CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 670

House of commons

oral EVIDENCE

TAKEN BEFORE THE

Energy and Climate Change Committee

The Big Six energy companies

Tuesday 7 December 2010

Phil Bentley, Paul Spence, Paul Golby, Guy Johnson and Alistair Phillips-Davies

Evidence heard in Public Questions 1 - 80

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Energy and Climate Change Committee

on Tuesday 7 December 2010

Members present:

Dr Alan Whitehead (Chair)

Dan Byles

Ian Lavery

Dr Phillip Lee

Albert Owen

Christopher Pincher

________________

Examination of Witnesses

Witnesses: Phil Bentley, Managing Director, British Gas, Paul Spence, Director of Strategy and Regulation, EDF Energy, Paul Golby, CEO, E.ON UK, Guy Johnson, Director of Regulation and Public Affairs, RWE npower, and Alistair Phillips-Davies, Energy Supply Director, Scottish and Southern Energy, gave evidence.

Q1 Chair: Good morning, gentlemen. Welcome to this Committee hearing this morning. We have welcomed you and discussed these matters with you on previous occasions. I’m sorry to see this morning it is the Big Five, not the Big Six. I understand Mr Campbell spent 14 hours at Glasgow airport attempting to get here today. We very much appreciate his effort and appreciate your effort also in being here this morning. Could I ask you to introduce yourselves, please, for the Committee record? We will start with you, Phil.

Phil Bentley: I’m Phil Bentley. I’m the Managing Director of British Gas.

Paul Spence: I’m Paul Spence. I’m Director of Strategy and Regulation for EDF Energy.

Paul Golby: Paul Golby, Chief Executive of E.ON.

Guy Johnson: Guy Johnson, Director of Regulation, RWE npower.

Alistair Phillips -Davies: Alistair Phillips-Davies, Energy and Supply Director, Scottish and Southern Energy.

Q2 Chair: Thank you. Perhaps, I could start. How much do you expect the average customer is going to be paying for their gas and electricity by, say, the end of 2010 and then by the end of, say, 2020? Any takers?

Phil Bentley: I didn’t catch that, Alan. Could you just repeat what you said?

Chair: How much do you think the average customer will be paying for their gas by the end of this year and then by the end of 2020?

Phil Bentley: Certainly, from our side, British Gas is the largest supplier of gas into the UK market. We’d expect to see bills this year on average to be just over £600. We have seen consumption of gas falling in our customers’ homes as we’ve been doing a lot more energy efficiency. We’ve seen consumption fall by 20% over the last five years and we might want to talk about energy efficiency. I think if you look forward to 2020, we’re all expecting to see higher wholesale prices and we’re all expecting to see higher transmission and distribution charges across the industry as we have to make much larger investments in the industry. So we’d expect bills-I think Ofgem have said they would expect to see average energy bills up between 15 and 25% by that time.

Paul Golby: I would add to that, in terms of E.ON customers, they’ll be paying at the end of this year exactly what they’re paying today because we have no intention of increasing prices this year. Like British Gas, we’ve seen significant reductions in energy consumption as we work with customers to improve the energy efficiency of their homes but unfortunately the inevitable direction of wholesale energy prices is upwards. So, in terms of tariffs, I think we will see continuing rises through the next decade and the only real way we can combat that, of course, is through energy efficiency measures and helping customers keep warm but consume less energy.

Guy Johnson: On behalf of RWE npower, we in fact haven’t increased our prices now for more than two years. Our customers are paying some 7% less than they were paying two years ago. I should make the small caveat that there are less than 200,000 online direct debit customers who had a price increase. But with that exception, we haven’t increased our prices now for more than two years. Indeed, there have been price reductions over that two-year period. I think, in terms of the 2020 question, the issue very much depends on the review that is currently being done of the market and the extent to which the outcome of that review drives what I would call "affordability outcome"; as well as issues, obviously, of security of supply and decarbonisation. So I think it is important that we try and create, through that electricity market review, a competitive framework in which low-carbon technologies are developed based on their levelised cost, their economic criteria, in order to ensure that we minimise the increases over the next 10 years or so.

Alistair Phillips -Davies: On behalf of SSE, an interesting question that’s got two parts. I think one is what the wholesale costs are, the cost for us to import gas. I think by the time we get to 2020 we will see probably 40% of the gas coming into the UK from LNG and a significant amount, additionally, from pipelines from Norway and Europe as well. So I think the wholesale cost is going to be very driven by what happens globally. You’ve got issues such as shale gas, which is clearly driving prices down in the US, and then the development of some of the BRIC nations, particularly China and India where they’re taking more and more gas, and other countries over in the Far East. What prices will be in 2020, I think, is very difficult to determine.

The other key factor will be the non-energy costs in there. Since 2005, we’ve seen something like a 20%-plus increase in tariffs arising from non-energy costs, which are things like network costs. The energy efficiency measures, which we’ve all talked about, are partly funded through costs in the bill and our estimate going forward-we’ve only done that to 2015-would be that there’ll probably be a 14% or 15% rise in the non-energy costs between now and 2015. I think that will probably continue as we invest more and more in energy efficiency and improving the housing stock in the UK. Currently, on prices, our prices are very, very similar to those of British Gas; so a little over £600.

Paul Spence: I can close out for EDF Energy. We announced a price freeze to protect our customers from any price rise over this winter. Looking forward to 2020, just to echo what Guy said, the critical thing is to make sure we add the right lowest-cost energy to the system as we invest over the next decade and the electricity market reform is the key to make that happen in the most affordable way.

Q3 Chair: Moving from that, I think a number of people will be rather puzzled about the fact that, given the arrangements for wholesale prices are reasonably clear across the various energy companies, some of you are freezing prices and some of you have increased prices to a very considerable amount. Why is that? In theory, should your prices not follow each other in a very rough manner?

Paul Golby: Let me pick that one up. We all hedge our prices to try and smooth bills for our customers. That’s quite different to, for example, Sweden where my company operates. They have a system there where retail prices follow the wholesale prices almost day by day. So customers are paying a very volatile price following the wholesale price. I think in this country most energy companies buy ahead and we buy ahead over some quite long periods of time and also short periods of time and we’ll all have slightly different hedging policies. So I think that substantially explains why some companies are able to maintain prices a little longer than other companies: they have bought differently in the market over the past few years.

Guy Johnson: But certainly from our part-excuse me, I can’t comment on our future plans on pricing, obviously, in view of competition law issues-there is no doubt there are substantial cost pressures. Ofgem, in its recent report, referred to an 8% increase in wholesale costs between September of this year and March of next year. Equally, network costs, which make up about 20% of the bill, are increasing probably in double-digit terms next year. We’ve talked about CERT costs, which are a smaller percentage of the bill but, in turn, are increasing in double digits. So there is no doubt that, while we all try to delay passing on any cost increases to our customers, there are substantial cost pressures.

Alistair Phillips -Davies: I’ll give this answer and then I’ll take any other questions. We were the first to announce a price increase. We were the lowest-priced gas provider in the UK up until that point. The principal reasons for us doing that were that we’d been losing money in that business for a number of years. Indeed, last year, we lost about £60 million. We had had the lowest price. It is a competitive market. Different people clearly have different behaviours and that is what you’d expect in a competitive market. We felt that we had to stem the losses in that business. We are seeing significant cost pressures. Wholesale prices have risen even on forward markets by 25% to 30% since we last cut prices in March of this year. If you look at prices this summer versus summer 2009, they’re 50% to 60% higher. If you look at prices for the winter that we’re in now, they’re again over 50% higher than they were a year ago for the winter that we saw in 2009. So there are very significant cost pressures in the wholesale market, as well as the areas that Guy referred to earlier. And a combination of those factors led us to conclude that we had to get back to earning a reasonable economic return in our gas business.

Q4 Chair: But I have to say that wholesale prices are still substantially below the level they were in 2008 and, even though they are fluctuating, there certainly is a perception that the retail prices that you are putting out do not follow the changes in wholesale prices sufficiently closely, not to the Swedish extent; but certainly a view that the wholesale price reductions are not reflected in what happens as far as retail prices are concerned and that there is, shall we say, some banking going on as far as the difference between the two are concerned. How do you respond to that?

Alistair Phillips -Davies: Well, we reported to Ofgem that we lost £60 million in our gas business last year. Ofgem themselves concluded that, for over 50 of the last 74 months, margins have been negative in the retail market and that is not sustainable. So I think the view that people are making excess profit is entirely wrong and none of the analysis supports that. One of the issues that we clearly have about people looking at wholesale prices is none of us ever charged a wholesale price that would’ve effectively recovered a reasonable amount of money from the peak prices shown in 2008. In the run-up of prices in 2008 versus the early part of 2007, prices were up close to 200% at one stage and retail bills never went up to that extent. The clear evidence is the losses that a number of us are reporting in our business and the analysis that Ofgem have done that clearly backs that up.

Guy Johnson: If I could just reiterate, our domestic supply business was loss-making in 2009. We will make a net loss this year as well. The Ofgem analysis itself shows substantial periods of negative margins. And I think it should also be said that the Ofgem Probe Report of October 2008 showed that there wasn’t a differential lag, if I can put it that way; in other words, that there was a differential speed between passing on price reductions and passing on price increases. Ofgem found no evidence of that.

Phil Bentley: Obviously, it’s a difficult time for everyone at the moment. I think we all recognise that and it’s one of the reasons why, in British Gas, we didn’t raise prices for our most vulnerable customers. But I think the thing also to remember: the market here in the UK is delivering the lowest prices for gas to the end customer in Western Europe. So, even though it’s an international commodity that we have to buy the gas from, we’re still delivering to UK households the lowest prices in Western Europe. So I think that’s one positive about the way the market works competitively. None of us want to have to raise prices and, indeed, as we’ve said, despite having put prices up recently, our prices are still £100 lower than they were a year ago.

Q5 Dr Lee: You talk in terms of 2008-2009. Clearly, in this market, the size of your companies, you presumably take a decade look at things; a strategic look at your return on gas and your electricity over a very longer period than 2008-2009. Does the data exist in terms of comparing a system where companies hedge with a country where they pass on the price immediately over a 10-year period and does Britain do well out of the fact that your companies hedge, if that data exists, or do the Swedes have it right?

Phil Bentley: We’ve got the lowest prices across Western Europe and have had in gas for over 10 years. So I think the UK customers have benefitted.

Q6 Dr Lee: Is that because you’re hedging, though, or is that because of the way in which the market is structured?

Phil Bentley: I think it’s because we’ve got a competitive market. Customers have choice and because we’re all competing to one

Q7 Dr Lee: My point is, if you didn’t hedge, would we have even cheaper gas?

Phil Bentley: We absolutely have to hedge because there isn’t enough gas available at very short notice to meet the needs of the country. If you take today, it’s a very cold day. That gas will have been bought two years ago, three years ago, at prices that prevailed at that time and we need that certainty to know that that gas is going to be delivered to the UK market on a day like today. So we will continue to hedge forward to assure delivery of supply.

