Energy Bill

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Q 88Anne Main: A sub-question on that. You mentioned your four times estimated gas bill, and gas comes up regularly as an issue. Do any of you have views on electricity display devices being a possible distraction to moving forward to smart metering?
Allan Asher: I just observe that the data that the EDD gives you is only about electricity. It does not have current prices and it cannot give you access to new prices or energy-saving tariffs. It can be costly and it certainly will be a big diversion on suppliers. I think that consumers who want EDDs should be able to buy them. But why should there be a tax on consumers to install in all homes devices that do not meet any of the tests when there is a roll-out of meters? It is a huge waste of money and, I fear, a huge diversion in the debate when we should be focusing on getting things right and making the market work.
The Chairman: I am trying to be fair about this. John Robertson was next.
Q 89John Robertson (Glasgow, North-West) (Lab): I would like you to explain the £60 that the consumer is paying? Do the companies claim that they are spending the £60 or do they accept that the £60 comes from the consumers? If so, should the £60 from the consumer be matched by the companies to ensure that there is proper development of energy-efficient designs and energy-efficient housing and so on?
Allan Asher: The current sum is more like £30, and it comes from what is called the energy efficiency commitment. We are just finishing the last phase of that and then it will change into a new scheme in which the commitment will double to £60 per customer for two fuels. As part of their licences to operate, the companies are required to commit a certain sum, averaged out at that, on measures for home insulation, energy efficiency, advice and various other things. It is not disclosed separately. Perhaps there is a case for that, but currently it is not.
Q 90John Robertson: My follow-up question would be to Ofgem then. What are you doing to ensure that there is some kind of visibility for the money that is taken from customers that is then supposedly matched by companies, and how do you ensure that the money is invested in a proper manner?
Alistair Buchanan: There are a number of issues there. Let me start with our administration role. We administer the energy efficiency commitment, the carbon emissions reduction target scheme and the renewables scheme. That is not what you would regard as a regulator’s job because it is more like an auditor’s job but I believe that we do it very well. On behalf of consumers, we have to ensure that those markets are administered fairly and according to the law. We also have to ensure, as best we can, that there is no fraud in those markets because large sums of money are involved. That is a very important act that we do on behalf of the consumer. We are also keen to ensure that the consumer has that information. One of the issues with regard to the price increases that consumers had to endure in January is that perhaps for the first time they are having to address the fact that they are paying for renewable environmental schemes. Some £80 of roughly £1,000 dual fuel average household bill is now a combination of ROC, which is about £10, your energy efficiency, which is about £35 to £36, and your European Union Greenhouse Gas Emission Trading Scheme (EU ETS), which is around £30. So, it is very much part of your bill, and there is only one way that that is going, and that is up. The ROC will go from £10 today to £21 by 2019 or 2020. I am not saying whether it is a good or bad thing. This is Government policy. I believe that consumers are starting to address what they are paying for. Allan raises a very reasonable issue, which is whether the companies start to put that on the Bill. As an aside, in my previous job, when I used to be involved with and follow German events, there was a German company called EnBW—one of Germany’s big four companies. It tried to put environmental taxes on to its bill and the Government passed an action to make sure that it could not. At that time, in 2001, it was an uncomfortable, high profile issue that the German Government did not want on the bill. Maybe its time has come, however.
Q 91John Robertson: You look at the fact that there is no fraud and that everything is in order in that respect. How many checks have been done efficiently and for the benefit of the consumer and not the company?
Alistair Buchanan: If these schemes operate, we are effectively acting as a middle man between the company that has a ROC certificate and the supplier that has been penalised. So we act to ensure that the moneys transfer across. We effectively act as an auditor and we stress-test that, as you would expect, through both external and internal audit programmes. It is a very big issue for us to keep control of.
Q 92John Robertson: I am sorry to press this point, but do you not have any regulation on how the money is spent?
Alistair Buchanan: No, the regulations are set down by the Government. Therefore, the Energy Bill with the ROC banding, for example, will merely be administered by us. That is not our policy.
The Chairman: A lot of Members are trying to catch my eye. We have only 14 minutes left. I shall now call people who have not yet asked a question.
Q 93Martin Horwood (Cheltenham) (LD): My main question is on transmission and distribution, but may I ask a quick chaser to Mr. Buchanan? Are you saying that if the energy companies wanted to protect shareholder value and simply pass on those costs that you were talking about to the consumer instead, you would have no power to stop them doing so.
