Select Committee on Business and Enterprise Written Evidence


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





 
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