Energy efficiency and fuel poverty - Environment, Food and Rural Affairs Committee Contents


Examination of Witnesses (Questions 140-159)

MR JIM MCDONALD, MR ALAN SMITH AND MR GEAROID LANE

10 DECEMBER 2008

  Q140  Lynne Jones: Centrica has historically spent more on this area of poverty measures. Could you comment on the question? Is it enough and is the money that your companies are spending on these various schemes coming out of your profits or is it being re-charged back to the customers?

  Mr Lane: The question are we collectively doing enough to deliver the targets, I think the answer clearly is no. As an industry, as a government and as a third sector more needs to be done. The trajectory we are on will not eliminate fuel poverty by 2016 notwithstanding what might happen to energy prices and the general state of the economy. Do companies need to do more? Does it come out of their own profits or does it, at the end of the day, come from customers? Most of the energy companies are multifaceted companies who operate in a number of different sectors and parts of the supply chain in multiple geographies in different countries. In order to determine whether there is too much profit in the supply of energy to customers you need to focus in on the energy retail business, and our energy retail business has been either marginally profitable or loss making for many years and has never achieved the kind of profit margins that are achieved in other retail sectors, for example in groceries. Therefore, if further demands are put on that then inevitably over time that will end up being carried by customers.

  Q141  Chairman: That is a lovely way of dancing around the problem.

  Mr Lane: I was not trying to.

  Q142  Chairman: Let me ask you the specific question that goes to the heart of what Lynne Jones was getting at. In terms of the costs you had to bear to meet your various commitments under EEC1, EEC2 and now CERT, in cash terms and the expenditures that you made to meet those obligations how much has been re-charged back to the customer through their bills?

  Mr Lane: I am not trying to be evasive in any way but the price that one charges to customers in a competitive market is determined by the market conditions and the market prices but the profitability of our retail division is extremely low.

  Q143  Chairman: That was not the question I asked. That is a wonderful plea for problems in the retail energy field but the question I wanted to ask was how much money have you spent. To meet those obligations it has cost you something and the question was how much of that expenditure for EEC1, EEC2 and now CERT and other programmes has actually been charged back within the bill to the consumer? Lynne Jones asked the question: how much has come out of your profit, in other words off the bottom line, and that bit is what you have not charged back to the consumer.

  Mr Lane: It is by no means as simple as that. You cannot ask that question.

  Q144  Chairman: I can ask the question.

  Mr Lane: But I cannot answer the question because companies do not say "Here is this portion of cost. I am charging it this way and this that way." Basically your cost is what it is and your prices are what they are.

  Q145  Chairman: No, I would fundamentally disagree with you. The cost of meeting the obligations which the government has set energy companies is a cost to your business. We are agreed on that. If it is a cost to the business, it goes into your P&L on the same basis as any other cost and you have to decide, as a corporate entity, how to deal with it. Do you take it as a cost, of which I presume it is allowable against tax as a business cost, and thereafter what remains do you charge it back in the price of the produce to the customer or do you allow your shareholders' return to be diminished by bearing that as a cost to the business? What is the strategy?

  Mr Lane: Within the retail business we bear all of our costs as costs, including transmission, distribution and the cost of these obligations.

  Q146  Chairman: But you charge back in the cost of the product. The transmission and the distribution go back to the customer as part of the price of the product.

  Mr Lane: No, that is not the way it works at all. The way retail prices are determined is in relation to the competitive market.

  Q147  Lynne Jones: And what prices you can get away with.

  Mr Lane: No, not by any means. That is the way that companies work: prices are determined by the market.

  Q148  Chairman: There must be an expectation in terms of your pricing strategy. You, like any other retail business, have to work in a competitive market-place and the market-place determines the parameters within which you can set your pricing for whatever offers you make to your customers. At the end of the day you earn an income and some of those out of the income effectively repay the costs of doing business and at the end you hope you will have a margin which ends up as your gross profit. Nobody would disagree with that. There may be, and we do know from what Ofgem have told us, that there is a charge back to the customer as part of the price the cost of meeting some of these obligations. I am asking you, straight forwardly in your case, what is it?

  Mr Lane: It is our strategy over time to ensure that all divisions of our business make some kind of a profit.

  Q149  Chairman: That is a bit vague.

  Mr Lane: Within the retail division itself we will aim to make some kind of reasonable margin within that business given the competitive pressures and given the cost base in recent years.

  Q150  Lynne Jones: Mr Lane constantly refers to the retail business. Your companies are also involved in the wholesale business.

  Mr Lane: Yes.

