Examination of Witnesses (Questions 121-139)
MR JIM
MCDONALD,
MR ALAN
SMITH AND
MR GEAROID
LANE
10 DECEMBER 2008
Q121 Chairman: Can I welcome everybody
to the second of our three evidence sessions on our inquiry into
fuel poverty and associated issues. Can I, for the record, welcome
our first set of witnesses for E.ON UK, Mr Jim McDonald, the commercial
director of the retail part of that business, for RWE nPower Mr
Alan Smith, head of government and regulatory relations, and for
Centrica, Gearoid Lane, managing director of British Gas New Energy.
This is a subject with which you are very familiar. It is a subject
which has been the focus of public attention for some time and
yet, Mr Lane, in your evidence you said "Centrica believes
that a fundamental review of the government's Fuel Poverty Strategy
is therefore now necessary to ensure that the government's fuel
poverty targets are reached." It is almost like saying everything
we have done up to now has not worked so we better start again
when you talk about a fundamental review. Let me ask you the reverse
of that. What has been so fundamentally wrong in what we have
done that now you are recommending a fundamental review, if by
that I think you mean you are not going to hit the 2010 target
and you hope to meet the 2016 target? Would you like to respond?
Mr Lane: The starting point is
to say that by saying there was a need for a fundamental review
we were not trying to suggest that everything that had been done
up until now has been worthless or indeed a failure but just a
recognition that the Fuel Poverty Strategy was conceived and put
together in 2001 which was a time when energy prices were at very
different levels to where they are now. There was a much more
benign pricing environment for energy and many other factors were
different as well particularly in relation to security of supply.
The concerns we have now are different to the ones we had then.
We were a lot more comfortable as regards security as a nation
back then and the focus on the need to deliver radical changes
in respect of technologies for reducing CO2 emissions was lower
than it is now. Against that backdrop it is widely recognised
that the 2010 target is very unlikely to be met and the mix of
policy instruments that we have might not be fit for purpose in
delivering the 2016 target of elimination of fuel poverty. It
was really with that in mind that we said it would be sensible
rather than focusing around the edges of existing policy instruments
to say should we look at the whole thing again and look at all
the things we have and will deliver in 2016 or whether we need
a different approach.
Q122 Chairman: Do our other two witnesses
share the same view that we are at a watershed moment and there
needs to be a fundamental change? I was looking at Ed Miliband's
speech entitled The Rise and Fall and Rise Again of a Department
of Energy. He seems to be taking quite a robust line on the whole
subject of fuel poverty; in fact the words used in the speech
are rather less brutal than the interpretation given by some newspapers.
For example The Times describes his approach as "a
more muscular approach would be needed from the government to
tackle the challenges of fighting climate change, curbing fuel
poverty and securing long-term energy supply". I do not know
whether you interpret that as a sea change moment in government
policy which affects this area of fuel poverty but it would be
interesting to have your reaction to what both Mr Lane and the
Secretary of State have said.
Mr Smith: What we do need is a
road map that quantifies the scope and scale of the task, and
with that in mind we do welcome the creation of the Department
of Energy and Climate Change. Hopefully that will bring together
the key policy areas of government as an enabler to take account
of the energy policy objectives of sustainability, security of
supply and affordability. We do need to achieve various different
targets with different drivers, and we have touched on some of
those: we have the 80% reduction in carbon that we need to do
by 2050, we have the 20% renewable energy targets, and we have
the fuel poverty targets. To date we have had a lack of a clear
long-term action plan and the industry has experienced a set of
relatively short-term obligations. Just as we get geared up to
deliver one set of issues another target is set.
Q123 Chairman: Do you mean by that
the succession of EEC1, EEC2, CERT and now the new Community Energy
Savings Programme?
Mr Smith: That is exactly what
I mean. Energy efficiency must be the long-term way to reduce
and alleviate fuel poverty because it delivers year-on-year sustainable
benefit, but we need a greater coordination of the programmes
that currently exist which should avoid resource duplication and
address some of the tensions that exist between carbon saving
and energy efficiency.
Q124 Chairman: Who should do all
this? It sounds like a big job that has to be done in a great
rush. If we are talking about 2016 and here we are in 2008 that
is seven working years away. If people talk about fundamental
change to achieve the redirection or coordination of policy that
you delineated, it will probably take a year's work so that is
six years to do it. We are already running out of time. Who is
going to do all this?
Mr Smith: I think we all need
to do that.
Q125 Chairman: When you say "we
all need to do it", who do you mean by "we"?
