Memorandum submitted by Energy Retail
Association
The Energy Retail Association (ERA), formed
in 2003, represents domestic electricity and gas suppliers in
Great Britain. All the main energy suppliers operating in the
residential market in Great Britain are members of the association—British
Gas, EDF Energy, npower, E.ON, ScottishPower, and Scottish and
Southern Energy.
The ERA is pleased to submit written evidence
to the BE Select Committee inquiry into the UK energy market.
We have limited our responses to the following areas of the Committee's
inquiry:
— whether the current market structure
encourages effective competition in the retail markets for gas
and electricity;
— the effectiveness of regulatory oversight
of the energy market; and
— progress in reducing fuel poverty
and the appropriate policy instruments for doing so.
In this response we aim to present a comprehensive
picture of the retail market with a level of detail that demonstrates
the diversity of offers and range of consumers that are catered
for. We will support this with independent evidence sourced through
desk research. In order to represent the retail energy market
in context we have provided some background information on the
dynamics of the market.
The ERA evidence submitted here is intended
to be factual and a comprehensive report on all the areas of the
inquiry in which we are qualified to comment. For completeness
we have included some additional comments, which due to their
topical nature are likely to be raised in other submissions.
Whether the current market structure encourages
effective competition in the retail markets for gas and electricity
1. Background to Changes in the Market
Key points:
— We are no longer an energy island
with domestic UK Continental Shelf gas and oil reserves. Therefore,
the price we pay is aligning itself with our EU neighbours whose
Governments face similar pressures to control rising prices.
— Britain continues to have some of
the cheapest gas and electricity in Europe.
— All energy retailers purchase from
the same wholesale and primary fuel market and are, therefore,
affected by the same wholesale price volatility. This means they
face similar movements upwards or downwards in their costs at
broadly the same time. However, actual price movements will also
be influenced by suppliers' individual strategies.
— Purchasing strategies are based on
securing future national supply and meeting current and projected
future demand.
— Britain's dependence on gas-fired
generation makes our need for competitive gas supply even greater.
1.1 Since the gas and electricity industries
were opened to competition over ten years ago Britain's energy
retailers have operated in an increasingly globalised marketplace.
This has begun to present some significant challenges. A series
of global events have led to record wholesale gas prices; these
include:
— Increased demand in China and India.
— High wholesale European gas prices,
which are linked to the global oil market.
— Instability in oil producing nations
leading to record prices.
These increases have, in part, been passed on
to UK consumers through the retail price.
1.2 We are no longer an energy island with
domestic North Sea gas and oil reserves. The price we pay is aligning
itself with our EU neighbours whose governments face similar pressures
to control rising prices. There remains a challenge to create
a more competitive market in many EU countries and to improve
the transparency of the market operations. Nevertheless, the result
of having the most competitive market in the world (see Section
3.1 below) is that Britain continues to have some of the cheapest
gas and electricity in Europe.
1.3 Against this volatile background, the
UK energy marketplace is adapting and changing. In order to cushion
consumers from volatility in high wholesale prices energy retailers
have hedged their costs. However, efforts to hold back from passing
on some costs are becoming unsustainable due to external market
pressures. For the first time the UK has become a net importer
of natural gas; in future gas will come from areas such as North
Africa, the former Soviet Union and the Middle East, as well as
from Norway and Holland. The costs of imported gas and other fuels
are determined by world markets and these factors will influence
the costs of all suppliers.
1.4 The fall in UK gas production, coupled
with rising demand for gas, has been an additional factor behind
rapidly increasing wholesale gas prices. Over the past 18 months,
all UK gas retailers have been forced to increase their prices
to customers as a result of the higher commodity costs set on
the open global market. The higher cost of gas and coal has also
influenced the wholesale price of electricity.
1.5 The situation is not exclusive to Britain.
There have been price rises in many other EU states as the impact
of world markets has been felt. In Germany, according to a poll
by the Financial Times on 7 January 2008, rising electricity prices
are topping the list of concerns for German consumers this year
where electricity bills have increased by 50% since 2000.
