Energy Bill

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Q 84Paddy Tipping: May I ask Mr. Buchanan for his comments?
Alistair Buchanan: There were two parts to the question. We are very keen to take the switching message to Scotland, and I know that Allan is as well. Switching in Scotland tends to run 2 to 3 per cent. below the 18 per cent. churn that there was last year in England. One of the substantial problems there is the housing issue. Housing renovation typically costs 10 times more with some of the poorly insulated housing in Scotland.
Looking at fuel poverty, there are three elements to it—50 per cent. is income, 15 per cent. is housing and 35 per cent. is the fuel bill. I am not trying to belittle the fuel bill, but it must be taken holistically. We are representing what we can do. We want to facilitate the opportunity to switch on the fuel price side. Clearly, housing and income sit with the Government and the instruments that they have. Taking Government as a lead into the targeting issue, it is extremely difficult to target the fuel poor.
The Warm Front programme ensures that one third of the fuel poor do not have access to it, which is an alarming statistic. With that in mind, Ofgem has launched a very good initiative with Citizens Advice—I have some of the guff with me—to ensure that its staff are well trained, so that they can ensure that they get people to get the best deal. Part of the problem is the confusion about what is the best deal. We have also funded research with Bristol university, ward by ward throughout the country, to try to analyse, through what we call our find and fix programme, who the fuel poor are.
Some practical issues could be addressed, such as returning to the days when a Department for Work and Pensions secondee would visit a fuel-poor person with the local company. Some macro issues, such as smart metering, can be addressed, and I hope that they will be. There will be a debate about social tariffs; but holistically, if you consider equalising the tariff, or setting a particular tariff for the fuel poor, it will be worth inquiring into how many people that might tip into fuel poverty. If you add a certain amount, assuming you do not expect the companies to pay for it, in which case I am sure that you spoke to them this morning and asked them to do so, it will be worth inquiring into how much more it will cost everybody else and what implications it will have for fuel poverty.
Q 85Steve Webb (Northavon) (LD): As you mentioned, we had evidence this morning from the companies, and I have a follow-up question that is germane to Alistair and Allan—one each if I may. I shall give you both questions, so that you can get thinking.
To Ofgem, Rupert Steele, director of regulation at Scottish Power, said that your analysis was simplistic, that it did not recognise the £9 billion figure and that it made long-term decisions about investment, so your suggestion that we might have any of it back was naive—my word, but it was implicit in his comments. I should be interested in your reaction.
To Allan Asher of energywatch, we asked about social tariffs, and I said that it spent tens of millions on social tariffs, to which he said, “Yes, but we spend billions on energy efficiency, and isn’t the most important thing for the fuel poor not to give them more money to pay high bills, or to make them pay slightly less, so that they pay less when they heat the open air, but to spend billions on energy efficiency? And aren’t social tariffs therefore a distraction?” In that sequence, can you respond to those two questions?
Alistair Buchanan: I am very happy to do so. You may have noticed that we were invited to see the Chancellor a few weeks ago, and the letter that was sent to us invited us to address what we called a shopping list of ideas on fuel poverty, so it is encouraging that the Chancellor wants to consider those issues. Among our shopping list were to get smart metering rolling, to examine the DWP’s work with companies on the ground, to get the Minister to join Ofgem when it hosts a fuel poor summit—we are delighted that he will join us in April—and finally, an idea that was not new.
We published the idea in April 2006 at the time of the energy White Paper. I was invited to offer ideas, and we took the idea that we offered in April 2006, which was that if the companies have been given a vast amount of free hand-out because of the EU ETS free hand-out scheme—and they have been—is there any opportunity for the Government to use some of it for fuel poverty? The answer may be no. I do not know whether the Government can do it; there may be issues about hypothecation, but that is not my problem. We gave an idea. We are not a lobby group, but a statutory organisation, and I am not lobbying for that idea. However, it is an idea, and it was part of the shopping list that we gave the Chancellor a few weeks ago.
Allan Asher: Ten seconds on that question, and then I shall turn to the question that you asked me. The £9 billion is not the companies’ money but consumers’ money. That is where it comes from. In a highly competitive market, the companies should be investing that £9 billion on low-carbon infrastructure, as intended, and nobody would complain if they did that. However, it is obvious that some companies are returning material portions of the money to shareholders. That should not be happening. The money should be competed away, and in an efficient market they would not have to claw it back, because competition would force them to lower their prices. In a competitive market, companies would not be able to get away with giving shareholders sums of money above the long-term average cost of production of the power.
