Supplementary evidence from EDF Energy
During the oral evidence I gave to your Committee
last week I promised to provide a note giving more details about
bad debt. I would in addition like to clarify some of the evidence
I gave in relation to vertical integration and risk.
On the first point, it is obviously not a surprise
that bad debt increases when prices rise. EDF Energy has nevertheless
been working hard to reduce bad debt levels, and to mitigate the
impact of price rises. We were the first company to introduce
a trust fund, overseen by independent trustees, to help customers
most in need: to date the trust has awarded £7 million to
some of our most vulnerable customers. However, we have still
seen an increase of 7.6% in the amount of customer indebtedness
over the last twelve months, and we currently predict around a
10% increase in bad debt this year compared to 2007.
On the second point, relating to vertical integration,
some of the confusion stems from written evidence given to the
Committee by Ofgem, which stated that the value of trades in the
wholesale market was only £31 million in 2007. This figure
was cited in questioning by Adrian Bailey MP. Unfortunately this
appears to be a typographical error on the part of Ofgem, whose
evidence is quoting from an FSA report that in fact estimates
the market value of such trades to be £31 billion.
As we have said to the Committee, vertical integration
is a way of reducing risk, and thereby reducing our customers'
exposure to volatility in the wholesale gas and electricity markets.
As members of the Committee highlighted, it is for example beneficial
to the UK to have more vertical integration in gas through the
building of gas storage. Similar benefits arise from vertical
integration in electricity, by reducing financial risks. We do
not have to sell directly from our electricity generating plants
to customers to realise this benefit.
It is important to be clear, however, about
the difference between the physical supply of electricity from
a generator to a customer and the volume of electricity traded
in the wholesale market. When I was asked whether all of the electricity
that EDF Energy generates is sold on the wholesale market, I said
yes. I wish to clarify this by making clear that we trade the
equivalent of all of electricity we generate, and in fact much
more besides: in 2007 we generated 26TWh in 2007 and traded 124TWh.
We trade to source electricity for our larger
industrial and commercial customers, to hedge our generation position,
balance and "shape" the mismatch between the electricity
we generate and our customer demand, and to adjust for volume
changes arising from events such as abnormal weather. It is this
traded volume which determines liquidity in the market, not the
extent to which there is a transaction between our plants and
our customers or other customers.
The benefit to customers of vertical integration
is that vertically integrated companies are able to manage the
volatility between the wholesale and retail markets, thereby reducing
the cost to our customers. Of course, when the primary costs of
fuels rise as they have done over the past few months, the margins
in both wholesale and retail markets are squeezed and retail price
increases are inevitable—but companies will all try to avoid
raising prices for as long as possible to maintain a competitive
offering in the market.
I said to the committee that this market is
not perfect and can be improved and that we have to be realistic
and modest and to recognise the strengths and weaknesses that
we are all facing in Europe in general and the UK market in particular.
There are a number of factors that can explain
why trading multiples in the UK are not as high as in the Nordpool
and in Germany. A key factor is the existence of an exchange that
can facilitate financial trading in futures, allowing market participants
the flexibility to trade non-physical positions. These exchanges
also offer a clearing service for Over The Counter (OTC) trades
which reduces the counter party risk for market participants.
As I said to the Committee, EDF Energy is supporting efforts to
create such an exchange within the UK. The experience of Germany
and the Nordpool holds valuable lessons for the UK and demonstrates
that more vertical integration does not reduce liquidity. In the
German market there are only four major vertically integrated
players, but considerably more liquidity than in the UK.
1 July 2008
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