Supplementary memorandum submitted by
Scottish and Southern Energy (EEFP 19b)
OVERVIEW
SSE is the UK's second largest supplier of electricity
and gas, with around nine million customers, having been the fifth
largest six years ago. It is also involved in the generation,
transmission and distribution of electricity, and in the storage
and distribution of gas.
In its initial submission to the Committee re:
Energy Efficiency and Fuel Poverty, SSE outlined its views on
the three underlying causes of fuel poverty—inadequate income,
poor energy efficiency, and high energy costs—and the responses
of both industry and government to these. SSE also outlined its
overall approach to fuel poverty, including its company wide responsible
pricing policy, its social tariff which is the deepest on the
market, and its huge contribution towards improving energy efficiency.
As SSE did not have the opportunity to provide
oral evidence, on discussion with the Committee Chair and clerk,
it was suggested that we provided additional information on the
key issues raised during the oral evidence sessions.
ENERGY PRICES
Throughout the oral evidence sessions, the price
of energy was under scrutiny. Increased global demand for fossil
fuels has driven up the wholesale prices of oil and gas. As a
supplier, SSE buys electricity and gas from the wholesale market,
and then sells it onto customers in what is known as the retail
market. Wholesale forward annual wholesale prices rose by 190%
for electricity and 230% for gas between February 2007 and July
2008. Suppliers therefore had no option but to raise prices to
account for these rising input costs.
Until very recently wholesale gas prices remained
high, even as oil prices have tumbled. While the price of oil
fell from a peak in July 2008, some wholesale energy prices were
still rising as recently as early October. Added to this, energy
companies buy significant quantities of gas in advance, which
has the effect of protecting customers from price spikes in times
of volatility. This means that any drop in the price of wholesale
gas can not be passed on immediately, i.e. there is a lag. This
lag was found to be no greater when prices are falling than when
they are rising. Nonetheless, as mentioned in its interim results
statement, if wholesale prices for electricity and gas maintain
a downward trend, SSE is optimistic that it will be able to deliver
reduction in prices for domestic customers during the early part
of 2009.
CARBON EMISSIONS
REDUCTION TARGET
SSE would like to clarify a point that was discussed
during the Committee's evidence session with representatives of
some of the major suppliers. SSE doesn't need to remind the Committee
that the cost of CERT was designed to be passed through to consumers,
and Government set up the scheme with that intention. However,
SSE would also like to note that it said it would not change prices,
as a result of the significant costs incurred (£150 million
for SSE) as a result of the September energy efficiency agreement.
As a general point, SSE would also like to note
that, while energy efficiency is the most effective course of
action available to tackling fuel poverty, CERT is not a policy
tool designed to target fuel poverty as its "priority group"
does not match up with the demographic of people in fuel poverty.
CERT was designed to improve the energy efficiency of homes of
the entire UK population, regardless of their financial situation,
and together with its predecessor (EEC), has done what it was
intended to do (the Government has estimated that £300 is
the average figure saved through standard CERT installations).
However, it is important that their roles should not be confused.
SSE is therefore in favour of keeping CERT,
but also thinks that it needs to be overhauled to ensure that
it is fit for purpose in the long term. Currently the system takes
far too long for new measures to be approved for CERT, and in
the short term SSE would like restrictions removed so that suppliers
are allowed to trial more innovative techniques and devices to
help achieve their emissions targets.
SUPPLIER OBLIGATION
In the longer term, although CERT does help
to reduce demand, cut carbon emissions, and save people money,
it is measured on inputs, rather than outputs. This means that
specific energy efficient measures are accorded a value in carbon
savings, and suppliers have to achieve a certain amount of these
inputs. However, such inputs may include handing out energy efficient
lightbulbs which, while potentially effective, does not guarantee
that they will actually be plugged in.
SSE strongly favours a move to an output based
system that focuses on the actual delivery of demand reduction,
and measures this reduction, rather than simply assuming it. SSE
therefore supports the notion of a Supplier Obligation, where
suppliers are incentivised to reduce the demand of their customer,
but are free to use any solution that works.
