Examination of Witnesses (Questions 80-99)
MR PHIL
BENTLEY, MR
MARTIN LAWRENCE,
MR JIM
MACDONALD, MR
GUY JOHNSON,
MR IAN
MARCHANT AND
MR NICK
HORLER
11 FEBRUARY 2009
Q80 Judy Mallaber: Does the customer
have to put that in writing, because at that time we were told
they could accept it, even if they had not written something down?
Mr Johnson: That call happens,
and the call centre takes them through that process. At the end
of it, providing that that process is one where the customer confirms
that he or she is happy to proceed, then the customer will sign
the contract. After the contract is signed, we still have all
our subsequent procedures. One of those is that we write to customers,
as you all know, immediately thereafter reminding them of the
opportunity to cancel, et cetera; but we do have that specific
check in order to—we employ 100 per cent point of sale verification,
but it is a specific verification in order to ensure that the
customer is not misled in terms of what is happening.
Q81 Judy Mallaber: Quite apart from
my case, there must be something wrong if 40 per cent of customers
have somehow not managed to get the advice that would make them
realise that they were switching to something that was going to
be more expensive! There must be something going wrong, even if
you have cleaned up your act so we do not find somebody has switched
us without even having signed anything!
Mr Marchant: The reality is, the
industry's performance on sales was not good enough a few years
ago. We all have scars of things that our companies did wrong.
I think we are now at the situation as an industry where we can
give you confidence that all our people have had the appropriate
training; that we have the systems and procedures in place; and
if they follow that, they are doing a good job and they will not
mis-sell. The problem is, we have about a thousand people out
there selling; and you only need one person to push the envelope
to say things they should not do, and you can have ten or twenty
complaints in a day.
Q82 Judy Mallaber: Unfortunately
these figures quoted by the Chairman were only last year.
Mr Marchant: For us, I simply
do not accept that 40 per cent of people switching have ended
up paying more than if they had stayed. I simply do not accept
that. They might end up paying more than they were, as Mr Bentley
said, because when the survey is done, how the question is asked
is actually very important in times of rising prices. If you ask
people in the next six months, "Did you end up paying less?",
they will all say, "Yes", even if they still could have
saved more by not switching!
Q83 Chairman: Can I just clarify
a legal point? I have had a complaint from one of my own constituents,
who was a customer of npower. She was approached via cold calling
by a British Gas phone salesperson. She showed an interest but
said she made no commitments. She then found that she had been
switched and when she complained she was told that she had made
a verbal contract on the phone. Is that how you operate or do
you expect people to sign a contract?
Mr Bentley: I do not know this
particular case. Let me just try and help with that one. In terms
of complaints, our complaints are 0.0002 per cent, so occasionally
an isolated case might happen but that is two in 10,000 sales.
I agree with Mr Marchant. It is not the issue that it might have
been five years ago. The point about the verbal contract is a
point that was made across here, which is that it is confirmed
with a third party. We say, "You have made a sale here",
then it is confirmed with a third party, saying, "You do
realise you are entering into a contract?", and it is all
run through a double-check list, and that is the way most of the
industry works today. Frankly, it is more efficient because you
have got pieces of paper flying around the place and the double-check
process has reduced the number of complaints and it is something
that works well in the industry.
Q84 Charles Hendry: Mr Horler says
that if people ask to switch you will always advise if there is
no saving. Can I suggest two things which would enable you to
go rather further. First of all, if somebody asked to switch you
would automatically advise them of your lowest tariff for them,
so it is not just that there is no saving; you are more proactive,
and this could apply to other companies as well; and, secondly,
you show on people's bills what would be the lowest tariff given
their consumption pattern, so that you give people more information
to enable them to switch. Are those practical steps and would
you consider doing them?
Mr Horler: To the first, we would
certainly think about that. To the second, tariffs change. Products
are being developed all the time. It might be a practical challenge.
That is my initial reaction to what you say.
Mr Marchant: My initial reaction
to your first point is that I am sure the salesmen do that. They
are going to want to put their best foot forward because their
commission is the same whatever tariff of ours they sell. They
will offer the best they can.
Q85 Charles Hendry: Could you make
it a policy that you will instruct your salesmen and saleswomen
that if anybody asks about a tariff they will always be told your
most favourable tariff?
Mr Horler: Yes.
