Memorandum submitted by Centrica plc (CIT
40)
INTRODUCTION TO
CENTRICA
1. Centrica plc was formed in 1997 when
the former British Gas plc was demerged to form BG Group and Centrica.
In the UK, we trade under the brand names British Gas, British
Gas Business, Scottish Gas and Nwy Prydain. We are the UK's largest
energy supplier, supplying around 11 million gas and 6 million
electricity customers in the domestic sector and around 900,000
customers in the Industrial and Commercial sector.
2. Centrica believes that individuals can
play a key role in reducing carbon emissions and as a major supplier
in the UK we are committed to offering advice and practical support
to our customers and others on how to do this. In this submission
therefore, we have concentrated on those areas with which we are
most familiar: namely domestic energy efficiency. Individuals
can also influence overall emission levels, however, through other
personal choices associated with surface travel and aviation,
for example, and we believe that carbon emission reductions need
to be found across all sectors.
WHAT IS
THE REAL
SCOPE FOR
INDIVIDUAL AND
LOCAL COMMUNITY
ACTION TO
CONTRIBUTE TO
TACKLING CLIMATE
CHANGE?
3. Centrica believes that in establishing
a strategy for tacking climate change there should be an overriding
principle that all sectors should face the same or similar carbon
price incentives to reduce the level of carbon emissions they
generate.
4. Currently around 25% of all carbon emissions
are generated in the domestic sector and energy efficiency can
make an important contribution towards Government carbon reduction
targets.
5. Individuals can make a range of choices
that can limit their carbon footprint. In the energy sector, these
include reducing energy consumption, becoming more energy efficient
and moving towards greener energy where that is possible. These
areas are expanded in the following sections.
The Energy Efficiency Commitment (EEC)
6. The Energy Efficiency Commitment (EEC)
is one of the flagships in the Government's instruments to improve
energy efficiency in the household sector and a key part of the
UK's Climate Change Programme.
7. Energy suppliers have been committed
to EEC and have delivered substantial energy savings under EESOP
and EEC1. However, the success of previous programmes has been
largely due to the flexibility that suppliers have had to deliver
the programme, together with the emergence of new products and
channels and growth in target audience through the inclusion of
gas homes.
8. For EEC2, running from April 2005-08,
the situation is very different. Traditional growth products such
as appliances and compact fluorescent lamps (CFLs) are working
at full capacity, whilst condensing boilers no longer receive
as many EEC credits now that they are becoming mandatory under
changes to the building regulations.
9. No significant new product developments
are anticipated during the first three years of EEC2. Instead
almost the entire programme, around 80% of the energy savings,
will need to come from insulation. This is a heavy dependence
on a sector which is already facing capacity constraints, with
few options available from other areas. Centrica believes, however,
if government is to transform domestic household energy consumption,
it needs to consider enhancing EEC.
10. Realistically, a more radical evolution
of the scheme is unlikely by 2008. However, we believe it is imperative
to push through changes as quickly as possible with the overall
aim of completing the necessary reform before the end of the current
EEC phase.
11. Key changes to the scheme should be
considered in the context that early agreement to the transition
rules between EEC2 and EEC3 are required before any decisions
about the proposed shape of future schemes takes place.
12. The following changes would enhance
EEC and support delivery of the government's carbon targets:
Reward behavioural changes
13. To achieve the level of carbon emission
savings required to reach the government's overall target commitment
will require fundamental behavioural change by consumers. To facilitate
this, there should be scope within EEC3 to reward for actions
such as energy efficiency audits and consumption changes that
could result in positive sustained behavioural change.
14. In support of this, the inclusion of
smart metering and measurement devices within the remaining period
of EEC2, and within EEC3, could encourage innovation and could
potentially stimulate investment in smart metering for those customer
segments where it would otherwise be uneconomical to do so.
15. These approaches could incentivise the
introduction of innovative new tariff structures and product offers
that reward consumers for changes in consumption. Linking this
approach in with the carbon traded market would enable suppliers
to be innovative and flexible to customers and pass on additional
incentives for behavioural change.