2. Wholesale versus Retail
Key points:
— Energy is not the only commodity
affected by a global economic downturn.
— Other products eg food, transport
and water are facing similar price pressures.
— Volatility in the wholesale oil markets
is due to political and economic factors beyond the control of
any one nation.
— Energy suppliers have, to varying
degrees, been able to delay the impact of high wholesale prices
by adjusting their energy purchasing strategies and making efficiencies
elsewhere in their businesses.
— Retail prices have come down as well
as gone up.
2.1 Around half of a typical domestic energy
bill is made up from wholesale costs and over the last five years
consumers have seen double digit rises in both gas and electricity.
The juggling act performed by energy retailers between cushioning
wholesale price increases to protect retail prices will be made
all the more difficult by the cost impact of a raft of environmental
regulations due to be implemented in the UK. This is in addition
to the requirement for large scale investment in energy infrastructure
and the increased cost of the Carbon Emissions Reduction Target,
which is estimated to be at least £38 per fuel. The graph
below from Ofgem shows the factors that make up a domestic energy
bill and the increasing cost of environmental levies.
2.2 Unlike petrol pump prices, our energy
prices do not fluctuate frequently because energy retailers attempt
to smooth the peak and troughs. It can be some months, depending
on individual circumstances, before retail prices are caught by
the wash of the volatile upstream prices. Similarly, as and when
wholesale prices have retreated from these record levels, there
has been a delay before those ripples reach retail prices.
2.3 A further criticism raised by some observers
is that energy suppliers appear to raise their prices in line
with each other. All energy retailers purchase from the same wholesale
and primary fuels market and are, therefore, affected by the same
wholesale price volatility. While there is some variation in timing
and amount of any price adjustments, depending on companies' positions
and strategies, the broad commonality of any movements reflects
the strength of competition and the consequences in terms of customer
losses for any company charging significantly more than its rivals.
2.4 The energy retail market in Britain
continues to be defined by highly competitive and dynamic service
providers who continue to innovate to increase their market share.
In real terms, the competitive market is keeping prices lower
for British consumers: the prices they pay for energy remain lower
than before market deregulation.
Source: Ofgem factsheet
66 Jan 2008
3. Indicators of competition
Key points:
— Britain has the most competitive
market in Europe (Oxera, January 2008) in which 55% of gas and
electricity consumers have switched supplier.
— Only 25% of consumers have never
switched either gas or electricity supplier.
— 400,000 consumers are active and
switch each month. Of the remainder, some will have switched and
switched back, some changed one fuel, but not the other and some
will have changed tariffs.
— Energy consumers have access to the
widest range of products provided by energy retailers to meet
the requirements of an increasingly engaged market.
— Suppliers are developing markets
to promote energy services packages.
— Smart meters will prompt innovation
that will shift consumer buying habits from being based purely
on price.
3.1 The principal feature of Britain's energy
market is consumer choice. A report by Oxera in January this year
heralded Britain as having by far the most competitive energy
market in the EU and G7 countries over the period 2004 to 2008.
3.2 One indicator is the switching rate
of 55%, which is far higher than Sweden at 32%; the second most
competitive market in Europe. Ofgem records state that 100,000
consumers switch supplier each week. However, it is likely that
the actual switching rate is even higher in Britain because many
consumers switch tariffs without changing supplier. This is not
just an indication of a dynamic market, but also that many consumers
are happy to stay with their existing supplier and choose instead
to change tariff or payment method to get the best deal for their
individual circumstances. According to MoneyExpert.com's switching
index for household products in Q1 2007 the energy market was
more dynamic in terms of switching levels than markets in:
— landline and mobile telephone services;
3.3 Research by BroadbandChoices.com, a
price comparison site, showed that the figures for consumers switching
providers for their broadband services was just 13% in 2007, prompting
the comment that broadband service providers had "something
to learn from the energy industry".