  Q151  Lynne Jones: Perhaps the question should be addressed to the business as a whole. If the retail is the loss leader but you are making loads of profits in the wholesale area then it is still the same company. Can you answer questions about how the wholesale business allocates its prices? Are you able to make larger profits at the wholesale business on the basis that you are immune from the kind of questions that we are asking today?

  Q152  Chairman: I guess your wholesale must sell to the retail business and the wholesale business makes a margin on its sale to the retail business. Nobody minds people making margins up and down the chain within the company but somewhere along the line the cost of meeting these obligations has got to be met by somebody and it is either being met as part of the price which the customer pays for the energy. We have had lots of evidence that talks about the regressive nature of people, particularly on lower incomes, effectively paying for their own energy efficiency. I am trying to establish from your standpoint, because you said we have got to do more, whether "got to do more" means "we would like to put some money out of either the retail or the wholesale part of Centrica into the pot and do more over and above paying our way to meet our EEC, CERT, et cetera, obligations." Within those two I wanted to know whether it was 100% cost pass back to the customer of meeting your national obligations over and above what you might do as a benevolent supplier realising you have wider social obligations. Could you tell us specifically what the answer is to those questions?

  Mr Lane: There is certainly no policy of creating a 100% pass through of the costs of CERT, or any other obligation, to the customer. There is no such policy. The question as to whether the poorest customers are being asked to pay for their energy efficiency is a perplexing one given that customers are on 11 different kinds of qualifying benefits and now all our customers over 70 get all of those energy efficiency measures for free and beyond that, in terms of dealing with the customers in the greatest degree of fuel poverty, our social tariffs, the essentials tariff, is costing us this year £90 million which is three times the amount that we voluntarily agreed with the government. I do not think against that backdrop we can in any way suggest that there is a policy of passing costs through 100%.

  Q153  David Taylor: What proportion does that £90 million represent of your domestic revenue?

  Mr Lane: What do you mean by domestic revenue?

  Q154  David Taylor: The income you get from domestic customers.

  Mr Lane: I do not know the answer to that.

  Q155  Chairman: If this causes you some pain, let me ask you perhaps you may want to go away and write to us about it. If I was a shareholder at a meeting and I stood up and said "One of the costs of the company is meeting these obligations, could you tell me how it is met? Does the customer make a contribution to meeting those costs?" Somebody like the finance director would be able to answer that question and you are struggling to answer it at the moment.

  Mr Lane: I am not because I am not sure it is a question that can be asked in that kind of simplicity.

  Q156  Chairman: We can ask the question with great simplicity but what I am worrying about is the answer.

  Mr Lane: I do not think you can ask a grocery company whether this specific element of your cost chain it is your policy to pass through or not to pass through. The prices are determined by the market, the costs are determined by what your costs are and on that basis you either make a profit or a loss.

  Q157  Lynne Jones: Could I ask the other two gentlemen, are your companies involved in the wholesale market as well and could you comment on this issue as regards how the expenditure on CERT is actually financed and whether you pass it on to the customers?

  Mr Smith: I would like to make a comment that we could get into difficulties if we get into too much detail. We should not forget that apart from the fuel poverty targets we have, as I said at the start, we have other targets one of which is an 80% reduction in carbon. In order to deliver those we are going to have to replace aging fossil fuel and nuclear plant over the coming years. By 2020 we will need to build at least 20 new power stations to deliver the low carbon future. As a company nPower would be spending or investing significantly more than it earns year on year for the next 10 years. We are very pleased that our parent company in Germany will bear that cost. I simply wanted to make that point.

  Mr McDonald: I only have retail responsibility so I could not comment on the wholesale. I apologise for that.

  Q158  Lynne Jones: You are spending that money in the future but you have made huge profits in the past. There is a big call for some of those profits to be taxed in the form of a windfall tax to make sure that it is spent on relieving fuel poverty. Would you care to comment on that?

  Mr Lane: I would comment that in terms of excess profits arising from the free distribution of carbon emissions allowances into the market we have been supportive, probably as a lone voice over a long period of time, for every tonne of carbon that is emitted by a power station to carry a cost and for that cost to be borne by the power generator that emitted that CO2, and the revenue that accrues from the sale or auctioning of those emission allowances should be used in areas of fuel poverty or delivering low carbon or zero carbon technology.

  Q159  Lynne Jones: What about the free allowances that the energy companies are going to get under the next phase, something like £10 billion?

  Mr Lane: We believe from phase 3 onwards there should be no more free allowances.


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2009
Prepared 10 June 2009