Energy and Climate Change CommitteeSupplementary written evidence submitted by EDF Energy
EDF Trading
Both EDF Energy and EDF Trading (EDFT) are wholly owned subsidiaries of EDF SA.
EDFT is engaged in the trading of global commodities, including oil, coal, carbon, gas and electricity. It offers market access services (ie access to wholesale markets to meet the needs of industrial participants) to all EDF Group subsidiaries, including EDF Energy, and also to third party customers ranging from utilities and commodity producers to banks, investment houses and governments.
Whilst being a UK-based entity that employs over 1,000 people world wide, it does not form part of EDF Energy. It is important to note that EDFT and EDF Energy are separate legal entities with resulting separate accounts. Based in London, EDFT’s activities are global and extensive. For example it:
Operates a fully integrated coal and freight business with multiple sources of supply worldwide including South Africa, Asia, the US and Eastern Europe; and
Has a midstream business that ranges from a fleet of ocean-going dry bulk carriers to inland rail and barge logistics, coal terminals, LNG re-gasification, underground gas storage and crude oil marketing and transportation. Across Europe and North America, it has extensive power transmission and gas interconnector capacities.
All profits—or indeed losses—that EDFT makes through its global operations are tracked and reported separately to those of EDF Energy. Any assessment of its profitability should therefore reflect the extensive and global nature of its activities rather than the fact that it is based in the UK. This choice is a testament to the skills and resources available in London to host an international trading business.
The 2011 profit before tax for EDFT was €614.5 million (answer to Q88).
The Committee may wish to also note that for EDFT, the difference between UK GAAP accounting and IFRS accounting is minimal.
All transactions between EDF Energy and EDFT take place on an arm’s length basis, including the payment by EDF Energy of brokerage fees for providing access to the wholesale energy markets. Furthermore, EDFT like EDF Energy, operates to strict risk mandates set by EDF Group to ensure that its overall risk is contained.
Brokerage fees paid to EDF Trading for 2012 were around £1.3m. These are based on standard brokerage fees applicable in the industry, and are reflective of a highly competitive market for brokering services.
Intra-group Loan
The Committee asked about an intra-company loan of £1.6 billion provided to EDFT. Our parent company in France does make loans to EDFT to help cover its short term and long term capital requirements in order to ensure it maintains a sufficiently strong cash liquidity position and strong independent credit rating. As the Committee will be aware, access to credit is a key requirement of participating in wholesale markets. However, for the avoidance of doubt this loan would be between EDF SA and EDFT and not between EDF Energy and EDFT. Interest on these loans is charged at commercial rates, in line with the relevant tax legislation, so there can be no question of them being used as a means of repatriating profits (answer to Q91).
EDF Energy’s Segmental Accounts
EDF Energy has completed the Business Function Table according to Ofgem’s requirements. In no case does “another part of the business” have profit and loss (P&L) responsibility for a particular supply or generation activity.
May 2013
Additional Questions Received on 24 April 2013
Questions on Trading
These Questions are Related to Electricity Only
1. What percentage of your total electricity trades are over-the-counter (OTC) versus trades on the wholesale exchange?
EDF Energy traded a total of 176TWh of electricity for delivery in 2012 (97 TWh of sales and 79 TWh of purchases) out of which 21% were executed on exchanges and 71% were brokered on the OTC market through EDF Trading. The remaining 8% was traded via structured bilateral contracts.
It should be noted that the majority of the trades settled through exchanges have been executed on the N2EX auctions on our behalf by EDF Trading. It forms part of EDF Energy’s contribution to the reliability of the day ahead index achieved through a gross bidding agreement with N2EX entered into in April 2012.
2. What are your criteria for trading OTC versus on the wholesale exchange?
Since the advent of the New Electricity Trading Arrangements in March 2001, the OTC electricity market has been the main route to the wholesale market for energy companies who wish to forward hedge their electricity market risks.
In our case, the majority of this volume is executed through EDF Trading which provides market access services at arm’s length conditions for our hedging orders.
EDF Energy hedging activity is dependent upon the liquidity of the market. Liquidity closer to delivery is well developed on exchanges whereas the more forward time frame requires access to the OTC market.
Exchanges, such as N2EX and APX, are a growing part of the traded market, but they are focussed on prompt periods at this time and this only really provides a service for short term position management.
The many published sources of forward OTC product prices provide a transparent market benchmark upon which to base any market transactions, for example, the pricing of large B2B market-indexed customer contracts.
3. What is the average difference in price for your OTC versus wholesale exchange trades?
EDF Energy’s only access to exchange traded products is in the prompt timescale to optimise the portfolio position, which is entirely forward hedged, for short term fluctuations in market conditions (eg due to weather, unexpected outages).
The average price achieved with these trades is reflective of our residual ability to balance our portfolio position from our physical assets in the event of any changes in supply conditions (eg outage at a power station) or demand (increase in forecast demand of our customers).
In 2012, EDF Trading traded on the N2EX auction on our behalf at an average of £45.30/MWh. APX trades, which EDF Energy transacted directly for the purposes of short term position management (balancing), were priced at an average of £45.75/MWh. Both of these sets of trades were done during 2012 using short term instruments at different moment in time. Under no circumstances could these average prices compare to the average price of EDF Energy’s forward hedging activity.
To smooth its long term price risk, EDF Energy gradually secures purchases and sales on the market as liquidity allows. Purchases and sales realised for 2012 delivery were first entered into in March 2009 and progressively developed over 2010 and 2011 to reach average price of £49.40/MWh.
4. Does your company deal in long-term contracts? Who has access to the information contained in the contracts?
In 2012, the following volumes were delivered by long-term contracts:
12TWh was sold to Centrica indexed to market prices as part of their 20% ownership of EDF Energy’s nuclear output. The Secretary of State, and other relevant government officials, are party to all information pertaining to this contract given it was put in place at the time of the British Energy acquisition.