Paul Golby: If I can answer your question. We’ve done some of that analysis and the analysis shows that, broadly, whether we hedge or do not hedge, the cumulative price is very, very similar. What we do through hedging is to give customers greater certainty and stability, rather than having to pay very volatile prices.

Q8 Albert Owen: I’m still not clear on this issue and I take Mr Johnson’s point that Ofgem looked at the differential lagging. But the reality is, when oil prices go up, usually fuel prices follow it straight away. When they come down, there is a period of time when a customer doesn’t-You are nodding your head, but I’ve got bills at home that could demonstrate this and so have my constituents. This is what’s happening. When this was raised in 2008-2009, the response from your companies was that it was to do with the mechanism, that it didn’t allow them to fall. Which one is it? Was there no differential lagging or is it a mechanism that doesn’t allow you immediately to pass on those drops to the customer?

Phil Bentley: There isn’t a difference between lagging going up and lagging going down and Ofgem had a recent probe into that and concluded the same point and that was the reason why I say that. There was no evidence. We’ve had 17 inquiries since 2001 and there’s never been any evidence that suggests that the energy companies are slow to pass on reductions. That’s why we’ve been able to lower prices by £200 in the last two and a half years, because we were able to pass that benefit through to our customers.

Q9 Albert Owen: So you’re confident that you’re passing it on as quickly as possible?

Phil Bentley: Yes.

Q10 Albert Owen: And is that the case for everybody?

Paul Golby: I would concur with that. Ofgem have looked at this several times and have come to that conclusion. They’re probing the market again, as you know very well, and let’s see what comes from that. But I’m confident they will come to the same conclusion again.

Q11 Albert Owen: Okay. Well, we will have to await that and, obviously, I’m pleased that there is another inquiry because the anecdotal evidence doesn’t match that. That’s what I’m saying. At that time, there was a response from yourselves that the mechanism wasn’t right. The market: you had to pay that price-and you talk about hedging-but you couldn’t pass it on immediately to the customer. I don’t have the evidence in front of me, but that was the response from your companies. What has changed, or wasn’t that the case?

Paul Spence: I’m not sure we’re behaving any differently today to the last time we gave evidence and the last time we answered the same questions. We have the same policies in terms of hedging the supply of energy and the same policies in terms of how we price for our sale to domestic customers. We’ve been consistent, consistent when prices have risen and when they fall.

Albert Owen: Okay, we’ll have to await the probe.

Q12 Chair: Two thoughts that have gone into the question of price rises are, firstly, the question of environmental levies and the extent to which they affect the prices and, secondly, the extent to which you may be using price rises to bolster your investment in new capacity. Would you like to comment on either of those thoughts and whether they, indeed, are substantial factors in price rises as some have suggested they are?

Paul Golby: Again, maybe I’ll kick this off. Some of these levies, of course, do affect prices. The renewable obligation puts about £12 a year on to the average electricity bill. Some of the social measures, CERT and these measures, add about £48 for the average customer. So yes, these measures do end up being passed through to customers. But, other than the renewables obligation, none of those measures at the moment have anything to do with building new capacity. And that’s where the energy market reform discussions and decision by the Government are going to be very important over the next six months or so.

Guy Johnson: But I think it is very true that there has been a substantial increase in a number of social or energy efficiency measures. In particular, we are very conscious of the expansion of CERT. We’ve spent £300 million on CERT since 2002 and-sorry, we’ve spent £500 million on CERT since 2002 and we plan to invest a further £300 million over the next two years. So you can see the substantial expansion there. Equally, I would say that CERT is a hugely important programme.

Of course, 40% of that expenditure-in our instance 50%-is spent on the priority group. I’m simply making the comment. I’m not suggesting that that isn’t extremely valuable expenditure and, for example, the fact that cavity wall insulation will result in a saving of some £110 a year for a customer for an average three-bedroom semi-detached house means that it is, I think, a hugely important enduring part of the energy efficiency measures that we can make to address fuel poverty.

In terms of your second comment about investment: in fact, last year we invested three times our profit in the UK in improving our generation fleet; updating, decarbonising our generation fleet. So it wouldn’t be true, I don’t think, to characterise at least RWE npower in terms of profitability from its supply business being invested into its generation business. That’s not the case.

Alistair Phillips -Davies: From SSE’s point of view and my point of view, as Paul has said, you probably have £80 or £90 worth of electricity costs that are currently coming from environmental levies, ROCs, carbon, CERT and CESP schemes, things of that nature. As I said earlier, the increase in that since 2005 has probably been a little over 20% and, going forward, we would expect at 2015 another fairly significant increase in the proportion of the bill that comes from those areas as we increase all those measures. There’s a potential for putting a carbon floor in that we’ll probably discuss later and the ROC regime will continue to add more costs there.

So, all in all, you will see additional investment in decarbonising the economy on the demand side and on improving build, but all of those things will ultimately end up in a consumer’s bill. And things such as solar PV and the Feed-In Tariffs: I suspect at the moment they only add less than £1 to a consumer’s bill, but over the next two or three years that might rise to something like £5 per annum to a consumer’s bill. Obviously, paying Feed-In Tariffs at £400-plus per MWh is going to be expensive. We’re going to have to fund those and they will ultimately end up in the consumer’s bill in order to put those pieces of kit on people’s houses. So I think there is a significant uptick in environmental costs that will go through, but they should move to decarbonise the economy and reduce our dependence on fossil fuels.

On the investment case, I think that’s a separate matter at the moment. Clearly, the investment case is very poor because the generation margins are so high in the UK, but I think that’s a separate issue, and I don’t think we particularly see cross-subsidisation of supply margins driving investment. But, at the end of the day, if we are going to invest the sort of monies that people want over the next 10 years-the £200 billion, something of that nature-that is going to have to feed through into wholesale prices in some way or into some sort of support mechanism to drive that capacity, carbon floors and so on, and those are ultimately going to end up in a consumer’s bill. I don’t think they particularly do at the moment. I think the consumer benefits from the fact that there are very, very low capacity margins in the market; very, very low spark and dark spreads.

Q13 Chair: The bottom line, after all that, is that retail margins, according to Ofgem, after recent price rises, are rising to £90 from £65. Is that something you accept?

Alistair Phillips -Davies: I think the basis of their calculation is reasonable, depending on the level of consumption that they assume. But I think the level of consumption that they assume in making in that calculation-both Ofgem and DECC have recently put out figures that indicate that the 16,900 KWh that they used for gas is too high and a number more like 14,300 would be acceptable. If you adjust for the sort of volume figures that you’re seeing, I suspect the margins in December, currently where we sit, will be something like £60 for a dual-fuel customer. If you roll forward to next March, they’ll be substantially lower because wholesale prices for next year are substantially in excess of where they are. So I think the number is closer to £60. We did put a short note into the Committee about that at the end of last week.

Phil Bentley: I think it shows the volatility in the market. Since Ofgem produced their report the price of power has gone from £47 per MWh, which was only two weeks ago, to £64 today. On gas, spot prices were at the time 50 pence a therm; now, they’re 61 pence. So what Ofgem calculate is a theoretical margin for the next 12 months, but in reality the market is much more volatile than that. Three months before, the margins were 50% lower than Ofgem calculated and in the same chart that they had, as you’d see, we’ve shown negative margins across the industry from August 2004 to August 2009. So back to your point about longer term; that is the reality of longer-term margins in the retail energy business and, of course, we want to make sure that we keep prices as low as possible. But we have a huge amount to invest to, as we say, decarbonise the market and ensure that all our customers are using less energy.

That is the secret to lower bills: make our homes more energy efficient. Britain has the worst housing stock in Europe because we’ve a lot of old Victorian homes and we’ve a lot of post-War, concrete-poured social housing. I’ve spent a lot of time in those estates and I’m afraid we still have a lot more work to do to bring them up to the standards that anyone in Britain should expect to live in. So it’s right that we have the obligation of CERT and CESP. It is right that we are investing to insulate and do the energy makeovers a lot of homes require and what I can tell you is it has a massive impact to that individual homeowner when the lower bills start to come through, and they are doing.

Chair: Thank you. Perhaps we can move now to the structure of the energy markets.

Q14 Albert Owen: Just before I do, can I just have clarity? There were a couple of answers that were not quite the same from different companies there. The current price rises we are seeing has nothing to do with investment in new capacity. Is that right, from all of you? Okay. So there are other factors that relate to that. How do you think the current market arrangements are promoting real competition? The next question I’ll probably ask is: what do you want to see in the market reform mechanisms that we see going forward? I mean, is it competitive? Are you happy or do you think there are restraints?

Paul Golby: Let me kick off again. I think the levels of customer churn still remain very high: 17% for electricity, 18% for gas; slightly lower than 12 months ago but customers are exercising their right to switch. Positively, I think 67% of customers now say, when they switch, that they now go to a better deal. That’s up from 62% 12 months ago. So I think there is consistent switching in the marketplace. Certainly from my point of view, it feels a pretty competitive market out there.

Paul Spence: Can I just echo the point? It feels competitive out there and, as well as the evidence of switching, if you go on to one of the online sites and ask for comparison of the different tariffs that are available, you don’t only have the five of us or the six of us who would’ve been in front of you offering prices. You have something up to 10 other companies who are offering to supply you gas or electricity. So there is real new entry into the market as well, which I will argue is another signal of a competitive market for domestic supply.

Guy Johnson: If I could just take care of that. The reality is, as Phil has said, that we have among the lowest domestic gas prices, among the lowest domestic electricity prices in the EU15. There is a lot of talk about the Big Six but the reality is that six is more, I think, than any country in Europe, with the exception of Slovenia and Denmark, in terms of companies with retail market share in excess of 5%. Of course, the annual switching rate doesn’t just compare well with other European countries. It compares well with other retail services in the UK. At 18%, it compares very well with telecommunication, insurance products, mortgages, and so on. But I think the best evidence, as I’ve said, is the competitiveness of the profitability position. I’ve talked about our domestic supply business making no money last year. That seems to me to be the best evidence of just how competitive the UK is.

Phil Bentley: There might be a bit of a misnomer here about the energy market reform, because the energy market reform is about the wholesale market and how do we ensure that we decarbonise the generation industry to meet our binding CO2 emission reduction targets. That’s the issue and what that means is we’re obviously going to have to move from burning fossil fuels where the cost of the input, cost of the fuel, is high and the cost of building the plant is quite low. So you’ve got low fixed costs, high variable costs. We’re going to move to low-carbon, zero-carbon, wind and nuclear where the cost of build is very high but the variable cost of the fuel is very low.

So we need a reform of the industry and that’s what energy market reform is about. How do we move to low-carbon, high capital cost, low variable cost, intermittent, in the case of wind, markets? That’s the challenge when we have to withdraw coal plant and old nuclear plant over the next 10 years, some 30% of current generation capacity. Energy market reform is to say, "What is the investment environment needed to make these huge investments-one nuclear plant, £4 billion-and very long-term payback?" You’re probably talking 35 years for a payback on a nuclear plant. So that’s why we need reform. We need an investment regime that provides some certainty for these huge investments that are now needed to decarbonise our industry.

