Energy Bill

Memorandum submitted by E.ON (EN 12)

The Green Deal – getting it right for our customers

· Easy to understand: It is important that the Green Deal is simple and easy to understand, with customer needs placed at the heart of it. A long term, stable framework is essential.

· Attractive to customers: There need to be tangible "nudges" from the Government to encourage uptake.

· Whole house assessments: Assessments should include suitability for microgeneration measures from day one, even if these may not be supported by the Green Deal finance package.

· Need a flexible ECO: The Green Deal will be complemented by an Energy Company Obligation (ECO). There needs to be a robust policy framework for the ECO which can provide stability to 2020 plus flexibility of delivery.

· Finance has to be attractive: If interest rates are too high customer uptake will be severely damaged. But we do not believe it is appropriate for energy suppliers to have to underwrite debts and bear the default risk for the banks or other institutions providing finance.

Comments on specific clauses of the Bill

Green Deal Plans and Framework (Clause One-Three)

We believe that it is our job to help our customers understand how they can reduce their energy consumption and help keep their bills as low as possible, providing them with the right information, advice, measures and services to make this as simple as possible. We intend to be a Green Deal assessor and provider, as well as enabling customers to pay their Green Deal charge as part of their energy bill.

In order for the Green Deal to be successful, it will be important that it is attractive for as broad a group as possible with tangible incentives from the Government to encourage uptake. We hope the Green Deal will be an enabler, targeted at those who would love to try these measures but are worried about spending their hard earned cash to insulate their homes.

This means that consumers must:

· View the Green Deal as an attractive way into a wide range of energy efficiency measures

· Not be put off by the interest rate – if it is too high customers may think they are getting a worse deal if they went direct to the market and uptake will be severely damaged

· Be satisfied that they will see sufficient savings on their bills to cover costs, and the hassle factor

· Have access to good, impartial advice on what measures are best for them

· Have confidence in the accreditation scheme for Green Deal installers

Take up of the Green Deal

In order for take up for the Green Deal to be sufficient to meet its objectives, we believe that there will need to be both market-led and government-led incentives to encourage customers to take up the Green Deal. It will be for individual companies to decide what position they wish to take in this market place and so what additional incentives they might offer to customers to support their own Green Deal proposition. However we believe that additional government-led incentives will also be required to increase confidence in the Green Deal.

One of the major concerns yet to be addressed is the impact of the Green Deal charge on the value of a customer’s property. We therefore believe that an incentive linked to house sales would militate against this perceived risk until the market has proven that the Green Deal charge does not reduce house prices. A pro rata percentage reduction in stamp duty, based on the achieved percentage of carbon savings possible outlined in a Green Deal assessment, could provide this reassurance and would underline the Government’s commitment to the Green Deal and improving energy efficiency more generally. For example, a total of three measured have been identified that meet the "golden rule", the customer chooses to take two which in total meet 70% of the carbon savings possible for the house in question. This would result in a 0.7% reduction of the total stamp duty reduction available under the Green Deal.

The success of the Green Deal will rest on whether consumers believe that they are seeing the savings on their energy bill that they were promised, that the measures installed are appropriate for their property, and that they were installed in a professional manner, to a high quality standard.

Green Deal providers will need to be clear about which measures can meet the "golden rule"- that the charge attached to the bill should not exceed the expected savings - so customers can trust that they will be covered by the Green Deal finance package, with support from the Energy Company Obligation if required. At the same time, consumers will need to be aware that financial savings cannot be guaranteed (as energy prices and consumption patterns may vary from those estimated). We believe it is also critical to provide basic energy efficiency advice and information at the point of installation to make sure everyone gets the greatest benefit.

It is very important that customers can access accurate and impartial assessments that put the customer’s needs first and that ensure the selection of the most appropriate solution. We therefore welcome proposals for a code of practice for the Green Deal to ensure confidence in the quality of advice provided, the accreditation scheme for Green Deal installers and the process for handling customer queries and complaints. If a separate body is to be authorised to oversee this, it will be important that this is an independent body, trusted by consumers, to give confidence in the Green Deal process.