3.4 The UK (with the exception of the smaller
system in Northern Ireland) and Scandinavian countries are the
only European states that can claim to have achieved intense competition,
as demonstrated by switching rates that far exceed the other EU
members. Austria, Denmark, Germany, Netherlands and Spain offer
switching opportunities to some degree and Belgium, Ireland, Italy,
Luxembourg and Portugal have also already met the EU's market
opening requirements. However, it is crucial to note that in other
countries the opportunities to switch are not always reflected
by the numbers of consumers actually switching. For example, Germany
and Austria have a switching rate of 6%. The Netherlands is one
of the better performers with around 12% of the population switching
energy provider.
3.5 British consumers exercise much more
power over the market than in many other EU states and this also
impacts on the prices that companies are able to charge. Price
is a key factor dictating the flexibility of the market and decisions
by companies to increase retail energy prices have to be balanced
against the potential loss of market share.
3.6 Competition for consumers has driven
innovation and better customer service. A variety of different
offers are available to consumers indicating a degree of product
differentiation. Energy retailers offer price caps, bills without
a standing charge, dual fuel discount, and many non-price related
benefits, such as a single bill or electronic billing. A number
of energy retailers have diversified into other services and offer
bundled services, including the supply of energy and telecoms
with an option of paying just one bill, for example.
3.7 Affinity partnerships with large retail
brands in other sectors continue to be an important feature of
the market. Customers are rewarded through bundled offers of products
by loyalty points. Energy companies on the other hand benefit
from better customer retention and a means of attracting new customers.
The introduction of capped and fixed price products by energy
suppliers as wholesale prices rose protected many customers from
increased prices. Moreover, consumers can now choose to have their
retail price indexed to the wholesale market which may provide
good value over the long term.
3.8 However, price remains the primary differentiator.
This means that any new product must be cost effective to produce
and competitively priced to attract consumers. No matter how good
the product if consumers consider the price in anyway excessive
the product will not sell. A current example is the niche market
in microgeneration technology which, due to its high cost has
not achieved the critical mass required to enable economies of
scale.
The effectiveness of regulatory oversight of the
energy market
4. Effectiveness of Regulation
Key points:
— Doorstep sales complaints have fallen
by 97% since the EnergySure Code was put in place by industry.
— Switching complaints dropped by 60%
after the completion of the Customer Transfer Programme led by
the ERA.
— Energywatch has recorded a 70% reduction
in overall complaints in the last five years.
— The Billing Code and Energy Supply
Ombudsman are voluntary schemes established by industry.
— Self regulatory schemes are independently
audited and enforced.
— The Debt and Disconnection Safety
Net was reviewed by Ofgem in 2006.
— Ofgem reduced the number of supply
licence conditions as a response to confidence in the industry
to self-regulate.
— Existing regulation must be proportionate
to risk eg consumer protection, health and safety.
4.1 The ERA's members operate in a regulated
and customer-facing environment, which naturally leads to close
monitoring of the industry by Government and the regulator, which
have a responsibility to protect the interests of consumers. Regulation
must be proportionate in order to allow the competitive market
to function effectively and to enable suppliers to innovate.
4.2 As an example of the ability of the
industry to self regulate where appropriate, in 2003 the ERA took
ownership of the Code of Practice on Face to Face Marketing of
Energy Supply. The voluntary Code, now known as the EnergySure
Code, sets standards by which energy suppliers can be judged.
Persistent failure to observe this EnergySure Code will lead to
a withdrawal of using the EnergySure "badge". The Code
aims at the same time to help customers understand the service
and behaviour they can expect from EnergySure Code Members. The
Code is independently audited on an annual basis by KPMG. Whilst
it has no legal force, it provides a means for self-regulation
in the competitive energy market and aims to assist the realisation
of the benefits of competition. Annually, Code members approach
approximately 35 million people about switching their energy supplier,
and fewer than 1 in 100,000 approaches results in an energywatch
complaint about direct selling. Since its launch complaints to
energywatch about doorstep sales practice have fallen by 97%.
