Memorandum submitted by Ofgem
INTRODUCTION
1. Ofgem is the regulator of the gas and
electricity markets in Great Britain. Our principal objective
is to protect the interests of present and future gas and electricity
consumers through the promotion of competition, wherever appropriate,
and the regulation of monopoly companies responsible for the operation
of the gas and electricity networks. We also have secondary duties
which include, amongst other things, the promotion of security
of energy supply, the protection of certain classes of vulnerable
customers and the promotion of sustainability.
2. Ofgem welcomes the Committee's inquiry
into environmental labelling. Our focus in this submission is
on the work that we are currently undertaking, in consultation
with interested stakeholders, regarding the development of a clear
set of guidelines and to facilitate the development of an "at
a glance" independent certification system for energy tariffs
which have additional environmental benefits. We have addressed
the Committee's questions on what should be shown under a labelling
system; the case for rationalising environmental labels; the impact
of environmental labelling on consumer behaviour; the regulation
of environmental labelling and international labelling.
BACKGROUND
3. In response to increased customer awareness
of the global challenge of climate change, a number of electricity
suppliers are offering "green tariffs" to customers.
These tariffs range from products that are designed to ensure
that 100% of electricity used is from renewable sources to others
where suppliers take action to offset carbon emissions arising
from the energy sources used. The National Consumers' Council
(NCC) has recently estimated that nearly 200,000 domestic customers
(plus a large number of industrial and commercial customers) have
chosen a green tariff. These tariffs therefore represent a useful
tool to increase customer awareness of the challenges of climate
change, enabling customers to provide increased investment signals
towards the development of renewable generation and also to support
meeting the government's carbon emission reduction targets.
4. In 2002 Ofgem issued a set of Guidelines
on Green Supply Offerings in the domestic electricity market to
facilitate the provision of information to customers regarding
green supply tariffs. The guidelines suggested that there were
three key principles to which such tariffs should conform; information
about them should be transparent; they should afford additional
environmental benefits ("additionality"); and suppliers
should be able to verify the claims of these benefits.
5. A recent study by the NCC[1]
concluded that there is considerable customer confusion, and,
as a result, a level of consumer mistrust of green tariffs. This
view was also corroborated by the conclusions from our recent
Consumer First project which highlighted that although there was
limited customer awareness of green supply products, there was
clear interest in these tariffs once customers understood that
they may be able to support the environment by signing up to them.
Customers need clear and transparent information to make informed
choices when choosing an energy supplier, and being able to signal
their environmental preferences is an important part of this when
it comes to green tariffs. This clarification is also important
to ensure that opportunities offered to them by the liberalised
energy markets are not masked by the threat of misleading practices.
6. Our Consumer First project aims to help
Ofgem better understand the developing interests and priorities
of consumers. Research carried out for Consumer First illustrated
the importance that consumers attach to greater transparency in
general with regards to their energy consumption.[2]
The research indicated that consumers want clearer information,
for example on energy bills, regarding the contributions they
are making to the Renewables Obligation (RO) and the Energy Efficiency
Commitment (EEC). This is particularly important to customers
given that the RO currently adds £7 to an annual electricity
bill and this is set to increase to around £20 a year by
2015. The EEC scheme costs £9 per customer, per fuel, per
year. Further Consumer First research will soon begin into consumer
views on proposals relating to renewable and low-carbon supply
tariffs.
7. In view of Ofgem's duties to protect
the interests of consumers and to contribute to the achievement
of sustainable development, we want to ensure that customers wishing
to support the environment as part of their energy supply choices,
can be confident of what they are getting by way of environmental
benefits associated with their energy tariffs. As such, in June
2007 we issued a consultation document which included a number
of proposals to revise the guidelines to reduce customer confusion
regarding these tariffs. We also proposed the development and
implementation of a linked certification scheme which would provide
further information and certainty to customers regarding these
tariffs and the environmental benefits that they promote. Following
the publication of this document we held a number of workshops
with interested stakeholders to discuss the proposed approach
and these have been exceptionally useful in further developing
the proposals with the input of interested parties.
