Supplementary memorandum submitted by
Centrica plc (EEFP 21b)
1. Any examples you may have from your company's
experience from operating across Europe of approaches that have
been particularly effective in other European Union countries
in tackling fuel poverty through energy company programmes.
Unlike our competitors, due to the continued
lack of liberalisation of continental energy markets, Centrica
has limited retail experience and we are therefore unable to draw
upon comparative data.
However anecdotal evidence shows that generally
energy companies are not involved in the same way as in the UK
in developing schemes to support the fuel poor, and that mostly
Members States' Governments take responsibility for targeting
social help.
2. Your suggestions, as requested by the Chairman,
as to what elements a fundamental review of fuel poverty policies
should include and who might contribute to it.
As fuel poverty is a complex interaction of
quality of housing stock, household income and energy prices,
any review of the UK's current approach to tackling fuel poverty
must consider these three elements and subsequently ensure that
there are specific and coherent programmes which address the main
drivers of fuel poverty.
Specific elements which we believe should be
considered under any review include: a fundamental consideration
of the relevance of the definition of fuel poverty to today's
energy market and whether fuel poverty should be considered as
part of the wider problems of poverty and social deprivation,
reform and better targeting of the Winter Fuel Payment, income
maximisation through schemes such as benefits health checks, separation
of the carbon and fuel poverty objectives of CERT under future
phases of the scheme, the role of a community based approach to
tackling fuel poverty, the role of smart meters, the role of data-sharing
and funding solutions for high cost measures such as microgeneration
within the CERT programme going forward.
Any such review should incorporate contributions
from across Government departments (DECC, BERR, DWP, DoH), energy
supply companies, fuel poverty campaigning organisations, advisory
bodies such as FPAG and relevant third sector bodies.
3. Clarification of your company's annual
spend on CERT and how this is funded—including specifically:
a. how much of the CERT expenditure is recouped
through customer's bills and how much is offset as a cost against
profits
b. whether the figure quoted by DEFRA/Ofgem
of £38 per customer per annum reflects accurately the actual
cost to your company per customer (before the extension of CERT
announced in September)
c. what the treatment is of CERT spend for
corporation tax purposes and is the expenditure under CERT eligible
for any capital allowances
d. what the cost of the British Gas council
tax discount scheme has been and how many councils and households
have participated
CERT is an obligation on energy suppliers to
cut carbon emissions from domestic properties with a significant
element aimed at helping the most vulnerable households. It is
not a commitment to a monetary spend. The Defra figure, therefore,
implying that CERT is equivalent to £38 per dual fuel customer
is indicative only. Suppliers will aim to meet their carbon target
in the most cost-efficient way, something the programme was designed
to achieve as clearly this limits the impact on customers' energy
bills. The actual costs of the programme to British Gas are commercially
sensitive, and will vary from supplier to supplier depending on
how efficiently the programme is being delivered.
We have met all our supplier obligations in
this regard to date, and have already delivered millions of energy
efficiency measures into UK homes. We are on track to deliver
significant carbon savings in the current CERT round and have
made an early start on delivering our target. We brought forward
a significant amount of activity into CERT, equivalent to delivering
around 25% of our target prior to the programme starting. This
means that our customers are able to benefit earlier than they
would do from practical energy efficiency measures. We will be
ratcheting up our effort further in the coming months to ensure
the maximum amount of work can be undertaken this winter. Most
significantly, British Gas will aim to install free insulation
into 50% more vulnerable households than the same period last
year. Given the different levels of activity we are undertaking
on different channels at different times, British Gas will spend
differing amounts on the programme at different times.
Delivering the CERT programme is one cost amongst
many that the company will need to incorporate and take account
of when deciding tariff rates to our customers. It is not possible
to allocate a specific cost to the business to a ring-fenced part
of the customer tariff. The tariff rates we set reflect the need
to ensure that British Gas does not make a sustained loss. Within
that parameter, tariff levels will reflect that British Gas operates
in an extremely competitive market where customer switching is
at unprecedented levels and profit margins when compared to other
sectors are extremely low. In fact, British Gas' margins have
averaged only 3.8% over the last six years.