Q15 Albert Owen: I am sure we’ll get the opportunity to discuss that over the coming months. But if I could just mention something that you raised again, Mr Johnson, with regards to, "We’re fairly competitive because we’ve got the Big Six". If you’re not a member of the Big Six club, if you’re one of the smaller ones, they feel quite crowded out. There’s evidence of that. How would you respond to that?

Phil Bentley: All I would say is margins, on average, have been negative over the last five years and in a good year we might have retail margins of 5% or 6%. So you’re asking new entrants to come in, to buy the energy, the risk around hedging: is it going to be colder; is it going to be warmer; are we going to buy more energy than we need, than our customers use? There’s a lot of risk there. We’ve got to build. We’ve got to collect the cash and the margins-

Q16 Albert Owen: The point I’m making is you have the vertical integration of the market now and there are issues affecting liquidity and t he newer players feel crowded out. That’s the issue I’m talking about. I know the general issues that you’ve raised.

Paul Golby: I would suggest in my trading business we offer energy supply to those smaller companies and we’re currently trading electricity four times physical and gas a lot more than that. So those products are available. The issue with some of the smaller new entrants is the credit risk. Unfortunately, as Phil was starting to explain, this is a market that brings quite enormous capital requirements with it; maybe in some ways similar to banking where you need a firm capital base in order to operate in this marketplace.

Albert Owen: I was agreeing with Mr Bentley then. I didn’t cut him off because I didn’t agree with him. I was cutting him off because I understood it.

Paul Golby: Okay, right, and I think that is the issue: many of the smaller competitors just do not have the capital base in order to compete in this kind of market.

Q17 Albert Owen: Okay. Another point that Mr Phillips-Davies made with regards to cross-subsidies between generation and the supply arms: did you say it doesn’t exist? Is that what you were saying?

Alistair Phillips -Davies: Yes, I don’t think-well, your implication was that we were subsidising the generation arm potentially from the supply arm and I don’t think that’s the case. The margins that we’ve earned in supply, shown by most of the evidence, are relatively small. We’ve consistently had-

Q18 Albert Owen: Sorry, "relatively small". Does that mean it does go on, but only to a small extent? Is that what you’re saying, with the subsidy?

Alistair Phillips -Davies: No. No, sorry. I said the margins are relatively small. I didn’t say there was any cross-subsidy, sir. I said-

Q19 Albert Owen: Is that the case in general?

Paul Golby: Certainly that’s the case in my business. We lost money in 2007-2008. In our sales business last year, we made about £50 million1. That’s £50 million2 on £8 billion sales; so that’s a margin of less than 1%. There is no way that sales businesses can cross-subsidise investment in upstream activity.

Q20 Albert Owen: So what is the cost of buying your own generated energy and how does this affect the market price? You do buy it?

Paul Golby: Yes. And, in my company’s case, we have a centralised trading activity for all of our European businesses. We trade that in the marketplace. Two added components of what we do: we’ve been reporting segmental profits for a long time now-so we say very clearly where our profits are coming from-and, being an international company, we have to justify that to the Inland Revenue to make sure that the profits are being made in the right country for taxation purposes. So we very openly trade on very clear market numbers.

Phil Bentley: If you go back to that point we were making about the input fuel costs, the variable costs of generation, you’ve seen coal prices go from about $60 per tonne to over $100 per tonne. That’s an input fuel cost. And you’ve seen gas for gas-fired, again, go up from probably 35 pence to over 50 pence, 50 to 60 pence, per therm. So even though you think, "Well, the price of gas has gone up; therefore, gas generation must be more profitable", it isn’t, because that fuel cost has gone up. And, therefore, what we call "spark spreads", the spread of converting gas to electricity, are at historically low levels.

Guy Johnson: The only comment I was going to make is: about 90% of our generation and our retail volume is traded through the wholesale market. So we don’t have that self-supply situation that I think you were talking about. We have been trying to encourage a number of other markets that allow commodities to be traded. There’s a thing called N2EX, which is something that we particularly have been behind and there is evidence that increasing volumes are now going through that.

Q21 Albert Owen: I don’t dispute anything that has been said in the last couple of answers. Why isn’t there proper transparency then? Why can’t you all lay your books bare so we can see the separation of profit figures between the upstream and downstream markets?

Paul Golby: I would argue, in our case, that we’ve been doing that for a number of years and, of course, the segmental reporting to Ofgem now is in place. So I think that transparency has been there for some companies for some time and, in the future, will be there for all companies.

Q22 Albert Owen: Is everybody comfortable with that, because that’s what the consumer wants?

Alistair Phillips -Davies: Fine. You’ve got an Ofgem report that gives you a clear view; well, at least for two of us anyway. You’ve got a view of what our statutory accounts say and it reconciles what we have. For SSE, the only thing I would add is that we manage our generation and supply business as one entity and, therefore, the figures that we report to Ofgem: an accounting exercise. We do not operate internal transfer pricing. We operate the entire business as one large portfolio. So that’s probably where we do differ from some of the other people.

Phil Bentley: Sorry to interrupt. British Gas has been the only company that’s disclosed its energy supply margins for the last 10 years. So we would welcome that transparency, because I think it is part of building the trust that customers and, rightly, Parliament needs to have in the energy industry. So we welcome all of that transparency. I think you’ll find-and I spoke to Ofgem last week-that they have all the info they need already through the reporting of margins on a regular basis to Ofgem. So I think it’s now incumbent on them to explain fully the margin performance of these businesses and explain that these margins are not perhaps as high as some of the public perception might have it.

Q23 Albert Owen: Mr Spence, did you want to add anything?

Paul Spence: I was just going to make exactly the same point, which is that the rules and the segmental reporting from Ofgem is very clear. On that basis, we are reporting the contribution of the different parts of our business and that’s the transparency that we believe is needed.

Q24 Albert Owen: Mr Johnson, I don’t want to leave you out, otherwise people will say you a re less transparent.

Guy Johnson: That’s right. They show the revenues, the cost, the profits in our generation business and in our supply business, split between electricity and gas. That’s the obligation that we now have. We filed those accounts in the middle of last year, the middle of this year. We’ll do so again in the middle of next year.

Q25 Albert Owen: So you would be happy for it to go further; for Ofgem to go further and have full transparency between the profit figures for the upstream and the downstream elements of your business?

Paul Spence: We would be .

Guy Johnson: Yes.

Paul Golby: Yes.

Alistair Phillips -Davies: It’s not how we manage our business. We don’t manage our business like that. I’m not happy at having to employ another accountant to make up a set of numbers.

Q26 Albert Owen: But can you give your existing accountant a bit of extra work and just tell them to-

Alistair Phillips -Davies: Well, that’s exactly what we do. All I am saying is we are not managed

Albert Owen: Because the customer doesn’t want to pay for your extra accountant, but it does want to see your figures published.

Alistair Phillips -Davies: Sure, but our figures are: we’ve more than doubled our customer base because we’ve offered better prices than virtually every other company in the market consistently over the last five or six years. That’s the reality of what our promise has been to our customers. We’ve offered the best service and we’ve offered some of the very best prices and that’s because we don’t spend too much money on things like extra accountants when we don’t need them.

Q27 Christopher Pincher: Just a quick question on vertical integration, following on from Albert’s points: I think, Mr Johnson, you said that you buy 90% of the energy that you supply to your customers from the wholesale market. Therefore, presumably, 10% comes from your own vertically integrated generator. Does that apply to the rest of you, gentlemen? What is the percentage of the energy that you supply, which is generated by yourselves internally?

Phil Bentley: If you take British Gas: the gas that we, if you like, make upstream, as we call it, is about 15% of our sales to British Gas customers in the domestic and B2B market and in electricity it’s about 20%. So I think this idea that we’re all 100% vertically integrated isn’t the case. The other thing just to watch out for as well is in gas production from the North Sea, profits there are taxed at a higher rate than supply margins. So if we take our largest gas field, Morecambe Bay, it’s taxed at 75%. So, again, you’ve got to recognise that, after tax, the returns from upstream aren’t that high.

Paul Spence: Like Mr Golby, we have a separate European trading business, EDF Trading, which is responsible for trading out all of our production and buying for us through the wholesale market. So we use them as our interface and trade the majority of our activity through them.

Q28 Christopher Pincher: Right, but what is the percentage?

Paul Spence: Similarly, over 90%.

Alistair Phillips -Davies: On gas, we’ve only recently entered the gas business. So when we complete the purchase of our gas assets we could potentially have 5% of our gas supply coming from fields that we own. Unfortunately, all our gas is currently sold through long-term contracts to other people. So, therefore, we source 100% of our gas either through the market or through long-term arrangements with major suppliers who are LNG producers.

On the electricity side, we probably supply between 60 and 65 TWh of power to our entire customer base and we generate somewhere between 40 and 45 TWh of power. However, of that 40 to 45 TWh of power, we probably churn that in the market five or six times. So our total turnover in electricity would be maybe £4 billion or something like that. Our trading volume in electricity would probably be north of £10 billion.

So, therefore, we’re a very active trader and, as Paul said earlier, if people want to buy power off us at any point in time, I think we’re one of the most active traders in the UK electricity market. In one of these fancy investment banking trading magazines, we won the award this year for being the most active trader. So, although you could argue that two-thirds of our customer base is supplied from our own stations, we do buy and sell an awful lot of power as well and put an awful lot of liquidity into the market. I’d be happy to share with anybody any statistics on that.

Christopher Pincher: Okay, so it is reasonably liquid, but there is some differential between the companies.

Chair : Can we turn to metering now, Christopher?

Q29 Christopher Pincher: Metering, yes Chair; a very popular topic. Can we talk about metering, both smart metering and prepayment metering? If we start with prepayment meters, I think something like 20% of people who have their energy supplied to them use prepay meters, which is-if the figures that I have are correct-something like 8.5 million people live in homes where they use prepayment meters. A lot of those people are going to be at the lower end or the lowest end of the income scale. A lot of those people are going to be, for example, disabled; so they have no real opportunity of getting out of the lower end of the income scale. So I just wonder how easy is it to switch from prepayment metering to, for example, direct debit payments where you have the best tariffs available?

Phil Bentley: There is probably another one of these myths around prepayment meters, because remember the tariff price for prepay now is the same as a credit meter. So there used to be a time when you paid more for a prepayment meter, but that’s not the case today. Even though the infrastructure of a prepayment meter and collecting the money through the retailer and the banking costs the industry more, customers don’t pay the differential. So that’s the first point to make. We find that a lot of our customers choose prepayment because they like to be able to budget; particularly the students in shared houses, for example, prefer to use prepayment. It helps them budget.

Your point about vulnerable customers or disabled customers is a very good one. We have what we call a home energy top-up system; so you can top up your card in your home. You don’t have to go out into the wilds of the night, as it were, to top up if your card has run out. So, generally, we would say prepayment meters have been a good thing to give choice, help people to budget, and there’s protection there for vulnerable customers who find it difficult to get out during the day.

