We shall start, as we did with the previous sessions, by inviting the three witnesses to introduce themselves, giving their names and explaining which organisation they represent.
Welcome, ladies and gentlemen. I was going to ask how much you welcomed the debate about tariffs. We have initiated quite a wide-ranging discussion, part of which we enjoyed earlier this afternoon, as you might imagine, about the objective of greater transparency and simplicity, and the effect that that will have on people’s capacity to navigate the system—the energy prices available to them. How important do you think that that is for particularly vulnerable consumers? What advice would you give, because we are involved in a consultation on this, and I would respect and value your comments?
Jenny Saunders: NEA has for some time tried to highlight the difficulties that low-income customers in particular have had in engaging with the competitive market. That is partly because of the offerings to them—the lack of good deals available, particularly for people on pre-payment meters—but also because of their trust in the market and their legitimate fears that they might move to a worse deal. We found that when people were switching on the doorstep, for example, they quite often did not understand the offerings and were switching to something that left them worse off.
Having something on the face of the Bill to introduce transparency and simplicity would be very welcome. Going beyond that, we would advocate support for local, trusted intermediaries who are able to explain and to engage people in the marketplace. That is something that DECC is currently consulting on, and we have strongly suggested that, as well as having a network of agencies at local level that are encouraging people to switch, that network should also be encouraging them to take up energy-efficiency measures and looking at their benefits and levels of income, because a lot of people in fuel poverty will not be maximising their incomes through the benefits system. There are some welcome opportunities, but there are difficulties. We will see how effective some of the schemes are that are being funded through a DECC grant aid for collective switching. How effective will they really be at engaging the poorest because, as I say, they have traditionally not benefited from tariffs?
Gary Smith: Minister, as someone who is going through the process of switching at the moment and sees how difficult it is, I have great sympathy for people who are trying to remove concerns about the tariffs.
As a trade union, we welcome the commitments around transparency and simplicity, but the rhetoric is easier than the actual delivery. There are a couple of important things. In terms of helping people with their bills and giving them confidence in what they are paying, the key thing for us is smart metering. People will pay for the energy that they have used, which is why we think that smart metering roll-out will be important. The other thing—we think this is a deficiency in the Bill—is about the system of regulation. People should have confidence that the regulator who is supposed to be on their side is on their side and is delivering on their behalf. The fact that there is no systematic overhaul of Ofgem and of the regulation, as we see in the Bill, is a huge deficiency.
It is also easy to talk about simplicity, Minister. Actually, when you look at the detail of the Bill, in terms of the energy market we see—as it has been argued—that there is a huge amount of failure, but it is also massively complex. Government after Government have presided over this complexity. So the Government can talk about simplicity of Bills, but what is driving costs for customers, or a lot of those costs, is hugely complicated and, with respect to Members of Parliament, I think you would have difficulty explaining to your constituents on the doorsteps what they are actually paying for.
Before we move on to wider issues, do any hon. Members want to ask consumer-orientated questions on tariffs, consumer redress and such issues? If not, we will move on to the heart of the Bill and the need for electricity market reform.
Gary Smith, we have in our packs a copy of the statement that you made—I am not sure whether it was from when the draft or final Bill was published—about the changes. What are your views on the design of the counterparty? Do you think that it meets the objectives that you set out in your statement?
Gary Smith: The energy companies are very happy that the Government or a Government body is going to be the counterparty. I think that is what you are referring to. Throughout the Bill, we see certainty for energy companies in terms of income and price, and maybe that is required. What we do not see, however, and what would be an important trade-off in this for me if I were in government, is certainty around what is going to happen with bills for customers going forward. If energy companies are getting the right return—let us be honest, they are going to need it—customers need to have a degree of certainty over what is going to happen to their bills. We need honesty in the debate on energy prices, because energy prices are going up and will continue to rise, as the Bill recognises. I am not sure whether that answers your question, but the provision is required and is necessary.
Perhaps I can try to ask the question a bit better. When the draft Bill came out, there was talk of multiparty counterparties. Following the response to the Select Committee’s report, we now have a model with a single counterparty, which has been broadly welcomed. Do you have any concerns about the way in which that counterparty is likely to act? Does there need to be more in the Bill to provide some clarity and detail on that, or are you satisfied that the intent given in the Bill is enough to be going on with?
