Energy Bill

Memorandum submitted by CENTRICA (EN 10)

Background to Centrica

Centrica is a top 30 FTSE100 company with growing energy businesses in the UK and North America. Upstream we source, generate, process, trade and store energy. Downstream we supply gas and electricity to millions of homes and businesses and offer a distinctive range of home energy solutions and low carbon products and services.

We are delighted to submit written evidence to the Energy Bill Committee. Our comments focus on Part 1 of the Bill dealing with the Green Deal and ECO. The submission also updates on a joint industry/government initiative to test the cheapest tariff information on bills proposed in the Bill.

The Green Deal

The Green Deal is the Government’s flagship energy efficiency policy and will replace CERT and CESP when these schemes finish at the end of 2012. Under the Green Deal, consumers will be able to get energy efficiency improvements without having to pay upfront. Instead businesses will provide the capital, getting their money back through the energy bill over a period of time. A "golden rule" is at the heart of the offer – estimated average savings on bills will always exceed the cost of the work. Actual cash savings can not be guaranteed since only individuals and businesses can control how much energy they consume. If a customer moves out and ceases to be a bill-payer at that property, the financial obligation stays with the property and is paid by the new bill owner.

Centrica has been an early supporter of the Green Deal announcing last year that it planned to launch a Green Deal "go early" to gain early learnings before full roll out. In preparation for this, we have held a number of focus groups with customers to test understanding and appetite for the Green Deal. Key learnings include:

· The core idea of saving money works well

· Mainstream consumers do not seem to like the "green" link

· People do not feel they need measures on offer, even if they want them.

· Green Deal is not the best name. Customer insight shows that mainstream customers build an unattractive picture from this name, so customer-facing communications should use a different form of words.

Some of these concerns can be addressed through better communication – but others have more fundamental implications which Government will need to address before the full roll out in 2012. We welcome the publication of further details on the Green Deal and ECO this week which go some way to clarify a number of details and hope that the Minister will expand on these during the course of Committee. Key areas of interest for Centrica can be summarised as follows:

1. The Financing arrangements need to be urgently clarified

Default liabilities

The Green Deal provider will offer a Green Deal plan to customers which enable them to finance work recommended by an accredited surveyor and undertaken by an accredited installer. The customer’s contractual relationship is with the provider. Through the Energy Bill (clause 15), energy suppliers are obliged to collect the Green Deal charge through the energy bill and pass it onto finance providers. Whilst energy companies are willing and able to act as collection agents for the scheme, we feel the risks associated with non payment should sit with those institutions who will benefit financially, rather than with energy consumers. Following consultation with stakeholders, DECC have announced this week that Green Deal Plan repayments "will be treated as pari passu for the purposes of managing a customer’s energy debt". We understand this to mean that the energy suppliers bear no ultimate liability for Green Deal debt as the proportion of Green Deal repayments not received will now be borne by the Green Deal financier. We hope that the Minister will confirm that this is the case and outline how Government propose to legislate for this change.

A landlord obligation to inform us of change in tenancy (as for water) would help reduce the cost and amount of default. It would help keep bills lower, provide an incentive for landlords to take up the Green Deal and make securitisation more attractive to investors. We have promoted the obligation through the Energy Bill which is being actively considered by DECC.

We are also expecting important regulatory changes to limit financing costs to be introduced through secondary legislation. The key change will be extending the right to object to a customers switching away from their supplier if they are in debt to Green Deal payments (the right to object currently only applies to energy). We understand this is also implied by the decision to treat Green Deal payments as pari passu for payments of energy debt. However, we would welcome clear confirmation of this decision.

Securitisation

Capital markets may be reluctant to invest in the Green Deal in the early stage. This is because until the Green Deal is up and running, the real risk of investment is hard to quantify and secondly, because the relatively small amounts of money required may be too small to make it worthwhile. A warehousing facility will therefore probably be needed to make the initial investments, to aggregate those investments and to sell the larger, combined portfolio to finance providers.

