it
is or is not using. Plasma screens, I know you will be aware of
the amount of energy they use, the amount of energy that is used
to make them, having a situation where standby buttons are on,
having situations where if you go into any city centre on a winter's
evening and look at the table and chairs outside, next to them
will be these stand-alone patio heaters.
Q415 Chairman: Mr Sedgwick, your
analysis of the problem is fine. Have you moved on to providing
some of the solutions about how you deal with the shopping list
of issues, which you so clearly enunciated, in getting the connection
to be made between the information that is there and consumer
action, the citizen's action? How do they respond to that?
Mr Sedgwick: We have a current
mechanism, the EEC2 mechanism, which is, largely speaking, based
on insulating the home, insulating cavities, filling cavities
and putting loft insulation in. That mechanism runs through to
2008. What it does not do is allow within the mechanism the flexibility
for the suppliers to be much more innovative. If one goes into
a home to put in insulation it does not enable you to do the other
changes that are necessary in the home, like draught-proofing
or putting in low-energy light bulbs.[51]
It is always interesting, we talk about low-energy light bulbs,
perhaps what EEC should do is talk about high-energy light bulbs
and ordinary light bulbs. Perhaps, again, we ought to start turning
these discussions around so that standard light bulbs are low
energy.
Q416 Chairman: In summary, you are
saying that EEC3 has the potential to be developed in a more innovative
way to address the issues which you put on your shopping list,
so who is going to decide if EEC3 turns out the way you suggest
it could be?
Mr Sedgwick: The ultimate decision-taker
on that is government via Defra and we are talking to Defra in
order to try and get them to come up with what we believe will
be more innovative proposals, not just rolling from EEC2 to EEC3
and making EEC3 yet more of an insulation scheme.
Q417 Chairman: Are you able to share
with us a list of what EEC3 should look like?
Mr Sedgwick: I suppose to be fair
with you we are a little bit still in the early days as far as
this is concerned, so at this moment the type of things we are
looking for is we believe that lighting should be able to go into
that, we believe that we should look and be able to get much more
microgeneration into that. We also believe—and this may
be a subject we will come on to later—that a lot of the
things which can be done with smart metering can also be covered
there. Perhaps I can ask my colleague to add something.
Mr Hamblin-Boone: Yes, I think
there are some additional things around behavioural change. At
the moment EEC is structured such that energy suppliers have to
prove the energy savings of a measure in order for it to attract
EEC credits, so they are, therefore, taking less risk, doing less
experimentation because it is too costly to get to the point at
which you can suddenly prove energy savings. Smart metering would
be a good example where you have got to go through a whole long
process and then finally present it to the Government and say,
"Right, here, we are making some savings, now can we have
our EEC credit?" If there was some element of EEC which allowed
that risk to be taken, so a kind of research and development credit
could be given against trying to assess behavioural change, that
would incentivise energy suppliers, and equally the Government,
to look at more options rather than going for the safe option
of insulation where the market is becoming smaller and smaller
and the opportunities fewer and fewer.
Q418 Sir Peter Soulsby: Following
on really from the last question you had there, Chairman, I would
like to take up three bits of your evidence and ask if you would
perhaps expand on them. I note that you said you: "... would
like to see the Government embark on a project, along with industry,
to ascertain the best vehicle for driving forward domestic energy
efficiency in the next decade". What are you asking Government
to do that goes beyond what you have just been telling us? Who
needs to be doing what?
Mr Sedgwick: I think that the
importance here is for Government to be very clear on setting
on overall strategy as to what we are trying to do. I do think
that, largely speaking, it is the things that I have been talking
about, so I think it is allowing there to be more innovation within
the market, allowing those things to be able to be counted against
EEC. I do believe though that what we are starting to see now,
and this is in the very early days, led by people like B&Q,
they are prepared to start investing in new products and they
are prepared to start seeing this sort of encouragement to a change
of customer behaviour. You then get into the type of changes that
if we are going to be able to take this forward, and I will give
you a small example; if, for instance, there is a consumer where
there will be some benefit in doing some work within their property,
we start changing the way that energy services are given to the
customer so what they then have is a longer-term deal. For that
deal they perhaps get a smart meter fitted within their property.
They get their property made fully energy efficient, I do not
just mean the walls and the roof space done, so fully energy efficient,
draught-proofed, low energy light bulbs, the whole package, and
that sort of thing will start changing over a period of time the
way in which people are using their energy. One of the challenges
that Government is putting to us is that we move from being companies
that are driven by selling more energy to companies who are incentivised
to sell less energy. That is quite a challenge for any business
because any business if it is seeing its income level go down,
which is what that could mean, has got to be able to reduce its
cost base in order to carry on as far as its shareholders are
concerned. The way we can do that is perhaps by things like smart
meters which can have a very strong business case for suppliers
based around billing costs, meter reading costs, et cetera,
and greater accuracy on settlement. All of those sorts of factors
are what we are now working with Government on but you have to
change certain things because of that. You certainly have to move
to a situation where you have this 28-day rolling contract for
a customer to be able to say, "Thank you very much, I do
not want to be with you any longer", because if that happens
that is driving short-term behaviour, it is not going to see the
long-term benefits.
Mr Hamblin-Boone: The other thing
that has already been mentioned is fiscal incentives and it is
clearly the carrot and stick approach, it is the stick for the
non-energy efficient products and looking more closely, for example,
things like tumble dryers and things like that are still very
energy inefficient and we could do more to either reduce people's
use of them or improve manufacturers' development of those products
to make them more energy efficient. We could look at, as B&Q
were saying, information at point of sale which is very important
as well. Energy suppliers, as you have pointed out yourself, make
a point of emphasising energy efficiency and emphasising energy
savings in the products they sell. There are lots of other products
available that are potentially energy saving that could be better
communicated to consumers.
Q419 Chairman: You were talking about
tariffs in commercial relationships. On the continent there are
some electricity tariffs which are geared on a maximum demand
basis, so that you buy the three kilowatt tariff or the six kilowatt
tariff, in other words there is a constraint on the total amount
of power that your home can consume and, therefore, you have to
make the rationing decision as to how you sort that out in terms
of making best use of the kit or the whole house gets plunged
into darkness. If you move to the six kilowatt tariff you end
up paying a premium for that. In the United Kingdom we do not
have such an arrangement, you have the design of your electricity
system which determines how much electricity you can push around
the domestic ring circuit and you pay for as much of the power
as you happen to use. Which do you think is the best? I am giving
you two alternatives, but is there another way in which the tariff
structure could be re-engineered to provide some energy saving
incentives?
Mr Sedgwick: The tariff structure
can certainly be re-engineered but to do it you need different
metering technology in the home. Once you have different metering
technology in the home you start opening up a number of these
opportunities to limit how much.
51 Note by witness: This is not the case because
EEC does include draught-proofing and low energy bulbs. Back
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