Gary Smith: In terms of our comments, we need the guarantees to ensure that the investment is delivered. That is absolutely important. Having the single counterparty is probably the right thing. Whether we are the party that is best equipped to give a detailed answer on this point about counterparties, I am not sure. I do not believe that we are. We have tried to focus our comments on things that we are equipped to deal with and that we have experience in. We have tried to focus our comments on regulations, claims about economic growth, job creation, and the Bill providing for the huge decarbonisation of the energy sector.
Is it your view that the counterparty, as part of this set of issues in the Bill, gives enough to drive investment and to create the jobs in industries in which you have members and expect to get more members from? Does more need to be done to provide that?
Gary Smith: My understanding—we speak to all the big energy companies regularly—is that if the price is right, they will build infrastructure and invest as required. If the price is not right, we will have a problem. The fact that the Government or a Government agency will be the counterparty is helping confidence. It is bound to do that, and we argued in favour of that.
You talked about jobs, and we question the suggestion that the Bill will create thousands of jobs. The case around job creation and economic growth is unproven at best, because let us not forget that, while we are talking about investment, Ofgem is talking about huge cuts in investment in electricity and gas transmission and gas distribution. Thousands of jobs are going as we speak, and if we do not get the right investment in things such as carbon capture and storage, the indigenous coal industry will be finished and more jobs will be lost.
Jenny Saunders: The assumption that we have gained from the impact assessment is that the proposal will reduce investment costs by some 1.5%. If we are correct in our understanding, that would lead to a potential 5% to 9% drop in energy prices. We are dependent on the analysis in the impact assessment and do not have the internal resource to scrutinise that. We depend on Government to produce transparent analysis. We have difficulty in understanding some of the assumptions that have been made, because the Government are saying, “We are not entirely sure how to model this.” All the way through the impact assessments, they make assumptions that may be in a very large bracket. More work probably needs to be done on that.
Gary Smith: Just to be clear from the GMB’s perspective, having a single counterparty reduces risks and therefore should reduce costs. I am not sure that the Bill does give consumer certainty over what is going to happen to bills. It does give energy companies certainty over what they are going to get in returns. That is not fair.
Mr Gary Smith, in your written submission, you acknowledge the importance of the Bill’s three objectives: the security of supply, the decarbonisation and the reduction of fuel poverty. In your remarks today, you have alluded to what in effect could be stated as a further objective, namely, economic growth, seeing how the energy system feeds into the wider economy.
You make specific charges about Ofgem in your submission. I am sorry, I was out of the room when you started speaking about Ofgem, so I just got the tail end of your remarks. Can you elaborate further why you think Ofgem has made the proposals it has, which you feel will undermine growth in the economy quite badly and undermine skills and jobs?
Gary Smith: Thank you, Mr Gardiner. I don’t think it is an assertion; I think it is a matter of fact. I see day in, day out, the consequences of the Ofgem Rio funding process in terms of jobs and safety. Safety is being compromised and skills are being lost—the much-needed skills to equip the economy for the future.
We believe that the Bill does not deal with the systematic failings in regulation. The current system of regulation is dysfunctional. We think that is demonstrated by the fact that the Rio process means there will be huge cuts in the electricity and gas sector, and jobs are being lost as we speak. There is no provision within Rio to ensure that there is a skills base for the future in this country. There is no social provision in terms of jobs. What customers and the British public can look forward to is higher bills but little by way of investment in jobs and skills, we fear.
Nobody could deny that the current system of regulation has failed in its primary responsibility to customers over their bills. You know that very well because your constituents are furious about the increases in bills over the past period and, importantly, they do not understand why the bills have been hiked in the way that they have. Part of the difficulty with Ofgem is that it relies on market mechanisms in order to deliver competition, which is supposed to deliver better prices. It has failed, and we have to be honest about that. What you are dealing with here in the Bill, as we see it as a trade union, is in large part about market failure.
We can talk about capacity mechanisms, contracts for difference, feed-in tariffs and all the rest of it, but what we are talking about here is subsidies. We are having to subsidise companies to produce energy and we are having to subsidise companies to set aside capacity for days when we are going to need additional power. I think I have made the point in the past to your constituents. They would be forgiven for thinking that this is the common agricultural policy in the British energy market.