This approach would not only give the government
actual statistics on how much carbon and money is being saved,
but also encourage innovation from suppliers that would create
jobs and encourage a greater degree of communication between suppliers
and customers. SSE has seen the effect of innovative and community
based projects on carbon reduction first hand. In its previous
submission SSE outlined one of the projects it is involved with
in Scotland that improved household efficiency by 17%; there are
numerous other examples where innovative, and often community-driven,
projects have led to substantial increases in carbon and monetary
savings.
These types of projects also help to foster
a sense of togetherness within the community and have longer term
social benefits. However, under the current system, suppliers
have to voluntarily initiate these projects and as such they are
on a small scale; a Supplier Obligation could help to bring this
approach to a wider audience.
There has been concern expressed in some quarters
that a more output orientated system would eventually lead to
a point where the work needed is too costly for suppliers to undertake,
excuses would be made, and those "hard-to-treat" homes
which cost the most to make energy efficient would be left untouched.
SSE understands these concerns, but would point out that the current
situation is a long way from one where only "hard-to-treat"
homes remain, and that introducing an output based mechanism now
would allow for research and investment into innovative insulation
methods to help tackle this problem. Therefore when this problem
arises solutions are already in place. (To see information on
annual savings for different energy reduction solutions see tables
1, 4 and 5 from page 32 in the CERT Order: http://www.opsi.gov.uk/si/si2008/em/uksiem_20080188_en.pdf)
FUEL POVERTY
AGENCY
In its initial submission SSE outlined its position
in favour of a National Fuel Poverty Agency. This independent
Agency would coordinate the government's fight against fuel poverty
centrally. This joined up approach would focus on information
sharing (a problem illustrated clearly in the previous submission),
and co-ordinating energy efficiency measures and benefits assistance
to the most vulnerable in our society. The current system has
too many projects working in the same areas towards the same ends,
with very little co-ordination and, although these do a great
deal of good work, there is still too much overlap.
As noted above the greatest problem in finding
those who are most vulnerable is the lack of information and SSE
would invite the Committee to refer to page 3 of its previous
submission for more detail on this. A central agency would be
able to access all the data from the various agencies, and amalgamate
it so that a clear picture of who needs help is presented to both
government and suppliers. The current situation puts the onus
on suppliers to find the fuel poor but provides them with no data
about where to look. SSE works around this, by using "data-mining"
exercises, partnerships with local charities, as well as relying
on its call centre staff, to find the fuel poor. However, this
is clearly sub-optimal due to the framework we have been provided
with.
Once this information is known, it will also
be much easier to offer vulnerable households benefits checks
and advice. There are currently £10 billion worth of unclaimed
benefits, with many people not receiving the full amount of benefits
they are entitled to, and others not receiving anything at all.
In checks that SSE carries out, or helps to carry out, every £1
invested leads to £15-20 return in unclaimed benefits. SSE
would like to draw the Committee's attention to the Warm Zone
in Northumberland where, since December 2006, a single benefits
officer has been able to help nearly 600 people receive almost
£500,000 in unclaimed benefits. These are astonishing figures,
and a centralised, co-ordinated agency with a dedicated benefits
team which knew who to target would be able to really tackle the
benefits issue.
SSE firmly believes that Fuel Poverty and Carbon
Reduction are two separate issues, and should be addressed by
government as such. Although the two are related in as much as
more efficient homes will help people save money on their fuel
bills, they are not one and the same—fuel poverty is a product
of a variety of factors which include the energy efficiency of
people's homes; their income, including benefit; energy prices;
and other issues including financial management and energy usage.
Failure to understand the wide-ranging causes of fuel poverty
will result in a failure to provide effective remedies. The current
government approach of attempting to solve the problems of fuel
poverty through CERT, a poorly targeted Winter Fuel Payment, complicated
"opt-in" benefits systems and suppliers' CSR offerings
is far from adequate.
SOCIAL TARIFFS
Once those living in fuel poverty are identified
SSE offers them its Energyplus Care social tariff, which is the
deepest on the market, offering a 20% discount on standard credit
rates. At present this discount is higher than 20% due to our
price freeze for Energyplus Care customers, and is estimated to
be worth £480 per year. SSE feels that the depth of its tariff
actually gets people out of fuel poverty, and that the inherent
nature of social tariffs—which suppliers have agreed with
Ofgem and government—is that the poorest are subsidised.