The second question, which is on social tariffs, is an important one. Again, the companies are not spending billions on energy efficiency. The money comes from consumers. It is part of the energy efficiency commitment, which is a sum levied on everyone in this room who pays gas and electricity bills, and it is going up to around £60 per consumer. It will come from us, and the companies will direct it more or less to energy efficiency measures.
The scheme has been really good. It has saved a huge amount of carbon, but do not for a moment think that the money is company money—it is consumers’ money. Until now, there has been a target requirement that about half of it should be spent on measures for fuel poor customers: insulation, light globes and so on. There will be a bit of a change in the future. The money—not all of it—plays an important part in poverty alleviation. It is highly complementary to social tariffs, not in competition with them.
There are many ways in which we currently levy consumers for various things. Consumer prices, the climate change levy, the energy efficiency commitment and the European energy trading scheme—all of those come from consumers. Why is it only when we talk about some direct sum to the most grindingly poor in society that we find it offensive that money should be directed to them? I am puzzled by that.
Q 86Dr. Alan Whitehead (Southampton, Test) (Lab): I have some questions on investment in transmission and in plant. First, clause 40 relates to offshore energy transmission and gives Ofgem several responsibilities in respect of encouraging grid replacement and enhancement on an offshore basis, particularly through offshore wind renewables. Are you happy that the powers that the Bill provides are sufficient to develop those processes in the time scale that is clearly necessary?
Secondly, are you happy that the general imperative to increase investment, particularly in large renewable plant, will be undertaken on the basis of the present arrangements and brief of Ofgem, when probably at present the quickest and most competitive replacement for plant that is retiring is a combined cycle gas turbine power station with no combined heat and power or any other saving device attached to it? The general point of the question is whether the Bill is sufficient to enable the shape of energy reinvestments to happen in the way that we now feel that we need to direct them.
Nick Winser: On the offshore transmission regime, we do have concerns about the approach that is laid out in the Bill, which is to auction the provision of offshore transmission. That has not been done before. It seems to us that it is a complex, innovative and uncertain way of approaching this task, which is very significant, as the Committee will have discussed. Getting to the sort of level of renewable deployment that we need to get to by 2020 needs some quick and certain action. There has been talk of 33 GW of renewables offshore. Twelve years is a blink of an eye against such a challenge.
In National Grid’s view, we need to deploy simple, co-ordinated, well tried and tested, regulated transmission build. In short, we do not think that the proposed approach to auction transmission offshore is going to be quick, certain or in customers’ best interests. We do not think that it will help us to get to the carbon targets. We think that it will introduce delay. It would be better merely to extend the regulated transmission provision offshore for ourselves and for the Scottish transmission companies.
Alistair Buchanan: May I start with an overview in respect of your concern about whether Ofgem can handle the new challenges? Over the past five years, we have shown in our price control decisions that we are very minded to the renewable task. In the price control review of 2004, on the local electricity network, we increased capital expenditure by 50 per cent. In the transmission price-control review—National Grid’s review, two years ago—we increased capital expenditure by nearly 100 per cent. The renewable elements within that have been clearly identified, and if they are such a large sum, we actually set the sums of money aside for that project. So there are four projects, effectively all in Scotland, under the banner of transmission of renewable projects, for which the consumer is going to provide £560 million in addition to our normal five-year price control review. So we are extremely minded to it.
Crudely, I believe that Ofgem, as an organisation, has been able to evolve because we have gone from the privatisation compact of “RPI minus x equals save” to “RPI minus x equals spend” to ensure that we have a reliable, trustworthy and renewable connected network that the consumers want. I feel confident about that.
On the specifics of the offshore regime, the Minister put his stamp on the non-exclusive competitive approach in March last year. The structure is now in place.
To answer your excellent questions as a business manager, yes, I am pleased that we have got the powers that we need to be able to do our job as set out in the Bill, which means that we will be able to push this forward quickly. I am also pleased that it is going to be paid for, so there will be no worry about administration costs dragging down the process.
David Smith: I should just like to make a couple of points about what happens when the transmission hits shore and becomes part of the distribution system. The build will be in remote places. We will, at the same time, have to look at our distribution network and whether we need to beef up the network or put new networks in place.