Integration with other schemes

We need stability across all Government incentives like the Renewable Heat Incentive and the Feed-in Tariff. Customer confidence here will also affect confidence in the Green Deal – a stable framework is required for both customers and financiers. We also believe that we need to see better integration of the schemes so that customers can clearly understand which measure is right for them.

Much more so than insulation, microgeneration and renewables incentivised through the Feed-in-Tariff and forthcoming Renewable Heat Incentive, have created enthusiasm, and engaged customers to think proactively about how they use energy. Whilst insulation will remain a core measure, and rightly so, we hope that the Government will fully capitalise on the excitement created by "eco-bling" and ensure that microgeneration is able to work alongside, and in the future as part of, the Green Deal. The measures available to customers under the Green Deal must be kept open and flexible. For example, the inclusion of microgeneration would allow customers who are concerned that they will not be able to recover the costs of installing the measures if they move house to make the investment as they would be able to fund the measures through the Green Deal with the costs (and the income from the Feed-in Tariff) attached to the property rather than the individual.

Assessment of Property (Clause Four)

To date, some customers have been either reluctant or unable to invest in energy efficiency measures because of the up-front costs involved. The Green Deal will help to remove these barriers and we hope that it can become one part of a bigger national drive towards improved energy efficiency in the UK. However, the Government should also capitalise on public interest in saving energy as a result of the launch. Green Deal assessments should be a first step to helping all types of consumers understand what their energy options are, regardless of how proposed measures might be funded.

Assessments should be therefore be fully "whole house" and include suitability for ECO support and microgeneration measures under the Feed in Tariff and Renewable Heat Incentive from day one, even if these may not be supported by the Green Deal finance package. This is particularly relevant given the timing of the launch of the Renewable Heat Incentive.

Private Rented Sector (Clause 12 and Chapter 2 and 3)

We welcome the Government’s recognition that additional support is required to improve energy efficiency standards in the private rented sector. A key challenge for this sector is to increase the market value of energy efficiency. This would provide additional incentives for landlords to make improvements to their properties. Although Energy Performance Certificates do help, the information provided is often not interpreted as financial savings by potential tenants. This could be remedied by requiring rental properties to be advertised with their expected heating costs.

We are pleased to see that the Government has recognised some of the difficulties in the tenant/landlord relationship through its proposals around ensuring consent from the bill payer for Green Deal measures. It will however also be important that tenants allow Green Deal assessors access to properties to carry out assessments requested by landlords. Clear information on the benefits for improved energy efficiency may help here.

Collecting Green Deal repayments (Clause 15)

We do not believe it is appropriate for energy suppliers to have to underwrite debts and bear the default risk for the banks or other institutions providing finance. This would require energy suppliers to reduce investments in other areas to compensate for their Green Deal debt in order to maintain their funding structures and credit ratings.

Discussions are on-going with DECC on this matter, but we continue to seek reassurances that the final format agreed for collecting the Green Deal charge will reflect the financers’ need to successfully recoup investments without impacting on the balance sheets of energy suppliers.

Whilst our preferred approach is to act purely as an agent, we understand that this is unlikely to be practicable. If this remains the case, we would like Green Deal debt to be treated as energy debt and for all Green Deal payments to be recovered under a pari passu system where any money received is split in proportion to the value of the energy and the Green Deal components of the bill, and the Green Deal component is passed back to the financer. In the event of default for example, if the total bill in one period was £100 and the energy debt totalled £80 and the Green Deal charge was £20, any money received would be split on a 80:20 basis. So if only £50 was received from the customer, the energy supplier would receive £40 and the Green Deal provider would receive £10.

Financing (Clauses 23 – 29)

We believe that a Special Purpose Vehicle (SPV) is required to support the investment community in providing the financing for the Green Deal. An SPV would provide a single point of access to Green Deal finance and would facilitate securitisation of Green Deal debt. Given that securitisation is only going to occur once the portfolio reaches a certain value (indicated by financial experts to be in the region of £200-300m debt), a single entity is likely to reach this value at a much earlier stage. Securitisation may lead to the Green Deal being off balance sheet which is likely to be more attractive to investors and so would facilitate further investment in the Green Deal in the future.