Q30 Christopher Pincher: But if you wanted to leave your prepayment meter and move on to a separate form of paying, how easy is that to do? Is there a cost associated with moving on to direct debit, for example?

Alistair Phillips -Davies : Some suppliers charge money, I know we didn’t for a while and we’re thinking of reintroducing charges for switching meters. But , generally , we will switch meters for people as lon g as they are reasonably credit worthy. A lot of housing is perhaps in rented accommodation . W e sometimes get significant problems with debt. I think that happens across the industry. Everybody else bears that problem and , therefore , sometimes we do install prepayment meters in those properties. As Phil ha s said earlier, we obviously all took quite a big hit - I mean for our company it was probably £20 million per annum - when we levelised charges. Prepayment meter infrastructure is more expensive than normal credit meter infrastructure but I think all of us now have levelised those charges so that they’re the same credit meters.

Also , I think one other issue is that a lot of people on prepayment issues tend to use less electricity or gas in the average. There are a lot of fixed costs in the industry. We were talking earlier about standing charges and fixed charges in electricity and gas. You’ve got fixed charges or fixed costs of supplying close to £200 per customer, which we don’t really recover fully because we don’t have standing charges of that level , or blocked rates at that level, and I think that’s a significant problem going forward as well. In order just to have an electricity or gas supply into your house, there is a significant cost associated with that to do with networks and Ec onserve and things of that nature.

Q31 Christopher Pincher: You say that people using prepayment networks use less energy. Is that because they self-disconnect more regularly?

Alistair Phillips -Davies: I wouldn’t have thought so. It’s pretty rare that we see self-disconnection. We certainly do put a lot of effort into avoiding self-disconnection as a company. I don’t know about other companies but last year we actually called out to several thousand consumers, the most vulnerable, who had prepayment meters in their houses. We sent them special top-up keys. We talked to about 2,000 people who we thought were disabled or had things like oxygen machines in their homes and made sure that they felt comfortable with the services that we offered and the fact that they weren’t going to be subject to things like self-disconnection. So we do work hard on that. Do we get it right every time? No, but we do work extremely hard at that. We’re starting our campaign for this Christmas or we will probably be starting it next week now because our call centres have been quite badly hit by the snow in Scotland. But we’ll certainly be ringing out to those customers again and it is an issue that we’re acutely aware of at this time of year.

Q32 Christopher Pincher: Because something like 16% of people say that they will self-disconnect at a point during the year and something like 5% say that they will disconnect fairly regularly. So I take your point that you’re doing certain things to try to make it easier for people not to do that but I just wonder-if I can ask you all-what you’re doing to ensure that you reduce the instance of self-disconnection?

Phil Bentley: We would say no customer in Britain today should be self-disconnecting. There’s a huge amount of support available. Just to give you any number: anyone over 60 we will insulate their home for free. We have a social tariff, which is £130 lower than an average bill for low income. We will do a benefit check analysis for vulnerable customers, because there’s £8 billion of unclaimed benefits for which customers are eligible, and we’ll continue to give energy efficiency advice. We would argue the winter fuel payment should be directed at those on low income and not just paid to people who over-winter in the Caribbean, for example. But with the winter fuel payment collectively, there is no reason whatsoever why citizens in Britain, customers in Britain, should be self-disconnecting. There’s a huge amount of help available. We also spread debts and recover them over a two or three-year period if necessary; for example, if someone has lost their job. So there is a lot of help and I think it’s one of those myths, again; that the public aren’t aware of how much help is available from the energy companies.

Paul Golby: I’d just echo what Phil said; I think there’s an awful lot of help there. We work very hard so that there isn’t any self-disconnection and the real issue is in improving the energy efficiency of people’s homes. That is the fundamental issue here, because most people who get into that situation are living in very poor-quality accommodation and that’s what’s driving their energy bills upwards. Help is there and we certainly concentrate that help in the over-60s and more vulnerable customers.

Q33 Christopher Pincher: But how do you advertise that? Because I had a surgery last Friday in my local Morrison supermarket and two people came to see me, both of them concerned about rising energy prices and what they were going to do to keep their energy prices down over the cold period, as it was getting colder in Tamworth last Friday. So how do you advertise what you can do to help people so that the most vulnerable know?

Paul Golby: Certainly in my case we run various campaigns. We are currently running an Energy Fit campaign that is helping people reduce energy usage; campaigns around insulation. So there’s a lot of information out there for people but it does need to be more joined up. We need to work with local authorities and other agencies to make this work. We can’t just do this on our own. It really does need a more joined-up approach across local government, as well as the energy companies.

Q34 Christopher Pincher: Are you doing that?

Paul Golby: Yes we are.

Phil Bentley: I think there is one thing, from this Committee’s point of view, to reflect on, or maybe two points. Firstly, private landlords are probably not as incentivised or nudged enough to do more on energy efficiency. That’s one area you might want to think about: how do you get private landlords to step up to the plate in insulating, making those homes that they rent out more energy efficient. And I think that’s certainly an area you might want to think about.

The other thing to consider is the data that’s held by the DWP. The industry ran a trial run earlier this year where we did data matching. So we take our database records and we take DWP database records and we selected "customers over 75 on guaranteed income support" and you get the match of the data. Then we all put £85 on the bill of that individual matched account. That’s the way to get the help to where it’s needed. DWP know who’s claiming what and what people are entitled to and we know how to put the money on the bill. The problem with paying a winter fuel payment-and I don’t want to keep going on about it-is that it’s paid as a cheque, paid before Christmas, and it’s not selective on who should get it. Our argument is that more could be given to fewer. Only 18% of those that receive a winter fuel payment are regarded to be in fuel poverty. So we’ve got over 80% receiving it when they don’t need to. DWP is the answer.

Paul Spence: I think if I can, I’d just echo the points made by Paul and Phil and just re-emphasise the points about working with local authorities and working with organisations like the Citizens Advice Bureau to make sure that the schemes we offer are available and that people like your constituents know about it. We all do that. We won an award yesterday evening for work that we have done with local organisations in the southwest to try and raise awareness of what is available.

Q35 Christopher Pincher: Working with the fire service too, I would suggest, is a good move. Shall we move on to smart metering? We had a demonstration of smart meters in this Committee a few weeks ago, which was very interesting, and clearly British Gas is leading a charge in rolling out smart metering. But I just wonder whether, in doing that, there is a danger that those smart meters will not be interoperable with other smart meters. Are you confident that you’ll be able to interoperate with your metering?

Phil Bentley: You’re right. I think we all believe as an industry, not just British Gas, that smart meters are absolutely needed for the industry. The technology is available to allow absolutely accurate bills to be calculated from the meter. It allows customers a link to a VDU in the kitchen or on your laptop or iPad to see exactly how much energy you’re using and, in time, should be able to allow us to see what appliances are using what amount of energy. So it’s a real opening up of the mystery behind the energy bill. We’ve seen in the UK, we’ve had three years of consultation. In Italy they rolled out smart meters in three years. We’ve spent three years talking about it. So time is of the essence now, where the UK runs the risk of being left behind.

One of the reasons why British Gas chose to go early, at its risk, is that we wanted to get the industry moving. And we certainly welcome the announcement yesterday that DECC will take over the responsibility for policy and roll-out of smart meters because, frankly, there isn’t the certainty of how the transition will work. We all believe that interoperability is a red herring and we can get all the meters to talk to each other. All we need are some straightforward rules about telecoms protocols that should come out of the consultation on the Smart Prospectus in January of next year. And, if we get that, with the right interim arrangements that allow early switching, then the UK can get behind it. We would argue that in a competitive market we’re more likely to compete in that space and innovate and offer time-of-use tariffs and all the other things that come with smart meters. The sooner we have policy clarity, the sooner we’ll all be competing to roll out these real transforming items in the market.

Paul Golby: I would concur with that. We have a phrase in my company, which is "start properly, finish early", and we need to stop talking about this; get the policy instruments in place and get on with it. Particularly for the Government and Ofgem, setting up the data communications company is absolutely critical if we’re not going to have to rework some of these systems going forward. That has to be a clear priority for both Government and Ofgem. And I equally welcome the fact that DECC are now seizing the control, so to speak, and Charles Hendry, in particular, is focusing on this. So I’m looking forward to some action, as opposed to talking, over the coming weeks.

Guy Johnson: If I can just endorse that. We obviously are very supportive of smart meters. We can see some more mundane elements of benefit, if you like. For example, we spend an awful lot of time at the moment encouraging our customers to send us actual meter reads in the booklets we leave with them when they become new customers. Whenever we issue a bill based on an estimated reading, that section of the bill highlights that an actual reading should be sent. But obviously manual readings of meters are a nuisance for customers. As a result, reads aren’t frequent enough and, as a result, bills aren’t always as accurate as they could be. So smart meters read automatically clearly makes a huge difference. We are currently fitting a smart meter with a stand-alone display unit as a trial. We’re trialling it in certain areas for the moment but would intend to roll that out.

And you talked about PPM meters before where we all now have equalised our PPM costs with our receipt of sale customers. But, nevertheless, there is no doubt that we are substantially subsidising our PPM customers at the moment. There is no reason why we shouldn’t do that, but obviously the cost will come substantially down when we have smart meters for our PPM customers as well. So I think there are huge benefits. We have concerns about interoperability. One of the issues is whether the asset itself should be owned by the distribution network rather than by the supply companies. But it’s something that we do need to get on with and it clearly brings the financial benefits to our customers.

Phil Bentley: If you wait for everybody in the industry to agree, you will lose time. So all I would urge is: set the policy and have companies compete.

Alistair Phillips -Davies: Just briefly, I think Phil and Paul are right on setting the policy quickly. The fact that Centrica has gone early, as Phil said, is at their risk but it shows the market is competitive if they’re willing to invest significant money in trying to differentiate a customer experience. That shows that there is something there.

One word of caution, going back to the phrase that Paul uses in their company is about starting well. I think we do need to try and get the standards agreed and I think the particular piece at the moment that would concern us the most is the fact that they want us to roll out maybe 20 or 25% of the meters across the country under one communication standard and then switch to a new national one partway through. I think that presents a very significant risk to the programme and to a sensible delivery of the programme. That’s called a DCC from the detail. But that’s where we have significant concerns, I’d say; around interoperability and getting systems to work properly.

One final point, in Italy at least they had a monopoly business. I think in this country, because you have six major competitors and a number of others, you have a slightly more difficult situation, in terms of central systems, to enable everybody to roll out smart meters and get all the communications working when you’ve still got a lot of competition going on. That’s not what they had in Italy. So it made their job a little easier but it means that we must plan-

Q36 Christopher Pincher: But as long as you’ve got a data clearing house that shouldn’t present you with a technological issue.

Alistair Phillips -Davies: Yes, but at the moment the proposal is that we all get on with it and do something to start with and then we’ll have a new data clearing house at the end of 2013, early 2014. I think that presents a significant risk. I don’t know what other people feel.

