The following is a summary of the recent House of Commons report on energy prices and fuel poverty in the UK.
Since the beginning of 2008 all of the UK's "Big 6" energy suppliers (Npower, Centrica, EDF Energy, ScottishPower, Scottish and Southern Energy (SSE) and E.ON UK have announced increases in their wholesale gas and electricity prices. This has major implications for the millions of domestic and industrial consumers and the competitiveness of the UK economy as a whole.
Due to increased public concern, the House of Commons (all party) Business and Enterprise Committee published their report on "Energy prices, fuel poverty and Ofgem" (dated 28th July 2008) after their own investigation, which started on 5 February 2008, on the reasons behind the rise in energy prices. The Committee gathered evidence from a wide range of energy bodies including the consumer watchdog, industrial consumers, large independent electricity generators, the energy regulator Ofgem, oil and gas producers, small energy retailers, the "Big 6" energy companies and also the European Commission. The report looked at all aspects of the energy supply chain, from upstream gas production to domestic supply, to assess whether the markets were operating competitively and in the best interest of both domestic and industrial consumers.
The Committee examined a cross section of the energy supply chain and looked at whether each of the markets involved were running as efficiently as possible so as to maximise benefits to domestic consumers and businesses alike. The government upheld the view that their main concern is "to maintain a public policy environment in which UK energy prices for both domestic and commercial users are as low as possible, but also one in which the other crucial objectives of energy policy – environmental sustainability and security of supply – are delivered".
The Report investigated the wholesale and retail gas and electricity markets and addressed a number of concerns of fuel poverty with the following conclusions:
The gas market:
- Gas fired power is responsible for approximately one third of the UK's generating capacity. The wholesale gas market is regarded as the most important factor affecting the cost of energy. Wholesale gas prices have increased throughout 2008.
- The UK is becoming increasingly dependent on imported gas as the North Sea supply continues to dwindle. In 2003/4 imported gases accounted for a mere 2% of UK demand, and in 2008/9 the figure is expected to be nearer the 40% mark. In 10 years time it is estimated that 80% of the UK's gas will come from overseas. The effect of this is hard to ignore, with increasing reliance on overseas gas resources the UK is forced to compete with the rest of Europe and the Globe. Fluctuations in supply and demand overseas will thus have a knock on effect on domestic energy prices.
- The lack of gas storage facilities is also a problem for wholesale prices, as supply has to be balanced carefully against imports instead of being able to draw from reserves. Investment in storage needs to be encouraged and is recommended as being a high priority for national policy.
The electricity market:
- The "Big 6" share the market vertically and wholesale electricity prices have been increasing since Spring 2007. Many factors have an influence on this increase including soaring prices of coal and gas, which provide between them nearly 80% of the UK's power generation.
- The increasing environmental costs under the EU Emissions Trading Scheme are reputedly adding about £9 per megawatt hour to the wholesale price of electricity.
- The wholesale electricity market suffers from an inherent lack of liquidity, which in turn contributes to price volatility and poor price transparency.
- The imperfections in the wholesale markets will be transferred to the retail markets for both gas and electricity as rises in the wholesale electricity and gas prices have been identified as the largest contributor to rises in household electrical bills, with environmental costs hot in pursuit.
Fuel poverty:
- Fuel poverty refers to the households who spend in excess of 10% of their income on maintaining an adequate level of heating and lighting. The report outlines three contributing causes: the level of household incomes, fuel costs and the quality of housing.
- In 2000 the number of fuel poor households was officially estimated at around four million whereas now it is estimated to have increased by half a million. A further 400,000 people will fall into the fuel poverty trap, if there is a further 10% increase in energy prices. The rising energy prices are therefore not a welcome sight to a government trying to eradicate fuel poverty in two years' time. Should the fuel prices fail to stabilise, the government will have to ensure a rise in incomes or perhaps, most cost effectively, an improvement in the energy efficiency of the housing for those people affected.
Subsequently, Ofgem also launched their own inquiry on 21 February into the energy supply markets for households and small businesses. However, the inquiry came as a surprise to many because of their earlier statement that "Britain's competitive market is working" and afterwards that there was "no clear evidence that the market is failing". The House of Commons Report concluded that the markets are not functioning at full potential and it clearly contradicts Ofgem's earlier statements. Therefore the Report aims to provide the necessary information to Ofgem to tackle the many problems highlighted about the workings of the energy wholesale and retail markets. It also aims to provide the necessary information to the Competition Commission for further investigation in the energy markets. Whatever the outcome of these inquiries, it is clear that the Minister of State for Energy, Malcolm Wicks speaks sense when he claims, "the era of cheap energy is surely over".
Interestingly, Ofgem has announced that it will review aspects of its Social Action Strategy in December 2008 after the conclusion of its probe into the supply markets. Under the Social Action Strategy (which has been in place since 2004) energy suppliers have a Corporate Social Responsibility to assist in eradicating fuel poverty by supporting customers who are struggling to pay their bills. This has lead to the introduction of various initiatives including discounted tariffs, rebates and benefit entitlement checks.
In the 2008 budget, the Government announced that it had secured agreement from energy suppliers that their collective expenditure in meeting their social objectives would be £150 million per year until 2011. It remains to be seen though whether this will be sufficient to stave off the public threat of a windfall tax against the energy companies based on the profits made in respect of previous emissions trading permits granted under the ETS.
For further information please contact Liz McRobb, Joanne McDowall or Leon Moller at Shepherd and Wedderburn LLP.