14TWh was sold via structured trades to a mixture of counterparties and large customers. Please note that these deals were inherited by EDF Energy as part of the British Energy acquisition and most of the counterparty based structured trades expired March 2013.
EDF Energy also has a number of long term power purchase agreements with small generators in its portfolio, namely wind farms. These contracts are volume variable and market indexed.
These Questions are Related to Gas Only
5. What percentage of your total gas trades are over-the-counter (OTC) versus trades on the wholesale exchange?
EDF Energy traded a total of 2 billion therms for 2012 delivery, of which:
95% was executed through EDF Trading as our market interface for forward hedging purposes.
5% was traded on the on-the-day Commodity market (OCM) exchange by EDF Energy for balancing purposes (ie the market period just before physical delivery which is used to ensure that our physical inputs and off takes to the gas network are balanced).
Proportions are broadly the same on buys and sells.
6. What are your criteria for trading OTC versus on the wholesale exchange?
EDF Energy predominantly trades where market liquidity permits. On the longer term products the OTC market remains dominant. However, in the shorter term, the OCM exchange offers increased market liquidity and the only Out of Hours liquidity. EDF Energy’s use of market reflects this liquidity shift.
7. What is the average difference in price for your OTC versus wholesale exchange trades?
The majority of the gas traded by EDF Energy on either the OCM exchange (On the day Commodity Market) or OTC is not for overlapping time periods, ie the majority of our Within-Day and Day-Ahead trades are done on the exchange but this is not possible for longer dated trades as the platform does not allow trading in longer timeframes so the prices below are not comparable as they are not for like for like products.
For 2012 delivery:
Gas trades on a forward hedging basis for 2012 delivery have been at an average price of 62.82p/th and were first placed in September 2009.
Gas trades through the OCM exchange platform for 2012 delivery have been at an average of 60.6p/th and are traded using short term instruments.
8. What announcements have you made in accordance to REMIT? Where is it posted? If you trade gas outside of the UK within the EU, where do you post announcements for other EU markets?
EDF Energy does not operate any physical assets that require REMIT publications for gas. West Burton B CCGT, as well as all other power generating assets, is published as part of the EDF Energy electricity REMIT website since early 2012 http://remit.edfenergy.com
The Hole-House Farm gas storage facility operated by EDF Trading is fully compliant with REMIT requirements and has published a number of announcements on its own website, and more recently on the newly established REMIT website operate by National Grid Company which provides a platform for market participants to publish in a centralised place https://www.remit.gb.net
9. What access to market information do your traders have about any other division of your company? Do they have access to storage levels, upstream information if applicable (geological data), or daily production/consumption data?
EDF Energy does not operate gas assets at the moment. Operation of the Hill Top Farm storage asset (currently under development) will be handed over to EDF Trading, and operated under a single control centre with its own Hole House Farm storage facility. Accordingly, all information required to be published under REMIT legislation will be made available by EDF Trading either on the NGC REMIT platform or its own website (in the event the NGC platform is not available). EDF Trading also receives gas from an EDF SA (partly) owned offshore facility through an off take agreement. Any REMIT relevant information in this case would be published by the facility operator. EDF Trading is not allowed to act on any REMIT inside information relating to EDF Group assets prior to publication and controls are in place to ensure our compliance with this regulation.
10. Does your company deal in long-term contracts? Who has access to the information contained in the contracts?
EDF Energy has no long-term gas contracts.
Additional Questions
11. How many of such “immobile” customers are there?
Approximately 510k (9%) of our domestic customer accounts have not changed their tariff or account since 1998. These customers are supplied under our evergreen standard variable tariff, which has, on average, been the cheapest standard variable tariff of the major suppliers for 45 of the last 52 weeks.
12. Do you offer all customers all of your tariffs? If not, what are the reasons for not offering the full suite of tariffs?
Every tariff we offer is available to all existing and prospective domestic customers.
However, customers with an agreed debt repayment programme through a prepayment meter may be unable to access the full range of tariffs and discounts until they have repaid the debt, for example, because they are unable to pay by direct debit. These customers are supplied under our standard variable prepayment tariff, which is, on average, the cheapest standard variable prepayment tariff of the major suppliers.
13. What can you do to reduce the cost of customer service yet also improve their quality?
In recent years EDF Energy has made a significant investment in its customer service systems and this has been supported by significant investment in training and quality. This has also included the introduction of 24 hour live web-chat services and improved online account management tools.
As reported on our website we have started to see the effects of this investment with improvements in our customer service performance in 2013:
(http://www.edfenergy.com/products-services/for-your-home/customer-commitments/#).
We expect that continued improvements in efficiency and quality will be realised over the coming years.
14. What proportion of calls/correspondence are caused by billing queries and by how much do you anticipate this will fall after the advent of smart metering?
Currently approximately 22% of our customer calls are caused by billing queries. We anticipate that smart metering could bring about a 50% reduction in billing call volumes post 2020. However, we expect this to be partly offset by an increase in the average handling time of calls by up to 25%. In the shorter term, we are expecting an increase in call volumes handled in customer services as part of helping customers transition to smart metering.
15. If the billing problems were sorted out, do you think this could encourage new entrants to come into the Supply business, as you might not have the big upfront cost of establishing large customer call centres to cope with the inevitable problems.
As can be seen above, although we would expect a reduction in call volumes post 2020 as a result of smart metering this will only partially reduce the overall demand on customer services and will also be preceded by an increase in call volumes.
However, recent years has seen an increase in the number of new entrants in the domestic supply market, with three new entrants already in 2013.
EDF Energy
May 2013