Encourage investment and inclusion of new technologies
16. The current over-dependence on insulation
which accounts for around 70-80% of EEC is ultimately unsustainable.
There is an urgent need to widen the scope of EEC to incorporate
a more diverse portfolio of energy efficiency products.
17. To encourage this, government must create
a framework to attract investment and encourage new technologies.
Under current rules, energy efficiency measures are prohibited
unless a demonstrable energy saving can be verified.
18. There should also be greater sharing
of risk, which currently lies entirely with suppliers and manufacturers.
By allowing products to be accredited for EEC whilst the energy
saving potential is being evaluated, this risk could be shared,
which would encourage greater inward investment. This must be
aligned to a more rapid process for accrediting products with
EEC carbon savings.
19. The inclusion of new renewable technologies
is paramount to increase the range of products offered to householders
under EEC. Only micro-CHP is currently recognised. This should
be extended to include other forms of renewable technologies such
as micro-wind.
BUILDING AND
APPLIANCE STANDARDS
20. Individuals can choose to replace appliances
with more efficient equipment. This depends, however, on more
energy efficient products being available, and consumer awareness
of the benefits of these products. Centrica has been promoting
energy efficient appliances under the EEC programme.
21. In addition to enhancing EEC, we believe
that the government should implement a strategy for progressively
raising building and appliance standards. The raising of boiler
standards to the latest condensing technology combined with tougher
building regulations have been very successful in increasing the
base standards in these industries. This approach should be used
to increase appliance standards and further raise building regulations,
ensuring at the same time that the market has the flexibility
to meet these standards in the most efficient manner.
22. To ensure improvements in home efficiency
are met, it is important that the necessary controls are in place
to ensure full compliance. The introduction of energy efficiency
audits will provide the framework to introduce energy efficiency
standards on the existing housing stock, potentially requiring
sellers to achieve a prescribed thermal efficiency before they
can put their properties onto the market.
23. We also suggest that the government
should consider ways in which the new requirement under the Housing
Act for an energy audit when a property is sold could be adapted
for application in the rented housing market, in order to raise
awareness and reinforce the incentive for landlords to improve
energy efficiency.
24. Looking more radically at energy efficiency
initiatives introduced in other countries, the government could
look to set regulations for the household products sector that
are far more challenging. This could include, for example, setting
a very high energy efficiency standard that really stretches manufacturers
to achieve the required energy savings for products sold in the
UK.
25. This will encourage significant innovation
and help radically transform the energy consumption and hence
carbon emissions of these products. It will also be necessary
to consider, in that part of EEC which is aimed at fuel poverty,
the extent to which this new energy-saving technology is or can
be made affordable for low income households.
MICROGENERATION
26. Technological developments, including
microgeneration have the potential to deliver major improvements
in household energy efficiency in the UK at either the individual
or community level. A Society of British Gas Industries (SBGI)
commissioned report entitled "Micro-CHP—Updated market
projections" has estimated that micro-CHP products could
realistically be expected to have displaced over 30% of annual
domestic boiler installations by 2015.
27. This is estimated to provide carbon
savings of 0.4 Mt per annum by 2015 rising to 1.1 Mt per annum
by 2020. These market projections will require validation as product
offerings are introduced to the market.
28. Centrica is actively exploring a range
of microgeneration technologies including domestic combined heat
and power, wind turbines and solar thermal panels. We are working
with Microgen to develop a domestic combined heat and power boiler
for UK homes. These developments have the potential to significantly
change the type of boilers we use for our heating and hot water
in the UK.
29. We also have a relationship with Ceres
Power to develop the world's first mass-market, household boiler
powered by fuel cells. Unlike many fuel cells, the Ceres fuel
cell can work on natural gas as well as hydrogen, making the technology
immediately accessible by UK households with a gas central heating
system.
30. Micro CHP is an important carbon reducing
technology which is reaching a stage where it can now be manufactured
to a high reliable standard at an acceptable size and at reasonable
cost. However, pump priming of this market is important if consumers
are to be persuaded to buy them and help the technology achieve
critical mass.