It is a troubling suggestion that the regulations proposed by Ofgem will compromise safety. May I ask you to send some further details to the Committee as written evidence?
Gary Smith: Let me just say this to you, Mr Gardiner. The changes are where we are going to lose skilled workers in areas such as the gas industry—first call operatives. Reductions in gas mains replacement will compromise safety. We have had a very wet summer, and we now have a cold snap. The King report, which dealt with and instigated the massive gas mains replacement programme, came about as a result of weather conditions similar to this and the explosions that resulted.
Can I just say this about jobs, because it is important? We think that the suggestion that this investment is somehow going to facilitate the creation of jobs is unproven. Apart from what I have said about potential job losses in coal and the energy sector because of Rio, there is a serious question mark about whether British manufacturing is well equipped to deal with, meet the challenges of, or seize the opportunities offered by this investment. Let’s not forget that a factory in the north-east, the only factory that produced an important component in the electricity sector, was closed by the German owners last year despite a full order book. That work was transferred back to Germany. So this suggestion that somehow British manufacturing is going to benefit—we do not see that. There is no industrial strategy backing this up, and that is necessary if we are seriously going to create jobs and get the full benefits for this investment. Sorry to go on, Chair.
I want to delve a little deeper into the issue of jobs. The reason why this legislation is so important and there is so much demand for this Bill, is that we are facing the effects of a lack of investment in the energy sector over the past 13 to 15 years. A lack of investment must obviously have equated to fewer jobs in the sector. We are now looking at a piece of legislation that has been introduced to release up to £200 billion for renewing, refurbishing and bringing on new forms of generation in the energy sector. I cannot understand why this particular measure is going to deliver fewer jobs than the past 13 years of lack of investment.
Gary Smith: I think that, in principle, there is a lot of merit in the Bill, but the argument that it is somehow going to create jobs and economic growth is, at best, unproven. We have had a huge building boom over the past 20 years, but the reports I read say that the UK economy now has less skilled labour than 20 years ago. The danger is that a lot of the work is sub-contracted out. There are no obligations on sub-contractors with regard to sustainable skills or investment in job creation. The danger is that we get things done cheaply and with little regard for the future.
Let me go back to this point about the supply chain. I worry when I find myself agreeing with Michael Heseltine, but we do not have an industrial strategy to back this up—
Gary Smith: The truth is that, to a large extent, the components in these power stations will be built in Korea and Germany, and they will be connected up with Chinese-made cables. In terms of British skills and jobs, we are the Meccano men and women; we bolt things together and the high-value stuff is produced elsewhere. That is what is happening on the ground, I’m afraid.
Let me focus on this. When we talk about buying manufactured goods from abroad, I understand exactly the point you are making. However, investment in energy infrastructure has to be done in this country, and a whole raft of jobs will be required. Also, there has been quite a lot of investment in apprentices and the engineering and skills sectors in order to meet this demand, not least in my constituency. So I still find it very difficult to understand why this is not going to deliver more jobs.
Gary Smith: We have not said that it is not going to deliver more jobs. We are saying that there is a huge issue with underemployment at the moment, so presumably people can do more and pick up the slack. Look at the experience in engineering and construction over the past 10 or 15 years. It was presented as British jobs for British workers, but with some industrial disputes in the sectors—that was never true. It was about contractors trying to bring cheap labour in under the agreed and established rates. What happens is that companies bring in labour and that labour goes back to wherever it came from without leaving any residual skill base. There are some great examples out there of investment in jobs and skills—there is no doubt about it—but without an industrial strategy backing this up, we will not maximise the opportunities.
Before you come back, Laura Sandys, I want to say gently that we have hours ahead of us when we will be able to debate the merits of the Bill. These sessions are largely for us to put questions to the witnesses, rather than for us to debate with them. I know that you have further questions.
Gary Smith: Chair, I just want to say that we are big supporters of the nuclear industry. It creates quality jobs. If you get the opportunity, you should look at some of the good stuff that we are doing with EDF. We are in social contracts, which are about investment in skills, jobs and communities. If we get the right funding for carbon capture and storage, that will create jobs as well.
Jenny Saunders: Can I just add that the insulation industry is concerned about the impact, not necessarily through the Bill, and the loss of jobs in the short term in the insulation and heating industries? If we bring forward some proposals through the Bill for demand reduction, we might create very useful jobs in the insulation industry as well. I want that to be considered by the Committee.
