Memorandum submitted by the Fuel Poverty
Advisory Group
1. The Fuel Poverty Advisory Group (FPAG)
is a group of external members appointed by the Government (Defra/Berr).
Our job is to report on progress on fuel poverty in England and
on the additional policies that are needed to deliver the Government's
fuel poverty targets. The Group's membership and terms of reference
are attached as Appendix 1.
2. As will be seen the Group consists of
a wide range of organisations with different views and this is
one of its strengths. On many of the issues there is a very large
measure of agreement, on others—including energy prices—
there are more differences and the views in this report do not
always therefore reflect the views of all our individual members.
INTRODUCTION
3. FPAG takes a pragmatic view of the operation
of the market, reaching its judgements on the benefits or otherwise
of the market, on the basis of evidence and of developments rather
than on the basis of prejudged views. Thus we appreciate that
for many years energy prices were very low, partly as a result
of the operation of the market. We also believe that the market
works well for some customers. We also think that there are some
serious problems with its operation and we have been more willing
than Ofgem or Government to face up to the difficulties. There
are now signs that the Government and Ofgem approaches may be
changing.
4. In this evidence we cover:
— The differentials between the
prices paid by different customers;
— The overall level of prices;
— Other issues relevant to prices;
— Regulatory oversight; and
— Progress and instruments for
fuel poverty.
PRICE DIFFERENTIALS
5. This section sets out the current situation,
and then briefly considers the announcements of the 2008 Budget.
— The position here is extremely
troublesome and has been getting worse.
— Customers using prepayment meters
for electricity and gas, according to Berr data, are paying on
average £990 pa in 2007 compared with the average for a direct
debit customer of £845 pa. This is a gap of £145, a
huge differential of 17%.
— In 2004 the gap was £70
per annum and it was similar in previous years, so the gap has
increased a very great deal.
— The average gap between prepayment
and online direct debit prices is higher still—as much as
£250.
— Customers on standard credit
for electricity and gas (ie those paying by cash or cheque) are
paying £85 more than direct debit customers in 2007 compared
with £36 pa in 2004. This is another huge increase.
— In the very recent increases
early in 2008, there was little change in absolute terms on average
in the differentials, except that the differential between prepayment/standard
credit and online tariffs seem to have increased still further.
— There are very significant differences
between the companies. In some companies prices to prepayment
and standard credit customers and/or the differentials are more
reasonable than in others. There are also differences in service
levels e.g number of payment outlets, availability of 24/7 service.
— Prepayment customers have lower
incomes than others; 40% were in the two lowest deciles in England
in 2005-06 compared with 20% of all customers and less than 5%
were in the top two deciles. In 2006 19% of those paying for both
fuels by prepayment were fuel poor compared with 6% of direct
debit customers—an incidence of fuel poverty more than three
times as high amongst prepayment compared with direct debit. The
incidence of fuel poverty amongst standard credit customers is
also fairly high.
— The prepayment /direct debit
gap was a big one even before the increases of the last few years,
for instance it was £28 in electricity in GB in 2004 (compared
with £6 in Northern Ireland).
— The increase in the gap is difficult
to understand. Margins on prepayment and standard credit customers
appear to have increased significantly in relative terms as there
is no reason why relative costs should have gone up.
— About three quarters of gas
and electricity costs are wholesale supply and transportation
in which there is little difference between prepayment and direct
debit costs; the £145 differential thus represents over 60%
of the remaining price.
— Ofgem in its Domestic Retail
Market Report (June 2007) estimate that costs to companies for
prepayment customers for both fuels are £85 more than the
costs for a direct debit customer (although some of the companies
believe that the cost differences are greater than this). The
costs for a standard credit customers are £25 greater than
for a direct debit customer. Thus the gap in the prices paid by
customers is far greater than the gap in costs. Prepayment and
standard credit customers are therefore significantly subsidising
direct debit customers.
— There has been good progress
on social tariffs and social programmes offered by the energy
companies and this is important. However—as is now acknowledged—it
is in no way adequate to offset the sharp deterioration in the
relative prices paid by low income customers, because of the widening
price differentials described above.
