Good morning. We will now hear evidence from Greg Jackson, CEO of Octopus Energy; Hayden Wood, co-founder of Bulb energy; and Juliet Davenport, the CEO of Good Energy. Thank you all for being here this morning. Members of the Committee will now ask a series of questions. Unfortunately, this session has to finish by 10.15, so brief questions and brief answers will be gratefully heard.
I am going to ask questions of Octopus Energy and then Bulb, because you are new entrants.Q
Octopus, do you think there is a risk that once the cap comes in, prices will all bunch around that cap level? Some people have said that switching activity might then reduce. Do you think that is a risk? Bulb, do you think that the cap will disincentivise investment in infrastructure at this stage, or do you think we can manage the infrastructure need separately?
To answer those three questions, on the bunching question we do not agree. There are 70-odd energy suppliers in the retail market currently. The majority of them price below any realistic level at which an absolute cap would be introduced. If there is any bunching, it will be the welcome bunching of the suppliers that currently charge their loyal customers more than an absolute cap by bringing their prices down to that level. Underneath any realistic cap, there is still plenty of room for competition, and competition among the challengers that have to fight for and win every single customer from scratch will be unabated.
In terms of switching rates, the first thing is that the idea that very high levels of switching is a good thing is outdated. For 20 years, consumers have been told that they have to switch; in any given year, no more than 15% to 20% will do so. All the rest are getting ripped off. What we need is a market in which you get good value without switching, and an absolute cap is a step in the right direction. It is an excellent measure that will help reduce the rip-off for those who switch and those who do not.
Finally, in terms of investment in infrastructure, Octopus Energy is backed by the Octopus Group, which is one of the largest investors in renewable generation in the UK. Frankly, something that makes the retail market behave more like a proper market—one in which consumers get good value by staying loyal to good suppliers—will generate more investment in the sector, rather than the current strangulation that occurs because of things such as predatory pricing, whereby back-book customers of large companies cross-subsidise loss-making deals.
It is going to be interesting—that is the answer. If you look at the current data in the marketplace, with no intervention whatever four out of the big six have a 25% gap between their most expensive tariff and their cheapest tariff. There are two that do not—two have closer to a 6% to 8% differential between the two. Interestingly, the one with the smallest differential also has the lowest standard variable tariff.
If you have an absolute price cap, you will obviously see that the affordability of the lower tariffs for the big six will be less: you will see some shrinkage between the highest price and the lowest price. That is what we are trying to do—to get rid of cross-subsidisation between the most expensive and the cheapest.
Will we see some bunching? We will see a narrowing of that. The question is: how do you want to achieve that? I am assuming that is what you are trying to achieve: the stopping of cross-subsidisation, keeping those people who are very faithful to their suppliers and making the suppliers pay for the discounts that they are using to get other people. I think there will be some slendering through that and the data is kind of showing that already, if you look at it.
I would say two things. The first, on the bunching question, is that a price cap would have absolutely no effect on how Bulb sets its prices. We have one tariff, so whether the cap is there or not we would continue to charge the rates that we charge now, and they are among the cheapest rates in the market. There will probably be some bunching, but it is going to occur because suppliers currently adopting these “tease and squeeze” tactics, where they have a great rate in the first year and then they charge more in later years, will be less able to do that: they will not be able to subsidise those teaser rates with expensive rates later. However, we do not expect the long-term cost of energy to change.
On your question about whether this will disincentivise investment in infrastructure, there are two parts of infrastructure that spring to mind: the first is network infrastructure and the second is generation infrastructure. On the network infrastructure question, those investment decisions are made by the regional power networks. Those are regulated local monopolies. They make a metronomic profit margin of between 7% and 9%. The price cap should not affect the profit margin that they will make here, so I do not see any reason why they should be disincentivised from investing.
On the question of generation, from where I am sitting the introduction of a price cap would be a big stimulus to investment in renewable generation, because it would mean that more and more homes could choose to buy their energy from a low-cost, efficient renewable supplier. We see no reason why renewable suppliers should be exempt from this cap, because my view is that Bulb can provide 100% renewable electricity, at a rate that is at least £200 lower than the cap.
