House of Commons - Business and Enterprise

Select Committee on Business and Enterprise Written Evidence

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 Gas—a 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.



© Parliamentary copyright 2008	Prepared 28 July 2008