I will be asking about demand reduction. How do you envisage measures to develop permanent demand reduction being incorporated into the fabric of the Bill? What areas would benefit the most from legislative touch, shall we say, to enable the incorporation of demand reduction on a permanent basis into either capacity processes or contract for difference processes? How would you distinguish between measures to develop demand-side response and measures to develop demand-side reduction within the Bill?
Peter Smith: We are in the process of responding to the DECC consultation on the options proposed to potentially pull through electricity demand reductions. Broadly speaking, as you said, you have the capacity market that it could sit within, you have an energy efficiency feed-in tariff, you have proposals to potentially introduce a non-domestic ECO, and who could forget the energy efficiency feed-in tariff, which is popular among a growing number of NGOs?
There are two things to say, really. We are very supportive of the role of electricity demand reduction in reducing exposure to rising wholesale prices through reducing the consumption of what will be quite high-cost energy services in the future. It has positive merit. We are in the process of evaluating the options that the Government have consulted on. One concern from our perspective is that the Government’s analysis to date is broadly that the domestic sector is largely covered by the existing suite of policies. We would question that assumption. The worry is that you would see, in pulling through any of those four options, the imposition of a potential additional consumer-funded mechanism, which would be limited to the non-domestic sector, with clear implications, as was discussed in the previous session, for domestic consumers potentially picking up the tab for non-domestic customers.
I am sure that Members might want to come back on the positive macro impact of supporting demand reduction over and above centralised generation. We recognise that there is a positive story to be told there, but a lot depends on what you assume the cost of the energy mix is going forward, and where you pin the incentives.
In our response, we are looking to flag up the opportunities for other measures that could potentially be pulled through by making minimal tweaks to primary legislation or simply changing the institutional arrangements for the green investment bank, and by enhancing the role of electricity district network operators to realise the value of electricity demand reduction in the context of reducing reinforcement costs. I would be happy to send something to the Committee about that issue should you be able to stand reading through it.
Gary Smith: Very briefly, in terms of flexing demand for domestic customers, we think that smart metering is going to be very important, both the right financial mechanisms and the technology. I am sure Members of Parliament are far better placed to say how that might fit in to anything in the Bill. As a trade union, we are conscious that hundreds of millions of pounds is going unspent that could be used to assist the poorest in terms of insulating homes. I appreciate I could be straining the issue as that might be thermal rather than electricity demand and conservation, but certainly we, as a union, as part of a group of trusted organisations, are working with companies such as British Gas to try to get communities to sign up to initiatives that will help to reduce their bills and their demand for energy.
Peter Smith: One further thing is worth mentioning in this context, in terms of the implication of helping households to reduce their exposure to some of the imposition of additional costs that may be coming down the tracks as a result of some of these policies. Built into the assumptions about the cost of the EMR policies are the Government’s—I say Government because it is not simply DECC, but the Department for Environment, Food and Rural Affairs as well—assumptions about products policy, that is, the degree to which existing legislation or EU regulation affects the consumption of electricity, and the assumption that the situation will steadily improve in the future as products policy ramps up across Europe. We question the saving that has been attributed to all households of circa £150: that largely means that, on top of the costs proposed by the EMR, you may be assuming that a household is in a position to buy new flat-screen televisions, efficient lighting and so on, but in the case of low-income households, sadly, those electrical appliances will largely be out of reach.
On that principle of the extent to which consumers may be underwriting things that are not necessarily coming back to them, what is your view on the relative merits, in terms of the cost to consumers, of a market-wide capacity payment mechanism as opposed to a strategic reserve mechanism?
Jenny Saunders: The Fuel Poverty Advisory Group is hoping to undertake some analysis of the distributional impacts. We are about to start that work. Our particular concern is the impact on the fuel-poor who use electricity to heat their homes. That is where we think there will be the greatest impact and where we would like to see some mitigating policies—new policies—because that is where we think there is a particular problem. You have 570,000 fuel-poor households using electricity; their average income is just over £11,000; they need to spend about 18% of their income to heat their homes and they have a very low household energy efficiency standard. They are the people for whom we think there could be a problem in relation to the Bill as the costs pass through, so that is where we would like to see some action.