Paul Spence: If I can, just pick up on that point. I think that’s why we absolutely welcome DECC grabbing hold of this and the focus on getting the DCC established as quickly as possible. If they can get on with that piece of it and give us all the clarity on the rules and the policy then, as Phil says, we can get on with doing what we do best, which is competing and offering our customers what they want.

Q37 Christopher Pincher: If I can just ask two more quick questions. What about overall national reach? Because when we had our Committee meeting and looked at smart meters, one of the concerns raised, I think by Albert, was some companies are talking about using mobile phone networks to interact with smart meters. There are parts of the country that are not covered by mobile signal. Are you confident that all consumers will be able to benefit from smart meters because they’ll all be able to connect to them?

Alistair Phillips -Davies: I think there are going to be some challenges in certain areas and clearly our distribution area in the north of Scotland will present one of those challenges. People will have to look at things like power-line carrier technology in order to get the signals back because you don’t have a communication network perhaps that covers all that equally. If you went to things like long-wave radio across certain frequencies you may get better coverage. There is clearly an issue around delivering a technology that can give you 100% coverage; can cover the Shetlands, the Western Isles and things like that, which will clearly be a big issue for us because we’ve got an awful lot of customers there.

Phil Bentley: You’ve got 49 million smart meters to be put on the wall between now and 2020; so let’s get cracking in the areas where you’ve got the better reception. I’m absolutely convinced, and I know it to be the case, that mobile network companies and fixed-line companies are investing every day on improving coverage. So you will find a situation very soon, I’m certain, where you’ll have more smart meters in the homes than you’ll have homes on the gas grid; so I think we’ll get the technology solution.

Q38 Albert Owen: Why start in the centre? Why not start on the periphery? Why not go to some of these hard-to-work areas and have a pilot scheme in northwest Wales? We get poor broadband; we get poor telecommunications. So why not start there and join the whole thing up?

Phil Bentley: We would be happy to look at a trial when we’ve got clarity from DECC on how to deal in that particular area.

Q39 Albert Owen: Otherwise you’re going to have a second-class operation.

Alistair Phillips -Davies: I think if we do that, it unfortunately doesn’t deal with Anglesea in north Wales. At the moment we’ve got a project on the Shetland Islands to put in smart grids, which will include smart metering as well. That’s a project we put forward to Ofgem that we’d still like to try and get running with them. But I think there are other areas, too. We will have hard-to-deal-with areas and, clearly, trying to get a bid for a particular area to get a trial running to show that there’s a particular technology that will work outside of some of those big areas is very worthwhile. I suspect all the companies here would support doing that at some stage.

Q40 Dr Lee : It’s not just about coverage though is it? It’s about capacity. Again, this is interesting because I’m with Vodafone and it was suggested to me by a competitor that a lot of the information is sent in the middle of the night, because that’s the only time the network can carry the information. By definition that means it’s not real time; which means that, unless everybody’s up in the night anticipating usage of their washing machine, they don’t get any benefit from it if you start introducing tariffs that change on an hourly basis during the day. Do you have any concerns that maybe going with a mobile phone operator in the medium to long term won’t have a return for the customer, because you won’t get a real-time exchange of information?

Phil Bentley: There’s a huge amount of investment going into capacity and there is a ramp-up scale. We were hoping to put 2 million smart meters by 2012 on the wall. At that level, that won’t be an issue and we’ll continue to see investment in coverage; also in the new mast system as well, that BT are looking at, that will also potentially be able to carry messages as well. So we don’t see the data capacity being an inhibitor of roll out.

Q41 Dr Lee: We’re talking about quite a lot of information transfer, aren’t we? Daily I have problems sending emails by mobile text, BBM messages in this area, and I’ve complained about it. The capacity is completely overloaded. Sometimes it takes four or five hours to receive a text. Now, if that’s happening here, and that’s with just communication between individuals, I just worry about the idea of all of these smart meters-you are talking about 40 million or whatever it is-suddenly coming on the market and the increase in the use of Wi-Fi, which is another suggestion. With all the data transfer that’s going on, are we not concerned that the capacity issue is actually going to prevent what we all want, which is a proper use of smart metering?

Alistair Phillips -Davies: I think in your house you can have a display that communicates with your meter that shows you exactly what’s going on. You only necessarily want real-time data every single household if you’re looking at extracting smart grid benefits. The fact that we pick up periodically, like overnight, what the data is, you can see in your house what’s going on. You may be able tell whether your immersion heater has been knocked on by accident or whether you have got certain appliances that are using a lot of power, real time, there and then. We can pick up, for billing purposes, that exact same data overnight. So it’s not necessarily critical for all aspects of smart metering to be able to have real-time data going for 40 million households into some central system. Clearly that’s more relevant if you’re looking at smart grid benefit, but I think you can still generate an awful lot of benefits without having that. So I think some of your concerns aren’t perhaps quite as strong as you think.

Q42 Dr Lee: And one final small point: the manner in which data is transferred depends on the technology. So BlackBerrys use different data transfer to other mobile handsets. There’s a difference in energy usage in the transfer of data. Has there been any investigation into that in terms of the most energy efficient way of collecting and transferring data?

Alistair Phillips -Davies: I’m not sure. I don’t know.

Phil Bentley: I’ve not heard that as an issue and we’ve put 200,000 on the wall. Certainly we’re working very closely across the industry but also with the mobile companies and the meter manufacturers and DECC and Ofgem and I’ve never heard that issue raised before.

Alistair Phillips -Davies: It’s an interesting one though

Q43 Christopher Pincher: One last quick point, and the caveats that we’ve heard notwithstanding. I assumed that smart metering, which will provide real-time data to you, will enable customers to switch between suppliers much more quickly than they are currently able to do. So you’ll reduce the three-week turnaround to something like what?

Phil Bentley: Could be within a day. You could switch four times in a day.

Paul Golby: There’s absolutely no reason why you couldn’t achieve that.

Alistair Phillips -Davies: I’m more sceptical than that, personally. You’ve got a lot of work to do on industry systems and things of that nature. So, okay, if the DCC comes in and I think if you put that into the first spec of the DCC, you’ll delay the DCC and you’ll have even more problems. If you want to get smart metering in, put smart metering in. If you then want to change settlement systems and industry transfer processes, no problem with that. But the more complex you make that large IT project, the more difficulty you’ll have in delivering it anything like to time and budget.

Paul Golby: Alistair, I think you’re right in prioritisation but we ought to use this as an opportunity of tidying up all of these bureaucratic industry systems that were put in place with all good idea at the time of privatisation, but technology has moved on an awful long way from those times.

Alistair Phillips -Davies: Well, it has, but people have to weigh up the cost benefits of that because we’re spending an awful lot of money on doing these things. And if you put major IT system delivery at risk and other things at risk and if people said, "Okay, rather than changing in 17 days, you can change in two days but it’s going to cost £1 billion", is that what people want to do?

Q44 Christopher Pincher: As long as you’ve got the data and as long as the settlement systems -ELEXON and what have you that provide the payment between themselves-have the technology to make that payment, then as far as the customer is concerned they can switch very quickly and you can deal with the transfer of funds, back office.

Alistair Phillips -Davies: I have no problem with it in principle. But people keep layering extra levels of complexity on to something, which is going back to the point that was made earlier by my colleagues. Let’s make some simple decisions and deliver the things that we think are right and then you can come back and layer extra complexity on later. But I think if you build systems that are far too complicated-we’ve all had our issues over the years with doing things like that, some of them pretty painful-you will end up with issues like they had in the NHS and elsewhere, in terms of delivery systems. And I don’t think that’s what we as an industry or you as a Government would want.

Phil Bentley: I think that sort of illustrates my point though, which is that the different individual companies are in different places. If I take British Gas, we’ve invested a huge amount in systems and billing capability in anticipation of smart meters. Not every company is in the same place in terms of billing capability to handle the huge volume of data. So I think that’s back to the point about DECC and policy. If DECC says we need these rules in place by this time, then it will force other energy suppliers to modernise their systems. The other point to remember as well though: to transfer one electricity customer today, there are 47 different pieces of data that have to move around electronically-47. Paul is right. We can simplify a lot of those processes, almost designing in the ability to switch quickly, and that’s something that we should, as an industry support, and not get hamstrung on worrying about our own individual billing systems.

Q45 Chair: We’ll have to move on now to the question of tariffs. Are you all confident now that, after the Ofgem intervention, your doorstep and phone selling practices are as good as they can be and Ofgem will not be visiting you again with another discussion on this?

Guy Johnson: If I could start the response to that. We made massive changes to the way in which we control our door-to-door and event sales. Perhaps the one that’s easiest to visualise is that, if we were selling to a customer during that door-to-door sale, we would give a phone to the customer and ask them to call our centre in Glasgow. There would then be a conversation between the customer and that validation centre. They would go through, by script, a number of questions in order to seek to ensure that the customer was very clear that it was the right product for them; the estimate that we had given as to what the charges would be over the next 12 months from us; if we’d made a comparison, the basis of that comparison with their incumbent supplier.

So we have a very clear third party control now in trying to ensure that the risk of any mis-selling through our door-to-door or event sales is minimised. We’ve put in a number of other measures and perhaps one that would particularly ring home is that we ensure not only that action is taken against any sales agent who mis-sells, but also it affects the bonus of the manager of that team. So, as you all know, there is an ongoing investigation by Ofgem at the moment but we believe that the controls we have put in place, and particularly that independence of that control, that telephone control, should eliminate so far as possible any risk of mis-selling.

Paul Golby: Could I just add to that because my company was the first company to move to pentablets or handheld computers for controlling our people on the doorstep, so they have real live data. They have the information on the computer. The customer has that information directly in front of them. We can clearly see that the customer has agreed or not agreed to the transaction. Maybe that’s why we’re one of the companies not being investigated by Ofgem for doorstop selling.

Phil Bentley: And we’re the other one. We’ve also invested in handheld terminals. So that if you get on the doorstep, you put in the postcode and the address-because every tariff in the different areas has different distribution charges, it’s quite complicated-and you press the button and you say how much volume are you selling and it will calculate there and then what you will save. Sometimes it might only be £2.50 but you can’t fake it. It’s absolutely what the savings are and it gives absolute transparency. Four of the industry are being investigated because we are concerned that there isn’t that transparency standard applied across the whole of the industry. And I think we will find, coming out of the probe, some recommendations to invest in the type of systems that British Gas and E.ON have invested in because it’s what’s needed. It’s the same point about building trust, because customers switch and then they find they haven’t received the savings they were anticipating.

Q46 Albert Owen: So, just on the check, do they actually-forgive me, I’ve never changed and you’ve not yet convinced me on that one. Two of you will be very happy to hear that. So you have this handheld equipment. How soon does the potential customer get a printout so that they can read it in their own time and-

Phil Bentley: For us, if they then confirm they want to go ahead we would send the printout confirming their-

Albert Owen: And there’s a cooling off period?

