Further supplementary memorandum from
the Office of Gas and Electricity Markets (Ofgem)
1. The Committee asked Ofgem, following
our oral evidence on 17 June, to submit a supplementary memorandum
containing our reflections on the regulation of domestic heating
oil. Members also raised the issue of how customers can have greater
confidence in green energy tariffs.
DOMESTIC HEATING
OIL
2. Approximately 5 million households in
Great Britain are not currently connected to the gas network.
The best starting point may be to step back and ask how these
customers heat their homes. At present, many rely on domestic
heating oil and so it is important to be sure that there are no
barriers to that market working as effectively as it could. Secondly,
rising prices are pushing more users of domestic heating oil into
fuel poverty and so concerted action is required to alleviate
the difficulties they are facing. Thirdly, it is important to
look at longer term options too. For example, in some cases, extension
of the gas network or district heating may be a long term solution
and customers' electricity could come from the public network
or from microgeneration.
3. If the concern is that there is a problem
with the market for domestic heating oil, the Office of Fair Trading
(OFT) has the remit to look at the market and if necessary refer
the matter to the Competition Commission (CC) for them to undertake
a full market investigation. The CC has the power to put in place
whatever regulatory remedies it considers appropriate. Indeed,
as you may be aware, this is the approach that has already been
taken with the market for bulk liquefied petroleum gas (LPG or
propane). In 2004 the OFT conducted a study of that market and
referred it to the CC in July of that year. The CC published its
final report in June 2006 and is now in the implementation phase,
putting in place a number of remedies to help overcome barriers
to the effective working of the market.
4. I understand that the Committee has raised
with the OFT the issue of the domestic heating oil market. This
matter can be pursued as a supercomplaint by a designated consumer
body, such as the National Consumer Council, and in those circumstances
the OFT is required under the terms of the Enterprise Act to carry
out an investigation and report within 90 days.
5. Our work on Ofgem's energy supply markets
probe will look, among other things, at how well markets are serving
the needs of different groups of customers, including those who
are customers of electricity only. In addition, our broader work
on fuel poverty—such as helping to improve the targeting
of existing measures—should play a part here.
6. Even if there are no structural failings
in the market for domestic heating oil, it is still clear that
prices have increased significantly and that many customers are
at risk of fuel poverty as a result. In this case, there are several
appropriate routes for action:
— The Government's Fuel Poverty strategy
covers this group of customers who, as National Energy Action
indicated in their evidence, account for a disproportionately
high number of the fuel poor. For example, in considering the
new arrangements for the Carbon Emissions Reduction Target (CERT)
Defra introduced a flexibility mechanism to allow more expensive
measures to be provided to groups most at risk of fuel poverty.
This includes the provision of ground source heat pumps for those
not on the gas grid. This is addition to any Warm Front grants
or CERT measures that the suppliers provide to these households
as electricity customers.
— Defra are considering the needs of
this group in the context of the Energy Services Directive which
covers these other fuel types as well as gas and electricity and
where they are looking to secure voluntary commitments from the
providers involved. There is thus already a clear remit for Defra
to consider the needs of this group of customers from a fuel poverty
perspective.
7. We believe it is important to seek longer
term solutions wherever possible, facilitating the use of electricity
and gas where appropriate, including as an alternative to heating
oil:
— Approximately half the communities
which are off the gas network in Britain are only 2 km from a
gas main, meaning it would be relatively easy to connect them.
Within that half, there are some 220,000 fuel poor households.
Providing new gas connections to these communities could reach
a lot of fuel poor households and possibly cut their fuel bills
in half, if they were previously using LPG and switched to gas.
Ofgem has put in place incentives in our gas distribution price
control for 2008 to 2013 that encourage the gas distribution networks
to extend the gas networks to deprived communities.
— The Department for Business has announced
funding of £3 million as part of a pilot project within the
low carbon buildings programme (LCBP) to introduce fuel saving
microgeneration to fuel poor communities off the gas grid.
— We also recognise that customers
off the gas grid may be well placed to benefit from support to
use renewable heat, or district heat, and this may be a relatively
cost effective contribution to meeting renewable targets. The
Department for Business, Enterprise and Regulatory Reform (BERR)
has lead responsibility for heat, and we understand they plan
to publish a heat strategy later this year, we are providing input
to them on these issues.
GREEN ENERGY
TARIFFS
8. Many consumers want to play their part
in the fight against climate change through buying green energy
deals. However, when they look at the range of tariffs available,
they can find it hard to tell how much of an environmental benefit
each one actually offers. Ofgem therefore launched a project last
year to produce new guidelines for suppliers and an independent
accreditation scheme that will give customers confidence. We have
engaged extensively with consumer bodies, environmental groups
and energy suppliers and expect to publish our proposals next
week.
9. Our proposals will focus on two main
principles:
— Transparency: to ensure clarity on
supplier claims.
— Additionality: requiring that green
tariffs provide some benefit to the environment, as customer research
shows this is the core requirement.
10. We will be happy to provide the Committee
with full details of the proposals as soon as they are published
and we expect to finalise the guidelines in September.
4 July 2008
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