I have a question about what you were saying about the fact you have one tariff. Why do lots of your competitors—your older, more established competitors—have this completely mind-boggling myriad of tariffs? Can you explain why, if you can manage to price up one tariff, they cannot do so?Q
I struggle to explain it. We do not understand why two people in the same street using the same amount of energy from the same supplier should pay different rates. That just does not seem fair to us. There are some suppliers who will provide a fixed tariff and then they claim that there are substantial costs to providing that fixed tariff, and that those costs then need to be reflected in a—
Like a hedging cost—exactly. But the irony with the cost of hedging, which you need to put on to a fixed tariff, is that very often those fixed tariffs are cheaper than the variable tariffs. That does not make any sense to us, which is why we have chosen to have a simple offer that consumers can understand, and we think that if you provide something that consumers understand, they are more likely to engage with it.
Most fixed-price tariffs are slightly cheaper because it is cheaper to do that. If you minimise your risk, you can guarantee that that customer will be there, and you can buy forward. If you do not know whether that customer will be there, you have a bigger risk, because you might buy the power and then they do not turn up. That is why, when you buy forward on fixed-rate tariffs, you tend to get those.
I do not agree with the myriad. There are too many tariffs—agreed—but there are some differentials. People want choice, and we must not forget what customers want. Some customers want to fix their tariffs for the next two years. Some customers—they are fairly rare—want to have a daily price, maybe even a half-hourly price, where they can see what is going on and change their behaviours as things go on. Whatever we do, we must make sure that we take into account a wide range of customers in this marketplace and actually deal with their needs.
From talking to our customers we know that there are different needs. Some want smart meters. Some love the idea of smart meters, and some hate the idea, so we have to work our way through that one. Some love the idea of fixing their power for the next five years, because then they do not need to think about it and can get on with the rest of their life, but some want to be much more active. For me the key thing is to look after the people who cannot make those decisions—who do not necessarily have the time, the capability or the access to go and find tariffs that are good for them.
My question, which has been alluded to, is about green gas tariffs. In the Bill it is proposed that they should be exempt from the price cap. What are your views on thatQ ?
In our view, green gas is an area that is developing in the UK. At the moment, we have a limited amount of green gas. I think the heat targets under the Climate Change Act 2008 are quite significant, and we as a country are behind those targets. We are doing relatively well on electricity, but not so well on gas. My personal view is that we need to try to seed that market. People want to choose.
It reminds me of the early stages of the mobile phone market. If we had said that everybody had to have access to mobile phones right at the beginning, we would not have ended up with a product that was cheap enough. So if you think about technological innovation, that is the way we should go. I think it is the same in this area. We should allow the early adopters to come into this marketplace, which is why there is the idea of giving an exemption on that. We should allow the infrastructure investment.
I am afraid I disagree with Bulb. A lot of work goes into making sure that there are contracts in place to allow for infrastructure investment. We are currently running a pilot with the Eden Project in Cornwall to look at how to buy storage in this marketplace. Our customers back that—they love that—but we would not be able to do that unless we had a whole team managing it and looking at that. It is the same with green gas. You can go and buy certificates, which is really easy. You can buy them on the wholesale market. But if you want to provide investable contracts that allow people to put money behind the projects, then that looks very different.
To add to that, today Bulb supplies green gas to more homes in the UK than any other energy supplier. We are growing so quickly that there are new green gas plants being built at pace in order to meet the demand from our future customers. We see absolutely no reason why a green gas tariff should be exempt from the Bill. The cost of providing green gas to homes is between £25 to £50, which is much smaller than the £200 gap between the best tariffs in the market and the most expensive tariffs under a capped regime.
In our view, what we cannot allow is a loophole that allows exploitative suppliers to create fake green products in order to evade the cap. It needs to be formulated in such a way that, for example, a company like Good Energy, which has highly informed customers that have chosen to be with an innovative supplier and chosen the price they are on, can carry on doing the good work that it does. But at the same time it should not allow what we are seeing already, which is two of the big six launching green products since the Bill has been under discussion. I do not want to sound cynical, but I cannot help feeling there is a connection.
