Supplementary evidence submitted by Scottish
and Southern Energy
ENERGY MARKET INQUIRY: FOLLOW UP TO ORAL
EVIDENCE ON 24 JUNE 2008
I am grateful to the Committee for giving me
the opportunity to set out views on the issues being considered
in its inquiry into the UK energy market, and I would like to
take up your invitation to follow up the evidence given on 24
June by addressing briefly three specific points: the EU Emissions
Trading Scheme (EU ETS); so-called "social tariffs";
and vertical integration.
EU ETS
It is absolutely vital that the Committee does
not fall into the trap of concluding that allocations of permits
to emit carbon dioxide, under the EU ETS, represent any kind of
"windfall". They have been carefully conceived and designed
to ensure the smooth introduction of EU ETS. Moreover, uniquely,
the UK electricity generation sector had to operate within tighter
emissions limits. Where those limits have had to be breached—often
to ensure the overall stability of the country's electricity system—generators
have had to purchase permits. SSE has incurred significant costs
in securing permits to make up for the shortfall in our allocation.
This is in marked contrast to the position before the EU ETS was
introduced, when power stations could emit carbon dioxide free
of charge. All of this means that the UK has been a net buyer
of permits to emit carbon dioxide.
The approach adopted by the UK government when
EU ETS was introduced has ensured stable supplies of power while
confirming that carbon dioxide should have a market price. It
has, therefore, been a positive first step and a similar, measured
approach to future phases of EU ETS should ensure a progressive
move towards lower carbon power generation while maintaining secure
supplies of energy.
A retrospective tax on previously-allocated
permits would severely undermine the EU ETS going forward. The
impact of such a move would also resonate well beyond the EU ETS.
Investors in the UK electricity sector would undoubtedly see such
a proposal as a short-term populist gesture—but one which
would have profound long-term consequences. It would reverberate
across the sector, leading to a step-change increase in investors'
perceptions of regulatory and political risk in the UK—at
a time when the country is looking for massive levels of investment
in power generation and distribution and gas storage. It is likely
to discourage existing—or new—investors from putting
their money into energy in the UK.
"SOCIAL"
TARIFFS
I hope I was able to impress upon the Committee
the strength of SSE's feeling about so-called "social tariffs".
In April 2008, we published a Code of Practice for Fuel Poor
Customers which contains two key principles:
— Energy suppliers should ensure
that any "social" tariff which they offer to fuel poor
customers is the lowest-cost tariff made available by them to
any type of customer, via any type of payment plan or sign-up
method; and, as an additional safeguard,
— Energy suppliers should ensure
that their "social" tariff for customers is lower than
average direct debit tariffs in the UK.
Vulnerable customers need the lowest prices
available, not simply a tariff labelled "social", and
that principle is at the heart of our Code of Practice. Most claims
about "social" tariffs do not conform to this principle,
but SSE believes they should. In that way, Britain's poorest customers
should be able to access Britain's cheapest energy prices.
That said, SSE is of the firm belief that whatever
superficial attractions it may appear to have, a mandatory social
tariff would be a retrograde step. Firstly, it would be yet another
contentious piecemeal intervention in the country's already complex
benefits system. Secondly, it would distort competition by effectively
encouraging suppliers to avoid (loss making) customers who could
qualify for the social tariffs whereas, in fact, the industry
should be working on innovative schemes to help them. Thirdly,
it does not tackle energy efficiency, so is further subsidising
people to heat inadequately insulated homes. Fourthly, it creates
additional issues in terms of establishing and then identifying
eligibility.
All these issues have to be addressed along
with that of what standards would this mandated tariff consist
of? This is the fundamental aspect of social tariffs, mandated
or otherwise. If a mandate was given that allowed British Gas's
Essentials tariff to count as a social tariff, then none of SSE's
customers (fuel poor or otherwise) would be on a deal that benefitted
them significantly. Likewise, if the entire "fuel poor population"
(by the Government's definition) were mandated to be put on a
tariff as deep as SSE's social tariff—all suppliers would
have to raise their standard prices extremely, and unsustainably,
high (potentially putting yet more people into fuel poverty).
In addition, such an imposition does not cater
for the eventuality of wholesale prices falling, making an imposed
"one size fits all" social tariff more costly than the
market price, nor does it cater for the fact that some people
are in deeper poverty than others, and therefore need more support.
Against this background, the Committee certainly
should consider recommending mandatory principles for a social
tariff, thus ensuring that suppliers do not get away with inflated
claims about their contribution in this area, but should think
very seriously about the implications of a "one size fits
all" tariff, which, on reflection is inflexible, unworkable
and inadequate.
VERTICAL INTEGRATION
There is a real inconsistency in some of the
arguments that have been made relating to vertical integration,
and I hope this section clarifies this for the Committee. Of particular
concern to me are the suggestions that being vertically integrated
is a bad thing, leading to an unfair deal for consumers. In fact,
the reverse is the case.
In almost every market in the world, major energy
companies are vertically integrated. The reason they are is so
that in periods where supply businesses are making a loss (which
occurs very often, including at present) the supply business can
survive because another part of the wider company is covering
the loss, thus protecting customers. If SSE did not have any generation
business at present, it could not have kept its prices as low
as they have been, and they would have been raised far more frequently,
and to even higher levels, over the last year.
However, just because SSE has both a supply
and generation business, it does not allow it to actually specifically
sell units of energy from its generation business to its supply
business in some form of underhand advantageous way, outside of
the boundaries of the market and out of sight of Ofgem. This type
of practice is not allowed within the BETTA arrangements and any
evidence that you have been given that suggests this is true,
indicates a fundamental lack of understanding in how energy is
traded in the UK.
In summary, we believe the wholesale electricity
market is liquid and transparent and allows indvididual generators
and suppliers to trade as equals.
SUMMARY
I would like to repeat my thanks to the Committee
for its time on 24 June and I would be happy to provide any further
information that might be helpful in advance of the publication
of its Report.
25 June 2008
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