4.3 The ERA aims to work with the industry
on issues where consumers can benefit from suppliers working for
the common good where there is no competitive advantage. The establishment
of a "safety net" for debt and disconnections set out
a framework for debt recovery and protects vulnerable households
from disconnection. In January 2008 Ofgem published an independent
review of the operation of energy suppliers debt recovery processes.
It concluded:
"Disconnections are down significantly from
the record levels seen in 2001. It is reassuring to see supplier's
progress in improving debt and disconnection procedures overall
since Ofgem's last industry-wide review in 2005".
(Debt and Disconnection Review 07/08, 25 Jan 2008)
4.4 In July 2006, in response to recommendations
following a supercomplaint against the industry, the ERA established
the Energy Supply Ombudsman to offer a redress scheme for consumers
unable to resolve billing disputes with their energy supplier.
The scheme is entirely industry funded and since its launch has
been extended to include all types of complaints. In accordance
with the Consumer, Estate Agents and Redress Act 2007 the Energy
Supply Ombudsman will become the Energy Ombudsman with effect
from 1 April 2008 and its remit will be extended to networks businesses.
4.5 Since the introduction of competition
in the gas and electricity supply markets, the industry has matured
and developed significantly. Customers now have a wide choice
of supplier and/or supply offers, indicating a high level of product
innovation and differentiation within the market. In Ofgem's Domestic
Retail Market Report (June 2007) they highlight that their research
has shown that less than 3% of customers think switching is too
difficult or say they are unaware that it is possible to switch.
A National Consumer Council report Switched on to Switching
(2005) found that 95% of energy consumers found the switching
process "very easy or fairly easy".
4.6 We believe that it is vital that the
supply licence provides a level playing field on regulatory obligations
for all suppliers, regardless of size or whether a new entrant
or not. Such differentiation would simply serve to distort competition.
We support the view that all regulation must be non-prescriptive,
proportionate and developed with a clear and realistic strategy
for implementation. Ofgem recognises that regulations that are
drafted without due regard to the impact on business will be ineffective
and lead to compliance problems.
4.7 As an industry, we acknowledge Ofgem's
right to enforcement through energy and competition legislation.
However, as the market matures a key advantage to offering added
value to consumers will be retailers' ability to innovate. It
is important that burdensome and disproportionate regulation is
avoided so that there continues to be innovation in the market.
Progress in reducing fuel poverty and the appropriate
policy instruments for doing so
5. Fuel poverty and social programmes
Key points:
— Fuel poverty is an effect of three
factors colliding—low income, poor housing and the price
of fuel. Energy suppliers have nothing to do with the first two,
and the third is largely driven by world energy markets.
— Nevertheless, energy suppliers have
engaged in a number of initiatives aimed at relieving fuel poverty.
These have included the significant spend on improving insulation
standards for the priority group in EEC/CERT, as well as other
voluntary programmes assessed by Ofgem at £56 million a year.
— The Government has challenged suppliers
to raise this contribution towards £150m a year over the
survey period.
— Social tariffs form part of a package
of measures and cannot be viewed in isolation where the issue
of fuel poverty is multi-faceted.
— The increased CERT charges present
a significant challenge and Government must help suppliers to
identify and target low income households.
5.1 Energy suppliers are not the architects
of "fuel poverty". People in fuel poverty often have
multiple debts and there is a challenge for the Government to
offer joined-up services to address all of the problems vulnerable
people face managing their energy bills and keeping their homes
warm. This requires long term, sustainable strategy.
5.2 An underlying cause of increasing fuel
poverty is higher primary fuel costs and investment requirements
in generation and gas import capacity, leading to higher wholesale
costs. Such rises greatly exceed margins in energy supply and
have to be passed through to consumers. Energy suppliers are intermediaries,
and their part in alleviating fuel poverty is focussed on a number
of special schemes including the CERT programme (which is improving
energy efficiency, especially of potentially fuel poor households)
and social initiatives. This is a substantial area of work, which
is making a real difference.