Chairman: Can we move on now? We would
like to spend a bit of time on future investment programmes, what
the current situation is, projections in relation to any potential
risks of energy gap, and also the shape of investment with renewables,
nuclear and coal in relation to the energy gap?
Q86 Sir Robert Smith: Obviously,
a big concern coming at the moment is that a lot of the power
stations are coming towards the end of their lives. Are the incentives
within the industry right for ensuring future investment in that
replacement stock?
Mr Lawrence: It is quite clear
that we have got a situation arising in the UK in the next ten
years where we could have a change of our generation capacity
on the back of LCPD and so forth. It is also clear that the direction
of travel is that we are moving towards a de-carbonisation of
the sector, and so what the industry is going to have to do is
invest huge sums in providing a generation platform for the future,
and it will have to do so in the face of at the moment no certainty,
no clarity, as to what sort of market structure is going to be
there. I am going to talk specifically about the point of carbon
if I may because the direction we are trying to move towards is
to put as a feature of part of generation capacity, be it renewables,
CCS-enabled coal stations or nuclear power stations, that they
can produce low carbon energy. At the moment we have some degree
of clarity as to what is happening in the immediate period about
EU ETS, but post-2020, when this new generation that we are now
discussing is going to come on line, we do not yet know. We do
not have any certainty as to what the carbon regime is going to
be into the future. Therefore, when we look to our shareholders
and to our investment committees to try and take decisions in
that time frame, one of the challenges they have is a lack of
certainty about what sort of carbon price is going to be there,
or indeed will there be a carbon price in the future? In my own
company we have some very publicly announced plans, particularly
on the nuclear front but also on other technologies as well. The
absence of certainty around the carbon price structure is a key
problem for us.
Q87 Dr Turner: Are your investment
decisions in new generation capacity being affected by the credit
crunch? Is it, for instance, turning out to be a pressure to invest
in the easy things, ie, cheap, gas-fired generation, or more complex
renewables?
Mr Marchant: If I could attempt
to answer both questions, by 2015 14 gigawatts of plant currently
operating will shut and up to another four gigawatts may well
shut, principally because of environmental concerns, so we need
to build between 14 and 18 gigawatts of new plant. Seven gigawatts
is under construction today with seven different CCGT projects.
There are another six CCGT projects with consent, about six gigawatts,
and about another 15 that I am aware of in process. You have also
got four or five potential coal projects being worked up generally
by people in this room at varying stages in the process with varying
degrees of views on carbon capture and storage. There is also
biomass and waste to energy which will contribute to security
of supply. There is a gigawatt in development either with consent
or in the planning process, and I am aware of another list of
projects which will probably add another gigawatt to that. In
terms of security of supply, therefore, we will end up with a
more gas reliant system because they are easier to build, they
are cheaper to build, they are less carbon intensive to build.
However, there are also 46 renewable energy projects in construction
at the moment in the UK totalling about five gigawatts of power.
To come back to your question about the credit crunch, what has
the last year done? It has pushed the cost of funding up, biofuel
30 per cent, one, one and a half per cent. Secondly, financing
is available. We raised £500 million from the equity markets
in January. We raised 3700 million from the debt markets later
in January. We raised that money on the back of our £6.7
billion investment plan. We said to shareholders and bond holders,
"We want to continue to invest", so the costing has
got higher, the funding is available. The short-term power prices
have damaged the economics of projects by around one per cent
on returns, because the next two to three years have deteriorated.
We have not yet seen equipment prices reduce, which is what you
would expect, the cost of the turbines coming down. They have
stopped going up; they have not been going up for months now,
but the Siemens, the GEs of this world are still seeking to hold
their prices, so I think you will see a slowdown in projects approved
for construction in the next six months whilst we beat up the
OEM and then I think you will see investment continuing later
this year.
Q88 Sir Robert Smith: Can I express
a concern? You say you are moving to a lot of gas generation.
A lot of consumers burn gas directly. Our own indigenous gas supply
is falling. We have got all these pipes and things and so on but
there is a lot of uncertainty because we are in a much more fluid
market. Where is the gas storage incentive coming from and if
we do not get the gas storage are we going to face massive hikes
for our constituents?
Mr Marchant: We are investing
hundreds of millions in gas storage as we speak at Aldeburgh in
Yorkshire. There is a lot of gas storage being considered. If
all the projects in the UK that are being talked about were to
go ahead about we would have more daily deliverability than the
highest of any demand the UK has ever seen, so the market is responding
to that concern, which I agree with, by looking actively at whether
the geological structures are there for us to store gas.
