Energy Security and Net Zero Committee 

Oral evidence: Energy bills for domestic customers, HC 299

Wednesday 8 May 2024

Ordered by the House of Commons to be published on 8 May 2024.

Watch the meeting 

Members present: Angus Brendan MacNeil (Chair); Dr Thérèse Coffey; Vicky Ford; Barry Gardiner; Mark Garnier; Sir Mark Hendrick; Mark Pawsey; Lloyd Russell-Moyle.

Questions 1 - 192

Witnesses

I: Chris Norbury, CEO, E.ON; Abigail Ward, Policy Manager for England and Wales, Energy Saving Trust; Simon Francis, Co-ordinator, End Fuel Poverty Coalition.

II: Chris O’Shea, CEO, Centrica; Rachel Fletcher; Director (Regulation and Economics), Octopus Energy; Tony Green, Future of Energy Director, SGN.

Written evidence from witnesses:

– E.ON

– End Fuel Poverty Coalition

– Energy Saving Trust

– Centrica

– Octopus Energy

– SGN

Examination of witnesses

Witnesses: Chris Norbury, Abigail Ward and Simon Francis.

Q1                Chair: Good morning and welcome to the Energy Security and Net Zero Committee session on domestic energy bills. We have two panels of three this morning, and I will ask the first panel to introduce themselves as they choose—name, rank and serial number.

Simon Francis: I am Simon Francis, co-ordinator of the End Fuel Poverty Coalition.

Chris Norbury: I am Chris Norbury, chief executive of E.ON UK.

Abigail Ward: I am Abigail Ward, policy manager at the Energy Saving Trust.

Q2                Chair: Thank you all for coming this morning. Just to kick off, are the Government and Ofgem clear on how to ensure that standing charges might remain fair for both electricity and gas? We have had sessions where we have mentioned these in the past, particularly with the Minister, Lord Callanan.

Simon Francis: Quite a lot goes into standing charges at the moment that we feel could come out of them, and the elements in that could be reviewed. One of the things that we are seeing at the moment is a lot going on standing charges around the £1.3 billion that we are paying to help energy firms administer bad debt.

We would like to highlight new research from the Warm this Winter campaign, which has shown that the impact of that bad debt is that almost one in five households in energy debt have turned to illegal moneylenders in the last 12 months. Among younger households, this rises to a quarter, which, for them, means potentially a lifetime at the mercy of loan sharks. We want to see more support for people in energy debt, if we are going to be paying a lot of money to support the administration of bad debt.

Q3                Chair: How much of that is due to the unfairness of standing charges? How does that feed into what you are talking about in terms of loan sharks?

Simon Francis: Among prepayment meter users, that percentage increases. Some 35% of prepayment meter users in energy debt turn to illegal moneylenders. In most cases, they are paying a standing charge even if they are not using any energy at all. That is absolutely part of that. For those who are in other areas, it is less so. There are ways that those standing charges should be reformed and brought down, because they are unfair in many cases.

Abigail Ward: We agree that standing charges are too high. Looking at the bigger picture, it feeds into the affordability issue at large of energy bills. We would call for the Government to follow through with their commitment in the autumn statement in 2022 to review the affordability of energy bills. Of course, standing charges are a large part of this, but there are also other bits at play here.

Q4                Chair: Are there elements in the electricity standing charge that you think should not be in it?

Abigail Ward: We do not have a firm view on what should be in and out of the standing charge. As I said, we wanted the Government to come forward with an affordability consultation so that this can be discussed and agreed upon within industry between Ofgem and the Government. We are quite disappointed that this still has not been brought forward. Lots of respected organisations such as Citizens Advice and the New Economics Foundation have put forward great proposals for how standing charges can be reformed, but we need the Government to step in now and for us to have this conversation.

Q5                Chair: Chris Norbury, what elements of the standing charge would you like to see changed, reformed or removed?

Chris Norbury: We would be open to a reform of the standing charge, but the point that Abigail and Simon make is really important, which is that we should consider that only as part of a wider review of affordability. The risk that we run, if, for example, we move elements of the standing charge off the standing charge and on to the unit rate, is that we could inadvertently and disproportionately negatively affect those customers we are trying to help.

For example, a customer who has dialysis at home will have a high level of energy usage. Moving those costs on to the unit rate will disproportionately affect that customer in that example. Therefore, we would be open to reform of the standing charge, but only in conjunction with the implementation of some form of targeted support for those customers who need it most.