5.3 According to Ofgem the price of fuel
makes up 15-20% of the overall effect. In supporting the Government
in eliminating fuel poverty the main contribution that energy
companies can make is to maintain pressure on fuel prices, to
promote energy efficiency improvements, and to ensure that there
is flexibility in a competitive market to enable vulnerable customers
to benefit from competition and the special services and tariffs
available to them.
5.4 A social tariff should be seen as one
part of a toolkit of measures that suppliers can deliver according
to the needs of their customers and according to what provides
the most help. Other measures include winter rebates, price freezes,
trust funds, boiler upgrades, free insulation, benefits entitlement
checks, partnership schemes with charities, local authorities
and health services and energy efficiency advice. All these schemes
offer flexibility in how they are implemented by suppliers.
5.5 Legislating for a social tariff could
become a complex intervention in the market, restricting rather
than promoting innovative and sustainable schemes. On the other
hand a contribution per customer from each supplier (as set by
Government) would enable assistance to be provided in
an equitable manner. If the Government chooses this option it
must be specific about what it expects suppliers to achieve and
that its expectations are realistic. It should also be recognised
that taking the social tariff option may remove a segment of society,
albeit temporarily, from access to choices in the market. This
degree of financial exclusion may be appropriate for some, but
there is currently no guidance on who should qualify.
5.6 Identification remains a huge challenge
for energy companies and Government, whether it is offering free
insulation or targeting welfare support. Means-testing is fraught
with difficulty because people do not self-diagnose. Many people
in need do not identify themselves and energy suppliers rightly
have only the minimum details about their customers' personal
circumstances. This needs to be resolved with Government before
any further schemes are launched. The Government must interrogate
its data and devise a means of sharing this and overcoming any
data protection issues.
For example, this winter 250,000 elderly gas
and electricity customers are benefiting from offers of free insulation
and heating systems under a joint government/industry scheme that
is being funded by energy suppliers. This is the second year that
energy suppliers have funded a winter initiative to provide free
insulation to 250,000 pensioners on benefits in England, Scotland
and Wales. Over a five week period a coupon was sent to targeted
households identified using benefits data held by Government.
This was a joint initiative involving energy suppliers, Eaga the
Department of Business Enterprise and Regulatory Reform and Department
of Work and Pensions. Customers responding to a freephone helpline
or completing a coupon were offered tariff advice and information
about their energy supplier's social welfare schemes that range
from trust fund payments to winter rebates. Households in England
were also offered Warm Front grants to improve their heating systems.
The scheme is branded under the Government's winter Keep Warm
Keep Well campaign. The scheme will measure the extent that energy
efficiency measures can be accurately targeted using data on benefits
claimants held by the government. Industry experience is that
on average £1,500 is under claimed by each household every
year.
5.7 Energy suppliers offer more practical
help to low income families than any other business sector. This
raises the question of accountability when external factors drive
adverse outcomes, as in the case of tackling fuel poverty. Energy
companies are not qualified to develop and deliver social welfare
programmes and should not have to substitute for public services.
6. Pre-payment meters
Key points:
— Prepayment meters (PPMs) operate
on a similar principle as "pay as you go" mobile phones.
— This enables customers to manage
their energy spend more efficiently.
— The majority of PPM customers are
low income, but not fuel poor.
— Of the customers who pay for their
energy with a PPM, a minority of 20% are fuel poor.
— Ofgem state that 75% of fuel poor
customers pay by standard credit or direct debit and only 5% of
pensioners (who account for 50% of Britain's fuel poor) use PPMs.
— Most customers who use PPMs do so
because it enables households on low incomes to budget their energy
use.
— Ofgem research (factsheet 67) published
in June showed that the majority of PPM customers are happy to
pay in this way.
— PPMs are also often used in rented
accommodation or holiday lets.
— Some PPMs are installed by energy
suppliers when a customer has difficulty paying their bills, to
help them manage their spend.
— In 2007 Ofgem research indicated
that the proportion of prepayment customers who had switched was
below the average for the market as a whole. However, switching
rates for prepayment customers were slightly above those for standard
credit customers.