Q89 Sir Robert Smith: But is it not
going quite slowly?
Mr Bentley: There are issues around
planning. Certainly the onshore is a big issue. There are also
issues around taxation because you have to put the gas into the
field to create a cushion that you can then extract from, and
if you think about the gas taxation rate here in the UK, in our
fields it is 75 per cent, so you produce it from one field and
you pay 75 per cent tax, and then you put it into storage and
you need to have a certain amount of cushion in, and it makes
these projects uneconomic, so there is an issue around where fiscal
stimulus and planning could help the UK to deliver the storage
that it needs.
John Robertson: Investment in renewables
has been lax, to say the very least, but the Government, of course,
has put a great deal of that money into that investment. I have
concerns in research and development about why we have put all
this money into wind in particular and we have sacrificed other
research and development in other areas which it turns out may
have been more beneficial to this country, so my question to you
is this. With research and development in the future how do you
see your position, along with the Government's, on research into
renewables that are not necessarily wind and land orientated?
Q90 Charles Hendry: Following up
on the gas storage side, the scenario which has been painted of
a huge change from generation from coal to generation from gas
will mean that by 2020 60 per cent perhaps of our electricity
will come from gas and 80 per cent of that will be imported. We
have two weeks' gas storage in this country compared to 100 days'
in France and Germany. Germany are saying they have to have a
massive expansion of their gas storage. I do not think the market
has actually delivered gas storage at a level at which we need
it. Whose responsibility is it to make it happen and whose responsibility
is it to fund it?
Mr Macdonald: In terms of the
gas, Mr Hendry, you are absolutely correct. From an E.ON perspective,
we are investing in excess of £500 million in terms of that
storage. In the past we used the North Sea in essence as our storage,
and picking up, Sir Robert, on your point, by 2018 we will be
80 per cent reliant on gas imports from that case, so it is fundamentally
important for all of us to make that investment in gas storage.
As I say, we are investing £500 million at the moment for
a guaranteed facility in Cheshire and we have got planning permission
in for a second one at that stage. The one in Cheshire will serve
about three and a half million homes, so we are taking the point
very seriously from an E.ON perspective.
Q91 Dr Whitehead: The Government
has proposed extending the Renewables Obligation over a longer
period and to a higher proportion, and also, of course, we have
recently in the Energy Bill seen the emergence for smaller scale
generation of a feed-in tariff and a proposed renewable heat incentive.
How do you think these combinations of obligations and incentives
for larger and smaller scale renewables are likely to affect the
emergence of a larger renewables market?
Mr Horler: Can I say something
about this, and also, if I may, bring in one of the unspoken issues
around investment? I think it is a challenging target, 30-35 per
cent. I think it is doable if the planning system works, if we
get some stability back into the financial markets, but one thing
that concerns me, and it is not talked about in all of this, is
around grid connectivity and the investment that needs to go into
the infrastructure in the UK. The situation that we have at the
moment is that we have typically five-year price agreements. We
are in the middle of DPCR 4 and we are about to negotiate DPCR
5. If you look at the regulated rate of return relative to where
bond prices are, it does not make sense to invest in the infrastructure.
Collectively we have to do something about this and I would urge
you to urge the regulator to keep a broader perspective on this
because one of the consequences of investment infrastructure at
the moment in DPCR 4, if there is a fixed regulated rate of return
against the price at which we are having to borrow money, is that
investment is being deferred, and if investment is deferred then
jobs are lost, and if this rolls on into DPCR 5 not only it is
bad for jobs but it will not enable renewables to get from the
points of supply to the points of demand. I think it is a really
important point.
Mr Marchant: I think the feed-in
tariff is a much-needed policy innovation for the small-scale
domestic and community level. My plea is that we get it in quickly.
I think it is important we get something in this year. It will
need to be tweaked, as the RO was, to make sure it is delivering
the right things so let us get something into that and let us
learn about it. I want to set up businesses to address micro-generation
and micro-heat, but I do not yet know quite what the pace of that
is going to be. The RO has been one of the most successful policy
interventions that we have seen in energy since privatisation
in terms of changing the direction of the industry. We now all
have, all six of us here, active renewable investment programmes.