PRODUCTS REQUIRING
LABELLING
8. The main proposed revisions contained
within the document are outlined in the table below along with
details of the way these have evolved following consultation.
9. The table shows there have been a number
of revisions to the initial guidelines. One of the key changes
is the proposal to develop separate guidelines for renewable and
low-carbon tariffs. There was concern that the inclusion, within
the guidelines, of tariffs sourced from non renewable low-carbon
sources of generation—primarily nuclear generation—would
increase customer confusion of what constituted green supply.
Opinions are divided on whether nuclear is really a green option
given the waste issues, but it is clearly a low-carbon energy
source. A proposal was developed to divide the existing green
supply guidelines into two separate sets of guidelines—one
to qualify which tariffs were sourced from renewables and the
other which would rate the carbon intensity of the supply tariffs.
We support this approach as we anticipate that it will reduce
customer confusion and provide clarity on what the guidelines
cover. We want customers to be able to make clear and informed
choices regarding their green energy tariffs and to easily distinguish
between low-carbon and green energy supplies.
| Proposed approach June 2007
| Rationale | Proposal agreed?
| Proposed approach October 2007 |
Ofgem should provide guidance on green tariffs
| To encourage innovation and competition |
‚ | Ofgem updating guidelines
|
| Guidelines should be voluntary | Consistent with better regulation—not onerous
| ‚ | Intention for them to become self-regulatory
|
| Guidelines should be extended to business supply
| Businesses have a key role to combat climate change
| ‚ | Separate guidelines needed for business supply
|
| Guidelines should be extended to tariffs sourced from low-carbon generation
| Low-carbon tariffs can have a role in contributing to targets relating to carbon reduction
| ‚ | Move toward separate guidelines on renewable/low-carbon tariffs. This recognises the environmental contribution that these supply sources make and also contribute to Government targets
|
| Suppliers should provide additional information to facilitate transparency
| Transparency is a key element of the guidelines
| ‚ | Standardised information to be provided on environmental benefits of tariffs
|
| Evidence of supply should be linked to Fuel Mix Disclosure (FMD) licence obligation
| To provide a standard requirement for verifying the source of supply
| ‚ | Evidence linked to FMD with clear information on sources of renewable generation
|
| Green tariffs should demonstrate additionality
| To ensure that tariffs being marketed as green are contributing additional environmental benefits
| X | Provision of transparent information will allow informed customer decisions on environmental benefits. This will lead to a greater customer steer for investment decisions towards low-carbon or renewable technologies in the medium term
|
| Should be clear guidance on use of funds |
To ensure that these are being used appropriately
| ‚ | Guidance to be provided on use of funds
|
| A certification scheme linked to the guidelines should be developed and implemented
| To make it clear "at a glance" the benefits that the tariff has for the environment
| ‚ | This will be developed by suppliers and interested stakeholders
|
| |
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10. Two further areas where key changes have been made
in relation specifically to the labelling system itself as opposed
to the scope of the scheme are outlined below:
— Provision of standardised information to facilitate
transparency: There was clear stakeholder agreement that transparency
is a key objective of the guidelines. As such, there was general
consensus that the provision of greater information would enable
customers to reach better informed decisions based on their perception
of the environmental benefits that it is most important to facilitate.
We anticipate that the provision of clear and standard forms of
information will allow customers to more easily compare competing
tariffs at the point of sale and therefore reduce customer confusion
with respect to their relative benefits. However, we recognise
that a balance needs to be struck between the provision of information
and ensuring the guidelines are not unduly onerous and we are
working together with stakeholders to develop a solution that
works for both suppliers and customers.