I had a conversation in this room a couple of weeks ago on the Planning Bill. These things need to sit hand in hand, because we cannot end up with wholesale pieces of the network sitting in planning for long periods. We also have a major skills shortage, and we need to address it. It is all about considering a series of stacking issues, rather than just focusing on one level of investment.
Q 87Anne Main (St. Albans) (Con): I should like to take you back to two things on your shopping list: smart metering and fuel poverty. Are you disappointed that they are not included in the Bill? Following on from that, you mentioned that some 52 per cent. have switched their energy tariffs between providers. Have you done any analysis of that? Because having mentioned that statistic, you threw in the fact that the most disadvantaged—still the most disadvantaged—were those on pre-paid meters up north somewhere, I think that is what you said. Have you analysed who is switching? If so, is this something to do with access to the internet or information or just being savvy enough to negotiate a complex system of tariffs? I would like to bring the two things together and ask if the lack of smart metering in the Bill is something that you feel is a lost opportunity to allow more people perhaps to switch tariffs or to engage with the best tariffs?
The Chairman: Who would like to take that question?
Alistair Buchanan: I am happy to start the answer to that question.
A few weeks ago in Parliament, Paddy Tipping hosted a meeting on smart metering. The reason I start by referring to that meeting is that I might have been unhappy at the lack of smart metering in the Bill had I not gone to that meeting. At the meeting, the director general of energy at the Department for Business, Enterprise and Regulatory Reform made it quite clear that the Government will make a statement on smart metering in the near future. Therefore, I am excited by the fact that a statement will be made on smart metering at some stage in the near future.
Ofgem has an open position on this issue. We favour the introduction of smart metering. There are two models that have been put on the table; what is called the franchise model, and the market mandate model. We favour the market mandate model, but we are particularly keen to see a decision made on this issue. Clearly, to an extent the decision and the timing of the decision might be confused by the two-year pilot scheme that Ofgem is currently running, but I was very encouraged by the announcement at that meeting.
To answer your switching question, and I am sure that Allan has even more up-to-date data than I have, you are absolutely right; around that central figure, there is a range of very interesting issues. One such issue is that, on gas pre-payment meters, the level is down at about 36 per cent. We must think about how we address that.
In terms of vulnerable and fuel-poor people, you get quite an interesting range around that figure. On the latest data that I looked at before coming out here this afternoon, single mothers with dependent children are switching above that level, whereas elderly people are switching below that level. So, it is difficult to make generalisations once you start to break the data down to see which part of the vulnerable customer group does not appear to be taking advantage of this opportunity. We have to look at the breakdown of that data and see how we can access those people who are not doing so.
Allan Asher: We say “smarter metering” rather than “smart meters”, because we are not referring to a lump of technology. Instead, smarter metering is the process of equipping consumers with much better and much deeper information about the services that they acquire, with up-to-date information on prices and quantity, the ability to have time-of-day tariffs, accurate bills and all of that. Most likely, it will be provided by a lump of hardware somewhere, but the point is the services offered by smarter metering and not the machine.
The key for us, though, is that smarter metering allows us to do two hugely important things. First, we will at last be able to get rid of what I think are these dreaded “poor pay more”, or PPM, meters; you might know them as pre-payment meters, but we know them as the “poor pay more” meters. I gave you the example in the north of people having to pay £486 a year more if they happen to be trapped with a PPM rather than being able to get somebody’s internet tariffs. That would disappear overnight; you would be able to switch from one tariff form to another.
There would be lots of other switching blocks as well. At the moment, if you are in debt you cannot switch and there are millions of consumers in that situation, especially if you are in Scotland. If you have a telemeter, that is a technology whereby hundreds of thousands of people simply cannot switch. We know that the elderly do not switch, and we know that anybody on a pre-payment meter cannot switch using the website. Six million people are prevented from effective switching. Smarter metering solutions will tend to make a lot of that switching easier.
There is also what I consider to be the clearly emerging evidence from around the world that shows that, if consumers get this accurate, timely information about their consumption and their options, they will use less energy. People respond positively. At the moment, however, one in three of our current bills are wrong, because they are based on an estimate of consumption and not on an accurate read.
How can people make the market work, or how can they conserve energy, if the information is so poor? I received my own bill yesterday. The last four bills that I have had for gas were based on estimates, even though I have an outside meter. I have no idea what my actual expenditure was. Smarter metering would almost immediately eliminate that as long as there is also a preference for eliminating pre-payment meters.
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