The Green Investment Bank (GIB) could provide this short-term facility by acting as a sponsor of Green Deal bonds, facilitating and encouraging growth. We welcome the announcement that the Green Investment Bank may play a role in the Green Deal and look forward to further detail of how this will integrate with existing proposals, particularly if it is envisaged to impact upon the interest rate provided.

If the GIB is not able to undertake this role, the Government may need to take a more active role to ensure Green Deal finance is successful, for example, setting up an investment vehicle, sponsoring securitisation, or providing assurances against the risk of stranded assets if Green Deal does not take off.

2. Customer demand needs to be actively stimulated

Our customer research (as outlined above) suggests that the scheme has some appeal but that additional nudges will be needed to drive the market. We are:

· Pushing "carrots" including council tax and stamp duty rebates

· Supporting "sticks" including proposals to regulate for minimal rental standards

· Arguing strongly that the Green Deal needs to include measures that will excite customers including microgeneration and renewable heating plus associated Feed in tariff (FIT) and Renewable Heat Incentive (RHI), and home management systems. DECC’s intention for the RHI and FITs to work alongside the Green Deal is a start. However, it is crucial that FIT and RHI are available to support the scale-up of microgeneration and renewable heat technologies within the Green Deal finance mechanism to enable a wide range of customers to take full advantage of the products. Without this, the Green Deal will largely be an insulation programme that will not capture the public imagination. This is not a "double subsidy" – the Green Deal is a financing mechanism not a subsidy.

· Arguing that we need to be allowed to take advantage of customer contacts to promote the Green Deal – most notably by allowing Green Deal surveyors to be tied (transparently) to installers and use the smart meter roll-out as a hook to discuss energy efficiency.

The different nature of the business sector is likely to require tailored incentives. In particular, the market contains a smaller number of properties, so requiring additional incentives to take-off and achieve critical mass. Furthermore, SMEs have a very low appetite for energy efficiency and tenanted properties dominate. Green Deal measures and associated default debt risk would be attached to the property (and therefore freeholder/landlord) so the landlord needs additional incentives to take on Green Deal.

British Gas is working with DECC to develop the business Green Deal. We support:

· The proposed measures to jump start the Non-Domestic Green Deal by setting minimum performance standards

· Making a Green Deal assessment a mandatory part of the Energy Performance Certification

· Offering deferral of business rates for participants.

3. Confidence in the Green Deal needs to be established and maintained through high standards

Under the proposed Green Deal framework, measures must be approved, recommended by an accredited objective adviser and installed by an accredited adviser. Finance providers will also need to be accredited. High standards in surveys, measures, installers and financial providers are crucial to create and maintain confidence in the market. Most installers, however, will need to undertake their own technical surveys before providing a quote, so it would be wasteful and costly for the surveyor to do this work.

We welcome proposals brought forward in DECC’s "Consumer Protection in the Green Deal" document released this week which outline:

· Plans to set up a new Green Deal Code – to protect customers at every stage of the Green Deal from initial assessment to installation.

· Plans to set up a new Green Deal advice line –to provide impartial advice and referral to accredited Green Deal assessors, installers and providers as well as a route for any complaints.

· The formal appointment of the United Kingdom Accreditation Service (UKAS) – which will ensure assessors and installers adhere to robust standards in order to participate in the Green Deal. 

The Energy Company Obligation (ECO)

The domestic Green Deal model will be supplemented by a new Energy Company Obligation (ECO) from the end of 2012. This will underpin the Green Deal for vulnerable households or hard to treat properties which cannot achieve financial savings without a measure of additional support on top of the Green Deal finance. Centrica supports the introduction of the ECO and welcomes the further clarification around how Green Deal and ECO will interact in their document, "Extra help where it is needed: a new Energy Company Obligation".

