Energy Bill

Memorandum submitted by SSE (EN 11)

SSE, formerly Scottish and Southern Energy, is a UK-owned FTSE 30 company with over 20,000 employees and a £1.6 billion annual investment programme until 2015. It is the largest renewable generator of electricity in the UK with nearly 2.5GW of capacity, and the second largest generator overall. It supplies over 9.5 million customers with electricity and gas through its Southern Electric, Scottish Hydro, SWALEC and Atlantic brands, and operates electricity and gas networks in the south of England and the north of Scotland . It also has interests in telecoms, water and contracting services.

SSE is supportive of the Energy Bill, the primary objective of which to introduce a scheme – the ‘Green Deal’ – which will enable the UK’s housing stock to become more energy efficient. The Bill also contains preliminary measures to enhance energy security and enable investment in low carbon energy, as well as measures on smart meters, customer billing and the new Energy Company Obligation (ECO).

Given that a reduction in overall energy demand will lower customer bills and reduce the need for energy infrastructure, it is important that Green Deal and the ECO are designed effectively. This briefing highlights SSE’s views on the Bill:

Clause 17 – Green Deal finance liability

While supportive of the Green Deal mechanism, SSE, together with the rest of industry, had been gravely concerned by the wording of Clause 17 (3)(c). If the energy supplier had been required to pay the whole Green Deal charge even when the customer had not paid their energy bill then, due to accountancy rules, suppliers would have found that the entire value of the Green Deal would have sat on their balance sheets. This could have seriously jeopardised the ability of the major utilities to invest in the UK’s energy infrastructure.

Fortunately Government has seen sense and introduced Amendment 45. This will allow for what DECC has told energy companies its intentions are, namely that they propose for suppliers to collect Green Deal repayments on behalf of financers on a proportional basis. In practice this means that when anything less than full payment has been received by a supplier, it can allocate payments proportionately between energy debt and green deal debt.

SSE’s View:

DECC’s solution will limit energy companies exposure to Green Deal debt. This is helpful and should not affect SSE’s ability to finance low carbon investments. However, Government must give more information on how the finance and liability mechanism will work in practise during the Committee Stage. At present, the broad nature of the clauses allows the Government wriggle room to change their mind further down the line, with considerable unintended consequences.

Clause 71 - Smart meters

During the Bill’s time in the Lords an amendment was raised, the aim of which was to protect consumers by preventing smart meter installers from selling additional products whilst they are in consumers properties. There was a concern that this could result in abuses of the position which the installers find themselves in, and would undermine consumer confidence in the roll-out and in other Government schemes such as the Green Deal.

SSE’s View:

SSE, together with the rest of the industry, takes the consumer protection issues raised by the amendment extremely seriously. However, whilst consumer protection is extremely important, there may be situations – a consumer might request information on tariffs or energy efficiency; or an installer might feel that a consumer would benefit from having a carbon monoxide detector installed – where a degree of flexibility will be required. Therefore any amendments to the Bill which were overly prescriptive as to what information installers can/ can not provide would not be appropriate.

Clause 74 - Information on bills

The Government is taking back-stop powers in the Energy Bill that will enable it to require suppliers to provide certain types of information about electricity and gas tariffs – principally about whether a customer can switch to a "cheaper tariff" – to consumers. Industry is currently working with Government through the Energy Retail Association to try and find appropriate ways of displaying this information voluntarily, and SSE is hopeful that this process will yield the best results for all parties – Government, suppliers, and most importantly, consumers.

SSE’s View:

The measures outlined in the Bill give the Government broad, but not prescriptive, powers to force suppliers to provide customers with specific information. This allows for suppliers to operate flexibly and adapt the information provided on energy bills to feedback from customers and changing circumstances. Therefore SSE believes that amendments, particularly those which would force suppliers to provide specific information before the results of the testing phase are known, are unnecessary and could create negative unintended consequences.

Clause 90 to 98 - The special administration regime

The Bill provides powers for the Secretary of State in the event that a large gas or electricity supply business becomes insolvent, to apply for an administration order to ensure that customers are supplied with gas and electricity as cost-effectively as possible. The intention is to allow the Government to act quickly in emergency situations in order to reduce risk and instability in the market, thereby protecting consumers.

SSE’s View:

Whilst this is clearly a desirable end, the concern that SSE and other suppliers have with the clause is that it does not include a clear threshold for when the usage of special administrative powers can be seen as an appropriate course of action. SSE would suggest any special administration must be subject to a clear and robust process, such as assurances that the consent of company Directors will be sought ahead of the use of such powers. If these are not clearly laid out at this early stage the option of special administration runs the risk of injecting instability into the market, rather than safeguarding energy supplies.

Clause 64 to 69 - The Energy Company Obligation (ECO)

The Bill introduces the new Energy Company Obligation or ECO into legislation. The ECO replaces the Government’s previous energy efficiency obligations on energy suppliers, CERT and CESP from 2012. The Bill does not provide detail on how the ECO will work, which is expected to be included in secondary legislation, but amends existing powers under CERT and CESP. The ECO will focus on householders and types of property which cannot meet the Green Deal’s ‘Golden Rule’.