31. We support the decision by the Government
to reduce VAT on grant funded microCHP as a move which could offer
reduction in household energy bills. However, for these savings
to be significant it is vital that this reduction should be available
for one-off domestic customers and on the total installation of
the microCHP boiler and not just the product. In addition, microCHP
should be given the equivalent grant funding on start up as other
energy efficiency products such as photovoltaics.
32. British Gas has also signed an agreement
with Windsave to make roof-top wind turbines available to UK households.
We will be undertaking the first trials in Scotland and the South
West later this year, and if successful, will look to roll the
scheme out across the country.
33. The microgeneration industry is in the
relatively early stages of market development, with a range of
technologies at different stages of development. Some are poised
for mass market deployment, some are still in development stage.
Some of these technologies will reach mass market production which
will help reduce the costs of the technologies but fiscal incentives
such as capital grants or VAT reductions/exemptions on technologies
will also help stimulate demand.
34. We welcome proposals in the Energy Review
to introduce Permitted Development for domestic wind turbine which
will help avoiding delay in installation whilst that can be associated
with getting planning permission.
35. Industry are currently working together
to develop arrangements for the export of electricity by domestic
customers to the grid. As this becomes likely, it will require
regulatory changes as well as investment in the grid and domestic
meters.
SMART METERING
36. For households to understand and effectively
manage their consumption, it would seem advantageous if they had
more information about the energy they are using, based on smart
meters or other devices. Furthermore, there exists some potential
around the use of remote devices with existing meter technology.
Ofgem's Demand Reduction Trial and also other supplier initiatives
will be helpful in establishing the potential for energy efficiency
gains. Early research is required to test the impact on consumers
of such technologies and to fully understand their potential to
provide a way to enable consumers to manage and reduce their consumption
in a long-term sustainable way.
37. Customer response to information provided
by smart meters is dependent on that information being conveniently
visible. This suggests the smart meter should be linked to a separate
display screen. A cheaper and less complex way of engendering
this response—at least in electricity—may be found
in other devices which measure instantaneous consumption for households
or for individual appliances.
38. A key element of overseas experience
in electricity has been that introduction of smart meters has
been accompanied by other policy initiatives, in particular novel
tariffs reflecting the time of use, which are used to smooth consumption
peaks. However, the effects of meters, tariffs and customer awareness
campaigns must be understood if any smart meter programme in the
UK is to be soundly based.
39. We note that in gas, Ofgem believe a
seasonal or monthly tariff is more likely than the time of day
tariffs envisaged for electricity. Such a solution might be achieved
with relatively simple Automated Meter Reading (AMR), or even
without changing existing meters to encourage and reward on-going
changes in consumption behaviour, but again, further work would
be necessary to understand the effects of such an approach.
40. The incentive of the competitive market
will give suppliers another strong reason to really engage the
customer and reward them for behavioural change, knowing there
is also potential commercial advantage for being creative and
innovative. Such an approach also provides an opportunity for
greater linkage to energy services.
41. Linked in to what can be done around
behavioural change, there is the possibility in the competitive
market, if suppliers have detailed meter data, to offer customers
the opportunity to benefit from new innovative tariffs that reward
sustained behavioural change. In the longer term, if this can
be linked to a move to a wider carbon traded market, suppliers
could utilise the opportunity to trade carbon savings into a wider
carbon market.
42. However, as Ofgem has acknowledged,
underlying savings estimates as a result of the introduction of
metering can only be illustrative. There is little or no reliable
evidence yet of sustained change in consumption resulting from
use of smart metering in this country. Claims of overall energy
savings are often based on limited sample size, or the experience
of other countries with very different climate and appliances,
and evidence of sustained reductions is not yet available.
43. As a first step, Centrica is keen to
understand how consumption monitoring devices may be useful in
encouraging consumer awareness and reductions in energy use. We
are also keen to test how far the provision of information to
consumers can contribute to changing customer behaviour.