To give confidence to the investment market and underline the Government’s commitment to the Green Deal, an SPV should be facilitated by Government. A single SPV would also help to keep interest rates low for the end consumer as this model would be less complex to administer and more attractive to financers than a model made up of multiple SPVs.

Relying solely on commercial provision of upfront capital for the Green Deal is likely to increase the amount of subsidy required to make the economics of Green Deal investment work, therefore we believe that there is also a role for the Green Investment Bank (GIB) in the early phases of the scheme. The GIB should be used to source upfront capital for the Green Deal and act as an aggregator for the creation of a SPV. Once the Green Deal is more established and there is confidence in the market over its risk profile, we would expect the GIB to start to exit its Green Deal investments through selling Green Deal securities. This will free up its balance sheet and enable the bank to make capital investments in other low carbon projects.

We are working with Government on this but it is vital that we come to a solution that works for all parties otherwise the Green Deal won’t work, interest rates will be too high and customers simply won’t be interested.

Energy Company Obligation (Clause 64)

The Green Deal will remove the barriers to some consumers taking up energy efficiency measures, however others may still need further support. The Green Deal needs to be one part of a national drive towards improved energy efficiency, regardless of housing type or tenure.

For this reason, it makes sense that the ECO will cover households living in fuel poverty, as they will often need more support than is able to be provided through the Green Deal. We are pleased to see that the ECO will look at providing more affordable heating, as well as reducing carbon. This is particularly important as in some cases existing heating systems may be inefficient but the existing carbon-focused schemes mean that it is not possible to install a new more efficient system. For consumers most in need we would expect the ECO to enable some measures to be fully funded by energy companies.

In relation to using the ECO to target hard to treat properties, this is likely to cover a broad range of households. Whilst many families living in hard to treat homes will require additional support to improve the energy efficiency of their properties, others may be able to cover more of this cost themselves, particularly if a low interest financing package were available to overcome the problem of high upfront capital costs.

The details of the ECO will be settled during 2011 and implemented in secondary legislation. The key principles we would expect to see are: a robust policy framework which can provide stability to 2020, with say three yearly reviews to ensure the specific targets remain appropriate, and hence provides confidence to develop customer relationships and delivery mechanisms, and to invest in innovate technologies; plus flexibility of delivery, so that the scheme is most cost effective and has the least impact on prices to all energy customers.

Smart Meters (Clause 71)

We support these clauses which amend powers in Energy Act 2008 to allow Government to direct the approach to the roll-out of Smart Meters until 2018 and to enable the Secretary of State to make changes to transmission licences to ensure the introduction of the new central communications arrangements. This will help ensure effective completion of the roll-out of smart meters and delivery of the new central communications arrangements which support the new metering, and which will simplify and improve the efficiency of industry customer-facing processes. E.ON is intending to roll out 1,000,000 smart meters by the end of the Foundation period.

Access to Energy Performance Certificates (EPCs) (Clauses 72 and 73)

We support these proposals which will give the Secretary of State powers to make regulations to remove certain restrictions on access to data from EPCs and specifically allowing access to accredited Green Deal providers. This will enable providers to provide information, services and advice to consumers who currently have an EPC, who might not otherwise be prompted to take action to improve the energy efficiency of their property.

Information on Cheapest Tariff (Clause 74)

We understand the Government’s aspiration to provide a ‘nudge’ to customers to get them to check whether they are on the cheapest tariff. However, to use space on the front of bills, as initially proposed, runs counter to what customers are currently telling us about wanting simple bills. We are working with DECC, Consumer Focus and Ofgem to look at the best way to engage customers, based on a signpost with the annual ‘Key Facts’ to a website (or call centre) that allows us to understand a customer’s individual circumstances before providing tariff information and to offer other support such as energy efficiency measures. We are disappointed that the Minister sees it necessary to introduce back-stop powers for this, when the regulator already has powers to require changes which benefit customers. It runs counter to the Government’s desire for a reduction in unnecessary regulation.