Peter Smith: Just one further thing, if I may. The value of a capacity mechanism is predicated on having a sound understanding about the capacity of the generation on the system. Through my previous career, I happen to know that our understanding of the extent of embedded generation at a distribution level is limited, as is our understanding of the extent of things such as diesel generators in leisure centres, and so on. Until you get a full picture of either the potential to contribute to existing capacity or, in the future, the value that that capacity will bring in the context of a capacity mechanism, we are just digging around. That is my immediate thought about the situation.
Gary Smith: Domestic customers may have a role to play, particularly when smart metering comes on stream, but the fact is that the majority of people in the UK heat their home using gas, not electricity. Electricity is very expensive as a way to heat homes, and we made the point in our submission that gas is going to be the fuel of the future for many generations to come, whatever the intentions of the Bill, because it is ludicrous to suggest that people are going to move easily or quickly to heating their homes through electricity, given the huge cost to replace their gas central-heating systems with one that uses a far more expensive fuel. That is not going to happen quickly, easily or in the short term, so what consumers can contribute to flexing demand is probably very limited.
So they would be able to benefit, because, conventionally speaking, thermal efficiency insulation is going to help to save money on the gas bill or the heating oil bill, rather than the electricity bill, so there is not a direct correlation with EMR, but it is interesting that there is a significant number where thermal insulation would reduce electricity demand.
Jenny Saunders: That is where we would like to see the revenues that the Treasury will accrue from the carbon price floor and through the additional funds from the EU ETS. There is an urgent need for a new publicly funded programme, so that not everything is through levies, and that should be focused on those households that will be most affected by the Bill.
Unfortunately, the Red Book has already bagged the forecast revenues from those schemes and factored them into existing forecasts for public spending; there is no unused money sloshing around. However, from what you say—perhaps you might reflect on this—there is interesting potential for thermal projects to bid into a capacity market. I wonder whether you feel they are at a sufficient scale and are economically attractive enough to bid into a capacity market against, say, a proposition to build a new gas-fired power station.
Peter Smith: We have certainly looked at the aggregation models that are out there. As part of our wrestling with the consultation on electricity demand reductions, we have looked at energy efficiency power plants in China. There are energy efficiency power plants throughout China, but there is one in particular in Guangdong—
Peter Smith: Yes, it is a virtual power plant, but the interesting thing from the perspective of the UK is that the Chinese have used the fact of the energy saving potential of the non-domestic sector to pay for extensive measures in the domestic sector, particularly the replacement of electric heating in big tower blocks, where you can get scale and aggregation in the way you are inquiring about.
We also think, as we mentioned earlier, that DNOs should be particularly interested in projects such as replacing electric heating in tower blocks, for instance, as a way of reducing their future reinforcement costs.
Jenny Saunders: Could I add that if the Treasury felt able, very recently, to find £250 million for exempting intensive energy users, I think it should be able to find a similar amount, at least, for low-income domestic users? If it has all been bagged for other things, it has been unbagged for a particular group of energy consumers, and we would like you to champion that for the fuel poor too.
The point I am trying to make is the slightly easier one that the capacity market represents an opportunity to get that quantum of funding without having to wrestle the Treasury for it. I am just interested in the economics and the piece of evidence that you have offered today. Perhaps you could let the Committee have details of the projects. Have you contributed to the DECC consultation?
The big challenge is getting to scale. The biggest electricity efficiency projects to date are in tens of millions of pounds.
Gary Smith: Could I help? There are some good initiatives. Our members have been involved with Toryglen in Scotland. British Gas has put in heat and air pumps, and insulated high-rise blocks. Communities have benefited, and money has been saved, but scale is a problem. The Bill will not represent a paradigm shift in moving to heat homes or power our transport system from electricity. It will just not happen.
Let me help you with this. Four times as much energy is carried down gas pipes as electricity cables. At its crudest, you would have to quadruple the size of the cables up and down the country to move to heating homes with electricity. It is simply unaffordable, and even after £110 billion and all the implications for customers’ bills, it will not happen in the short term.
A question for Gary Smith. You have argued with great passion, although perhaps it was more a critique of industrial policy or lack of a skills policy and so on more generally in the economy, but you said that you welcome elements of the Bill. Can you share with us what those elements are?
You also said—I am paraphrasing—that where we give a level playing field to the energy companies, you want a similarly level playing field for consumers. In that context, do you welcome the simplification of tariffs that the Bill provides?