6. The very large divergence between prices
and costs suggests that the market is not working well at least
for prepayment and cash/cheque customers. The prepayment-online
price gap is over £250 per annum compared with Ofgem's estimate
of the cost difference of a little over £85 pa. The standard
credit-online price gap is £180 pa compared with the Ofgem
estimate of a cost difference of £25 pa. Even if the cost
differences are slightly greater than this e.g for online customers,
either some companies are making extremely large margins on their
prepayment and cash/cheque customers or they are making losses
on their direct debit/on-line offers or both.
7. If, as it is likely, there are some high
margins, these would be competed away in a well functioning market—very
large numbers of customers would move to companies offering lower
prices and taking lower margins. Many of those who are paying
particularly high prices are likely to be vulnerable and elderly.
8. There is a whole range of actions that
could be taken by Ofgem in particular and also by Government.
A menu of possible actions is set out in Appendix 2. These should
be driven forward, in the context of Ofgem's probe into the energy
markets and of the actions following the Budget announcements.
It is very important that the review and the post Budget actions
should result in tangible improvements.
BUDGET 2008
9. Two issues relevant to this enquiry were
picked up in the Budget:
— Differentials between prepayment
and other prices.
— The companies' social programmes
and social tariffs.
10. FPAG is very pleased that the severity
of the fuel poverty situation has begun to be recognised. It is
particularly important that the Budget in effect recognised that
the market has not been working satisfactorily for all customers
and that the issue of the price differentials is being addressed.
Our key points at this stage are:
— It is important that the intentions
should be translated into action.
— We strongly believe, as the
Government does, that progress can be made on these issues, but
the impact of any proposals on fuel poverty needs to be carefully
assessed so as to secure the most effective measures possible.
— In assessing companies' performance
the level of their prices as well as their social programmes is
important.
— The differential between the
prices for cash/cheque and direct debit/online customers is also
important.
— Independent electricity generators
as well as the energy supply companies should contribute to any
fuel poverty fund as their profitability has increased sharply
and this will increase the size of the fund and/or reduce the
adverse impact on prices to customers generally.
11. Overall Price Levels:
— World forces have increased
energy costs, but the cost increases do not explain all of the
price increases in the UK.
— Specifically, between 2003 and
2006 expenditure by gas and electricity customers increased by
£8.2 billion (or 60%). Higher fuel costs only accounted for
a little over half of this—£4.5 billion—in spite
of claims that the price increases are attributable to rising
world energy prices. Other cost increases explain £1/1.5
billion of the increase. It seems that there has been a significant
increase in margins along the supply chain, especially in electricity,
of over £2.5 billion, accounting for as much as 30% of the
price increases.
— Some increase in margins, especially
in power generation, is reasonable given the low prices in 2003,
but it seems most unlikely that this could explain and justify
such a big increase in margins.
— We do not know exactly where
the extra customer payments have gone and where the extra margins
have been taken. The bulk of the extra payments have probably
gone to generators—both independent generators and to some
(although not necessarily all) of the big six integrated suppliers.
Traders and also owners of storage and distribution networks will
also have gained.
— There will be significant differences
between companies in the extra margins made.
— These data on prices, costs
and margins come essentially from a detailed report on this by
Cornwall Energy, commissioned by the National Right to Fuel Campaign
and UNISON. Further data based on this report are in Appendix
3.
— Ofgem also believe that electricity
generators are making some windfall profits—as a result
of the free allocation of permits under the EU Emissions Trading
Scheme. They and FPAG share the view that current and future profits
from this source should be removed over time by the auctioning
of the EU ETS permits, and in the interim by other means, and
the proceeds should be recycled into fuel poverty programmes.
— However, FPAG's view based in
part on the Cornwall analysis is that the issue is wider than
just that of the EU ETS. In 2006 the EU ETS accounted for £0.4bn
extra margins out of a total of £2.5 bn, ie 15%.
