Conclusions and recommendations
1. Energy
prices
2. Given
the expectation of recession amongst most advanced economies in
2009, and the absence of a co-ordinated response from OPEC, the
price of oil is likely to remain well below its July 2008 peak
in the short term. Accordingly, despite the problems with the
structure of the wholesale markets identified in our previous
Report, we would expect to see a fall in wholesale gas and electricity
prices. While recognising that the hedging strategies of the companies
means there will always be a lag of weeks or months between falls
in wholesale prices and matching reductions in retail prices,
we support the Government in calling on the 'Big 6' energy
companies to cut prices for their retail customers as soon as
possible in 2009, and in pressing for greater transparency on
the relationship between wholesale and retail prices. However,
we continue to believe that, once the global economy begins to
recover, in the long term "the era of cheap energy is surely
over". (Paragraph 9)
3. Gas
storage
4. If
the UK is to avoid falling victim to even higher levels of wholesale
gas price volatility in the coming years, it requires a level
of growth in storage capacity that is an order of magnitude greater
than that which the market has achieved on its own to date. The
Government's national policy statement (NPS) must set out in detail
what level of storage it wishes to achieve in the next decade
and the criteria that sites for development should meet. Given
that NPSs were announced some time ago, we are very disappointed
that the NPS for gas storage will not be available for consultation
until mid to late 2009, with final publication in 2010. We call
on the Government to bring this date forward. Moreover, given
the current economic climate, it must now re-consider the likelihood
that investment will take place without some form of regulatory
intervention. Given the amount of time that has been lost, and
the lack of progress that has been made, we think it likely that
the market will fail to deliver. There are many possible solutions.
To give two possible examples, some form of storage obligation
could be placed on gas shippers or suppliers, or the regulated
monopoly role of National Grid could be extended. (Paragraph
13)
5. New
electricity generating capacity
6. Generating
capacity equivalent to nearly a third of current electricity demand
will be made redundant by 2020. It will need to be replaced. We
believe that in the current economic climate there is a high risk
that the energy companies will not be able to raise the finance
necessary to build this. It is the Government's job to ensure
security of supply. Just as the Government has been quick to respond
to the crisis in the banking sector, it must now take action to
ensure investment in new capacity takes place as planned. A reasonable
level of profit by the big energy suppliers will be a precondition
of this investment taking place. The situation is now very serious
and we believe that a simple trust in the market's ability to
deliver without any intervention will see us facing an 'energy
crunch' in the medium term. The social and economic consequences
of such a 'crunch' would be disastrous. (Paragraph 17)
7. The
Government needs to take action to ensure the credibility of its
claims that climate change forms as important a part of the UK's
energy policy as security of supply. Further action is required
if both nuclear power and coal-fired generation are to form part
of the electricity mix in the medium to longer term. The Government
will need to learn from the recent Finnish experience of new nuclear
build to ensure a UK programme is not subject to the same delays
and cost over-runs. The national policy statement on nuclear power
should be brought forward at the earliest possible date. In addition,
much greater levels of investment in carbon capture and storage
(CCS) are required than the current single competition for a demonstration
plant if the Government wishes to see environmentally acceptable
new coal-fired capacity. (Paragraph 18)
8. Wholesale
market liquidity
9. We
welcome Ofgem's decision to take action to improve liquidity in
the wholesale electricity market. This is now more important than
ever, as the credit crunch has seen a decline in liquidity from
the very low levels that existed in the first place. We look to
the regulator to move quickly by proposing reforms in the first
half of 2009. These will be crucial for encouraging future new
entrants, both in the wholesale and retail markets. Furthermore,
we continue to believe the Government and regulator should give
greater attention to liquidity in the forward market for wholesale
gas, about which a number of witnesses raised concern in our previous
inquiry. The Government's response to that Report showed that
the last piece of substantive work on the topic was conducted
in 2005. It is time for the Department of Energy and Climate Change
(DECC) to consider the issue again and without delay. Unless wholesale
markets work well there is no chance of achieving a fair deal
for retail customers. (Paragraph 20)
10. The
Energy Act 2008
11. The
creation of the Department of Energy and Climate Change has brought
about new policy initiatives on feed-in tariffs, incentives for
renewable heat and smart metering, which this Committee has advocated
for some time. We welcome these developments. It will now fall
to the new Energy and Climate Change Committee to scrutinise the
finer detail of how the Department puts these policies into practice.
In particular, we hope that DECC will treat the twelve year programme
for the introduction of smart meters (two years consultation and
ten-year roll-out) as an absolute maximum, and aim to complete
it much more quickly. The new committee will also need to pay
close attention to other aspects of the Energy Act 2008, such
as the implementation of technology banding for the Renewables
Obligation and the establishment of a framework for financing
waste disposal and decommissioning costs arising from future new
nuclear power stations. (Paragraph 24)
12. Electricity
network infrastructure
13. The
UK's future energy mix will come from a more diverse range of
sources, including local energy and larger-scale onshore and offshore
renewables, as well as new nuclear power stations. More decentralised
generation will need technologies that allow more 'active' management
of the electricity networks. The scale of investment required
to install them is likely to be huge, but could yield substantial
benefits both in terms of security of supply and in reducing carbon
emissions. In conjunction with new incentives for decentralised
generation, DECC, Ofgem and the new committee will need to consider
whether the existing regulatory regime governing network investment
is sufficient to meet the demands posed by a more complex energy
mix. (Paragraph 26)
14. Funding
the Nuclear Decommissioning Authority
15. It
will now fall to DECC to avoid a potential "car crash"
by re-designing the Nuclear Decommissioning Authority's funding
model before the end of the current spending review period. Agreement
with HM Treasury on an appropriate framework should provide full
protection of DECC's non-NDA related departmental expenditure
limit. This issue should be a high priority for both the new department
and the new select committee which will scrutinise it. (Paragraph
28)
16. Cost-reflective
energy pricing
17. In
the short term energy suppliers may themselves take action to
ensure their charges for different payment types are cost-reflective.