Alistair Buchanan: Sorry, I do not quite follow you.
Q 94Martin Horwood: I mean the kind of costs that you were talking about that are coming on stream and which are likely to rise. If, as Mr. Asher pointed out, they wanted to prioritise and protect shareholder value and not pass the costs on to their shareholders in effect but pass them on to the consumers, you, Ofgem, have no power to do anything about that. Is that right?
Alistair Buchanan: That is absolutely correct and it is a very good question from my perspective, by way of looking at the market dynamic, because a way of being competitive might be that you say, “We will take some of the EU ETS charge, for example. Our shareholders will take that because we are going to win customers by offering a lower product and that will be part of our sales pitch.”
Q 95Martin Horwood: To move on to my substantive question, to Mr. Winser and Mr. Smith, from the provisions that are in the Bill, particularly relating to changes in the renewables obligation and banding and so on, do you expect any changes in the short to medium term resulting from this Bill in the patterns of distribution and transmission in the UK?
Nick Winser: From a transmission perspective, we would expect to see a substantial increase in flows from the north of the country to the south coming out of the encouragement of renewables, in particular wind power and offshore wind. We are projecting a very substantial increase in flows north to south. That is the predominant flow and has been for many decades. The demand centres are in the south and a large number of the renewables will be very remote from that. We are projecting those increases and we are working with Ofgem with regard to which projects should go ahead now to reinforce the transmissions systems to carry those flows. We are also going to work with Alistair’s people on what other project should be built ahead of the demand to make sure that renewables can come on quickly.
A large number of renewables are held up in planning—about 70 per cent.—and hopefully the Planning Bill will address that. The next problem will be getting enough transmission capacity to get them to the load centres.
David Smith: The other interesting challenge that we face—to a greater extent than the rest of Europe due to our large population growth—is that large population centres have grown up. That has a knock-on effect for the distribution network. The transmission system is pushing south. There are large new centres coming on line, particularly in east Anglia, which has not got large amounts of wire. We have remote energy generation in terms of offshore, and possibly nuclear. We have the North sea coast, the Teesside wind farm and so on, so a lot of work will have to happen to strengthen the existing network or to put in new build. If we take the example of Beauly, we know that it can take an awfully long time. That started in 2001, but will not come on until at least 2012, so the plans are long term.
Q 96Martin Horwood: This is more a question for Mr. Smith than for Mr. Winser, because it is about distribution at a local level. If there were a radical shift towards a more distributed system and if there were more geothermal heat substituting for gas, more small-scale community combined heat and power, wind power coming on stream or more tidal flow in various locations, could your members cope with the pace of change that we are probably looking for, or does more need to be done in the Bill or elsewhere?
David Smith: No. There are a couple of things that we talked about. The Planning Bill is important, and there is still a big skills issue that we must address. We need people who can build the network. The majority of it was built during the 1950s and 1960s, and those people are retired or coming up to retirement. We have a big plan, and we are already doing a lot of work on building the skills and getting the right people.
There is an issue with the price of copper, and ensuring that we have the necessary plant and equipment because 30 or 40 years ago, we probably had three, four or five manufacturers in the UK, but they are no longer based here, so we need long-term plans for 10, 15 or 20 years out to ensure that we have the right equipment, the right people and the right profiling to get everything in place.
Q 97Mr. Hugo Swire (East Devon) (Con): The discussion has moved on a bit, but I want to revert to something that Mr. Asher said about prepay meters and the way in which companies are behaving. Have you ever encountered—or is this a common problem—consumers who pay by direct debit and have variable bills, and the companies stack up the direct debits and do not volunteer to return the money immediately, so the consumer has to prompt the provider to return it or to discount it from the next bill?
Allan Asher: Yes, we receive thousands of complaints a year about such issues. There are requirements in the rules that if someone has built up a credit, they should be able to get it back within, I think, seven days. Some companies have been rather tardy about that.
The bigger problem was—it is now reducing—that some people did not get a bill for two, three or four and on one occasion seven years, and but then got a demand for immediate payment. I am pleased that Ofgem has now outlawed that, and if a bill has not been sent out for more than a year, that is too bad and the company cannot recover the money. That has led to huge improvements, but there is, sadly, still the administrative problem of tardiness in paying money back. However, it is a reducing a problem.