— FPAG has, over a number of years,
asked Ofgem to carry out a proper analysis of prices, costs and
margins along the whole energy supply chain. They have not been
willing to do this. They should now carry out a full enquiry into
where the extra expenditure by consumers has gone. It is hoped
that this will now be done in the context of Ofgem's recently
announced probe into the energy market. In doing this they should
give their views in detail on the National Right to Fuel Campaign/Unison
analysis—do they agree with the basic quantitative conclusions
and if so what in their view are the implications?
— Now it has been demonstrated
that this work can readily be done, Ofgem should carry out such
analyses at regular intervals in an objective way when they review
the operation of the market.
— The Government has also been
surprisingly passive on the price increases. given that there
are macroeconomic as well as fuel poverty implications.
12. It is acknowledged that there are difficult
issues here—volatility of profitability, low levels of profitability
in the early 2000s and the need for incentives for new investment.
We also appreciate that there are significant variations in the
position of the different companies. Nevertheless the companies
have not only been able to pass on substantial additional costs
in full, but they have also significantly increased their margins
as well. This would not happen in a properly functioning strongly
competitive market.
OTHER ISSUES
ON PRICES
AND COMPETITION
13. FPAG are clearly not experts on competition
issues, but we would just make a few brief comments.
— The six major suppliers of electricity
and gas to households are all vertically integrated, especially
in electricity. It is therefore necessary to look at the whole
energy supply chain and not just at the supply companies. It is
also necessary to look beyond the relationship between retail
and wholesale prices, as wholesale prices are often prices paid
by one part of a company to another part of the same company.
It is sometimes claimed by Ofgem that wholesale price increases
are not fully reflected in retail prices and that this shows that
the market is working well. This argument seems false to us—as
the losses or low profitability in the supply company affiliates
of the energy company are often offset by higher profitability
in the electricity generating part of the company—so it
is necessary to consider the whole chain.
— Ofgem often argues that there
is no evidence of anti-competitive behaviour. FPAG is not suggesting
that the companies are operating in an overtly anti-competitive
way. It is, however, our view that the outcomes are not satisfactory,
prices are too high certainly for some customers and the market
is not working well.
— Ofgem and the Government suggest
that the level of UK prices compared with those on the Continent
is evidence of the satisfactory operation of the competitive market.
We agree that such price comparisons are relevant. But in making
any comparisons for current purposes, prices excluding taxes should
be quoted, as low prices stemming from low UK taxes do not provide
any evidence of a better functioning market. In July 2007 UK domestic
electricity prices excluding taxes were the same as the average
for the EU 15 and gas prices were 15% lower. This is relevant,
but UK gas prices should be lower—irrespective of the competitive
situation— as the UK still gets the bulk of its gas from
the UK Continental Shelf rather than from much more distant sources,
and the UK is densely populated with a high penetration of gas
and hence lower gas transmission and distribution costs. When
these factors are stripped out the differences between the UK
and the Continent appear to be small. These comparisons are also
very much affected by exchange rates and as result of the fall
in the pound against the Euro in recent months it is possible
that the gap between the UK and Continental European gas prices
will now be significantly eroded.
EFFECTIVENESS OF
REGULATORY OVERSIGHT
14. Ofgem does some good work on social
issues, but regulatory oversight of the working of the market
especially, but not only, for vulnerable customers has been poor.
It is possible that this will now change.
— Ofgem was very slow to recognise
the sharp widening in the differentials between those paying by
different methods.
— They have done little so far
about these really troublesome differentials although there are
signs that this may now be changing.
— Ofgem has plenty of potential
tools to help to deal with the situation of the differential prices
and these are included in the list of possible measures in Appendix
2.
— Ofgem has been complacent about
the level of margins and has been unwilling over the past few
years to assess where the extra expenditure by consumers of gas
and electricity has gone.
— The Government has also given
the impression that they have been satisfied with the working
of the market and have not, until recently, given any indication
of disquiet.