That is exactly right. For example, if you are going to have an exemption, maybe a company would have to do 100% green products for all of its customers on all of its products. Something simple like that means you cannot get away with greenwashing a company that is really a cap evader.
Q I hear you saying that we need to encourage green innovation, while also insuring that there is no gaming. The approach in the Bill is that Ofgem will consult and then develop an exemption in a robust manner that reduces the risk of gaming but still allows innovation. Do you agree with that approach by Ofgem—that it should consult and, within those parameters, make sure that the green sector is protected?
This Committee has an opportunity to help 12 million homes that are currently languishing on standard variable tariffs and massively overpaying for their energy, and help them to reduce their bills. If we allow a loophole such as this into the legislation—let us say that it is Ofgem’s responsibility to manage that loophole and to keep it closed—we open it up to being manipulated or lobbied on or people working around it. We saw how the retail market review regulation years ago led to some unintended consequences in how the energy market is structured, and we now suffer from this “tease and squeeze” problem, which others on the panel have described. We would propose completely removing clause 3(2) of the Bill to eliminate any issues with unscrupulous suppliers introducing non-green tariffs and removing the effect of the cap.
I wonder whether the panel shares my concern that this also allows green tariffs to be seen as a premium product. To achieve our decarbonisation goals, what we actually want is for green tariffs to be seen as the norm. Therefore, to allow them to be sold as a sort of premium rather defeats that long-term aim.Q
My view is that you can have cheap greenwash tariffs alongside genuine innovative tariffs and you can have a differentiation. You have to focus on the big six and make sure that there are not any loopholes, but most of these companies have had people come to them as a choice. What is great about this market is that we do have choice. We have the cheap greens, and we also have the more innovative products such as us. Why would you close that down? You can see that we have been leading this market and making changes in it. We support about 140,000 homes who generate power in their own house. Those are the kind of innovations that we want to continue to do. To be honest, if you price-cap us, we are going to have no investment left for that kind of innovation.
I completely agree that we should have a differentiation and we should have products that are cheaper green. I met one of Bulb’s customers at the rugby the other day who was very enthusiastic. She was so excited by the fact that she is going on a green journey. I think that is brilliant, and that is what we should embrace in this. We should not try to close it down to be one thing or another. We should allow innovation within the marketplace.
On the cap mechanism, there has been debate about absolute versus relative, and I think there are split views across the panel. Why would we go with one versus the other? Some models are clearly more favourable to a relative cap, and others to an absolute cap. Why choose one over the other? The Government have come down for an absolute. I think that has almost got the majority view, but is it possible to find a cap level that is fair to everybody? Is there any trade-off between short-term customer needs and the long-term competitive market that we are trying to achieve? I will just throw that open.Q
That is the most important issue to address during these conversations. An absolute cap, as per the Bill, will provide a decency level beyond which no default customer will be charged. That is a good thing. However, at the moment, a loyal customer of, for example, one of the big six is paying £250 a year more than the price that the same company advertises openly to new customers. When I say “openly”, of course, you still have to type in 25 sets of details to see that price, because energy is too complicated. Under an absolute cap, we think that might fall to £200. It is still not going to create an effective market in energy, where competition thrives, if we do not do something about those tremendous differentials. That loyalty penalty is by far the biggest barrier to true competition in the energy industry, so we would propose that, with the protection of an absolute cap, it is the perfect time to bring in a simple limit on the difference between the cheapest and most expensive tariff offered by a supplier, to prevent it hoodwinking its customers into overpaying for loyalty.
The only reasons given during the Select Committee hearings not to have a relative cap were a concern that large suppliers—existing former nationalised suppliers—would raise their prices to fit a relative cap. The absolute cap prevents that being a concern. Bringing in the absolute cap provides the perfect opportunity to generate real competition underneath it by a simple limit on the loyalty penalty. If you do that, I think we will find a price war among energy companies, equivalent to that in supermarkets, where everybody sees the same price. In supermarkets, you do not need to switch, because the threat of some people switching forces supermarkets to bring prices down for everybody. That will be the effect of a relative cap underneath an absolute cap. It is one line of additional rule in the statement of a price cap that would enable this. I think that what you would find, when you take away the absolute cap, which is defined to be a temporary measure, is that you would have a truly competitive market in energy for consumers.