44. We would note that if higher tariffs
and customer price awareness produce the expected changes in customer
behaviour, current high prices may already be delivering the kind
of changes which some assume are dependent on smart meters.
What are the barriers to uptake of climate change
mitigation strategies at the level of the individual and how can
they be overcome?
45. Historically, consumers have been generally
apathetic towards energy efficiency and have been reluctant to
invest in energy efficiency measures such as cavity wall and loft
insulation. This situation is compounded by a general lack of
awareness of the extent to which the individual can make a difference.
46. In our view, there is more scope to
encourage energy efficiency measures as money saving initiatives,
rather than specifically carbon saving initiatives. British Gas
has recently proactively marketed an energy audit to around 9
million of our customers. Around 650,000 have so far completed
and returned their questionnaire. The Energy Savers Report is
thought to be the biggest energy census of Britain's homes, highlighting
savings of around £184 per annum per household for those
who have responded. We are currently analysing the responses and
will be releasing the results of the Energy Savers Report later
in the year.
47. Customer apathy to energy efficiency
in general remains a barrier to take up and ultimately to a reduction
in carbon emissions. Currently vulnerable customers such as the
elderly and disabled can qualify for free insulation under the
fuel poverty programmes run by energy suppliers and the Government.
Despite this, take-up is not as strong as would have been expected.
Furthermore, despite significant product subsidies in the able-to-pay
section of the market, consumer demand could be stronger.
48. A further barrier is the cost of equipment,
particularly in the early stages of a technology coming to market
when economies of scale are not there to exert a downward price
pressure. Modification of the current EEC scheme would allow energy
suppliers to give grants towards new equipment, as is currently
the case with condensing boilers.
49. Two key barriers to the installation
of microgeneration technologies include technical problems associated
with the installation of equipment in UK homes, and problems of
acceptability of carbon reduction equipment in some instances.
50. There is an additional challenge in
the rented sector when landlords may be reluctant to incur a capital
cost of installing energy efficient equipment when the benefits
accrue to tenants. Centrica believe that the most efficient way
to tackling this would be by direct landlord incentives in the
form of a tax break to the landlord for installing energy efficient
measures, perhaps against VAT/ Corporation or Income Tax.
51. There is scope to develop marketing
approaches that capture the consumer interest and offer additional
benefits. Linking energy efficiency to fiscal measures is one
way to do this. A trial launched by British Gas confirms that
linking energy efficiency to local council tax bills is appealing
and cuts through customer apathy.
52. As a market leader in delivering energy
efficiency products and programmes, British Gas has taken an important
step to help tackle this problem through an innovative scheme
which aims to motivate this group to see the benefits of improved
energy efficiency.
53. Working with a number of local authorities,
British Gas has developed an initiative that encourages the take-up
of energy efficiency measures by offering customers a discount
of up to £100 on their council tax bills after having subsidised
cavity wall insulation installed in their home.
54. Although the householder has to initially
invest around £225 to install the insulation, the resulting
savings on energy bills average around £150 per annum. Householders
can also spread the cost of the cavity wall insulation—discounted
from a normal retail price of around £430—over two
years.
55. In addition, under the scheme customers
are also entitled to a "Home Energy Audit" that highlights
other areas where they may be able to save energy in the home,
and potentially reduce their bills. Coupled with the council tax
rebate of up to £100, householders could see their investment
paid back within two years.
56. The installation of the cavity wall
insulation is managed by British Gas and is installed by installers
contracted to British Gas. Once the installation work has been
completed, British Gas notifies the participating Local Authority
who then arrange for the customers to receive the "rebate"
on their council tax, £50 of which is funded by British Gas.
The customer has the option of receiving the payment as a single
payment to use as a rebate against their annual Council Tax bill
or to spread the payment across 12 direct debit instalments.