Phil Bentley: During the cooling off period, before the final transfer takes place.

Q47 Albert Owen: So they receive that pretty quickly?

Paul Golby: Exactly the same situation.

Guy Johnson: In our instance, there is an estimate or an estimate and comparison form completed and left with the customer at the time of sale.

Alistair Phillips -Davies: It’s the same for our company as well; we leave it there and then.

Q48 Chair: Isn’t there a wider issue: that, in addition to the question of whether doorstep and phone mis-selling may have been taking place in the past-you’ve taken steps, we’ve heard about that-you are collectively addicted to completely impenetrable and over-extensive tariffs, which mystify the customer and remove some of the gains from reasonable selling, and reasonable phone selling. Is that a fair comment?

Paul Golby: I think, from my point of view, that’s one of the myths that’s grown up around the industry. In my case we have 11 tariffs and it doesn’t seem to be too many. One is a social product, seven enduring tariffs and three promotional tariffs. It doesn’t seem to be excessive to me for a competitive market, because customers do want to make their own decisions about the nature of the tariff and certainly 11 doesn’t seem complicated to me.

Guy Johnson: I think, in terms of clarity, what we now have on our bills is details of average daily consumption, that’s the previous year. We have a projection of charges over the next 12 months based on that consumption. We have a jargon buster within our bills. We have an information page that, in our instance, received the Crystal Mark under the Plain English Campaign. So I think we have sought to substantially reduce the complexity through the changes that we’ve made to the bills. In addition, we now send an annual statement. That annual statement has all that information on. The other thing that the annual statement has is a comparison of the cost that the customer is paying compared to the monthly direct debit charges. So I think there is now an awful lot of information in order to enable the customer to better understand the details of that bill. You could argue that perhaps the very fact we have a jargon buster is a little bit of an indictment of itself, but we do have that jargon buster that explains some of the terms used on the bill.

Phil Bentley: I think the thing to remember as well, over 70% of what is on the bill is laid down by the regulators. So what we can influence is quite difficult and, again, if there was a recommendation about moving to a plainer bill, we would welcome that. We do this calorific conversion of temperature and pressure that frankly I don’t understand. So I do think we can do more in that area. But the point about choice, I think, is an important one. I’m on a green tariff, for example, and we have a number of different green tariffs where money is then put into investing in green technologies and carbon offsets. Those are choices that customers make: fixed price products, tracker products, a variety. So while I think we should welcome transparency and clarity of what’s in your tariff, I don’t think we want to move to a one-size-fits-all tariff. I think that would be a retrograde step.

Q49 Chair: But the fact of the matter is, though, that a good proportion of the customers who switch end up paying more for their gas and electricity than they did before they switched and one of the arguments behind that is that you keep changing tariffs, sometimes quicker than the process by which the person can actually switch can take place. So that by the time they land in what they think is a better tariff, the goalposts have been changed.

Phil Bentley: That’s not the case in the industry. That’s not the case. The reason why people say, "Well, I switched but my bill went up", if you look in the period from 2007, 2008 and early 2009, wholesale prices were going up, and bills generally were going up. If you reverse that situation-we’ve been, as an industry, lowering prices since 2009; British Gas was the first to lower prices in 2009-anyone switching will have saved money by definition because we’ve all been lowering prices. We’ve lowered prices by over £200. So I think you have to unpick those statistics.

Chair: So you’re the good guys. There must be some bad guys here then.

Q50 Albert Owen: The logic to that: if you bought at the peak and then it goes down and you have a fixed term contract for a period, then you’re going to be worse off.

Phil Bentley: If you have but, equally, conversely, if you’d bought when the-

Q51 Albert Owen: So there will be somebody, when the prices go down, losing out? It’s not a myth.

Phil Bentley: No, but the point that Alan was making was about general switching because the vast majority of customers in Britain are on variable tariffs that go up and go down. That’s the majority we’re dealing with here.

Paul Spence: Just to pick up your point if I may. If a customer chooses to fix they’re saying they value the certainty of their forward bills and it’s their choice about the time they choose to do that.

Q52 Albert Owen: I understand that.

Guy Johnson: I think also your point about customers switching to a more expensive tariff was certainly something that Ofgem did raise at the end of 2008. One of the consequences of that has been that there will always be an estimate now and that estimate, say in our instance, will be left with the customer. If the sales agent makes a claim that we are cheaper than their incumbent supplier, there will be a comparison and that comparison will also be left with the customer. So I think there has been, perhaps, a substantial move on in practice from the criticism Ofgem made at the end of 2008.

Q53 Chair: Albert and I are together in the fact that we don’t switch very often, if at all, sorry. Conversely, overall, those who stay loyal tend to get a much worse deal than those who switch. Is that fair? There are always offers to switch and if you’re a loyal customer you tend to miss out on all those super offers.

Paul Golby: No, I don’t think so anymore. Certainly in our case, with the annual statement, we encourage our customers to contact our call centres and talk to us about the cheapest tariff available to them. Let me give you an example. This was a town hall meeting we held where we had a particular customer who was on Economy 7. He changed the working patterns of his house and the Economy 7, while it looked superficially the best tariff for him, with his changed usage pattern it was no longer the case and we switched him on to a different tariff. So I think, increasingly, we are giving customers the option to switch.

Guy Johnson: I think, again, it’s something that was a criticism. In particular, there was a criticism for those of us that had in-area electricity customers, that there was differential between in-area and out-of-area; that we were charging more to our in-area customers than we were to our out-of-area customers. That’s something that specifically has been amended by a licence condition and can’t be done. On the more general point, we offer, for example, £100 discount after 12 months for those customers who pay by direct debit and we also offer, after 12 months, an energy bonus £100 payment. So I think in our instance there are very clear benefits from loyalty with us.

Q54 Albert Owen: Just on that point: I accept that people have choices but elderly people that live in remote areas and don’t have internet and have been loyal customers for a long time, they don’t get many letters from the company saying, "Switch to this cheaper one", do they? I’m making a serious point here. I do applaud all of you for the efforts you’ve made into helping people in fuel poverty with their bills and getting the right advice and information. I think that’s a massive step forward. And I do agree with you, Mr Golby, when you mentioned local authorities. I’m not digressing. I do think it is important that local authorities have advice centres to help their people to get the best deals because it’s a big one. But there are still people that are hard to reach and they’re hard to reach because they’re quite proud people. They may have small savings but they are struggling and they’re not on the DWP database. So whatever method that we have, they are going to be difficult. They are loyal customers and they don’t get a loyalty bonus of any sort, do they?

Alistair Phillips -Davies: Some of them do; it does depend. Not all of our tariffs have them, but some of them do. Gary referred to a couple of his and certainly if you’re with Atlantic there are loyalty bonuses there. If you switch to some of our green tariffs you’ll get some of them. But you’re right; there are bound to be some customers-

Q55 Albert Owen: It’s not a pitch for me and Alan. It’s our constituency.

Alistair Phillips -Davies: But there are bound to be some customers out there who might have benefitted from switching who haven’t. I’m sure there are some of us who would benefit from giving up Waitrose and going to Lidl instead, but we don’t always do-

Q56 Albert Owen: It’s not quite the same, with respect, because people need heat and electricity and perhaps it’s something you should take on board about a loyalty bonus for some of your long-term customers who are elderly.

Phil Bentley: We certainly agree with that point because a lot of effort seems to go into winning new customers and not enough into looking after elderly; particularly elderly customers who have been with us for a long time. One of the things we do in British Gas is, if you take at the moment, we’re fixing 40,000 broken boilers a day around the countryside and our customers who are on Energy get priority. We’re joining the Nectar Scheme next year and we’ll give Nectar points for loyalty. So I think there are ways and I think we all recognise that a loyal customer is very valuable and we all want to hang on to as many as we can.

Q57 Chair: You all have social tariffs of various kinds. Do you think the Government should set the levels at which social tariffs should be set and the qualification criteria or do you think that should be left to you?

Guy Johnson: If I could start on that. We are definitely supportive of a mandated social tariff. We have had a voluntary scheme for the last three years, our Spreading Warmth scheme and we sought to devise that working with people like the NEA, Energywatch, because we will confess not to be experts in this area, in the right way. So we had a criteria of eligibility of households with income of less than £13,500 with a child or somebody on a disability allowance or a pensioner.

But there’s no doubt that that eligibility criteria, for some reason, has been criticised and I think that if we can end up with a mandated social tariff, and indeed with data sharing-because we have all participated in that trial that Phil referred to of using data share to give a discount to pensioners on pension credit above a certain age-I think that would be very beneficial. I think it is very important that we don’t lose our legacy operations. We believe that Spreading Warmth is very good, very valuable. We give a £300 discount from our receipt of bill tariff, which is among the largest in the industry. But sitting alongside that, I believe, should be a mandated social tariff as is going to occur from April of next year.

Paul Spence: If I can just echo those same comments. I think we were the first to introduce a social tariff and we have absolutely supported the move to a mandated tariff. In doing that, we are very keen not to lose the benefit and the success of the schemes that we’ve had: the Energy Saving Trust and the Energy Assist programme and schemes that we offer. So I think finding a way to get there, to share data with the people who are the experts in the ones who need help, which is the Government, and then working to make that apply effectively.

Paul Golby: One other thing that I meant to say was I do think that we also need to go back to the CERT priority group measures. We are spending something like £70 million this year on energy efficiency measures for the priority group. We know that is a long-term saving. Last year we insulated 1,000 homes every working day. We have a scheme, for example, at the city of Bradford that is addressing issues in 200,000 homes. And those kinds of schemes-working with local authorities-can, I believe, provide a long-term sustainable solution, or at least a part solution, to the fuel poverty issue.

Phil Bentley: It’s the right approach because you ensure you get it to the right customers who need the support the most. If you take an average energy bill, just over £1,000 per year: with energy efficiency you could probably knock £200 or £300 off that bill. If you’re over 80, you get a £400 winter fuel payment and then if we do go with the Warm Home Discount Scheme that DECC are proposing, which we would support, that could potentially take another £130 off. So you’re ending up with a bill that is maybe £1 per day for all the heating and hot water that you need in your home and, at that level, I think we’ve cracked our social responsibility to those in low incomes. And that’s the way to get 5 million homes out of fuel poverty and in this Parliament we have the opportunity, I think, to make a huge inroad into that number.

Q58 Chair : One of those things that it is coming forward obviously is the Green Deal, very shortly. How do you think that can best be arranged so that it maximises the benefits to the fuel poor?

Phil Bentley: British Gas is the only company that has decided to go early on the Green Deal and the idea of the Green Deal is that we will invest in energy efficiency in your home; you don’t need to pay for it but you’ll pay for it through your bill and you’ll get savings from having a more energy efficient home. So that’s the way it works and the so-called "golden rule" is that the amount you pay back will always be less than the amount that you save on your energy bill. So that’s the way it works. In the Green Deal, potentially, if we take the 24 million homes in Britain spending-I don’t know-about £3,000 per home to improve energy efficiency, that’s £60 billion. Now, no one company here can raise that money alone and, therefore, we’re going to have to be looking to financial markets to raise the funding. So one of the things the Committee might want to consider is what the mechanism is for financial markets to provide finance.