— Definition and measurement of additionality:
While stakeholders were keen to define and develop an associated
measure of additionality for renewable and low-carbon tariffs,
the consultation highlighted that there was a diversity of views
as to whether this could be achieved in an objective and measurable
way. While there was recognition of the possible definitions of
additionality, it was evident that there were difficulties in
developing an appropriate definition that would be both clear
to customers and which would clearly demonstrate whether a tariff
will offer more green or low-carbon energy than would already
be provided by suppliers under the Renewables Obligation. We consider
that providing greater information to customers regarding the
relative environmental benefits of competing tariffs will empower
them to determine the tariffs that they wish to procure. In turn,
this will clearly illustrate customer demand to suppliers for
either renewable and/or low-carbon forms of generation, therefore
providing clear steers for future investment decisions.
RATIONALISING ENVIRONMENTAL
LABELS
11. It is a priority that further customer confusion
on renewable and low-carbon tariffs is avoided. A proliferation
of guidelines and rating systems would not resolve current low
levels of confidence and trust amongst consumers. Therefore we
are asking industry to develop a scheme (or schemes), consistent
with the tariff guidelines that will best facilitate customer
choice and confidence of the various renewable and low-carbon
tariffs available, whilst ensuring the cost and administrative
burden on suppliers is kept to a minimum.
IMPACT OF
ENVIRONMENTAL LABELLING
ON CONSUMER
BEHAVIOUR
12. Although Ofgem's priority is to protect customer's
interests, we believe the guidelines and rating system could encourage
greater innovation and development in the types of renewable and
low-carbon tariffs available. This will lead to greater customer
choice and competition in this market as suppliers seek to differentiate
their products from each other. This type of system would also
increase consumer confidence in the claims made by suppliers regarding
environmental tariffs as suppliers would have to verify the claims
they make in respect of the tariff.
REGULATION OF
ENVIRONMENTAL LABELLING
13. Ofgem is committed to Better Regulation principles
and as such we consider that ideally the industry should develop
its own self-regulatory guidelines. We are therefore proposing
to publish revised guidelines that suppliers have to `sign up'
to, which would have the potential to become self-regulating as
the green energy market matures going forward. This would enable
the guidelines to evolve more flexibly in response to new types
of tariff being made available.
14. We believe that a voluntary third party accreditation
scheme should be developed and implemented for renewable and low-carbon
tariffs. Ofgem does not consider that it should perform this role
but will facilitate discussions and debate in this area together
with suppliers, customers and interested stakeholders. During
consultation, there was clear stakeholder support for the development
of a certification scheme linked to the guidelines and based upon
the principles contained in the guidelines. However, a strong
preference has been expressed for delaying further development
of the certification scheme until the guidelines are finalised
to ensure consistency between the principles that are utilised.
We would look to see that any scheme developed was entirely consistent
with the principles and requirements specified within the guidelines.
INTERNATIONAL LABELLING
15. The Eugene Standard is an international benchmark
for green energy tariffs. It supports energy technologies that
have undisputed environmental benefits. The Eugene Standard can
be used as a symbol of "good" energy, which has less
of an impact on the environment than conventional energy. The
Eugene Network mission is to promote green energy labelling as
a market tool to facilitate and stimulate additional generation
of renewable and efficient energy services, and to foster a clean
energy system. We are supportive of the developments being made
in implementing international benchmarks for green energy tariffs
such as the Eugene Standard but note that if such a scheme were
adopted in GB, its use would be separate and alongside the development
of renewable or low-carbon tariff guidelines.
16. Finally, we would like to thank the Committee for
the opportunity to provide this input into its discussions. We
would be very happy to provide any further information that the
Committee would find helpful.
October 2007
1
Reality or rhetoric? Green tariffs for domestic customers by Virginia
Graham. National Consumers' Council. December 2006. Available
from http://www.ncc.org.uk/responsibleconsumption/green-tariffs.pdf Back
2
The research was carried out by Stimulating World on behalf of
Consumer First. The full publication can be found at: http://www.ofgem.gov.uk/Sustainability/Environmnt/Policy/Documents1/Stimulating%20World.pdf Back
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