However, we believe that in future this requirement should be
set down in companies' licences to ensure the issue does not arise
again. We also support Ofgem's proposal for a further licence
condition that would prohibit undue price discrimination. This
would benefit vulnerable groups such as older people who are less
likely to switch, or rural customers who are not connected to
the gas grid. Such a condition would, however, need to make an
exception for those households who currently benefit from suppliers'
social tariffs. We also repeat that most of those in fuel poverty
are on standard credit terms and that, while much is said about
pre-payment meter tariffs, too little political attention is focussed
on this larger and often more vulnerable group. (Paragraph 32)
18. Direct
debit charges
19. We
welcome the regulator's initial commitment to look into whether
the energy suppliers are using higher than necessary direct debit
charges to boost their cash flow, and we look forward to its findings.
The level of public concern is high and we urge our successor
committee to maintain the pressure on Ofgem to resolve this issue.
(Paragraph 33)
20. Direct
selling
21. We
are deeply concerned that nearly half of consumers who switch
as a result of a direct sales approach fail to achieve a price
reduction. We welcome Ofgem's commitment to strengthen the rules
governing direct selling. It should ensure new rules are in place
within the first quarter of 2009. If they do not significantly
improve the level of service to customers by this time next year,
then the regulator should not hesitate to ban the practice outright.
(Paragraph 35)
22. Supply
for small businesses
23. A
consequence of BizzEnergy and Electricity4Business's recent demise
is that SME customers have lost two of their most effective advocates.
Households are represented by the successor to Energywatch, Consumer
Focus, and large-scale energy consumers have two dedicated advocacy
bodies in the Major Energy Users' Council and the Energy Intensive
Users' Group. Yet SMEs do not benefit from such advocacy, although
Consumer Focus is currently looking at its role in representing
them. Lack of a dedicated advocate may explain why anti-competitive
practices by the 'Big 6' have been able to develop relatively
unchallenged in the past. Though Ofgem told us it maintains links
to SMEs through its Small User Group, we believe the regulator
and DECC must ensure there are effective mechanisms for ensuring
the interests of SMEs are identified and properly safeguarded.
(Paragraph 38)
24. Fuel
poverty
25. After
two rounds of price increases, we estimate as many as 5.5 million
households may now be living in fuel poverty. We welcome the Government's
package of measures announced in the autumn, particularly their
focus on improving the energy efficiency of the existing housing
stock. This will prove the most cost-effective means of tackling
fuel poverty in the long run. We also welcome the contribution
to the package being made by non-vertically integrated electricity
generators, which acknowledges the fact that they too have benefited
from windfall gains under Phase 2 of the EU Emissions Trading
Scheme. (Paragraph 42)
26. The
creation of DECC removes one of the fissures in responsibility
for fuel poverty within government, with BERR and DEFRA previously
having overlapping involvement. We hope the Department will keep
its strategy under review as many of its current measures have
a limited lifetime even within the existing spending review period.
While there is currently a strong case for the industry's role
in alleviating fuel poverty because of the windfall gains it is
receiving, these will cease to exist once full auctioning of carbon
permits is introduced in 2013. Provided the regulatory framework
is sufficient to ensure fairness to all consumers, in the long
term the Government will need to consider whether it can continue
to expect energy companies and the regulator to be responsible
for the delivery of its social policy objectives. We also reiterate
our frequent recommendation that much more attention must be paid
to groups in fuel poverty other than pensioners, particularly
disabled people under 60. (Paragraph 43)
27. The
role of Ofgem
28. We
were pleased that the regulator's initial findings report and
suggested recommendations sought to address many, though not all,
of the concerns set out in our earlier Report. Indeed, its probe
raised some issues that had not come to light in our inquiry.
For this we give Ofgem credit. However, it is clear that in 2008
the regulator has been slow to respond to rising concern over
the functioning of the energy markets. We hope that in 2009 and
onwards, the new Energy and Climate Change Committee will not
have to take the lead in setting the regulator's agenda as we
have found ourselves doing on too many occasions. (Paragraph
46)
29. We
also express concern that the new consumer representation processes
and the plethora of bodies involved—Consumer Direct, companies'
complaints procedures, the Energy Ombudsman, Consumer Focus and
Ofgem itself—are opaque. Moreover, they risk reducing Ofgem's
awareness of issues of concern to consumers, such as the recent
complaints about direct debits. Ofgem and Consumer Focus will
need to have close and frequent contact. Otherwise, the combination
of a regulator which often needs to be prompted to take action,
and a lack of effective procedures for bringing shortcomings to
the attention of the regulator, will be a recipe for poor representation
of consumer interests. (Paragraph 47)
30. We
recommend the Government now investigates whether Ofgem should
have additional powers to guard against market abuses, particularly
in the wholesale electricity markets, and how these powers might
be granted. (Paragraph 48)
| 