It is worth noting that we are all challenger brands. We have to fight for every single customer from scratch. Eleven challenger brands favoured a price cap, and split roughly equally between absolute and relative, with a lot favouring the combination. We are one of those companies, and that is because we know that will generate the most competitive market for the benefit of consumers.
This is not a position, so much as I just want to add in the risks that we need to be aware of with the absolute price cap, just to see whether there is anything else we can think about in terms of softening those risks.
One risk with an absolute price cap that I am concerned about is that Ofgem will be setting the prices. There is no downside to Ofgem with getting that wrong; if Ofgem sets that price incorrectly—I know you are seeing Dermot after this, so you can ask him the question—what are the sanctions against Ofgem for getting that price wrong?
And it is really difficult to set prices at the moment. I could ask my colleagues about the unidentified gas charges that we have just seen go from 0.6% to 2% of gas bills. This is a post-charge that we were not aware was coming. We knew there was some discussion of it, but it has been charged in arrears. How does Ofgem factor some of those things into its price? Does it put a risk in the price? That would be one question.
The other question is, because we set the price cap at a particular time of year, we will get everybody forward-contracting with their hedging position at the same time of year. The concern I have is that we might see some distortion within the wholesale market. Can we keep an eye on the wholesale market? I do not know whether that means that we have to ensure that there are extra powers to ensure that the wholesale market does not try to spike at exactly the time that everybody will be forward buying their power.
Those are the two risks that I am concerned about with the absolute cap. That is not to argue against it, but those risks are there and they need addressing whether in the Bill or in guidance from Ofgem.
Q I was going to ask whether it was okay if Hayden could give an answer. Greg was saying that he favours an absolute cap with a relative cap underneath it, combining the two options. I just wonder whether Hayden had a view on that.
We think that the top priority is the absolute cap. As I have mentioned before, there is a risk that homes will not get relief from the cap if that is not in. The idea of a relative cap underneath the absolute cap sounds fine to us, too. I think more price competition in the energy market is a great thing.
The third point I would mention on these extraordinary powers that Ofgem would have under this new set-up to set prices is that those powers need to come with more transparency. The formula and methodology for calculating what the absolute cap would be should be published so that there are no surprises for suppliers and we can plan. We also think there should be more transparency around the contributions that Ofgem receives from suppliers and the meetings that they hold with them, in order to ensure that there is more transparency.
IQ want to pursue the question of the absolute and relative cap. The way the relative cap has been talked about, it does not look like a cap to my mind. In fact, as Greg mentioned, it is a process of narrowing the range between possible tariffs that are offered, in order, I would have thought, to regulate the market subsequent to an absolute cap. Is it your view that that is the role that might be played by what is called a relative price cap? Or is it something that ought to be done in parallel with an absolute cap? That is, is it a market solution for the future or is it a cap solution for now?
You are quite right that the phrase “relative price cap” is not necessarily the most helpful name. It is a simple restriction—a simple limit—on the difference between the highest and lowest price from a single supplier. There is no reason at all why that would not operate underneath an absolute cap. In fact, there is no reason at all why it would not be defined at the same time as the pricing rules of an absolute cap.
If we did that, it would simultaneously attack the loyalty penalty, which is one of the biggest topics currently being looked at in pricing in consumer markets where you pay by direct debit. The real issue is that in consumer markets where you pay by direct debit—running an account—you do not know what you are being charged. If you do not know what you are being charged, companies essentially can have these enormous false differentials, and the opportunity, alongside this absolute cap, to bring the differential down is sitting there today. That would turbocharge competition because it would mean that, if a company wants to win new customers, it would have to bring prices down for its existing ones. But not only that: if it wanted to hang on to its existing customers, it would have to bring prices down.