Q 98Mr. Swire: But should it be incumbent on the provider to reimburse the consumer after a certain number of days, regardless?
Allan Asher: Absolutely. If you have overpaid for something in any other marketplace, you would expect an immediate refund. There is no reason why you should not expect that here. Some people are happy to build up a credit, because it is a bit of a cushion into the winter months, but that should be at the wish of the consumer. If someone wants to do that, they should be allowed to do so; if they want their money back, they should get it back promptly and without fuss.
Q 99Mr. Swire: What is Ofgem’s view?
Alistair Buchanan: It is worth following this through. If there is a serious complaint by a consumer, and it is not handled properly by the company on the prompting of energywatch, which we then follow through, there is an ombudsman in place, and has been for two years now, through whom the consumer can seek redress.
Q 100Mr. Swire: That is not a particularly good use of the ombudsman, if I might say so. This is a mass problem, and it should be incumbent in law for the provider to reimburse the consumer.
Alistair Buchanan: There is a route there.
The Chairman: I have four people wanting to ask questions, and six minutes left.
Q 101Dr. Brian Iddon (Bolton, South-East) (Lab): Do you think the 20 per cent. by 2020 target will be hit if the Government intend to use secondary legislation to control the renewables obligation?
The Chairman: There are no offers to respond. Would one of you like to answer?
Nick Winser: I am not sure that I can address the point about secondary legislation, but the 2020 target is certainly challenging from an engineering perspective. There is an awful lot to do. We will need the Planning Bill and strong incentives. We will need simple, clean structures and organisational models to get it done. It is an incredibly challenging target for 12 years.
Q 102Albert Owen (Ynys Môn) (Lab): I have two brief points. First, Mr. Buchanan, I hold the citizens advice bureau in high esteem, but is it really its duty to inform people about switching, or is it the regulator’s duty to simplify the process on switching? The buck seems to be being passed to a voluntary organisation when the regulator should take a more robust role.
Secondly, on distribution and the location of some of the wind farms that you said were in isolated and often sensitive areas, will there be additional costs in getting the transmission of some of the northerly ones on to the grid system? Will Mr. Buchanan, and possibly Mr. Smith, address those points?
Alistair Buchanan: In terms of our working relationship with the CAB, I believe, from all the comments I have had from my team, that the relationship is working very well on both sides. For us and energywatch, the key is to ensure that we can help to get information to consumers. The CAB has to deal with those issues. As for the extent to which its staff are trained to a level at which they feel confident and comfortable with handling these issues, ultimately anything that we can do to help must be a good idea. Clearly, energywatch does a lot on that, as will the new National Consumer Council.
On transmission costs, yes, there is a range of transmission costs. As you know, throughout the past 20 years, the system has been based on the concept of locational charging. The further from demand you are, the higher the cost will be. There are issues regarding how the methodology works and how it is explained to potential builders of and investors in wind farms. For example, I spent an interesting week in the Hebrides in September, when there was a lot of discussion about the connection to the Orkneys. The charge for connection to Skye—I am going to use figures to give an example—was around £24 a kW. The charge for connection to Orkney changed while I was there from £114, which no one could really understand in relation to the price on Skye, to £76. It changed again, because of the question about what kind of standard is needed—N1 or N2. Those are technical standards from the grid company. The price might be a lot lower depending on what standard is used.
Part of the issue—we have discussed this with National Grid—is the degree of confusion about how the system works and whether the methodology is clear enough. On the back of that, we announced a major corporate governance review at the end of last year, which is to open up the rules and regulations within this sector. We are currently receiving feedback from that, and when we have a chance to digest it, we will have to work out how to take the project forward. The national grid will be very important in that regard. You have put your finger on an area of great concern, not only about the charge, but about how we get there. What does it mean? When will it change? Those are the things that we need to address going forward.
Nick Winser: I was just going to add that, yes, additional transmission infrastructure will be needed. It sort of depends on where the renewables are, especially if a lot of them are up around the north of England, or Scotland and above. It is worth bearing in mind that the part of the bill that constitutes transmission is only about 3 per cent. of consumers’ bills. Even though we will do quite a lot of work to reinforce the system, it is spread quite thinly across the charging base, at about 3 per cent., so I do not think that it will make a material difference to customers.
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Prepared 6 February 2008