Mr Smith: Government and industry.
Industry is set out to deliver many of the objectives that have
been set and it is working with government. I think the relationship
we have with government is very good.
Q126 Chairman: If it is very good,
why has it not delivered this coherence and coordination of policy
which you just said needs to be improved?
Mr Smith: In terms of the policy
that has been set to date, we have always delivered on EEC1 and
EEC2 and we will deliver on CERT. What I am saying is that at
times there may be a tension within some of those policies; for
example, with the priority group within CERT and EEC, the tension
between delivering energy efficiency and then priority on fuel
poverty issues. It is those sorts of things which need to be clarified
and that is why I believe we are at a stage, particularly with
the creation of DECC, where we should start working on a very
clear road map.
Q127 Chairman: If you have had all
these excellent working relationships with government, why did
you not say "Excuse me, we are on our third or fourth phase
of this particular thing, could you clarify what the priorities
are?" You very helpfully put before the Committee they need
to be done now, but Mr Lane quite rightly pointed out you started
off in 2001 on this programme and here we are in 2008, seven years
on, craving clarification.
Mr Smith: As we move on, it is
a learning process.
Q128 Chairman: It is a long time
to learn about it. You, from the world of business, work against
the background of very clear plans, that is what corporate management
structure planning is all about, and if you were not quite clear
what the aims and objectives of the policy was did you raise this
with government during the previous period?
Mr Smith: Of course we raised
them with government but I think business would not on its own
always have the same policy drivers and objectives that the government
has. It is trying to make sure that we deliver what is right so
that businesses can be competitive, that we can deliver things
in an efficient way and that government also meets the objectives
and targets which it sets itself.
Mr McDonald: I will not repeat
what has already been said as that would not be helpful. Can I
turn the debate around very slightly from Gearoid's viewpoint?
It is important that we turn around and focus on the customer
who is the individual, at the end of the day, we are trying to
make the change on behalf of. There are three important elements,
and certainly we focus down as a business from that. Without any
shadow of doubt energy efficiency is a fundamental part of that,
and will be going forward. That is the sustainable solution to
fuel poverty, however there are two other very important aspects
of this we need to look into: one is there is already specific
help out there in terms of government benefits that a lot of these
people are not claiming at this point in time. We have access
to that and we believe responsibility should sit with those who
have the capability of delivering it. We have access to customers
and one of the key things we have been trying to do is to ensure
that in terms of fuel poverty that we make sure our customers
actually are claiming what they are entitled to. I can give a
quick example of that. Last year we went out on about 2,000 cases
and in 1,000 cases we were able to help those people who were
in fuel poverty. The average amount we were able to help them,
which was not a contribution from us but was actually entitlement
they were entitled to, was on average about £2,000 per annum.
I think there is a duty, and we are happy to take it on, to get
out to these customers and make sure that what currently exists
we are utilising to an optimised basis to ensure that it is there.
The third element is we need to focus then on those who are most
at risk. I pull together in essence fuel poverty and energy efficiency.
We want to certainly focus down on those most at risk from not
being able to heat their homes during the winter and we are trying
to focus down specifically on the elderly and those over 60.
Q129 Dr Strang: We all agree that
the industry and government collectively have to have multiple
objectives in dealing with security of supply, affordability,
tackling fuel poverty and our responsibilities in relation to
climate change. I was interested in what was said about the timetable.
I do not want to make a meal of this, Mr Smith, but you said long
term in terms of energy efficiency in homes. The key clearly to
fuel poverty, and Mr McDonald was implying this, is to tackle
all these energy inefficient homes that many of our elderly constituents,
and others who are disabled, are living in. I put it to you that
the Warm Front Scheme could be doing so much more, if the ceiling
was lifted at a time when the Chancellor is trying to spend a
lot more money in the short-term and taking it from the future.
Pensioners have great difficulty; they have to arrange for somebody
to come, they have to lift their carpets, and all this sort of
thing, before somebody can come to do it. If somebody took a grip
of this and said we are going to put up the ceiling, we are going
to put more money into this. We know we will get more work in
relation to this for the industry and jobs in the construction
sector. We should be doing that now. This is a chance surely to
actually bash on with getting people into these houses and getting
work done and paying the bill afterwards.
Mr Lane: If I could pick up in
answer to that. There was a question asked earlier in this inquiry
around whether CERT has been a success in that context and I guess
some of the responses were somewhat negative in that respect.