We saw that British Gas provided a useful case study during the period when they were having to sit in front of Select Committees. They reduced their differential to basically zero for that period, and they lost 823,000 accounts in four months, I think, leading to a 12.5% drop in share price and a 20-year share price low. That demonstrates that companies that try not to offer good value in a world of a relative price cap will lose customers, market share and share price.
Therefore, we think that bringing that alongside the absolute cap, sitting underneath it, is the best way to use the force of competition to drive prices down for everyone. When you remove the protection of the absolute price cap, you will actually have a competitive market.
My question is about appeal. Ofgem come up with their absolute level. There has been a lot of discussion from different commentators about the right of appeal. The Business, Energy and Industrial Strategy Committee came up with its view. What is your view, GregQ ?
The only thing I would comment on is this. In a business you have got a first line, a second line and a third line of defence. Normally, Ofgem would be your second line of defence. The issue you have got is that you are blurring their rules: they are acting as first line and second line. That is where the appeal is a concern because they are setting the prices, and then they have got to judge themselves, almost, on setting the prices.
I wonder whether you have to look at the role within this: how you get that to be independent rule setting—whether it almost has to sit aside from Ofgem so that Ofgem can oversee it. If you put it within the regulator, I agree it is going to get—
They will have to consult but, even so, I think you can see this being contested time after time. On the prepayment meter cap that has gone in so far, our calculation is that it has been incorrectly calculated probably about twice already. The question is that, if that then goes across 11 million customers, what is going to happen at that point, when it really starts to hit people’s balance sheets?
The idea that you end up going to appeal in order to get the right to over-charge customers is going to be pretty grotesque. The reality is that they may try to do that, and you have to stop them. We have to prevent it becoming tied up in process. The prices are all still grotesquely high, whether they are set at £1,050, £1,075 or £1,030.
JulietQ touched on smart meters earlier and the rather ambitious and expensive project that is endeavouring to secure 53 million installations by 2020. To what extent do you believe that smart meters can make the market work for consumers? This is to everyone. Could it lead to an early end to the cap, or could it make it redundant before 2023? It is not a freeze, it is a cap. There are opportunities three years prior to 2023 in which it could be eased or lifted. What is your view on that?
I think smart meters make this all the more important right now. If we do not clean up the energy market before we end up with everybody having a different price every half hour, it is going to be a wild west. We have the opportunity to clean up pricing now, and that is why it is particularly important that we deal with this topic of the difference between the highest and lowest tariffs. If it is hard for someone to know where they stand at the moment, then it will be even harder for them to know where they stand in the world of rampant time-of-use tariffs. Let us tidy up pricing now, and then smart meters really can be a path to success.
To add to that, we find the conflation of the price cap and the smart metering quite troubling. We do not see a relation between them. A person’s understanding of how much energy they use does not influence how often they might go into the market and look at price comparison sites and understand how much they are paying versus other suppliers. We are also not aware of any evidence suggesting that installing a smart meter would offset the £100 a year that a consumer would save under this price cap. The Government’s own data would suggest that the installation of a smart meter saves the consumer only £11 a year on their energy bill. They are actually separate things.
My personal view is that they do come together when we get proper smart meters: SMETS2 in as opposed to SMETS1. The SMETS2 meters are going to make a significant difference to switchability. At the moment, if you take on a SMETS1 and you are not SMETS1-qualified you cannot switch them to smart metering. You would have a proper smart process in terms of switching. We are going to see some disruption in the market there with accessibility of data and third parties providing information in the house that can switch you instantly to another supplier if you are over-paying. That is the intelligence we are going to see with an increased amount of data. I am quite excited about smart meters and what they can do. They will facilitate households in saving much more than at the moment because we are going to see the smart house plug into that.
You now have a market of 70-odd companies, mainly vying it out in a 20% churning area. If we get this right, you will be able to let loose the competitive efforts of companies like ours and 68 or however many others to bring prices down for everyone. Getting it right involves the decency cap or the absolute cap and finding a way to tidy up the entirely unjustifiable hundreds of pounds of difference between the cheapest and most expensive tariffs from each supplier. At that point you can let loose our competitive efforts to bring prices down for everyone.