If we had sat here five years ago we would not. Also, to answer
an earlier question, I think it is fair to say we are all spending
more money on R&D now than we have ever done since privatisation.
For my own company, that R&D covers heat pumps, it covers
solar, it covers wave, it covers tidal, as well as making wind
more reliable. There are active programmes on energy storage,
so the RO has stimulated both near-term deployment and also stimulated
R&D.
Mr Lawrence: I was pleased to
hear you mention heat as well because it is very important that
we do not concentrate solely on one side of the equation. On the
feed-in time for heat that you mentioned, we need clarification
of exactly where the targets are in terms of meeting the obligations.
Heat can play a much bigger role than we think.
Mr Bentley: The problem we have
got now is that it means that the RO is insufficient to get some
of these bigger investments offshore off the ground. British Gas
built the world's largest offshore wind farm off Skegness and
there are other programmes we would like to go forward with but
at the moment the economics do not quite work, so one thing we
have urged the Government to look at is the RO banding for offshore
wind because that is a policy decision to move to renewables,
and it is a policy decision that requires 30-odd per cent of electricity
to be generated under renewables. You have therefore got to put
instruments in behind the policy to ensure the investment flows
without which you will find things like London Re gets scaled
back, Shell have withdrawn out of wind. That is a function of
the economic reality and other companies have made this point.
We are slightly different in the UK because it is our home strategic
market, but our European friends here have other markets they
can invest in, and if the returns are not there and if the uncertainty
of regulation prevails then, we have heard it already said, they
will spend money in Germany and in France.
Q92 Chairman: Has the falling oil
price affected your investment programmes for renewables?
Mr Bentley: The big issue is,
frankly, the cost of construction. Since the one we built it would
cost us nearly double to rebuild that same kit from when we started
three years ago. It is in the steel costs, it is in the rig rates.
There has been significant inflation there.
Mr Horler: May I just respond
to your question and contradict Mr Bentley? Iberdrola, our parent,
will spend through Scottish Power Renewables the same in 2009
and 2010 as it did in 2008, and is to maintain its position as
the world's largest wind developer and the UK's largest onshore
wind developer.
Mr Marchant: It is interesting
that most other countries are socialising grid costs for offshore
wind, so you do not necessarily have to tweak the RO mechanism
to get the economics of offshore wind, which are not looking good;
they are marginal. If you look in Germany and in Holland, for
instance, the cost of connection is part of the national grid
charge and not borne by the generator. In the UK it is borne by
the generator. There are two ways of influencing the economics
of renewables and I think the Government and Ofgem should look
at both and decide which is the best handle.
Q93 Mr Weir: We talked a lot earlier
in this session about the prices of energy and I wonder if you
feel there is a contradiction in what you have been asked to do,
both bring down prices and have this massive investment programme.
Given the current economic situation, are you able to do both?
Mr Marchant: I think it is fair
to say that some of what was being asked of us, particularly in
the back half of last week, was very unfair. We were being demonised
for raising prices and we were being chastised for under-investing,
and if somehow both could move in the right direction all would
be sweetness and light. The reality is that that is not true.
Our industry is one of the few industries that you could have
coming into this place to say investment plans this year will
be broadly unchanged on last year. Some of us will be up, some
of us will be down, but broadly this industry is investing £10
billion a year in this country. The work all has to be done here.
That is likely to continue for the foreseeable future as we decarbonise
our energy industry, as we modernise it. The reality is that one
sits at home sometimes and wonders why one bothers because one
seems to be the most hated man in my case in Scotland, yet, actually—well,
actually, maybe he was here yesterday. I will stop.
Mr Horler: It is worth pointing
out that with the effects of what is going on in the financial
market and the pressure on weighted average costs of capital,
the long-run marginal cost of new gas plant is currently higher
than where wholesale prices are at the moment, so it is a challenge.
Q94 Mr Weir: Mr Marchant mentioned
earlier that he managed to raise quite a lot on the capital markets
for his investment programme. Is the current situation making
companies have to rely more on profit to help with investment
or are you all still able to raise money on the capital markets?
What impact does that have on your profits?
Mr Marchant: Utilities have generally
been the most active capital raisers across the whole of Europe
in the last four months. Generally it has been a utility that
has reopened bond markets. It has been utilities that have reopened
equity markets. Centrica did a rights issue, and late last year
we did a placing, the first one this year, but generally we can
raise the money to fund our investments, but at every shareholders'
meeting that I have the question of funding is first, the question
of politics and pricing is second, and the third question you
get is about how do those two relate. It is front and centre in
people's minds.
