Letter by ScottishPower
Thank you for your letter to José Luis
del Valle of 11 January 2008, asking for us to provide written
evidence on energy prices and the Government's recent decision
on nuclear power. I am replying as Mr del Valle is out of the
country on business.
RETAIL PRICING
At the time of writing, ScottishPower has not
increased its prices this year. However, we are actively reviewing
the position; in the light of sharply higher input prices affecting
our business, it seems inevitable that an upward movement will
need to occur in the early part of 2008.
We already have a programme of assistance for
vulnerable customers, involving the ScottishPower Energy People
Trust and our new social tariff which will come into operation
shortly.
The tariffs charged to prepayment meter customers
have received particular attention in recent weeks. ScottishPower
is, we believe, the first and only large supplier to provide prepayment
electricity and gas at prices lower than standard quarterly credit.
We are giving careful consideration to the position
of our most vulnerable customers and considering if there are
any further steps we can take to mitigate the impact on them of
any price increase we have to make.
As we approach finalising our pricing review,
we will be looking at the following factors:
— the "end to end" income
from the business. It is important that income from customers
covers the input costs needed to serve them (coal, gas, ETS permits;
energy efficiency and renewables programmes; operational costs
etc) plus a return on the substantial capital invested. Many of
these factors have gone up sharply since February 2007, especially:
— coal and gas (market prices for both
are up approximately 80%);
— energy efficiency programmes (estimated
by DEFRA to rise from April 2008 by about £10 a year for
a single fuel customer and £20 for dual fuel); and
— ETS costs (where allocations are
lower and permit costs have gone from nearly zero to about €20
per tonne);
— the prices in the wholesale market.
In the long term, net income from retail sales needs at least
to match what we could achieve in the wholesale market, taking
account of the capital deployed in retail; and
— the competitive landscape. We monitor
our customer numbers daily and we need to take account of the
likely impact on our customer numbers of any pricing change we
make.
It is important to emphasise that the retail
business does not track the wholesale market precisely in the
short term. Retail margins tend to grow when wholesale prices
are low and shrink when they are higher. When wholesale power
prices fell below cost in 2001-02, a significant number of generators
without sufficient retail customers became insolvent; conversely,
in winter 2005-06 the retail market was not fully covering its
costs against wholesale prices and several small retailers could
not survive. However, end to end margins were broadly sustainable
throughout that period, enabling integrated suppliers to maintain
reliable supplies to consumers and to continue investing.
The free ETS allowances for phase II have acted
as an incentive to investment in generation (both gas fired power
stations and FGD plants) and a number of significant investments
would not in our judgement have gone ahead without them. It is
important, to maintain a stable framework for investment, that
this position is not changed retrospectively. The free allowances
will have contributed to the adequacy of generation margins in
the next few years, reducing the likely level of price spikes
in the wholesale market, as well as directly reducing the upward
pressure on end to end margins. A significant proportion of the
value of these allowances is therefore likely to accrue to customers.
NUCLEAR
Our parent company Iberdrola is a significant
nuclear operator in Spain. The Group is closely examining the
prospects for investment in new nuclear power in the UK, focusing
on opportunities in England and Wales.
We believe that the facilitative actions the
Government has announced are broadly the right ones to secure
the policy objective of allowing new nuclear to proceed without
subsidy. It is a significant programme of work that will need
to be driven forward with determination; we will play our part
in helping this. Inevitably, there will be many details that will
need to be resolved as the work moves to the next level and we
as potential investors will participate in this.
ScottishPower Renewable Energy Limited is the
UK's largest wind generator. We think that the proposals on nuclear
will make no discernible difference to deployment of renewables
which will be determined in the short term by the amount of progress
made on planning and grid issues, and in the medium term by the
Government's decisions on extending the duration and level of
the renewables obligation.
We are satisfied that the wider electricity
wholesale market in Great Britain has sufficient capacity, depth
and flexibility to accommodate nuclear plant at the likely rate
of construction without an adverse effect on the construction
of sufficient other plant to maintain security of supply.
Carbon Capture and Storage (CCS) is also a technology
which can play an important role in minimising the emissions of
CO2 from power generation. While there is a great deal of work
still to do on both the economic and the regulatory frameworks
for CCS to succeed, the Government's approach of seeking a post
combustion demonstration starting by 2014 and then moving on to
a wider deployment seems right and best calculated to secure a
positive result.
25 January 2008
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