Letter by Scottish and Southern Energy
In response to the Business, Enterprise and
Regulatory Reform Committee's request for energy companies to
submit in writing details of any price increases they plan to
implement in the near future, ahead of the oral hearing with the
Minister of State for Energy on 31 January, below is a contribution
from Scottish and Southern Energy (SSE).
In our contribution we outline our recent price
commitment, how it fits in with the competitive UK energy market,
explain how in the current climate of energy price increases we
support our most vulnerable customers, and highlight how we feel
the fuel poor are best supported longer term.
SUMMARY
SSE, already the cheapest of the
major suppliers, has committed to keep our electricity and gas
prices for domestic customers at their current levels for the
rest of this winter, when people are having to use most energy,
and until at least the start of British Summer Time.
In the highly competitive GB market
the ultimate safeguard for customers is their ability to switch
supplier if they are dissatisfied with the service they receive.
Our track record in customer service
and in regard to responsible pricing proves this as we had a net
gain of over one million customers between December 2006 and December
2007.
SSE's fair pricing policy is that
it seeks to be the last, or one of the last, of the energy suppliers
to increase prices if it has to and the first, or one of the first,
to lower prices if it can. As a result, following the recent British
Gas price rise, a typical SSE customer pays around £175 a
year less for their electricity and gas than an equivalent British
Gas customer.
This, backed up with our voluntary
social tariff and tailor-made approach to payment arrangements
for vulnerable customers, means that SSE is making a meaningful
contribution towards assisting the fuel poor.
The case for a mandatory social tariff
is not supported by SSE as it would be a very blunt and inflexible
way of targeting support to fuel poor households.
OUR ENERGY
PRICES
SSE adopts a "fair pricing" policy
and we seek to be the last, or one of the last, of the energy
suppliers to increase prices if we have to, and the first, or
one of the first, to lower prices if we can. At a time of sustained
rises in wholesale energy prices and other upward pressures on
domestic prices, SSE is aiming to protect its customers from the
worst effects.
Household energy consumption is at its highest
in the first quarter of the year, with the average household in
Great Britain using around 40% of its annual gas consumption and
around 30% of its annual electricity consumption in January, February
and March. That is why SSE has committed not to increase prices
this winter. The company is keeping its electricity and gas prices
for domestic customers at their current levels for the rest of
this winter, when they are having to use most energy, and until
at least the start of British Summer Time.
THE UK ENERGY
MARKET
SSE believes that our ability to keep our prices
down and the fact that we have almost doubled our customer base
to over eight million in the past five years shows that the UK
has a vibrant and highly competitive energy market. SSE is the
second largest energy supplier, having been fifth six years ago.
Our achievements in recent years demonstrate
the highly competitive nature of the market: by offering lower
prices and achieving the best performance ratings for customer
service we have outperformed our competitors in this market, and
customers have voted with their feet.
SSE last changed prices in early 2007. On 1
March 2007, SSE started implementing a cut of 12% in its average
gas bill and on 1 April 2007 it started implementing a cut of
5% in its average electricity bill.
However, this is not the only evidence of the
energy market being highly competitive. Consumers have a wide
choice of energy suppliers and they are exercising that choice.
According to Ofgem's Domestic Retail Market Report June 2007 annual
rates of switching were at the highest levels in four years. On
average 30,000 more switches took place per month than in the
previous year. This is an 11% increase in monthly switching rates
over the year.
This trend is set to continue. The most recent
statistics published by Ofgem show that more than 2.8 million
customers switched supplier in the first seven months of 2007.
Energy suppliers will continue to compete heavily on price and
service, strive for innovation and customers will continue to
benefit from switching supplier.
Britain's energy supply market also stimulates
new product development. Towards the end of last year, SSE launched
the "better plan", a unique and innovative package which
offers customers financial rewards for reducing their energy consumption.
CONTRIBUTORY FACTORS
TO PRICE
RISES
Whenever price rises are examined, it is very
important that people understand the reasons behind price rises.
One of the key drivers is the recent rises in
the wholesale gas price across the world. This is not the fault
of suppliers and the effect of this on gas prices within a country
importing significant quantities of its gas is obvious. However,
it must also be understood that with much of the UK's electricity
coming from gas power stations, it will clearly affect electricity
prices also.
In addition, Government policies to tackle climate
change and improve energy efficiency, which command broad support,
put an upward pressure on energy prices for all customers. The
Carbon Emissions Reduction Commitment (CERT) for example, will
add around £38 to the average Energy Bill for 2008. Network
infrastructure costs have also increased to support the delivery
of new renewable energy and the upgrading of energy networks to
ensure they are safe and secure for another generation. The total
costs to customers in delivering network infrastructure and environmental
policies have risen by almost 50% in the last four years, from
almost £170 on electricity and gas bills in 2004 to almost
£250 in 2008.