The transitional arrangements from CERT and CESP to ECO have yet to be established risking a hiatus in delivering energy efficiency until the rules are clear.

From our experience with CERT and CESP, we believe ECO should have two primary functions:

I. Provide free energy efficiency for the fuel poor for whom the Green Deal financing does not work

II. Provide support for those technologies that fail to meet the "golden rule", such as solid wall insulation

ECO should take lessons from the obligations that it replaces:

§ Eligible household definition should be simplified from CESP and CERT– based around household income. As incomes rise above a certain threshold, and when certain technologies that don’t meet the golden rule are required, there would be further opportunities to combine Green Deal and ECO financing tools. A CESP style "areas of most deprivation" approach could also be incorporated.

§ Measures available should support a whole house solution and have flexibility to ensure that the right measures are applied to the right property (given the duration of the obligation is likely to be five years plus, this flexibility should enable new technologies to be added to an eligibility roster)

§ There must be a smooth transition from CERT and CESP to ECO to avoid a hiatus in the industry. It should also be possible to borrow CO2 from the ECO obligation to discharge CERT and CESP obligations within a set time.

§ Simplicity needs to be a core feature of the design. The obligation should

a. Use a single over arching target, e.g. carbon reduction. Sub targets increase unnecessary administrative burdens and costs.

b. Clear and simple reporting and compliance

§ Suppliers should lead the delivery of ECO in eligible homes, building on considerable experience and capabilities built up through CESP and CERT. Energy supplier involvement ensures that carbon savings will be achieved. Energy suppliers do not have capacity to deliver the full amount of carbon and warmth savings and will (as they do now in CERT and CESP) have to turn to a significant number of third party delivery agents. (see Walsall CESP case study below). There is also a role for a brokerage service that would enable other suppliers to become involved.

§ Government should extend data sharing legislation to help target assistance at those who need it most. There is already a precedent for this in the Pensions Act which allows the Department for Work and Pensions to share data of pensioners on pension credit for the purposes of targeting the Warm Homes Discount scheme. Those identified under the scheme are also offered free energy efficiency.  We would support enabling legislation in the Energy Bill (or if more appropriate through the Welfare Bill currently in the Commons) to allow Government to extend data sharing to a wider group of benefit recipients (e.g. those on income support or disability allowance) for the purposes of targeting free energy efficiency advice and measures under ECO.

Other issues:

· The Treasury has imposed a limit on the amount of levy that can be retrieved through the energy bill. The limits for the portfolio of levies policies, Renewables Obligation, Feed-in tariffs and Warm Home Discount are £11.8bn over the Spending Review Period (2011/12 to 2014/15). Currently ECO is not included in the list of eligible levies despite it being a subsidy which will be passed on by energy suppliers through the energy bill. We would welcome further clarity from the Minister as to whether the ECO will be classified as "imputed public expenditure" and if so whether given the constraints on public funding this might result in reduction in ECO spend.

CESP CASE STUDY: Walsall

We launched this scheme in 2009 with an initial 136 properties in partnership with Walsall Housing Group (WHG). These properties were steel framed and pre fabricated concrete, with no opportunity for cavity wall insulation. All these properties received new loft insulation, new heating systems and external wall insulation. In addition residents benefited from face to face energy advice from one of our Energy Experts. British Gas customers in the scheme also received new smart meters.

During this scheme, we made an innovative agreement with WHG, and the council to roll out the programme to all private tenants in the area who requested this work. It is now expected to benefit around 300 customers in total. British Gas has invested over £2m in the scheme, with WHG providing funding around £400k of the work, and the local council added £150k.

Part 3: Cheapest Tariffs

The Bill allows the Secretary of State power to make changes to electricity

and gas supply licences to require suppliers to provide information to consumers on their cheapest tariff to help them control their energy costs clause 72). This power will be exercised through secondary legislation.