Mr Bentley: The fact is that investing
in offshore is more costly and therefore without subsidies generation
is going to cost more. You can square the circle by making homes
more energy efficient, so, yes, the per unit may go up but the
volume consumption per annum should fall, and that is what I think
we are all committed to seeing happen. It is not a contradiction
that we need higher prices to get the investment but we can still
deliver lower bills to the end customer.
Q95 Nadine Dorries: It seems to me
that many of the issues we have talked about today, such as storage,
reliability of supply, have all had nuclear answers to many of
those questions. Do you think, following the announcements, that
the Government are doing enough to facilitate the bringing on
of nuclear power stations? Where do you see your involvement as
companies in that, and do you think that we will have nuclear
up and running by the time existing nuclear has been decommissioned?
Mr Lawrence: Having recently completed
the biggest foreign investment in the power sector with the acquisition
of British Energy, we are clearly very positive towards the role
that new nuclear can play in the UK's infrastructure going forward.
There are still some big issues out there. We need to make sure
we maintain the progress on the planning, for example, so that
we can clarity about what that is going to deliver. I mentioned
earlier the issue around the carbon price, which is a major determinant
of the relative profitability of nuclear in the equation. We have
a public commitment and a plan to build four EPRs on land acquired
as part of the British Energy transaction. We want to make other
land available to others who wish to enter the world of new nuclear.
Our internal plans and gant charts have us as the first of those
on stream by the end of 2017, which is well within the framework
you are talking about, and we hope successfully to build the other
three units in the years that follow that with the same team,
so yes, we think we can. We think it must be part of the solution.
It is not the only solution. Everything else we have talked about—renewables
and CCS-enabled coal, must also play its role but we are confident
that it can play its role.
Q96 Nadine Dorries: How much of the
market do you see nuclear being able to absorb?
Mr Lawrence: At the moment we
are talking about replacing existing nuclear's percentage with
new nuclear.
Q97 Nadine Dorries: So there will
be no greater capacity?
Mr Lawrence: I was talking about
our existing plans. What may come afterwards will depend on what
other companies choose to do.
Mr Johnson: One of the things
that is very apparent from the discussion we have been having
in the last few minutes is that diversity is the key, balance
is the key. Clearly, comments about—I had in my head more
than 40 per cent by 2015 of electricity generation being from
gas plants; some have said it will be as high as 60 per cent—are
obviously a major concern. I think therefore we are all looking
for a balanced portfolio, not just for the security of supply
issues but also, obviously, for the carbon reduction issues, and
nuclear has a huge part to play in that. We have announced a joint
venture with E.ON and we are hopeful of developing six gigawatts
of new nuclear in the UK. I think the issue for us is as much
as anything about the planning issues. Even though we have announced
a new CCGT that we have got consent for at Pembroke, that took
more than four years and the spectre of the planning delays that
could be raised on a new nuclear build are—
Q98 Nadine Dorries: Where are the
delays coming from?
Mr Johnson: Hopefully, they will
come less with the new planning act because, of course, this was
done under the old planning regime. I think they come from, to
be honest with you, the planning process in the UK, and almost
from the fact that the absence of a decision is quite often the
way in which it proceeds rather than even a definitive "no".
Mr Marchant: All six companies
here have announced that they have an interest in nuclear new
build. We can all say that. That tells me that the Government
is doing broadly the right things because it is creating a climate
where that was not true a year ago, where maybe one of us had
announced plans. Now all six have. The key test is that we need
to get the first new reactors in construction by 2013-14. To me
that is the milestone and that is where the planning thing becomes
clear. No new nuclear is yet in the planning process.
Q99 Nadine Dorries: But what you
are saying is that there is a reluctance in decision-making, so
the Government has made the case and said, "Yes, we do need
to go nuclear". However, there is a reluctance for someone
to take on responsibility for making that decision locally?
Mr Marchant: There has been in
the past, and if the past is a guide to the future we will fail
on Martin's aspiration. If what has been going on in new nuclear
itself as a guide to the future, we will get there. The risk we
all face when we actually go for planning for a nuclear reactor—you
will probably have two, three, four requests going in at a very
similar time—is how quickly they come out of the system.
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