I would turn that around and say that EEC and EEC2 and CERT had
two very specific policy objectives: to fund amounts of energy
efficiency measures and carbon emission reduction measures and
to a deliver a certain proportion of those to people in fuel poverty
or to a priority group of people on benefits and now people over
70. It is important to note that despite a doubling and then doubling
again of the size of those objectives no single supplier has ever
failed to deliver that objective. I would say, from that point
of view, CERT has been an unqualified success and EEC also. I
would also point out that it has been further evidence of success
in terms of the early delivery that we have seen by most suppliers
of their obligations which has brought forward the measures more
quickly than government might have expected. It has been a highly
cost effective means of them delivering the simplest and most
effective energy efficiency measures, i.e. cavity wall, loft insulation
and lighting. Suppliers have been able to innovate to find the
types of solutions that you were talking about. For example, our
Here to Help scheme pulls together a multi-agency approach involving
ourselves, five different charity partners and the local authority
in any particular area to deliver a much more coherent response
to those citizens. I think that is what you are talking about,
that kind of more coherent response. In addition to that, I would
say that the levels of customer satisfaction we have seen in the
millions of people to whom measures have been delivered have been
very, very good. The Warm Zone and Warm Front programmes are different
programmes that are meant to be deeper and narrower and provide
a very holistic response to a much smaller number of householders.
I think over the six years about half a million homes have been
dealt with whereas CERT and its predecessors have been shallower
but much broader. The new Community Energy Saving Programme, which
we are now about to hear the details of, will be a further example
of a programme that takes that whole community whole house approach
looking right across the piece and including benefits assessment.
I would say there is a place in tackling energy efficiency for
all of these programmes, and CERT, in that context, has been a
very important part of the policy mix.
Q130 Dr Strang: I make the point
that housing is fundamental to this. The reality is there is social
housing both north and south of the border, a lot of Housing Association
houses really in need of proper insulation. Surely the energy
industry and the suppliers can at least do their best to help
raise the profile and get some action from yourselves and everyone
including the local authorities and central government, the Scottish
government and the Welsh Assembly, on housing.
Mr Lane: We have delivered millions
of home insulation jobs.
Dr Strang: It is a matter of how can
you can deliver in the next couple of years.
Q131 Chairman: Are any of you involved
in an initiative I heard recently announced by Dame Tanni Grey-Thompson,
who set up an organisation under the heading of Home Heat Help
where you ring up a line and it is focused particularly on families,
I think I am right in saying, with people who have a disability.
It has attracted quite a large sum of money to promote help. I
thought it was a most laudable objective but I was concerned that
it was an indicator to us, with our public programme and the programmes
you have been following, that there is still an awful a lot of
unmet need, of people unaware of what help exists who are fuel
poor. Is that a fair assessment? Have you done any work to identify
the unmet need amongst the fuel poor of access to the schemes
of which you have been talking?
Mr McDonald: With regard to your
first point, I think that contact is via the ERA so I am sure
is does involve us but I do not have any specific knowledge of
that. You raise a very valid point, and I made the point earlier,
that capability should sit with responsibility. As energy companies
we do have the capability of accessing those specific customers
with specific needs. For example, from an E.ON point of view,
we are working very closely with Age Concern again to identify
the over 70s. We have sent out a direct proactive communication
to those over 70s who we think actually are using less gas than
we would expect to be able to keep the house warm and offering
them direct energy efficiency advice as well as a warm assist
product which is a 15% discount. I do think, without trying to
say E.ON is doing all this, it is fundamental that we target down
on those who are most at need and we go out and identify them.
We are doing a lot on it and I am sure there is more we can do.
Q132 Chairman: E.ON as a company
is involved in other European Union countries. Most of our focus
has been looking at fuel poverty as a United Kingdom issue but
I cannot believe that there are not fuel poor elsewhere within
Europe. Do you have any experience of other programmes outwith
the United Kingdom which are judged to have been more effective
in dealing with this type of problem than the programmes we have
been following here?
Mr McDonald: I must apologise
I do not. However, we do operate, as you say, in other countries.
If you wish we will look into that and supply a written report.
Q133 Chairman: It would be very helpful.
I do not know if you have anything to add on that point, Mr Smith.
Mr Smith: No. The German market
is very different to the market in the UK and we have not drawn
too many comparisons with our views here.
Q134 Chairman: Should the focus in
dealing with this matter from the government's standpoint be on
income, because what we are talking about is a ratio between people's
incomes and the price or the amount they spend on energy? You
could be in an absurd situation of still having people in numerical
fuel poverty even though they were living in totally beautifully
insulated homes. Should the emphasis be on raising the income
or dealing with the energy aspects either by price or efficiency?