GEMA duty to report to the Secretary of State on future generating capacity requirements (Clauses 77 and 78)

These clauses confer on GEMA a duty to report annually to the Secretary of State with an estimate of future need for electricity capacity. It also amends the Energy Act 2004 to give the Secretary of State a duty to publish his assessment of future capacity need.

These powers enable the Government to give its view on how much capacity is required to maintain security of supply, based on expert advice from GEMA, which we assume will reflect input from NGC (who already publish their own forward looking estimates) and other sources of advice. This is against a background of increased uncertainty about the market’s ability to deliver these goals given the expected large volume of intermittent wind generation on the system, which means that other plant will need to make a return on the basis of reduced operating hours and higher prices during those periods.

While these powers will help improve transparency and improve monitoring of the effectiveness of the market in maintaining security of supply, investors will be making their own assessments of market requirements and will not necessarily adopt the Government’s own assumptions, and are in fact likely to consider a range of outcomes.

These powers may become more significant if associated with Government powers to intervene in the market to address any shortcomings. As part of its electricity market reform, the Government is considering the introduction of mechanisms to incentivise capacity which may require Government to set capacity requirements some years ahead.

Uniform Network Code (Clause 79)

These provide powers for Ofgem to require changes to be made to the Uniform Network Code so as to sharpen market incentive mechanisms for ensuring sufficient gas is available during a Gas Supply Emergency. We have no objections to these proposals although the extent to which they will incentivise companies to contract for additional gas in emergencies will depend on how probable companies think these events are likely to be. At present gas supplies are adequate to meet the UK’s requirements and the availability of shale gas has reinforced this view.

Sharper prices can only be maintained in a gas emergency up to a point. In the event of significant gas shortages, the market cannot continue functioning effectively as National Grid has to intervene to ensure that the safe operation of the gas system is maintained and to ensure that certain consumer groups continue to receive gas as a matter of priority.

Special Administration (Clauses 91 to 99)

These provisions propose a Special Administration Regime, which could be implemented by the Secretary of State if a supply company were to get into financial difficulty giving a company facing difficulties temporary protection from its creditors in order that a rescue or restructuring can be arranged. It is important that this measure is applied in a way which does not add to market uncertainty, with a clear threshold for when it can be used, including assurances that company directors would be consulted as part of any decisions made by the Secretary of State in this area. If this power is not tightly defined, companies may be concerned that Government could use this power in unforeseen ways.

As drafted, the threshold for implementing special administration is a lower threshold than the one generally in place for licence revocation. In this case (i.e. the grounds of being "likely" to be unable to pay its debts), the Secretary of State should only be able to apply to the Court for special administration with the consent of the company. This requirement would not apply to the other grounds for special administration. The legislation should provide for this.

It is important to recognise that the normal operation of market forces has in the past produced a trade sale of a failing business without the need for a regime of special administration, even where that business has been considerable in size (such as the failure of TXU Energy, a supplier with some five million customer accounts, in 2002).

Offshore Electricity Transmission (Clause 101)

We support provisions to extend the Secretary of State’s existing powers in the Energy Act 2004 (that expire on 18 December 2010) and also extend existing Ofgem powers in the Electricity Act 1989 to enable the implementation of the enduring offshore electricity transmission regime with a generator build option beyond 2010.

Nuclear Decommissioning Funding (Clause 102)

We support the proposals to amend existing powers in the Energy Act 2008 that enable the Secretary of State to modify a nuclear operator’s Funded Decommissioning Programme. The new subsections enable the Secretary of State, when approving a programme, to enter into an agreement setting out the manner in which the Secretary of State will, or will not, exercise the power to propose a modification to an approved funded decommissioning programme under the 2008 Act. This will help provide investors with more clarity about how these powers will be used and will help avoid exposing companies to unexpected policy changes by Government. This will contribute to reducing investment risks, with consequent benefits for customers.

June 2011