CERT expenditure is treated as a business expense
on normal principles.
British Gas' council tax scheme plays an important
role in helping to encourage the take-up of energy efficiency
measures and also contributes towards delivering British Gas'
CERT obligation.
Working with Local Authorities, the initiative
encourages the take-up of energy efficiency measure by offering
customers a discount of up to £125 on their Council Tax bills
after cavity wall insulation is installed in their homes.
The installation of the cavity wall insulation
is managed by British Gas and is installed by installers contracted
to British Gas. Once the installation work has been completed
British Gas notifies the participating Local Authority who then
arrange for the customers to receive the "rebate" on
their council tax. British Gas funds £75, and in some places,
the Local Authority provides £50 funding. The customer has
the option of receiving the payment as a single payment to use
as a rebate against their annual council tax bill or to spread
the payment across 12 direct debit instalments.
The cavity wall insulation is sold at a competitive
retail price of around £250 and can result in savings on
the average annual bill of £160*.
The scheme was initially trialled at Braintree
Council, Essex in 2004 and has now been extended to 67 Local Authorities
across the country. So far the scheme has generated over 36,500
surveys and 23,500 installations. The promotion of the scheme
is the responsibility of the participating local authority and
is promoted through enclosures in council tax bill mailings (in
March) and the local press, and is reinforced through quarterly
newsletters.
Customer research conducted about the scheme
shows that:
— 78% of customers would not have purchased
insulation if it wasn't for the council tax rebate offer.
— 94% of these customers prefer to
receive the discount on their council tax bill rather than reducing
the retail price.
— Of the 94%, 80% preferred the money
off the bill as opposed to the product.
— There are high levels of customer
satisfaction with this proposition. 80% would recommend to other
people.
Not all Councils have taken the decision to
match British Gas' funding, which is why some customers participating
receive a payment of £125 and others receive £75. Around
one quarter of local authorities top up the British Gas £75
rebate.
* average annual saving for three bed semi detached
property.
4.Information on how the programme for installing
smart meters will be funded, specifically in terms of the costs
to customers and any proposals to address concerns that customers
finding it difficult to pay their energy bills would find additional
costs an extra burden.
Each utility will be responsible for fitting
new smart meters for its customers starting a roll out from 2011.
It is estimated that this will cost about £7
billion, equivalent to about £15 per home per year although
with pass-through of reduced operating costs for utilities and
lower consumption, this cost is expected to be more than offset
by customer savings.
Suppliers recover the costs of metering via
charges to customers in their energy bill. Generally any upfront
costs of metering, such as initial installation and asset costs
are financed up-front by meter providers / suppliers then recovered
over the life of the asset via charges to consumers. So any changes
in metering costs are spread over a long period of time. The incremental
costs of smart meters will be reduced and benefits to customers
maximised if reforms are made to the current industry structure.
We and many others in the industry have advocated the "central
communications" model which would take care of smart meter
communications centrally, optimising the communications network
benefits and reducing costs and operational complexity.
Suppliers will fund smart meters in the same
way as today. Meter owners/suppliers will finance smart meters
up-front, and energy suppliers will individually work out how
much they will charge customers for meters in their energy bills.
The customer charges for smart meters will be higher than for
conventional meters, but customers will benefit overall from two
countervailing impacts:
(i) smart meters will reduce energy suppliers'
operating costs (e.g. from no longer needing to manually read,
from not having estimated bills, etc.) which in a competitive
market will be passed through to customers; and
(ii) customers will be encouraged to use their
smart meters and in-home displays to act on consumption and energy
cost information to reduce unnecessary consumption.
We undertook a detailed cost-benefit analysis
(CBA) during Autumn 2007, which demonstrated that customers should
see a net benefit from smart metering despite the higher costs
of the meters themselves. This result has been borne out in international
experience. Government are completing a substantial reassessment
of their own CBA on smart metering, which is also likely to show
a strong net positive result for customers, underpinning the decision
to mandate smart meters. This has not yet been published.
Gearoid Lane
Managing Director
British Gas New Energy
January 2009
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