15. It is a complex task to assess the functioning
of the market, but Ofgem (and Government) have, in our view, been
too eager to believe that the market is working well and have
not been willing to face up to the difficulties and to take an
objective view. This may be changing now, although this is not
yet certain. We hope very much that there will be tangible outcomes
from the Budget announcements, Ofgem's probe of the energy markets
and the Ofgem summit.
PROGRESS ON
FUEL POVERTY
AND FUEL
POVERTY POLICY
INSTRUMENTS
16. FPAG has just published its 2007 Annual
Report and these points are covered in detail in the Report. The
Report is attached.
PROGRESS ON
FUEL POVERTY
Table 1 sets out the position on fuel poverty
in England.
Table 1
| | Number of households (m)
| | | |
|
| Table 2: Fuel Poverty in England |
| | | Projected
|
| 2003 | 2004
| 2005 | 2006 | 2007
|
| Households in fuel poverty | 1.2
| 1.2 | 1.5 | 2.5
| 2.9 |
| Vulnerable households in fuel poverty | 1.0
| 1.0 | 1.2 | 2.0
| 2.3 |
| Households in fuel poverty (broader definition)
| 1.5 | 1.4 | 1.8
| — | — |
| Vulnerable households in fuel poverty (broader definition)
| 1.2 | 1.1 | 1.4
| — | — |
| | |
| | |
17. It will be seen that 1.2m people were in fuel poverty
in England in 2003, the lowest number reached. In 2006 this had
doubled to 2.4 million households (according to the Government's
Annual Fuel Poverty Progress Report) and in 2007 this will rise
to about 2.9 million. The 2008 price increases will take the total
to over 3 million. This is close to the 1998 position when 3.4m
households were in fuel poverty, although still well below the
1996 level of 5.1 million. (These estimates take no account of
improvements since 2005 in energy efficiency from the fuel poverty
programmes and they are in general "broad brush" although
it is likely that they will be in the right order of magnitude).
18. FPAG only covers England, but we understand that
the numbers in fuel poverty in 2006 were about 4 million in the
UK (compared with 2.5 million in England).
POLICY INSTRUMENTS
19. Fuel poverty results from a combination of the energy
efficiency of homes and equipment, incomes and energy prices.
Fuel poverty policy instruments need, therefore, to take account
of all of these.
— The fuel poverty programmes need to be maintained
at reasonable levels. In particular it was decided in the Comprehensive
Spending Review that annual expenditure on Warm Front (the Government's
main fuel poverty programme) will be nearly 25% lower in 2008
to 2011 than it was in 2007-08. At the very least Warm Front annual
expenditure should be restored to its 2007-08 level of £350
million. This can easily be done if Government expenditure is
better targeted, eg by discontinuing Winter Fuel Payments for
higher rate tax payers, which would free up £200 million
into Warm Front and which would make possible increases in Warm
Front over the three year period. Alternatively the programme
could easily be funded if, as Ofgem has proposed, the windfall
gains being made by some electricity generators as a result of
the EU emissions trading scheme were recovered. Finally the Treasury
has received an additional £400 million pa of VAT payments
from energy customers as a result of the price rises and this
is another source of funding.
— More generally, the balance between capital
and revenue measures should be reconsidered. It will be essential,
in a world of high energy prices, to secure the highest possible
energy efficiency in the dwellings, heating and equipment of low
income households. Although the recent increases in Winter Fuel
Payments will clearly be welcomed by pensioners, it would be better
to spend some of the money on energy efficiency measures, which
could also be better targeted—in order to make progress
towards the fuel poverty targets.
— The Government is considering the energy
supply companies' carbon reduction obligations after 2011, and
a sizable social obligation will continue to be required along
with the carbon reduction programme.
— Tariff differentials should be reduced as
discussed in Section 2 above and in Appendix 2.
— Ofgem and the Government should do everything
possible to keep energy prices as low as practicable, again as
discussed above.
— Energy companies' social programmes should
be expanded, following the Budget announcement.
— There should be more drive by Government
to ensure that Benefit take-up is increased. In particular there
are opportunities for automating the take-up of Council Tax Benefits
for those in receipt of other benefits or tax credits.