— The majority of pre-payment customers
are not in debt.
— Suppliers use PPMs as an alternative
to disconnections.
6.1 There has been much attention focused
on prepayment (PPM) energy customers over the last few years and
this has led to some misunderstandings. Prepayment meters operate
on a similar principle as "pay as you go" mobile phones
and enable customers to manage their energy spend more efficiently.
A feature of a pay as you go option is that the cost is often
higher than an online offer. In the same way mobile phone calls
and texts are more expensive for pay as you go offers and there
is a sometimes a minimum monthly top up requirement. In energy
most PPMs work with a swipe card or key, which customers use to
buy their energy in advance at a local corner shop, garage or
Post Office, and then charge their meter.
6.2 Suppliers incur additional charges from
meter provision and maintenance, and prepayment meter infrastructure.
As with pay as you go mobile telephones, the cost of servicing
PPMs is higher, and historically, users' tariffs have often reflected
this. Ofgem indicates that on average each PPM costs an additional
£60 compared to standard credit customers and £85 compared
to direct debit customers.
6.3 Of the total of 26 million electricity
meters and 20 million gas meters in the UK, there are currently
3.5 million electricity PPMs and 2.2 million gas PPMs. The majority
of PPM customers are not fuel poor. In fact Ofgem figures state
that of the customers who pay for their energy with a PPM, a minority
of 20% are fuel poor. Furthermore, 75% of fuel poor customers
pay by standard credit or direct debit and only 5% of pensioners
(who account for 50% of Britain's fuel poor) use PPMs. We are
concerned about any proposal to intervene on prepayment tariff
rates, without a clear principle of seeking to focus help on those
in greatest need. Aside from the cost to all consumers, including
the majority of fuel poor who do not use PPMs, the proposed intervention
will benefit those who use prepayment meters in second homes,
holiday cottages, rented property and student accommodation.
Source: Ofgem Domestic
Retail Market report, 2005
6.4 A feature of a competitive market is
the ability of suppliers to vary their service offers. Every supplier's
customer base differs, and companies have decided on an individual
basis how to charge their customers. Companies ensure in a variety
of ways that they are offering appropriate products for customers
on PPMs. Some energy suppliers have chosen to reduce or equalise
their tariffs with standard credit tariffs. However, others consider
that equalising tariffs would disproportionately affect the 3
million fuel poor customers who do not use PPMs. According to
Ofgem's Domestic Retail Market published in June 2007 if the cost
of servicing PPMs was recouped across all customers, every bill
would go up by approximately £14 per year.
6.5 In response to concerns about disconnection
levels the ERA established a new protocol in 2004 under what is
known as `safety net' procedures. The scheme has been successful
in ensuring that no households identified as vulnerable have been
disconnected in over three years. The number of disconnections
last year was 5000. This is down from 17,000 four years ago. However,
the commitment to reduce disconnections has led to suppliers recovering
debt in other ways. Consequently the number of prepayment meter
installations has increased.
6.6 PPMs are used to recover debt accrued
where this is the best option for the customer. For those customers
who are repaying debt, most repay it at less than £3 a week.
The rates at which they can repay debt are tailored to the customer's
needs. For example, a customer need only pay £2.85 week of
debt on a PPM if they are on benefits. However, a significant
number agree to a higher repayment rate in order to be clear of
a debt. Provided a PPM is not carrying a debt of more than £100
a consumer could switch to a supplier with a better deal. Anecdotally,
suppliers have indicated that prepayment users are currently amongst
the most active switchers compared to other forms of payment.
This confirms figures in Ofgem's 2007 retail market report that
show PPM user switching levels are higher than those on standard
credit tariffs.
6.7 There is particular concern about old
style token meters because they cannot be adjusted remotely, so
require a home visit to recalibrate them when prices change. Suppliers
are complying with the new license conditions concerning the timely
recalibration of token PPMs, and are making significant progress.
This style of meter will be phased out by 2009 when the current
replacement programme is complete. Suppliers are taking measures
to ensure that the number of token PPMs accruing debt is falling.