SSE’s View:

SSE welcomes the opportunity to build on the successes of previous energy efficiency schemes (CERT and CESP), which enabled SSE to provide insulation measures to over 700,000 properties since 2008. The ECO should be designed with clear targets in mind, but suppliers should be provided with flexibility to innovate in order to meet these targets, building on the successful local partnerships and diverse supply chains that suppliers have built up through CERT and CESP. The primary focus should be vulnerable customers, with harder to treat properties a secondary, but important objective.

Potential amendments

New clause 7 - Energy efficiency aims

The Government has put forward a new amendment for consideration in Committee on energy efficiency aims. The amendment will give the Secretary of State powers to take appropriate action to in regard to domestic energy efficiency, alongside a duty to report annually on the success of the Green Deal. The amendment appears to be in response to growing pressure from the Stop Climate Chaos Coalition and its campaign "Demand a Better Bill". The group are calling for a Warm Homes Amendment which sets out a level of ambition for energy savings from the Green Deal and outline plans to meet the plan.

SSE’s View:

SSE believes that it is important that the Government is clear about the level of ambition it has for Green Deal and wider energy efficiency policy.

New clause 14: Compulsory acquisition for CCS pipelines:

The Government have put forward a couple of new amendments on CCS infrastructure. New clause 14 amends the Pipe-lines Act 1962 allowing the developers of CCS projects to apply to the Secretary of State for compulsory acquisition orders for land for construction of pipelines transporting carbon dioxide.

SSE’s View:

SSE welcomes the new amendments that will aid in promoting the development of CCS, which will benefit the UK through its potential to decarbonise the UK 's electricity sector and provide an export market for UK industry. But SSE has concerns on C lause 14 (8) (c), which gives the Secretary of State powers to revoke compulsory acquisition powers. SSE would like to seek clarity on the definition of "ceases to be used to convey carbon dioxide", as this is ambiguous and there may be valid reasons, to which a pipeline may cease to operate at any given point for any given period of time. SSE would recommend that Clause 14 (8) (c) is expanded to remove the ambiguity.

New clause 1 & 2 - CCC Carbon budget recommendations for local authorities

The opposition have tabled an amendment which would see the Committee on Climate Change (CCC) give advice to the Secretary of State about the contribution of individual Local Authorities to national carbon budgets.

SSE’s View:

SSE is very supportive of the idea behind this amendment. The abolition of Regional Spatial Strategies (RSS) removed an intermediary link between local council carbon targets and national level targets. There does need to be a strong signal to ensure that local authorities each play their part in meeting national carbon targets. As a renewable energy developer, SSE often sees a disconnect between national ambition and localism, so this would appear to be an interesting solution worthy of exploration.

Other issues potentially raised in Committee

Rising block tariffs

During the Bill’s passage in the Lords and the Second Reading debate in the Commons, there were debates on the introduction of rising block tariffs. During Grand Committee whilst the Bill was in the Lords, an amendment was tabled that looked to give the Secretary of State powers to compel energy suppliers to configure their tariffs so that the initial units of energy supplied are at a lower cost to the consumer than the remaining units. The amendment was not put into the Bill.

SSE’s View:

SSE is concerned that mandating rising block tariffs could result in a number of unintended, and potentially perverse, consequences. For example, there is a risk that suppliers could end up subsidising low users such as young professionals living in small flats who work long hours at the expense of high users, whom are often those at home in the day (e.g. the elderly and unemployed) or those with large families. There are also concerns that some vulnerable customers could be penalised, because they may consume more energy than the average due to living in inefficient properties, or having health issues. These types of individuals should not face pressures to under-heat their homes

Also rather worryingly, this type of financial model would make it less attractive for suppliers to acquire loss making low users, but suppliers would only "want" high users. Therefore energy suppliers would have no incentive to encourage their customers to reduce energy usage, which is at odds with the rest of this Bill.

It should also be recognised that altering the tariff structure in this way will undermine the model used to determine the saving which will be made under the Green Deal, meaning genuine benefits from the scheme may not be realised

Green Deal interest rates

During the Second Reading of the Bill in the Commons, there was concern from a number of MPs that the Green Deal was dependent on the interest rate that would be available. Unfavourable interest rates could hinder the uptake of Green Deal measures and result in excessive finance payments meaning that the measures are not viable.

SSE’s View:

SSE acknowledges the concerns of MPs in ensuring consumer protection under the Green Deal, the Government must be aware that undue restrictions on financers will lead to lack of investment into the scheme. This lack of investment could require intervention from the Green Investment Bank in the future, and whilst SSE sees a role for the Bank in the Green Deal, this could restrict the ability of the Bank to invest in other areas of the energy sector, such as offshore wind, which it was originally intended to support. This may mean the Bank may struggle to drive the required infrastructure investment, stifling supply chain development which could provide vital export markets for the UK economy.

June 2011

Prepared 8th June 2011