Letter submitted by E.ON UK plc
Thank you for your letter of 11 January.
You will appreciate that, since E.ON UK operates
in a competitive market, and such information may well be price
sensitive, I am not able to provide you with specific information
in relation to any possible prospective price changes (E.ON has
made no public announcement of a change in prices). However, I
am pleased to provide some background which I hope will help with
your evidence session with Malcolm Wicks.
RETAIL PRICING
Ofgem has provided some useful independent commentary
on the link between wholesale and retail prices, which I would
commend to you. This is provided in depth in their Domestic Market
Retail Report (June 2007) and has been updated in light of further
wholesale cost increases, in their short Factsheet on Household
Energy Bills (January 2008).
In summary:
— wholesale costs are volatile, and
high by historic standards;
— advance purchase allows for some
delay in passing through cost increases, but not indefinitely
(and carries a substantial risk if wholesale costs fall);
— the movement in costs is large (hundreds
of millions of pounds) and hedging is not a precise art, so no
two suppliers will have the same cost base. Therefore although
all suppliers are under similar pressures, there are significant
differences in any price change;
— suppliers have to take customers
with them, or risk losing market share. The GB electricity and
gas markets are amongst the most competitive in the world, and
also as competitive as almost any other household sector; and
— environmental costs are starting
to be material (notably the subsidy for energy efficiency measures,
which has increased over the last 10 years from the original EESOPs
scheme costing £25 million, to the £¾ billion cost
of CERT, which is due to start this April).
VULNERABLE GROUPS
In relation to your question about vulnerable
groups of customers, for our own part we are very mindful of the
impact of higher costs on vulnerable customers with above average
energy needs. The most effective mitigation for such customers,
both in size of potential saving and in sustainability, is improved
energy efficiency. The larger part of the new CERT scheme will
result in free measures for the over 70s and customers on benefits.
Across all suppliers, this will amount to funding of around £500
million each year for this group of customers.
The next most effective measure is, through
information sharing, to increase customers' awareness of the benefits
to which they are entitled, so that they claim them. All vulnerable
customers are encouraged to call our "Caring Energy"
helpline, which will provide a benefits entitlement check as well
as energy efficiency advice and which also manages referrals to
our hardship fund. (Our hardship fund is designed to help vulnerable
customers, particularly those in debt, who cannot afford new appliances
or measures offered under CERT or WarmFront, for instance low
income customers not on benefits).
Tariff based mitigation has a useful role to
play but can only have a limited impact on fuel poverty. For instance
we have previously:
— increased the size of the cold weather
payment to our Age Concern customers;
— reduced the size of the price increase
for prepayment meter customers; and
— deferred increases for some vulnerable
customer groups until the spring.
In addition, customers on the social tariff
element of our "Staywarm" product have benefited from
continuing to pay average energy bills, although their energy
needs are significantly above average.
These measures can add up in value to some millions
of pounds, and are reasonably well-targeted on the fuel poor,
but cannot compensate all vulnerable customers for the full impact
of rising wholesale energy and environmental costs. In our view,
only government can do this, through full indexation of benefits
and winter fuel payments.
THE GOVERNMENT'S
DECISION ON
NUCLEAR POWER
E.ON UK welcomes the Government's decision on
nuclear power and views this decision as being complementary to
the recent announcements on the UK CCS competition and UK offshore
wind potential, all with the aim of ensuring the country's energy
supply is secure, low in carbon and affordable.
Between now and 2020, the UK will close up to
22GW of generation capacity due to the closure of life-expired
nuclear, coal and oil plant. E.ON UK itself will close over 4GW
of coal and oil generation capacity by the end of 2015 and intends
to be a major investor in new UK energy supply infrastructure.
The closure of this capacity provides a significant opportunity
to reduce the carbon emissions from the UK's power sector but
at the same time it is important to maintain diversity of sources
of fuel for power generation, to help ensure security of supply.
Therefore, new nuclear plant has a role in contributing
economically to the UK's C02 reduction targets and, in an era
of high fossil fuel prices, to a diverse and secure energy supply.
Assuming reasonable licensing and planning processes, we would
expect investment in new nuclear plant to be a credible economic
option given current expectations of fossil fuel prices and, at
the time a final investment decision would be taken (at least
four to five years hence), confidence in a sustained value for
carbon emission abatement.
In the meantime, to 2015 investment in conventional
generation technologies will be required to replace closing coal
and oil capacity. The UK market is already responding by building
new gas CCGT generation capacity, but reliance on this technology
alone will not deliver energy policy objectives.
Investment in new coal generation capacity using
supercritical plant technology enables the UK to maintain diversity
in supply (and has significantly lower C02 emissions than existing
coal-fired capacity) whilst carbon capture and storage (CCS) has
potentially a key role to play in enabling new coal-fired generation
to reduce its carbon dioxide emissions further by around 90%.
New coal investments need to ensure that CCS can be retrofitted
to allow reduction in carbon dioxide when the technology becomes
proven. We support the Government's announcement that it will
support demonstration of post-combustion CCS technology and will
be entering a project into the competition.
Stability in the existing Renewables Obligation
is essential to maintain investor confidence in the market for
renewable generation, particularly given the difficulties UK developers
are facing as a result of high world demand for turbines, aggressive
incentive mechanisms in other countries and limited competition
in the supply of equipment. The legally binding target agreed
by the European Council, that by 2020 20% of total final energy
consumption should come from renewable sources, will reinforce
support for investment in renewable technologies in the UK.
Therefore, we do not believe that the Government's
decision on allowing private companies to invest in new nuclear
power capacity will inhibit investment in conventional or renewable
generation capacity. Continued and consistent policy measures
are required across all technologies to enable companies to invest
in a variety of solutions to tackle energy security, climate change
and affordability.
25 January 2008
| 