Mr Lane: I would observe that
to try to simplify fuel poverty into one particular driver will
inevitably narrow the focus too much. Fuel poverty is a complex
combination of the fabric of the home, the price of energy and
the income of the family and unless you focus on all three then
you will get a suboptimal response particularly across an economical
cycle where sometimes energy will be cheaper, sometimes it will
be more expensive, sometimes there will be more or less unemployment.
Unless you look across all three aspects you do not get the right
answer and that is why a more fundamental review is called for.
If you look at income maximisation, for example, you have winter
fuel payments as something that is helping to deal with the denominator
rather than the numerator but I am sure much could be done, if
you were looking in a more holistic way, of reforming the Winter
Fuel Payments to make sure they are more targeted and more directed
on the people who need it most and on the energy needs.
Chairman: What I will say to all three
of you, as your first piece of homework if I may give that to
you today, is would you be kind enough to very rapidly send us
what the agenda for the first meeting of the fundamental review
should look like. What would be on your agenda and who would you
invite to come around the table to conduct the review, obviously
including your good selves?
Q135 Lynne Jones: In terms of the
input that your companies can give to such a review or to the
road map, as Mr Smith referred to it earlier—I do not know
whether that was just your own terminology but it was something
that our witnesses on Monday raised—have your companies
made any estimate about what order of magnitude of expenditure
needs to take place to meet the government's targets both in terms
of eliminating fuel poverty amongst, first of all, vulnerable
households and then households in general?
Mr Smith: I am not sure that our
company has done that. What we have done is we have looked at
the FPAG 2007 report that estimated that in order to eradicate
fuel poverty you needed to spend in the order of £1 billion
per year from now until 2016. I think that was clearly based on
lower prices so that will have gone up significantly.
Q136 Lynne Jones: That was just on
Warm Front.
Mr Smith: I would have thought
it was more than Warm Front if it is to eradicate fuel poverty.
Q137 Lynne Jones: With CERT we are
spending that sort of figure.
Mr Smith: Absolutely. In terms
of the companies, the total financial commitment in energy efficiency
and fuel poverty alleviation that the vertically integrated companies
and generators are going to do over the next three years is closer
to £4 billion. We do believe that we are playing our part
in funding many of these measures and we need to look and see
how we can get a more joined up approach with government on some
of these issues. We have talked about some of them already in
terms of increasing the Warm Front budget for future years and
simple better targeting of the Winter Fuel payment to those who
need it, and possibly improving the processes to ensure that the
estimated £10 billion per annum from income-related benefits
is actually paid to those who need them. There are those fairly
straightforward issues that can be dealt with on the income side
which would also be a good way of addressing some of the fuel
poverty issues.
Q138 Lynne Jones: The companies are
contributing through CERT, or perhaps more correctly your customers.
We know that the reason the government's fuel poverty targets
are way off course is because of the huge rise in fuel costs.
Although there has been a huge rise in fuel costs there has also
been a huge rise in the profits of your companies. Are your companies
doing enough? Clearly we have to gear up in this area to a higher
order of magnitude than we are currently spending if we are going
to achieve those targets. What more can the energy companies do?
What scope is there from the money you are making, or appear to
be making, to actually do more?
Mr McDonald: Could I just pick
up on one point from an E.ON viewpoint? From the point of view
of profitability, our profitability is 25% down this year as opposed
to up and as a retail division we will not be reaching money from
that.
Q139 Lynne Jones: What about the
year before?
Mr McDonald: That, in essence,
is what I am saying. I do not want that to detract from the correct
sentiment that you are making. Can I turn round to what we are
doing? There is a huge investment and we are probably not particularly
good at getting out there to say exactly what we are doing to
help. That does not mean to say there is a lot more, of course
there is, from that. From an E.ON perspective over the next three
years we will spend between £450 million and £500 million
on the insulation on CERT. This year there is a three-fold increase
in terms of insulations and we are very much trying to target
those who are most at risk at this point in time. We have also
committed £56 million over the next three years in terms
of social programmes to try to alleviate those most at risk of
fuel poverty. Over and above that, we have particular measures
through Age Concern on Winter Fuel Payments through them and particularly
social programmes that sit behind that as well. It is very difficult
for me to give you an answer to say is that enough; all I can
say is it is a huge amount from that perspective.
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