But to your point about low income: we could do the same situation, do the makeover, but not recover it; because for the low income we simply do the work, they enjoy the lower bill and they don’t have to pay. As long as we’ve got the right balance and we know what the rules are, there should be sufficient interest from capital providers that will allow a huge home energy makeover in Britain’s homes in the next five years. But, again, DECC need to say what the rules are about not paying anything back and what the rules are about financing and getting returns because, without the right incentives, the capital markets will never deliver the scale of funding that is needed for the Green Deal.

Paul Golby: I agree substantially with what Phil just said. I think this can work but we need the rules. We need to understand the financing mechanisms. If, as companies, we are sharing the burden of a £200 billion investment in upstream, we just don’t have the capacity to take these sorts of additional costs onto our balance sheet. So we have to engage the financial markets. I think the Green Investment Bank is a vehicle. It doesn’t look as though it is going to be funded sufficiently to do this, unfortunately, but maybe leveraging that may be a way forward. But clarity of rules, because these are relatively small amounts of money for households-so it’s multiple transactions-and it’s the clarity of that framework that is going to make this successful or not. And I desperately want it to be successful and we need to make sure that we don’t over-promise and under-deliver because we haven’t thought through that financing mechanism.

Guy Johnson: I think the pay-as-you-save elements of the Green Deal are different from the fuel poverty elements of the Green Deal. Clearly, the pay-as-you-save is something that will hopefully encourage a client rating where there is greater householder demand for energy efficiency measures, which is something that is difficult for CERT, which is more of a push mechanism. I think we should wait to see what the energy company obligation part of the Green Deal is going to be, which will come into effect from the beginning of 2013. I think all that I would urge is that I do believe that the work we do with the priority group is good and important. I think the fact that we spend 70% of our commitment on insulation is something that should be maintained. There were still-and I think these are last year’s numbers-5.5 million homes in the UK without cavity wall insulation and 1.7 million without adequate loft insulation. So that element of the Green Deal, which is the same as the priority group in that it isn’t charged to customers, should, I think, still focus on those relatively low cost but high benefit-in terms of reduction and energy bills-measures.

Chair : We have to move on now. Dan, you have returned from de-beaking hens and perhaps you would like to take us through some questions on energy security.

Q59 Dan Byles: Absolutely. I apologise for having to leave. I had a Delegated Legislation Committee I had to attend. I also apologise if I ask something that you have already covered in my absence. In 2004, the UK became a net importer of fuel. Obviously, as North Sea reserves dwindle we are going to continue to rely more heavily on imports. I’m concerned at the impact that has on energy security and on price volatility. Do you think the UK is developing a sufficiently diverse range of gas and electricity imports to guard against both price volatility and to maintain a secure energy industry?

Paul Golby: May I kick off on that? I think you are right to the extent that we are now competing in a global energy market. There is no question about that. I think the gas market is a very interesting aspect of that. We’ve seen, as you know, the advent of shale gas, or unconventional gas as it sometimes called, and that’s causing some interesting dynamics. I think we touched on this a little earlier on, that we have this market. The USA is a very interesting market. Their gas prices are currently about 50% below ours and I think last week we saw a first cargo returned to the United Kingdom from the US. It was imported into the United States and then it was re-liquefied and shipped back in this direction.

What are the dynamics there? I think we are seeing the emerging markets in the Far East, Japan, being very gas-hungry and that is creating demand there. I think we have seen, in the short term, some producer difficulties in Qatar and also the Norwegians have had problems in recent times. I think we are just seeing a completely different dynamic now. We are competing in this international market. From my point of view, I think we are doing the right things. We have key import terminals now. We’re getting cargoes from the Middle East shipped back from North America. I think we are as well prepared as any country, quite frankly, to meet that requirement.

Phil Bentley: It is worth separating energy security from self-sufficiency, because I think sometimes people use them synonymously and it isn’t. So energy security doesn’t mean self-sufficiency because, as you say, this year the UK will import 50% of its gas. I think it was in 1910 or something, when Churchill was First Sea Lord and he converted all the coal-fired Royal Navy vessels to oil and everyone said, "What about security of supply?" So it was a problem 100 years ago and what Churchill said was, "Diversity, and diversity alone, will deliver security of supply".

I think that’s what we’ve done in the UK because in the last five years we’ve added pipeline capacity and liquefied importation that is one and a half times bigger than North Sea production. So we’ve got the capacity there now and we’ve got the diversity. We’re shipping from Qatar, the Middle East, Trinidad; we’ve got pipe from Norway, pipe from Holland and, of course, we’ve still got our indigenous supplies. So we would argue that the UK market functions well and the only times when it hasn’t functioned well is when we’ve had severe disruptions-if you take the Ukraine situation- or we’ve had, as we’ve often had in Europe, lack of transparency and open markets.

And what do I mean by that? There was a time when prices were high in the UK and we weren’t able to buy gas in store in Europe because it was held by monopoly players without open transparent markets. In the UK the reverse is the case. Because our markets are so transparent and competitive, anybody in Europe can book our storage in the UK and ship it out through winter into continental Europe. So one of the things we’ve argued for is reciprocity in open markets and free access to data and storage booking in the rest of Europe, as we have in the UK.

Q60 Dr Lee: Are you getting anywhere with that?

Phil Bentley: It’s a question, I think, more for Government and the EU. I think we are making some progress. But in our view we still don’t have that reciprocity, no.

Q61 Dr Lee: Churchill said that when we had Iran and the reality is that we knew Anglo Iranian was going to be pumping oil and we controlled vast areas of the world. That was our security. You’ve just said that our security is dependent upon our European neighbours who are not playing ball.

Alistair Phillips -Davies: Some of it.

Q62 Dr Lee: So, with that and the fact that we have Russia, which has already turned it off once to the Ukraine-I know it has honoured every contract, I gather, with us-I don’t know about you, but I am not that trusting. On the subject of self-sufficiency, do you think we ever can be self-sufficient?

Phil Bentley : No.

Q63 Dr Lee: Why?

Phil Bentley: Self-sufficiency means do we make it ourselves in the UK. If we move to the decarbonised world-and I think it depends over what period. Can we get to self-sufficiency today? No. If we go forward to 2020, we should have 35% of our electricity generation from renewable sources. So that’s starting to build toward that element of self-sufficiency. We’ve got wind farms and when we get clarity from DECC on nuclear and how we can make nuclear investment, then I think we’ll get closer to your indigenous production argument. But in the next 10 years we are still going to be dependent upon imported gas for some of our generation.

Q64 Dr Lee: Do you distinguish between where you get your gas from, with that in mind? Because, without wanting to cast aspersions, I think we can trust the Norwegians probably more than most. Do you buy our gas from them because we know we can trust them or do you just strictly follow the commercial line?

Phil Bentley: At British Gas, we buy very little gas from Russia; very little indeed. I know, Paul, in Germany you buy a lot more.

Paul Golby: Yes. We buy from a diverse range of sources and I think diversity is the key. In respect to Russia, which is where I suppose the question is coming from, we have never had a contract that hasn’t been fulfilled. So it is difficult for me to point the finger and say, "The Russians are not reliable suppliers", when we have decades of proof to the opposite nature. But Russia is a very small part-from memory, it is about 8%-of gas coming into the UK. So strength is in diversity.

Q65 Dr Lee: But that is likely to increase, isn’t it?

Paul Golby: That is likely to increase, but we also have the Norwegians. You’ve identified Qatar and Trinidad. The positive nature of the gas market for me, in the medium term, is that we are seeing more and more sources of gas. The United States is going to become an exporting country in the not-too-distant future with their shale gas. So a lot of these countries are places that we would find inherently safe from a supply point of view.

Q66 Dan Byles: Do you see any future for coal-fired power production in the UK? Will we see another coal-fired power station built, do we think?

Alistair Phillips -Davies: I think there’s a chance you may well not see one, unless somebody gets carbon capture technology clearly off the ground. All the legislation is moving away from that: increasing carbon prices and carbon floors, talk of EPSs and things of that nature. It’s not beyond the realms of possibility, but I think it will be a difficult one. Clearly, one or two members around here will probably struggle to try to look at building things; probably converting existing machinery, if that can be done. But a carbon capture plant is very expensive. Whether that is one that ultimately proves the right way to go, I am not sure.

Q67 Dan Byles: This Committee has asked a number of people at DECC what plan B is, if CCS turns not to be commercially viable. Do you think that we have got problems if CCS does not turn out to be a viable option?

Phil Bentley: No. No, I don’t. I think you’ve got wind and I think you’ve got nuclear, which, in terms of price per unit generated, is far cheaper than CCS. The economics of CCS do not look attractive, which is why even the money that was available for the pilot-I think there is only one company, and they are not represented here, that has actually availed themselves of that money. So that tells you something about how we see the economics today. Get nuclear up and running and I think we will be in a much stronger place.

Paul Golby: Could I maybe just disagree with Phil for a moment? I think if we take a parochial point of view then he probably is quite right. But, quite frankly, we have no chance of solving climate change without carbon capture and storage, because whatever we do in the UK, frankly, is an irrelevance to climate change. That is because India and China are sitting on 200 years’ supply of coal and they are going to burn it irrespective of what we might have to say. So, to me, carbon capture and storage is absolutely critical. We were not able to build a new coal-fired power station in the UK because we couldn’t make the economics work but, as a group, we are testing carbon capture and storage in our Maasvlakte project in Holland . I think , globally, carbon capture and storage is one of the most critical issues that we have to solve.

Guy Johnson: I think the only thing that I would add to that is if you look at the latest DECC quarterly report-when I looked at the 2009 capacity margin-it was something of the order of 29% in electricity generation. So there is clearly not a short-term issue in terms of electricity generation. We have been investing hugely in new CCGTs. We have a new one at Staythorpe commencing operation this year, and a 2,000-megawatt station at Pembroke, about £1 billion investment planned to commence operation next year.

I think that is, in the short term, the replacement, to a large extent, for some of the oil plant that is closing under LCPD. I think it is important that that kind of gas plant-and we are talking now about super-efficiency gas plants, something like 59% thermal efficiency, with CO2 emissions of about 350 grams per KWh-should form a part, particularly with increased intermittency coming onto the system through wind, of our security supply equation over the next decade or so. I would have some concern if there was an intention to extend the EPS, for example, to CCGTs for that security of supply reason and because, perhaps, it is not a recognition of the extent to which these kind of super-efficient CCGTs can be consistent with the decarbonisation agenda.

Q68 Dr Lee: Talking about nuclear: are you satisfied with the progress that the Government is making with regards to new build nuclear power stations?

