Supplementary memorandum submitted by
RWE npower (EEFP 10b)
Any examples you may have from your company's
experience of operating across Europe of approaches that have
been particularly effective in other European Union countries
in tackling fuel poverty through energy company programmes.
RWE npower operates in the UK market. Our parent
company, RWE, is based in Germany. Our comments below are, therefore,
based on experience in Germany.
In outline, the German government contributes
to lower-income customers' energy bills by way of a subsidy to
a social tariff.
In Germany, social security protection generally
is a duty of the government. One reason being so as not to distort
competition in liberalised markets as well as social fairness.
Following this, all political initiatives to introduce social
tariffs were halted a few months ago. Consumer protection and
other social organisations in Germany are increasingly calling
for fuel poverty to be tackled by a focus on energy efficiency
rather than a social tariff (for example by the use of information
campaigns or price incentives for lower consumption).
However, heating and electricity do attract
different considerations. The greatest focus is on heating. People
who receive unemployment welfare benefits or are on a very low
income (below welfare compensation) in Germany also receive housing
and heating benefits. Long-term unemployed (Arbeitlosengeld II)
and welfare recipients benefit from full payment of the cost of
their heating.
Over the past 10 years, the government's share
has grown in both absolute and proportionate terms. In Germany,
the price for electricity that the companies are responsible for
has remained the same since 1998 (12.91/12.89 euro per month for
an average three-person household). The government's share has
grown considerably since then (from 25% to 40%, i.e. from 4.12
to 8.54 euro).
Turning now to specific measures introduced
by RWE. In 2008, RWE Energy started a 150 million euro campaign
to increase the awareness and knowledge about saving energy and
efficient energy use to help customers reduce their bills. This
was aimed at all categories of consumer—households, municipalities
(local authorities), schools and private companies—so that
they could better manage their energy consumption. Examples of
initiatives are given below.
In the city of Mlheim/Ruhr the company is installing
smart meters in 100,000 households so that customers can monitor
and adjust their electricity consumption nearly in real time.
We are spending 20 million euros on these smart meters.
5,000 municipalities can apply for a cost-free
energy check of their public buildings and information on where
and how they can save energy. Similar initiatives have been developed
for other non-profit organisations such as charities. More than
25 million euros has been set aside for such measures.
Small and medium-sized businesses will be able
to benefit from cost-free installation of energy control units
that can help make production processes more efficient and effective.
Older inefficient street lights are being replaced
to help municipalities save money. This will cost four million
euros.
Parallel to these measures, RWE Energy has started
a wide-ranging campaign to deliver advice and assistance about
energy efficiency via the internet, information booklets and face-to-face.
This is aimed mainly at households.
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 we said in our original submission to the
Committee last year[3],
fuel poverty has to be considered as part of wider poverty issues.
In addition, energy inefficient housing along with the price of
fuel are also key determinants of fuel poverty.
In the medium to long term, energy efficiency
is the key to ameliorating fuel poverty. Government recognised
this with its Home Energy Saving Programme (HESP) in the autumn
and the increase in the CERT obligation and with the introduction
of the Community Energy Saving Programme (CESP).
However, we believe that the current social
and environmental obligations could be improved. Presently, CESP
and CERT, which are primarily environmental obligations, have
a strong social component. Similarly, the social obligation which
is primarily aimed at fuel poverty has energy efficiency aspects.
Ofgem has decreed that measures which are eligible for CERT cannot
also be eligible for the social obligation. This might sound reasonable.
But Ofgem has disallowed the cost of measures against the Social
Obligation even where the measure is applied to the priority group
and takes the company over the 40% priority group requirement
under CERT, notwithstanding that the cost of the measure greatly
exceeds the cost of an alternative non-priority group CERT measure.
Consequently, companies do not receive adequate recognition for
measures which contribute to both fuel poverty and carbon reduction
objectives, but which may not be cost effective if they are only
counted against one of the obligations. This structure of obligations
does not best promote the public interest.
A far more effective structure of obligations
would be to have a carbon reduction obligation with no requirements
on the fuel poverty content and fuel poverty obligations with
no requirements on the carbon reduction content. But, measures
which delivered against both obligations would count against both.
This would promote relatively high cost measures which reduce
fuel poverty by improving energy efficiency which might not otherwise
be justified. This arrangement would be better aligned to public
policy goals as well as being much simpler to operate and administer.