· Centrica accepts the need for more transparent and consumer friendly information on bills.  However, over time the number of regulatory/mandated information requirements has increased to such an extent that much of the bill now contains information which customers are neither interested in nor understand, such as calorific value conversions. This restricts our ability to make changes to the format that would be more accessible to consumers without increasing the number of pages. As part of the consideration of putting more information on bills we would like to see a commitment from DECC that there will also be a review of the information to ensure it is of value to customers and remove information which is now redundant or irrelevant.

· Working with DECC and the rest of the industry, Centrica is supporting a number of billing initiatives to test the Government’s proposals for further information on bills. For example, we are currently trialling cheapest tariff information on customers’ bills. Over half a million bills have been sent out giving customers information on how much they would save if they were on the cheapest tariff. We are also testing whether signposting customers to a telephone number or website to find out how much would be save is more popular. Results from the trial are expected later this month.

· British Gas is leading on the roll-out of Smart Meters, which will transform the relationship customers have with their bills, and with their energy supplier. The average meter is read just 2.4 times a year, meaning bills are rarely timely – and estimated bills can be inaccurate, leading to confusion and difficulty in budgeting. Smart meters will allow up real time information on what a home is using and the cost of this. British Gas is then using this information to give customers tailored advice on energy efficiency methods and how to cut their usage.

APPENDIX 1: Further information on British Gas and Energy Efficiency

The Importance of Energy Efficiency for British Gas

A stated aim of Sam Laidlaw, Chief Executive of Centrica plc, is for British Gas to move from being an energy supplier to becoming an energy services company.  In September 2010, at the RSA, Sam argued that "the old utility model is dead" and that, within just a few years, British Gas’s energy services business will become at least as big as its energy supply business.

· We are already the largest installer of energy efficiency in the UK

· We insulated 270,000 homes last year

· We installed 120,000 energy efficient boilers, which can reduce consumption by up to 30%, and serviced or repaired a further 4 million.

· We are trialling a "go early" on the Government’s Green Deal, providing energy efficiency measures to those in the trial at no upfront cost.

· Over the last five years, British Gas has supplied a total of 100 million energy efficiency products to its customers.

· We also play a leading role in CERT and CESP

In addition to this:

· British Gas is committed to Smart Meters, having already rolled out over 300,000 smart meters

· We are also the UK’s largest supplier of microgeneration, including solar (via our subsidiary, Solar Technologies) Biomass / CHP (via a 19% share in Econergy, a leading biomass boiler producer; Micro-CHP (working with Ceres and Baxi) and Air and Ground Source Heat Pumps.

The energy efficiency measures employed by British Gas have made significant savings for our customers. 

In 2010, we asked the Centre for Economic and Business Research to evaluate 40 million British Gas meter readings, taken over a four year period - the largest ever independent analysis of natural gas use in the home. All the figures are weather-adjusted to show underlying trends in consumption. 

· British Gas customers have cut their gas consumption by an average of 22% in the past five years – and saved £322 a year.  This compares to an average UK consumption cut of 17%

· This 22% average figure masks large differences between homes. Some customers have cut their consumption by more than 44% - whilst some households have still to take up energy efficiency at all.

· The report found that the largest impacts on natural gas consumption are structural changes to the energy efficiency fabric at home, above all households insulating their cavity walls (18.3%), closely followed by those installing an A-rated energy efficient boiler (18.0 %) and by those insulating their lofts (13.8% overall).

· Advice and support in making everyday behavioural changes is also critical, resulting in an average 10% drop in consumption

· British Gas estimates our customers could save a further £3.6 billion over the next five years if they invest in energy efficiency measures.  

Other British Gas Action on Energy Efficiency

CERT

The Carbon Emission Reduction Target (CERT) is currently the main obligation on Suppliers to reduce carbon emissions in customers’ homes and is estimated to cost the industry £1.3bn per year. Measures are free for those in the priority group, and part subsidised for other households.