— The Government should, with the necessary
safeguards, make available data on customers on benefit to Local
Authorities and to Energy and Energy Efficiency companies so that
they can target their social tariffs and energy efficiency programmes
to vulnerable customers more efficiently.
— Smart meters are potentially good news for
customers generally and low income customers in particular. The
provision of low cost "pay as you go" meters will be
a major breakthrough and accurate bills with no estimates will
provide significant benefits. The decision should therefore be
made to introduce smart meters for all customers over a specified
period and this should be mandated by Government to avoid long
delays in resolving some of the issues.
— Other shorter run lower cost payment methods
should also be pursued eg fuel direct should be expanded.
— The Public Service Agreement and Government
Target Framework and that for Local Government must provide adequate
priority to fuel poverty, given that the eradication of fuel poverty
is a statutory requirement. It does not currently do so.
20. A series of detailed recommendations is set out in
section 13 of the FPAG Annual Report.
CONCLUSIONS
21. The fuel poverty situation is now very serious. Action
in a range of areas is needed in order to meet the Government's
fuel poverty targets in England. A key area is energy prices.
It will be important to ensure that prices are no higher than
necessary—for all customers and for vulnerable and low income
customers in particular. This is now beginning to be recognised
by Government and Ofgem. This will not, on its own, resolve the
fuel poverty problem as other measures are needed, but it is a
necessary step and it would make a noticeable difference.
APPENDIX 1
MEMBERSHIP OF
THE FUEL
POVERTY ADVISORY
GROUP
Peter Lehmann, Chair.
John Chesshire, Vice Chair Chair—Energy Efficiency
Partnership for Homes.
George Mayhew, Director of Corporate Affairs, National Grid.
Ian Peters, Chief Operating Officer, British Gas Centrica
Plc.
Graham Kirby, Retail Regulation & Energy Policy Manager,
E.ON.
Jenny Saunders, Acting Chief Executive Officer, National
Energy Action.
Kevin Miles, Chief Executive Officer CEO, Npower Retail.
Gill Owen, Chair, Public Utilities Access Forum.
Sarah Webb, Director of Policy and Practice, Chartered Institute
of Housing.
Dr Noel Olsen Public Health Physician, Trustee, National
Heart Forum.
Jerry Robson, Chairman, Association for the Conservation
of Energy.
Mervyn Kohler, Special Adviser, Help the Aged.
Jonathan Stearn, Head of Campaigns, energywatch.
David Pickles, Energy Agency Manager, Local Government Association.
John Clough, Chief Executive, Eaga plc.
Teresa Perchard, Director of Policy, Citizens Advice,
Eva Eisenschimmel, Chief Operating Officer, EDF Energy.
TERMS OF
REFERENCE
The Fuel Poverty Advisory Group is an Advisory Non-Departmental
Public Body sponsored by Defra/DI. Its primary task is to report
on the progress of delivery of the Government's Fuel Poverty Strategy
and to propose and implement improvements to regional or local
mechanisms for its delivery.
The role of the Group us:
— To consider and report on the effectiveness
of the current policies in delivering reductions in fuel poverty
and the case for greater co-ordination.
— To identify barriers to the delivery of reductions
in fuel poverty and to the development of effective partnerships,
and propose solutions.
— To consider and report on any additional
policies needed to deliver the Government's targets.
— To enthuse, and encourage, key players to
tackle fuel poverty.
— To consider and report on the results of
the work to monitor fuel poverty.
APPENDIX 2
RECOMMENDATIONS ON
RELATIVE PRICES
There is a menu of possible actions on relative prices. Some
of these are alternatives. We set out below the range of possible
activity. In order to drive all this forward there should be the
following actions by Ofgem and Government. Ofgem's probe into
the energy markets is a welcome first step, but it is very important
that the review should result in tangible improvements. The list
below includes many of the issues and outcomes which should be
considered by the review.
— Ofgem should make the issue of price differentials
a Special Project with adequate resources.