Paul Spence: I think we have seen very positive progress over the course of the last two years plus in terms of the progress on defining a national policy statement; in terms of setting the rules on waste and decommissioning; the decision on justification and the vote in the House on that. They are all important steps forward. We are seeing positive progress on the regulatory review of the two possible designs to be built; in our case, the European pressurised reactor. All of those are very positive steps. The really important step that we need to see is what the rules are going to be in terms of the market, the introduction of the carbon price floor and the electricity market reform.

We are very hopeful that when we see that it will be another step in the right direction. But we need to see it and then we need to get it in place pretty quickly. There is, I think, consensus in the industry, political consensus and public consensus. The latest polls show that more and more of the public see nuclear as part of the balanced mix that they want to see into future; so all of those things are moving in the right direction. There is some momentum we need to accelerate and we need to get it there quickly.

Paul Golby: I would concur with that. I think it was a slow start. I think we now have the momentum. We have to increase that momentum going forward. So it is really critical over the next six months that we get the electricity market reforms pretty much thrashed out so that we can go forward and invest in some confidence, because these are big investments. We are already investing very heavily in anticipation that we can get this right. We have a short period of time now in which to complete that work.

Guy Johnson: Just very briefly, I think it is very important that nuclear be given an equal chance to contribute alongside renewables and, hopefully, in due course, alongside CCS. I think it is the only proven technology capable of delivering large capacities of low carbon energy with very high levels of availability. And, of course, it has a full life cycle, CO2 emissions comparable to wind. So I think it is vital.

Q69 Dr Lee: But in terms of that life cycle or financial cycle of it, I get somewhat frustrated with the fact that you can’t actually get a real price about how much it costs to generate electricity via nuclear. I mean a real price, not just the build. What about the decommissioning and getting rid of the waste? Because you alluded to the cost comparison with CCS but that doesn’t include the cost of getting rid of the waste.

Paul Spence: Yes, it does. It does.

Q70 Dr Lee: The waste cost keeps going up. The liability for the Government, at the moment, is bigger than the DECC budget. On the stuff that we are getting rid of now, on my-

Paul Spence: If I may, the cost estimates you see for the delivered cost of a megawatt hour from a nuclear station do include the allowance for the cost of the decommissioning and the waste.

Q71 Dr Lee: Based on which figures? Because the figures keep going up on the previous.

Paul Spence: That’s based on the operator of that station paying the full cost of the decommissioning of the station and their share of the cost of dealing with the waste. It’s true that in this country we have an issue to deal with: the waste that we’ve created as a result of our military programme and of the early Magnox stations and the estimate of that cost has been going up. But, in terms of the newer stations and in terms of the new build stations, the money set aside will pay the cost.

Q72 Dr Lee: And are you confident about that?

Paul Spence: Absolutely.

Chair : We may well be in danger of getting into a substantially different area of discussion and I am anxious to try to make sure we do cover the material we want to this morning. Albert, you have some brief questions, I think, on energy capacity.

Q73 Albert Owen: Yes, on the energy capacity and a number of you have touched on this as we have gone along this morning. A very simple, straightforward question: do you have the organisational capacity and, importantly, the capital to invest in substantial new generation over the next decade?

Paul Golby: This is going to be a real challenge. Let me try to paint a picture for you. £200 billion: that is equivalent to 20 Channel Tunnels. So, effectively, over the next decade, we have got to build two Channel Tunnel equivalents every single year. That is going to be a major challenge financially to raise the capital for that and that is why energy market reform is so important. It’s going to be a real challenge for our engineering and skills base in this country, because we don’t have the number of skilled engineers to do that at the moment. So we need to make sure that we are getting those people through our schools and educational establishments. Is it doable? Yes, I think it is; but it is going to be a very significant challenge.

Alistair Phillips -Davies: I would echo that. The things like the supply chain, i.e. the manufacturing base for that, we are investing in the manufacturing base on the renewable side. On the nuclear side, there’s a whole generation of nuclear engineers who have probably got older and substantially retired now, so if we are going to build things like that; the amount of transmission and distribution going to underwater high-voltage DC cables, which is not really technology that we, as a company, have used before, even though we are a transmission operator. There are an awful lot of challenges there.

So all of the three points that Paul makes are very valid but, funnily enough, the supply chain and the engineering base may almost be the biggest one, even though financing is going to be the one that’s going to come up time and again. That’s probably the principal one that the energy market reform will try to address but then, behind that, we all have to be able to invest in and draw in the skills that we need to try to get a build of this level going. I suspect that we have got to aim relatively high but we will probably still miss, as is usually the case when these things tend to be a little bit more expensive than you would think and they often come in a little bit later than you expect, as well.

Paul Spence: If I may, to use a slightly different analogy to Paul’s; when we talk about our investment programme, together with Centrica in our new nuclear programme, we are talking about the equivalent of an Olympics programme at Hinkley Point in Somerset and the similar-sized programme at Sizewell in Suffolk. We are talking about the order of £10 billion to build the twin plants at each site. We know that means 5,000 people at peak on the construction. We know it means about 900 people during the ongoing operation of those stations. I think that the thing to give comfort is that we are building our workforce today knowing that we need to do that. We are already investing in some of the training infrastructure to make that happen. We have plans for new training centres. We are already getting the supply chain moving in terms of letting contracts and telling people what we expect. The UK supply chain can play its part in that. It has to step up. We have to address the productivity of UK construction workforce to make sure that we can deliver on time, on budget, to address Alistair’s point.

Q74 Albert Owen: I deduce from what you are all saying that the skills thing is moving forward and that you are comfortable with the technology and that will be developed, but the difficulty is to get the investment, the supply chain. And the potential investors need the confidence, and that is down to-

Phil Bentley: Policy. It’s down to policy. It goes to that point earlier on-going full circle and being slightly provocative-if the output from £200 billion of investment is expected to be sold at a loss, then the maths doesn’t work. So that’s to the point about the margins in the supply business, because all of this investment results in more energy to be sold into a low carbon UK marketplace. We can’t sell that at a loss. Centrica have committed over £15 billion over the next seven years. No board is going to sign off that scale of investment without some understanding of the policy frameworks that we are going to be operating in.

Q75 Albert Owen: To push it, what action is needed from Government?

Phil Bentley: Energy market reform has to lay down the rules on how we transition to a low carbon technology and the sooner we have that clarity, the sooner we can start building. Because next year we face a go/no-go decision as to whether the first new nuclear plants get built in Britain. I can only speak for Centrica and British Gas. If we don’t have clarity, it is going to make it very difficult to give the green light.

Q76 Albert Owen: What is the lack of clarity at the moment?

Phil Bentley: How is the carbon regime going to operate; are you going to have capacity payments for dealing with intermittency? There are a lot of structural questions. We all know what the questions are. It’s only through DECC that we can get the guidance to start investing. That is the biggest thing.

Q77 Albert Owen: Is that the consensus on-

Paul Golby: I think all the companies are very close on this topic, that we need to understand the carbon pricing mechanism. My company would argue for a low carbon obligation to drive this investment. These are decisions that we now need taking very quickly. I think DECC have promised to release their consultation prior to Christmas and I think, even in the political world, Christmas is a pretty immovable date. So I hope to see that consultation in the next week.

Q78 Albert Owen: So that is how you will be spending Christmas?

Paul Golby: That’s how I’ll be spending Christmas, reading a consultation document; yes.

Guy Johnson: I think if the market structure is right, then we have the possibility of encouraging new equity investors, because that is a key issue in relation to the pre-development stage. One of the things that we have found of late-and perhaps it is one of the reasons why I would share calls to you about a low carbon obligation-is that the element of confidence now in the renewable obligation has resulted in us being able to find equity partners for our offshore wind farm at Gwynt y Môr, which is a 570 MW wind farm off the North Wales coast. So I think that if the market structure is right-and perhaps the Green Investment Bank can also play a part in encouraging investors at that pre-development stage, but the precursor to all of that is an appropriate market structure.

Phil Bentley: We’ve talked about capacity of markets, but UKPLC is in a competitive market for investor funding. British Gas is a British company, but four out of the Big Six are based in France, Germany and Spain and they have choices as to whether they invest in Spain or France or Germany or the UK. If we don’t create a competitive investment framework in the UK then the funding isn’t going to come to Britain and that’s where Government can help.

Q79 Chair : We are coming to the end of our question period. I would like to ask you briefly to reflect, as far as renewables are concerned, on whether you consider the overall target of 15% of energy from renewables by 2010 is achievable and, in particular, whether the target of 30% to 35% renewable electricity is achievable. How do you think we are doing on that and do you think we can get to those targets?

Alistair Phillips -Davies: I think it is a very tall order and the points that have just been made about policy framework that relate to renewables are probably the same to the extent that people put things like low carbon floors in there. People tinker with renewable obligations. Even looking at the review of Ofgem, I think people need to have real clarity very quickly on what is going to happen. I think the more change that we have around renewables, around Ofgem and things like that, is going to make people more nervous. It’s going to make it more difficult to find financing and potentially more expensive. And, therefore, certainty and some of the getting on with it is what is really required and I think it is a big challenge to get there. We potentially can on things such as a low carbon obligation.

We, as a company, are probably more sceptical of that because I think, whatever happens, nobody here is asking for us to write a blank cheque for developers on putting some of these things forward. Therefore, looking at the regimes that have been talked about and which most people have accepted-like carbon floors, capacity mechanisms and the renewable obligation-we’ve seen more than enough to be getting on with now. Probably, what industry needs to do when Government are going through with their piece of work is make sure that we are doing all we can to reduce the cost of building this sort of stuff and ensuring that the supply chain is there. So we have our part to play.

Q80 Chair : Do you think there are any issues relating to transmission charges, particularly in hard-to-reach areas, or do you think that is an issue that has been addressed?

Phil Bentley: There’s a bit about getting planning approvals to some of the connections for the renewable offshore-the grid connections. We’re building one at the moment offshore, The Wash, and it’s taken us a huge amount of time for English Nature to allow us to put a trench through for the connector cable because it passes through some salt flats where there are some particular worms. There are a lot of worms in that area and we only wanted to build a narrow trench and it took a while. So I think the sooner we can get permission to get on with these things, the better. Today, only 3% of our generation comes from renewables and to hit the total energy target, generation has to pick up the lion’s share, which means 35% by 2020. So it is going to be tight. I think that is where, though, having the new planning process and the national policy statement to start to join up the big picture vision with what needs to get approved to deliver against those emissions targets is very helpful; because you can see that we have got to start approving some of these projects faster than we have done in the last four or five years.

Guy Johnson: I think I’m less clear on targets but, can I just say, we are getting on with it. We opened real plants last year. We have a joint venture with SSC at Greater Gabbard, which is the world’s largest offshore wind farm, in construction. I talked about Gwynt y Môr, which, as we announced in June of this year, for the joint venture as a whole is a £2 billion investment. So it is happening.

Chair : I think perhaps straying into national policy statements again is a further interesting debate but I think we need to conclude our discussion this morning. Gentlemen, thank you very much for your evidence this morning. We are very grateful to you for your attendance, which I know has been under some difficulty, and we look forward to further developments in this.