Select Committee on Business and Enterprise Written Evidence


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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