In June the number of token PPMs accruing debt was around 115,000—down
from 409,000 when Ofgem first took action in December 2006.
6.8 All suppliers who reduced PPM prices
following recent price cuts confirmed that the decreases will
be backdated on meters when they are recalibrated and that customers
will benefit from lower prices from the date on which they were
introduced.
6.9 Despite the poor image PPMs score consistently
high marks in customer satisfaction surveys. This was supported
by a survey of consumers carried out by Ofgem last June. Some
people prefer the pay as you go option as it means that they can
budget precisely their energy use.
Additional comments
7. A future low carbon economy
Key points:
— Energy suppliers have accepted that
a business model based on selling a finite resource, such as gas,
in ever-growing quantities is not sustainable.
— The supplier obligation challenge
for energy companies is to reduce carbon emissions from upstream
generation and increase energy efficiency downstream.
— There is a cost associated with developing
a low carbon economy.
— The next 20 years could see a new
era of energy generation.
— Government has a significant role
to play in helping energy suppliers to promote new attitudes to
energy use.
— The success of new technology depends
on creating consumer demand. This is currently undermined by perpetual
negative messaging based on misinformation and misunderstanding.
7.1 In the Energy Review in 2006, the Government
signalled an ambition for a low carbon economy. Energy suppliers
support this ambition and have committed to a major reform of
the energy market. The supplier obligation beyond 2011 will mean
that suppliers need to diversify their product offers and reduce
carbon emissions upstream and increase energy efficiency downstream
based on sustainable business model. Companies agree that there
is more that can and should be done through traditional approaches
(such as the insulation measures supported by CERT) and believe
that future policies could continue to encourage these opportunities.
7.2 The suspension of the 28-day rule, allows
suppliers to sign longer term contracts with their customers,
This will enable energy suppliers to invest in higher cost products,
such as new technology, advanced appliances and microgeneration
etc, because they can recover the cost over a longer period and
have the certainty that their capital investment is not lost by
the consumer switching away. If more consumers opt for a longer
contract with their supplier switching rates may slow, but the
competitive environment will be defined by an even wider range
of innovative products being brought to market.
7.3 An essential feature of this new market
structure will be the advent of smart meter technology to 26 million
homes throughout Britain. Smart meters are two-way communication
devices that have the potential to revolutionise the way that
consumers manage the amount of energy they use, the cost of their
energy and their impact on the environment. They are the next
generation of electricity and gas meters. A national roll out
of smart meters could bring about the end of estimated bills and
meter readings, and provide customers and energy suppliers with
accurate information on the amount of electricity and gas being
used. They will also provide the platform for the development
of a much greater choice in energy tariffs and services for homes
across the country. Smart meters will empower customers to make
choices on how much energy they use.
7.4 Suppliers will install two-way communication
systems that display accurate real-time information on energy
use in the home to the consumer and back to the energy supplier.
In addition, Smart meters enable:
— Automatic and actual meter readings
that will bring an end to estimated bills.
— Flexible tariffs that measure consumption
over set time periods.
— Capability for selling energy back
to the supplier which will facilitate microgeneration technology
(eg solar panels or wind turbines).
— The same meter for electricity (and
gas, subject to cost) will be used for all customers, whether
they are pre-payment or credit, and regardless of supplier.
— Suppliers could differentiate their
tariffs and services through offering alternative means of displaying
energy consumption—eg through handheld devices, mobile phones,
the internet or via digital TV.
— Improved accuracy of forecasting
energy demand at different times of the day.
7.5 The Energy Retail Association is calling
on the Government to provide a clear mandate to roll- out Smart
Meters across Britain. This mandate is essential if this huge
project to replace 45 million meters across every home in the
country is to be completed within 10 years at a reasonable cost.
Without the mandate it would be impossible to ensure that every
energy customer in the country has a smart meter fitted. The industry
would also be unable to take their current discussions further
and to work together to buy and install smart meters, which would
result in a significant increase in both cost and time.
31 March 2008
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