We believe that a fundamental review of fuel
poverty policies should include the following elements:
— The appropriate balance between Government
support for the poor and that provided by industry (including
the housing, food, water, and energy industries).
— The impact of the cost of environmental
improvement measures on the numbers in fuel poverty.
2) At an energy industry level:
— How data sharing between those government
and other organisations which look after and administer consumer
data and those organisations, like energy companies, which may
be able to provide assistance can work in practice.
— Those benefits which are at present
universal and may be better targeted at more vulnerable consumers
within the general recipient group. For example, the Winter Fuel
Payment and restoring Warm Front payments in future years.
— The widening of the eligibility criteria
of existing schemes such as fuel direct.
— We believe that one of the key initiatives
that could help drive down fuel poverty numbers is by addressing
heat, and we look forward to engaging in the post 2011 supplier
obligation and heat and energy efficiency consultation that is
being worked up with stakeholders now and formally out for consultation
in Q1 2009. Our initial view is that through solar thermal, air/ground
source heat pumps, community CHP, heat is cheaper and more efficient
to deliver than microgen.
— A look at incentives to encourage
consumers to take up fuel poverty alleviating measures (for an
example, reductions in council tax or stamp duty).
— A role for network providers (distribution
operators and gas transporters) which may be better placed than
suppliers to deal with fuel poverty.
— Regulation to ensure that only the
most energy efficient products are available to the market.
With the establishment of the Department of
Energy and Climate Change (DECC), it would seem appropriate and
sensible for it to lead the co-ordination of a fundamental review.
However, a number of other key stakeholders should be involved
including, Treasury, DWP, Defra, DCLG, Ofgem, suppliers, distribution
network operators, gas transporters, consumer groups and third
sector organisations.
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 customers' 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.
During the course of the Ofgem Energy Supply
Probe, when significant amounts of information were provided to
the regulator, Ofgem bundled EEC, CERT and ROC costs together
as a line item in direct costs. This indicated that it thought
these were costs that, as they affected all suppliers, they could
be considered a legitimate element of customers' bills. Furthermore,
in its report, Ofgem stated—"Direct costs: wholesale
energy purchase costs, network access and environmental costs.
Movements in these costs are, to a greater or lesser extent, outside
the direct control of the suppliers" (paragraph 7.81, page
95). Clearly, Ofgem sees these costs as legitimate components
to be considered when setting prices. Nonetheless, our prices
do not reflect the costs of the extension to CERT announced in
September.
CERT spend is deductible for corporation tax
purposes as it is a normal operating expense deducted in arriving
at the profit before tax of the energy supply business. As an
energy supplier we do not own or recognise any capital asset as
a result of the CERT spend, so the question of capital allowances
does not arise.
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.
Currently metering costs incurred by suppliers
are recovered, with all other costs, through customers' bills.
It is expected that smart metering will be dealt with in the same
way.
The cost of the installation programme for smart
meters will be higher than for existing "dumb" metering,
particularly in the early years, but the effect of these costs
will be phased over the life of the asset, assumed to be 15-20
years and matched against the benefits.
The evaluation of the full cost of introducing
smart metering is on-going and will depend on the market model
chosen for implementation. An Impact Assessment considering the
overall benefit of smart meters to "UK plc" has been
developed by DECC; the output of which has supported the Government's
recent announcement of their intention to mandate the full rollout
of smart metering to residential consumers by 2020. Estimates
of costs of £8billion-£10billion have been quoted but
offsetting this will be the benefits accruing to all stakeholders;
suppliers, distribution businesses and especially consumers.
Attached is the confidential view RWE npower
provided with our response to the Billing and Metering Consultation
in October 2007,[4]
showing a possible cost to consumers based on the most efficient
rollout model of a Regional Franchise approach. However, with
the new products enabled by "smart", greater granularity
of data and improved service, to encourage behavioural change,
consumers are expected to save around £16 per annum—a
net benefit to them.
One of the major benefits of "smart"
is the flexibility it provides to support customers. For example,
remotely switching a meter from credit mode to prepayment; for
consumers experiencing some difficulty in managing their payments
and wanting the assistance of "pay as you go" or prepayment
tariffs, the switch can be done quickly with less cost and disruption
of a meter exchange.
Alan Smith
Head of Government & Regulatory Relations
January 2009
3 Environment, Food and Rural Affairs Committee, Fifth
Special Report of Session 2007-08, Energy Efficiency and Fuel
Poverty, HC 1099, Evs 29, 30 Back
4
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