It is also important to understand that for
entirely responsible reasons suppliers "hedge" their
requirements by buying a significant proportion of their customers'
energy needs in advance. When wholesale prices are going up, customers
benefit as there is a lag before suppliers raise retail prices;
similarly, when wholesale prices fall, it takes time for suppliers
to see reduced purchasing costs and pass these through to customers.
Our ability to work effectively and efficiently in this area has
helped us to succeed in this competitive market, and not pass
on the full extent of wholesale price increases to customers.
As a result, our customers have paid an average of around £400
less for their gas and electricity between 2004 and 2007 than
have customers of British Gasa gap which will grow over
the rest of this winter.
These are not all the contributory factors.
Issues as diverse as Japanese nuclear plant problems, LNG supplies,
Chinese coal demand, logistical and freight transport issues,
Russian and Norwegian gas, and the Oil price and its effect on
the global economy, all play their part in influencing wholesale
energy prices. It is against these contributory factors that a
supplier must make its price choice and suppliers, of course,
have their own internal company structure and cost variations.
HELPING VULNERABLE
CUSTOMERS
SSE takes fuel poverty very seriously and our
strategic approach is to ensure prices are as low as possible
for as long as possible. At the same time, we target deeper help
to the households who need it the most. The "fair pricing"
policy ensures that SSE's customers consistently enjoy the lowest
prices for gas and electricity in the UK, ensuring that many of
our customers are prevented from being fuel poor by virtue of
cheaper supply deals.
In recent months, the energy regulator Ofgem
has conducted two reviews of suppliers' voluntary initiatives
to help the fuel poor. This review shone a light on the way in
which SSE conducts its business through responsible pricing strategies
and a focus on high quality customer service: "SSE has adopted
a strategy around competitively priced energy and excellent customer
service, which benefits all of its customers, including those
who are fuel poor and vulnerable and hard to reach ... SSE's fuel
poor customers will be around £40 per annum better off than
the average as a result of SSE's competitive pricing strategy".
(Update: Ofgem's review of Suppliers' voluntary initiatives to
help vulnerable customers, October 2007.)
SSE was one of the first suppliers to introduce
a social tariff to help its most vulnerable customers. Those qualifying
for Energyplus Care (people spending 10% or more of their income
on energy) are offered: a discount of at least 20% off their current
tariff; a benefits health check, where appropriate; free energy
efficiency measures such as loft and cavity wall insulation; and
the loan of an A-rated fridge or fridge freezer if the existing
one is inefficient. We believe this tariff makes a significant
difference to families living in fuel poverty as it addresses
energy efficiency as well as price reductions, while some of our
competitors' purported social tariffs have, on occasions, been
more expensive than our standard tariffs. We are working now to
double the number of customers on Energyplus Care by March 2008.
However, the case for a mandatory social tariff
is not supported by SSE as it would be a very blunt and inflexible
way of targeting support to fuel poor households. A fixed tariff
would also be insensitive to the market and presents potentially
perverse consequences which could result in higher prices than
the market price to such who are highly price-sensitive.
To complement our general strategy of low prices,
over 140,000 customers benefit from our policy to equalise electricity
Pre-Payment Meter tariffs with standard credit tariffs. As a result
SSE has the lowest electricity Pre-Payment tariff on the market.
We also have the second lowest gas pre-payment meter tariff. SSE
also offers tailor-made payment measures, used on a daily basis
by hundreds of thousands of people, in order to help them to pay
their bills in a manner which suits their financial situation.
Finally, SSE's product portfolio includes the
"better plan", a unique package that provides financial
rewards to customers for using less energy. This product is designed
to encourage households to become more energy efficient but can
also make a contribution to reducing the energy bills of some
fuel poor households.
A LONGER TERM
SOLUTION TO
FUEL POVERTY
Investing in energy efficiency measures and
the energy systems of poorer households is critical in bringing
down overall energy costs and while much progress has been made
through the Energy Efficiency Commitment, there is a long way
to go before many buildings are as efficient as they could be.
In time, part of the solution may lie in the
opportunities afforded by smart metering to allow more communication
between energy suppliers and their customers. In tracking energy
usage, smart meters enable householders to use energy optimally.
Beyond this, intelligent heating controls could allow people to
manage their energy use so that they are able to heat their homes
in the most efficient way possible. To help identify the potential
for smart meters, SSE is sponsoring Energy Demand Reduction Trial
in a number of locations throughout the UK.
COMPANY INFORMATION
Scottish and Southern Energy is one of the largest
energy companies in the UK, employing around 15,000 people. We
are involved in the generation, transmission, distribution and
supply of electricity; energy trading; the storage, distribution
and supply of gas; electrical and utility contracting; and telecoms.
We have over eight million energy customers operating through
the brands of Southern Electric, Scottish Hydro Electric, Atlantic
and Swalec. For further information on the company, please visit
our website (www.scottish-southern.co.uk).
January 2008
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