SSE finances its social tariff as part of its £16 million
per year voluntary spend on fuel poverty.
There appears to be some confusion over social
tariffs, with some MPs, outside of the Committee, believing that
social tariffs are a substitute for Government social policy.
SSE is very proud of its social tariff, but considers it to be
a voluntary initiative, and that it should be additive to, not
a substitute for, benefits payments and the Winter Fuel Allowance.
There is also some confusion as to the suggestion
of mandated social tariffs, with many commentators announcing
support for a mandated social tariff, without actually explaining
how deeply it should discount (our social tariff is, for example,
significantly more generous than that of British Gas), or to whom
it should apply (if we intend it to go to all of the fuel poor,
then there will be a significant cost that will have to be paid
for by other consumers via significant wealth redistribution).
On the issue of mandated social tariffs SSE's
position is that this stifles innovation and competition in a
competitive market place. A UK wide fixed price social tariff
would be a very blunt and inflexible way of targeting support
to fuel poor households, as, in times of low prices, open market
prices may be more competitive than the fixed price. If suppliers
were legally obliged to offer fuel poor customers a tariff that
was a percentage cut off an existing tariff, those suppliers with
the most competitive general tariffs would be penalised. Suppliers
with pricing policies that include a larger margin would be able
to more easily accommodate the social tariff because there is
a "buffer" built into their price. For both, there would
also be a real incentive for suppliers to "not find"
the fuel poor.
We are currently able to provide the deepest
social tariff on the market precisely because it is voluntary.
We decided to assist SSE customers in a meaningful way but target
it to those who are in fuel poverty. Removing discretion and opening
up the tariff more widely will make our pricing policies uneconomic
and we would need to reconsider whether we are able to provide
such a generous tariff.
EU ETS "WINDFALL"
The issue of the free allocation of EU ETS permits
was raised again in the Committee sessions with Ofgem's "£9
billion windfall" claim re-emerging. The BERR Select Committee
have questioned the idea of this £9 billion "windfall".
The Committee did not agree with Ofgem's view on the EU ETS and
were, in their words, "disappointed by the superficiality"
of Ofgem's analysis regarding the amount of money supposedly received
by the energy industry.
A recent independent report by Morgan Stanley
on the the apparent EU ETS "windfall" stated that there
was no windfall in energy supply, and that the carbon allocations
received by energy generators had been put to good use through
subsidising customers fuel bills, and investing in new generation
capacity.
As such, Morgan Stanley calculated that Scottish
and Southern ended up with a net "windfall" of negative
£2,300 million, clearly no windfall at all. This was primarily
due to SSE providing subsidies to its customers in order to protect
them from price rises, and investing in new, primarily renewable,
generation sources. According to the report, "SSE appears
to have done the most to invest its windfall to help shield customers
from the full effects of rising commodity prices".
What next for fuel poverty and energy efficiency?
The Committee will no doubt draw their own conclusions,
but, taking into account the points made in this, and previous,
submissions, SSE believe the following to be important next steps
in this area:
1. Adjust the Winter Fuel Payment so that it
actually goes to people in most need of assistance in paying their
Bills—if there is a limit to the pot size, it should start
with those who need it most: poor pensioners, struggling families,
those with disabilities etc.
2. Make it easier for people to get on direct
debit so that people can access better payment plans. This can
be done through the Post Office Account, or perhaps through the
Banks, given their additional responsibilities.
3. Make sure that our competitors' tariffs are
fair. Ours are cost-reflective, so our competitors should be also.
4. Give Suppliers freedom to innovate on energy
efficiency. Approval processes to allow suppliers to fund new
energy efficiency techniques through CERT (e.g. energy usage display
devices or spray on insulation) are overly-bureaucratic and take
too long.
5. Move towards a more output-focussed supplier
obligation for the successor to CERT. Only then will there be
a genuine market drive towards lowering customers' energy usage.
6. Government should improve benefits awareness.
For every £1 SSE spends on benefits checks in our community
energy projects, customers gets £15 in eligible benefits
bonuses. We are happy to help, but Government must do more here.
7. Set up a National Fuel Poverty Agency to co-ordinate
and target appropriate and effective remedies for fuel poverty.
Only with a Government involved process can the multiple causes
of fuel poverty be addressed in unison.
January 2009
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