— The Government should provide further resources
(from the abolition of Winter Fuel Payments for higher rate tax
payers or the auctioning of EU ETS Permits) to enable extensive
local advice to be given to low income households on switching
and on the best tariff available, linked to other advice on energy
efficiency, in order to cut fuel bills.
— As proposed last year the Treasury should,
within Government, take the lead with a determination to find
a solution on low cost payment methods.
The menu of specific actions is:
— Ofgem should assess the relationship between
relative prices and relative costs and, for companies where prices
and costs are far out of line, should consider whether further
action—legal, regulatory, guidance, persuasion—should
be taken. It may well be possible to use existing Licence conditions
and sales codes and/or it may be necessary to introduce changes.
Ofcom is taking action on similar issues and it may be possible
to learn from this.
— There should be reserve powers in the Energy
Bill to prevent companies with exceptionally high prepayment prices
from taking on new prepayment customers. This is important as
there is evidence that a very large number of prepayment customers,
who switch, are switching to worse deals.
— As an alternative where prepayment customers
are applying to switch to a worse deal, companies about to receive
such customers should by self-regulation or by Energy Bill provisions,
be obliged to explain the position to such customers in a clear
way. It is appreciated that this will be affected by differences
in service levels.
— The Government should strengthen its Environmental
and Social Guidance to Ofgem.
— The Government should, as it is doing, consider
the use of its existing powers on prepayment prices under the
Utilities Act.
— Those companies with wide differentials should
radically re-examine their policies.
— The market is clearly not working for many
low income customers. Much more advice and guidance should be
provided by voluntary and local organisations for low income customers
on the benefits of switching suppliers, the advantages and disadvantages
of different payment methods and on the best prices available.
Many very elderly people for instance will need careful guidance.
Local organisations will need to be resourced for this. This guidance
should be linked to energy efficiency and money advice services.
— Eaga, with its very good contacts with, and
channels to, low income customers could play a useful role here,
but an important proviso is that additional funds would be needed—this
should not be at the expense of the already inadequate fuel poverty
programmes for energy efficiency and central heating.
— It will be important to ensure that no more
prepayment meters are installed than necessary in debt situations
eg where payment by instalments or fuel direct would be feasible.
— The price comparison and switching sites
should provide the same facilities for prepayment as for other
customers.
— The debt blocking situation should be reconsidered
especially but not only where the receiving company is willing
to take on the debt.
— Smart pay as you go meters are now available
which would significantly reduce the cost to serve of prepayment
customers. There should be a determined drive by Government and
Ofgem to secure the installation of such meters at the earliest
possible opportunity.
— Banking arrangements can make a contribution
by encouraging more customers to pay by direct debit and the Treasury
should play a significant role here.
— Post Office budgeting arrangements are well
worth pursuing and the Government should be encouraging such arrangements
for the successor to the Post Office Card Account.
— Energywatch has provided tireless support
and advice for customers, especially low income customers, on
prices and other issues, and it will be important for the successor
to the National Consumer Council to take on this role as far as
is feasible.
— There should be strong minimum standards
on social tariffs and the Government should take reserve powers
in the Energy Bill on Social Tariffs and Programmes.
— If progress is not made by other means, the
size of the differentials between different payment methods should
be re-regulated. The Government should take powers in the Energy
Bill to direct Ofgem to do this.
APPENDIX 3
GAS AND
ELECTRICITY PRICES
In total expenditure by consumers on gas and electricity
increased by £8.2 billion between 2003 and 2006. Fuel cost
increases only accounted for a little over half of this—about
£4.5 billion.
The changes for gas and electricity are set out in tables
1 and 2 below.