Gary Smith: I tried to deal with tariffs earlier. It is not as simple or straightforward as people suggest—indeed, the whole energy market which, with respect, has been created by politicians over generations, is enormously complicated. If you want to help people with their bills, smart metering and investment in smart metering is an important component.
What we welcome in the Bill is decarbonisation, particularly in electricity generation. We have always supported development of a balanced energy policy—gas, indigenous clean coal, renewables and, very importantly, nuclear. We think support for these industries is in the Bill, and we welcome the move to decarbonise electricity generation, but as I keep saying, that does not represent a paradigm shift in heating homes and in transport. That will not happen as a result of the provisions in the Bill.
I touched on nuclear, you raised the issue of jobs, and your colleague talked about a nuclear. We are passionate about nuclear. We can see where the jobs will come from and quickly, but what we would like to see is less focus on decommissioning and more on nuclear development. Our approach to nuclear and generating low-carbon electricity through nuclear is very piecemeal at the moment. That is the truth of the matter.
Do the NEA members have any further concerns about the impact of the Bill on fuel poverty and any constructive suggestions about the additions or amendments we could make?
Jenny Saunders: Overall we foresee an increase in fuel poverty over the next three or four years as a result of the Bill. That is on the analysis that we have been given, the impact assessment and the work by the Climate Change Committee. Longer term, they assume that fuel poverty may be reduced. However, short term, we cannot see any real mitigating policies. The policies now in place to help drive down energy bills through energy efficiency will not adequately address the problem. We are going to see increases in fuel poverty as a result of the Bill. That is the bottom line for us. We would like the Committee to come forward with proposals on how to reduce the impacts.
Our proposals have been for stepping up an energy efficiency programme. There are some opportunities for getting closer to consumers with the introduction of smart meters, but they in themselves will not deliver lower bills. People will need advice and assistance and some more progressive tariff reduction—tariffs that are cheaper for them to access.
Peter Smith: The clear thing that we were trying to flag up in our briefing is transparency about the impact. We believe that the Department for Business, Innovation and Skills has admirably supported the intensive energy users to articulate clearly or work out what the impact is likely to be for them in terms of the competitiveness of industry. We would ask Members here to support giving as much rigour to the analysis about what the impact is likely to be on low-income and vulnerable households and their competitiveness in dealing with the things that everyday life throws at them. Having done that, we believe that a consensus would emerge that further additional policies are needed to mitigate the impact of the EMR.
Gary Smith: Two things: first, insulating homes is absolutely essential; and secondly, there must be honesty in the debate, because energy prices are going up and we have to help people prepare for that. Some of the political discourse has not been honest over the past few years. It is easy to play Punch and Judy with the energy companies, but it serves to confuse people who are paying the bills. The key thing in terms of dealing with fuel poverty is to create jobs—create well paid, skilled jobs like those in the energy sector and in the manufacturing supply chain. That is why I am so passionate about the fact that what is missing here is an industrial strategy. Unfortunately it has been missing for many, many years.
Jenny Saunders: It is currently £2.35 billion. It is going to treble. All we pointed to is the fact that those costs will be borne by the consumer. We think that there are negative impacts to that on the most vulnerable. A final point is about the issue of trust. The Government are passing through more and more social obligations on to the energy companies, which will see those costs come through to them. Consumers need to be able to have faith that the price they are paying is solid. The Government need to be able to stand behind the companies once these decisions are made and say, “These are fair.” That is why we need the transparency. We need the consumer advocacy groups to be able to sit at the table when the deals are done and to have access to some of the analysis that is being done so that they can reassure consumers that this is a fair price; otherwise they will not come forward and engage with smart meters. They will not come forward and ask for help under ECO and engage with green deal. The companies are driving green deal.
Peter Smith: There also has to be a recognition of what sits outside the levy control framework in terms of programmes. NEA admits that some of those programmes are social programmes but some of them are not. We have got to be transparent about that. When we see these rises, £7.6 billion per annum is not going to be the final word on the matter. Consumers are going to pay more than that—
Order. I am afraid that has to be the final word on that, because our rules state inflexibly that I have to interrupt at this point. I thank the three witnesses for coming here and answering the Committee’s questions. We are most grateful to you, and we look forward to the piece of paper that you said you would send us.