Select Committee on Business and Enterprise First Report

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)

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