57. The scheme was initially trialled at
Braintree Council, Essex in 2004 and has now been extended to
25 Councils across the country including South Cambridge, South
Hams, Taunton Deane, Conwy and Fareham. We are also in discussion
with many other Local Authorities about joining the scheme in
2006. The scheme is promoted through enclosures in council tax
bill mailings and the local press
58. Not all Councils have taken the decision
to match British Gas' funding, which is why customers participating
under the Braintree Council scheme receive a payment of £100
and customers in South Hams and South Cambridgeshire, for example,
receive a payment of £50.
59. We believe the scheme offers real benefits
to householders by offering both lower energy and council tax
bills and more energy efficient homes. So far the response to
the scheme has been encouraging, demonstrating that there is an
appetite for energy efficiency improvements that are linked to
fiscal incentives.
60. The government should explore introducing
a range of fiscal incentives, through, for example, council tax,
stamp duty, VAT, to stimulate increased consumer pull for energy
efficiency solutions.
61. Furthermore, in general consumers do
not understand the cost benefits of installing energy efficiency
measures, and the savings that can be made. However as energy
prices have increased we are seeing more consumer interest in
saving energy, but cost rather than saving the climate seems to
be the key driver for this.
62. Energy efficiency products such as loft
and cavity wall insulation are fairly dry subjects and some people
perceive a high-hassle factor in terms of installation. Microgeneration
products could change this perception as they seem to grab the
public imagination more. There has been great interest, for example,
in our domestic wind turbine trial announcement.
How can government and other agencies—at
national, regional and local levels—encourage the uptake
of domestic emission reduction measures? What is the role of community
projects in schools and other public institutions?
63. A lack of consumer awareness around
domestic energy efficiency measures can be addressed via consumer
awareness campaigns by government and other agencies. The public
sector also has a key role to play in leading by example. Community
and school schemes are also valuable in creating awareness.
64. British Gas' national "Think Energy"
programme is a free online educational programme designed to teach
students about different types of energy and the importance of
energy efficiency. Educational resources, based on the national
curriculum, have been developed for children aged from 7 to 18.
Teachers, pupils and parents can access free downloadable resources
from the website. Since it began, more than 52% of schools have
requested the resources. In 2005 we launched a new "Think
Energy" website to encourage children to get involved in
the battle to save energy and combat climate change.
65. Fun online characters such as Billy
Buzz and Power Pals have been introduced to help educate tomorrow's
adults about the dangers facing the planet. We hope "Think
Energy" will inspire children to think about the energy they
waste and the impact this has on the environment. The award-winning
programme has been running successfully for four years and has
already been used in thousands of schools, helping to develop
an understanding of energy concepts.
66. National government has a role to play
in setting improved building and appliance standards, reforming
the planning regime to encourage low-carbon development. Fiscal
measures will also have a role to play and the recent decision
to reduce VAT on grant-funded micro-CHP is an indication of what
could be done.
67. There is also scope for establishing
a wider carbon market, and we would like to see government explore
this. This would establish a framework for initiatives by energy
service companies, suppliers and others, and would encourage the
best practice and innovation in the domestic energy efficiency
market.
68. British Gas is committed to helping
our customers and others reduce their energy consumption and has
significant plans for an awareness raising campaign in the coming
months.
Here to HELP
69. British Gas' multi-million-pound "here
to HELP" programme is a national venture tackling the root
causes of household poverty in Britain's most deprived areas.
It was launched in 2002 with an aspiration to help make one million
households warm, safe and comfortable.
70. The programme offers energy efficiency
improvements, benefits assessments, essential appliances and adaptors,
home security measures, and advice from our charity partners—all
for free. It has identified almost £8.5 million in unclaimed
benefits, making a real difference to help improve people's quality
of life.
71. The programme works through a partnership
with six major national charities, each of them offering their
own skills and experience in improving the quality of life for
vulnerable families, older and disabled people. We refer people
in need to the charity we think can offer them most help.
72. Many local authorities and housing associations
have signed up to the programme and have seen the difference it
can make to their communities.
73. Our partners are Help the Aged, Family
Welfare Association, National Debtline, Scope (includes Capability
Scotland), Royal National Institute for the Blind and Save the
Children.
Centrica plc
September 2006
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