Table 1
INCREASES IN PRICES AND PAYMENTS 2003-06—GAS
P per kwh | P per kwh
| £Bn | £Bn
|
| Increase in Price of Gas to Domestic Customers
| Increase in Price of Purchased Gas | Increase in Payments of Gas by Domestic Customers
| Increase in Payments for Gas to UKCS Producers and for Imports and Storage
|
1.12 | 0.92 | 3.95
| 3.34 |
| |
| |
Table2
INCREASES IN PRICES AND PAYMENTS 2003-06—ELECTRICITY
P per kwh | P per kwh
| £Bn | £Bn
|
| Increase in Price of Electricity to Domestic Customers
| Increase in Price of Fuel Purchased for Power Generation
| Increase in Payments of Electricity by Domestic Customers
| Increase in Payments to Fuel Suppliers |
3.49 | 0.99 | 4.27
| 1.20 |
| |
| |
The numbers are all from published Berr data.
— It can be seen that in electricity there
is a marked gap between price and fuel cost increases. The price
of electricity to domestic customers increased by nearly 3.5p
per kwh between 2003 and 2006, far more than the increase of 1p
per kwh in the price paid for fuel used in power generation.
— Expenditure on electricity by domestic customers
increased by over £4.3bn, far more than the £1.2 billion
increase in payments for fuel use in power generation.
— The price of gas to domestic customers increased
by 1.12 p per kwh between 2003 and 2006, compared with the increase
in the price of 0.96p per kwh paid for purchases of gas from the
UK Continental Shelf and from imports and for storage.
— Expenditure on gas by domestic customers
increased by nearly £4bn—with an increase of a £3.3
billion in payments to UKCS producers and for imports and storage.
— Other costs have increased by £1.4 million—£370
million for gas and just over £1 billion for electricity.
Tables 3 and 4 give a breakdown of these cost increases.
Table 3
INCREASES IN NON-FUEL COSTS 2003-06—GAS
| £m |
| Transportation | 43 |
| Metering | 37 |
| Suppliers cost to serve | 31
|
| Energy Efficiency Commitment | 73
|
| VAT | 188 |
| Total non fuel costs | 372 |
| |
Table 4
INCREASES IN NON-FUEL COSTS 2003-06—ELECTRICITY
| £m |
| Transmission network use of system | 108
|
| Distribution network use of system | 124
|
| Metering | 16 |
| System losses | 379 |
| Suppliers' cost to serve | 4
|
| Renewables Obligation | 108
|
| Energy Efficiency Commitment | 84
|
| VAT | 204 |
| Total non fuel costs | 1,028
|
| |
— It will be seen that the main increases for
the two fuels taken together are VAT [nearly £400 million],
transportation/network charges [£275 million], system losses
[nearly £400 million] and EEC/Renewables Obligation [£260
million].
— two points from this are worth noting—additional
VAT payments account for £0.4 billion of the extra £8
billion paid by customers. Environmental policies, taken together
[the whole impact of EUETS, EEC and the Renewables Obligation]
account for £800 million of the extra £8 billion, with
EU ETS accounting for by far the largest part of this. While the
additional costs of the environmental policies are clearly material,
they only account for a relatively small proportion (nearly 10%)
of the large increase in payments by customers.
— The cost increases are overstated here and
margin increases are understated as substantial increased profits
in gas storage and in distribution are not reflected in the above
figures.
— Thus prices paid by customers have increased
by nearly £4bn more than the costs of fuel, and between £1
billion and £1.5 billon of this can be explained by other
cost increases. It seems that there has been a significant increase
in margins along the supply chain of over £2.5 billion, accounting
for as much as 30% of the price increases.
— Some increase in margins, especially on power
generation, is reasonable given the low prices in 2003, but it
seems most unlikely that this could explain and justify such a
big increase in margins.
— The estimates of the extra margins exclude
additional margins made by gas and oil producers on the UK Continental
Shelf.
— The overall position in 2007 will not be
very much different.
— We do not know exactly where the extra customer
payments have gone and where the extra margins have been taken,
The bulk of the extra payments have probably gone to generators—both
independent generators like Drax and International Power and to
some (although not necessarily all) of the big six integrated
suppliers such as Scottish Power and Powergen. Generators with
a great deal of coal fired plant will have been the biggest gainers.
Traders, and also owners of storage and of distribution networks,
will also have gained.
— There will be significant differences between
companies in the margins made.
— In any case customers are paying more than
they should be.
April 2008
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