Energy suppliers have never missed a target within an obligation and have delivered significant cost efficiencies as well as carbon savings. Through CERT, British Gas has been able to develop numerous innovative approaches to encourage their customers (and non customers) to take up energy efficiency products:

§ The British Gas Council Tax Rebate in which individuals receive a council tax rebate of up to £75 following the installation of insulation

§ Heavily subsidised or free insulation - Free for the elderly and vulnerable and for duel fuel customers (or supplied at significantly below market rate)

§ Partnerships with leading retailers and other commercial organisations that helped deliver products such as loft insulation for £1

British Gas has delivered over £1 billion of energy efficiency improvements, the largest commitment of any supplier.

CESP

The Community Energy Saving Programme (CESP) is an obligation on supplier and electricity generators on a community basis. The total obligation is £350 million, of which British Gas will contribute £100 million.  We were the first supplier to commit to CESP, via a 127 house scheme in Walsall, and currently work with 40 communities.

CESP promotes a "whole house" approach i.e. a package of energy efficiency measures best suited to the individual property. A key component of CESP is community partnership. British Gas and local authorities identify eligible areas. Local groups help to engage communities on the ground British Gas manages the scheme, provides products and services and offers substantial financial support. The programme is delivered via a house-by-house, street-by-street approach.  CESP is expected to deliver annual average fuel bill savings for those households involved of up to £300.

With the support of CERT and CESP British Gas has been able to deliver over 2.5m insulated households, and reduce the level of gas consumption amongst its customers by 22% since 2005. We strongly believe that British Gas is well placed to ensure that even more households and communities gain the advantages of more energy efficient homes.

Council Tax Rebate Scheme

Since 2004, British Gas, has been working with over 68 local councils to offer householders returns of up to £125, administered via council tax bills, after they have had subsidised cavity wall insulation installed in their homes. This "Council Tax Rebate" has proven extremely popular at increasing demand – and could lead to an increase in demand of between 8 and 15 per cent according to one Energy Saving Trust report (2009) and Quadrangle research for DECC (2009).

Social Housing

In 2010, British Gas announced it would work with social housing provider Mears to jointly bid on and deliver repair and maintenance contracts in the social housing sector. British Gas will provide energy services to the 500,000 social homes Mears currently works with, including whole house solutions which may include air source heat pumps, ground source heat pumps and biomass boilers as well as solar panels. This has been made possible by access to a range of Government schemes, including the Carbon Emissions Reduction Target (CERT), Community Energy Saving Programme (CESP), Feed-In Tariff and Renewable Heat Incentive funding, to subsidise energy efficiency measures and renewable and low carbon technology.

Green Streets

In 2008, 8 streets across the country were given £30,000 by British Gas to invest in measures to cut carbon and save energy. The streets competed against each other to see who could be the greenest, with support from British Gas engineers and energy saving experts. The experiment saw the average family cut energy use by 25% and carbon dioxide by 23%. The winning street, in Leeds, saw energy reductions of 34%

Building on Green Streets I, in 2010 British Gas awarded £2 million in funding to 14 community energy projects The communities will take part in a year-long challenge to cut energy use, generate their own energy and galvanise their local communities. Projects range from an island off the coast of Scotland which is aiming to be energy independent through to a hub of solar schools in Richmond

British Gas is shortly to launch a tariff explicitly focused on community groups, working alongside River Cottage

Heads of the Valleys

The Heads of the Valleys is a £140 million, 15-year programme launched in September 2004 with five local authorities and local stakeholders. It aims to tackle the root causes of economic inactivity in the area whilst also creating the EU’s largest Low Carbon Zone. As part of the programme, British Gas and the Welsh Assembly last year announced the UK’s first dedicated Green Skills Training Centre in Tredegar, South Wales.  We will train over 1,300 of the long-term unemployed in low-carbon skills, using this new workforce to install energy efficiency measures and microgeneration in 40,000 homes.

June 2011

Prepared 8th June 2011