Letter submitted by Centrica
Thank you for your letter of 11 January regarding
information you are gathering for the evidence session with the
Energy Minister on 31 January.
As you will be aware, British Gas recently announced
that it would be increasing gas and electricity prices by 15%.
We are firmly committed to supporting our vulnerable customers
especially during times of rising energy prices and as evidence
of this we have deferred the price increase for 340,000 customers
on the Essentials social tariff until 1 March meaning that none
of these customers will see a price increase until after the winter
period. Essentials offers up to 750,000 of our most vulnerable
customers the equivalent to our monthly direct debit rates—our
lowest standard offline gas and electricity tariff—irrespective
of payment method. It represents a financial commitment from British
Gas of £32 million per annum.
To offer further help for up to 25,000 of our
most vulnerable customers, British Gas has also launched a Winter
Protection Package, Winter Warmer, which includes a credit of
up to £90 and free insulation. We are also investing a further
£13.45 million in the British Gas Energy Trust over the next
four year, which helps consumers with debt problems, taking the
total committed by British Gas to the Trust to £21.3 million
since 2004.
A new report from energywatch last week found
that "British Gas has and will have made the most significant
voluntary commitment to measures to reduce the impact of fuel
bills on its vulnerable customers". The report concluded
that British Gas's financial commitment to helping its vulnerable
customers was "nearing double the level that would be
expected from its market share."
It is important to recognise that as the UK
becomes increasingly dependent on international and more expensive
sources of energy we can no longer rely on cheap energy prices.
The increasing environmental costs arising from the Renewables
Obligation and the Carbon Emissions Reduction Commitment are also
placing an upward pressure on domestic prices.
Since British Gas reduced its retail gas prices
by 20% in the spring of 2007, wholesale energy prices have risen
sharply and the forward gas price for 2008 has increased by 51%
and the forward electricity price by 61%. In addition the price
charged to British Gas to transport and distribute energy will
rise by 7% whilst CERT and RO costs are expected to add around
£31 and £12 respectively to an annual customer's bill.
Unfortunately we had no choice but to pass on
these costs in part to our customers. The last time British Gas
tried to absorb all of the increase in wholesale energy prices
it made an operating loss of around £200 million over a 12
month period. In the last six months of 2007, higher wholesale
gas prices have reduced British Gas operating margins to just
1% after tax.
It is important that British Gas generates sound
profits in order to fund future investment in securing future
gas and power supplies for our customers. We invested around £900
million in 2007 alone and we will invest around £2 billion
between now and 2009. We have also invested in our customer service,
with a £430 million commitment in a new billing system which
will enhance the customers' experience and lower our operating
costs to make us more competitive. Our internal costs reduced
by £140 million in 2007 and we are committed to a further
£60 million reduction in 2008. We are also committed to roll
out smart meters providing the Government creates the right market
conditions for the roll out to happen. Smart meters offer the
opportunity for energy suppliers to make a step change in the
services we offer customers, for example in the provision of accurate
bills and the availability of real time consumption information.
We would be happy to brief the Committee on this issue at a later
stage.
Even with the recent price rises, our customers'
bills will still be below 2006 levels. UK prices also remain competitive
compared with most other European countries. Average UK electricity
prices including taxes are the fifth lowest amongst the EU 15.
Britain's gas bills are also still amongst the cheapest with the
UK average gas price the second lowest in the EU 15. Belgium gas
prices have recently risen by 25%.
Going forward, we continue to call for faster
progress on liberalising energy markets in Continental Europe
which is important in helping break the link between gas prices
and high oil prices and which feed through to UK prices as we
import more gas from the Continent. Within the energy sector,
the Government estimates suggest that insufficient liberalisation
of EU gas markets will cost European energy consumers an estimated
£40 billion in 2007. A recent study by Copenhagen Economics
estimated that market opening in electricity could reduce prices
in the EU 15 by 13%. We welcome the third package of energy legislation
brought forward by the European Commission and we are calling
for full ownership unbundling as part of the package to improve
transparency and access to networks.
You also invited us to comment on the Government's
decision on nuclear power. We welcomed the Secretary of State's
announcement on 10 January which gave the go ahead to the construction
of a new fleet of nuclear power stations. We believe that new
nuclear will play an important role due to its low carbon intensity
and its contribution to the diversity of fuel sources in the UK
generation fleet. Centrica is already considering the economic
case for new nuclear power, reflecting the value we have gained
from sourcing nuclear generated electricity in recent years. We
will also continue to invest in other forms of low carbon technology
such as offshore wind and we remain committed to our role in the
gas market which could see further gas exploration and storage.
23 January 2008
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