Chair: Thank you. Barry Gardiner, do you want to comment briefly before we move on?

Barry Gardiner: Sorry, I was muttering. I agree with your final point in terms of moving to a rising block tariff, avoiding standing charge in the first place, and then making sure that the people you have just identified, who are the exception, receive the support that they need that comes with their disability or whatever else it is.

Q6                Sir Mark Hendrick: I take the point, and it is a valid example of where it would disproportionately disadvantage somebody, but surely that is the exception that proves the rule. A lot of people who cannot afford to pay their electricity bills are trying to limit their amount of usage, but they are not getting a great deal of benefit, because the standing charges are so high.

Simon Francis: As you move forward and, hopefully, we see wholesale costs continue to come down, the standing charge element of that is going to become even more of a problem. You could look at how we pay for the investment in the grid. At the moment, that is done, essentially, through bills and standing charges, and could be moved on to general taxation. It is a major nationwide infrastructure project that we are looking at to improve the grid. That could be taken out of standing charges and put into general taxation, or through another form of investment from the Government.

Q7                Lloyd Russell-Moyle: The example that you gave there was quite interesting, Chris, because I thought that we had a system of support for people with disabilities. We already have a system of support if you use oxygen or if you are terminally ill, so are you saying that we just need a bit more money in that, or are you trying to push standing charge reform into the never-never by throwing in lots of things that are a bit irrelevant?

Chris Norbury: No, not at all. Just to be clear, there are support mechanisms in place. Certainly, when we talk to our customers and when we look at the growing level of energy debt that we are carrying, we see that the support that exists for those families who are on very low incomes does not go far enough.

To Abigail’s point, we have called for, for example, a social tariff to support those customers who need it most. This winter, we introduced a 50% and 25% discount on the energy bill for our customers, plus debt forgiveness for those households on very low incomes. That is the type of support that I am calling for.

Alongside that, though, we need to address some of the fundamental drivers of the cost of energy. The biggest drivers of the cost of energy are the wholesale price and network costs.

Q8                Lloyd Russell-Moyle: We are trying to really explore the division between the unit rate costs and the standing charge costs. Do customers understand what is driving this increase in the standing charge?

Chris Norbury: There is more that we can all do to improve the level of transparency that we have around customer bills. We are doing work on that currently, which I am happy to share with the Committee in writing. There is more work that we can all do across the sector to improve the level of transparency and help customers better understand what is driving the cost of energy.

Q9                Lloyd Russell-Moyle: Simon, what changes would you hope for from Ofgem to the current standing charges?

Simon Francis: Ofgem is already reviewing suppliers’ operating costs, headroom and EBIT allowances, and we would want to see those come down. Things such as operating costs and marketing could well be put on to unit costs once they have been reviewed. That might drive more competition on price, so you might not see energy firms sponsoring Premier League football clubs, for example.

Q10            Lloyd Russell-Moyle: Would it be fairer, then, to be much clearer on the standing charge that it covers fixed infrastructure but not any of the operations of the energy companies?

Simon Francis: That would be one thing, but, as I say, we would prefer to see some of that infrastructure investment moved on to general taxation and not on to bills at all.

As Chris mentioned, a lot of that is the cost of the infrastructure. That is where there is a significant amount of profit in the energy system. Over the last few years, around £30 billion of profit has been made by the gas networks and transmission operators, and that is an area that could be used to bring that down.

Q11            Lloyd Russell-Moyle: So £30 billion has been made in profit.

Simon Francis: In the network and transmission.

Q12            Lloyd Russell-Moyle: Consumers are still being charged for £1.3 billion-worth of debt. Rather than taking the debt out of the profit line, which all other businesses do, they are passing that debt payment back on to the consumers, even though they are making huge profits.

Simon Francis: Chris might know this better than I do, but that is because of the difference between the transmission and the network companies, and the retailers and suppliers.

Q13            Lloyd Russell-Moyle: So we need to put that debt in the right place.

Simon Francis: You need to make sure that the support is there. The wider energy industry is making so much profit, as well as through the producers. How do we get that money to the people who need it, those in energy debt and those who potentially need a social tariff?

Q14            Lloyd Russell-Moyle: Separation is the problem. Abigail, I am interested particularly in how we get consumers to know better what that distribution between their bills is, and particularly how we drive changes in behaviour if we change the bill structure.

Abigail Ward: We see that consumers are not aware of the difference between the volumetric charges and the fixed costs on their bill. In the advice services that we deliver across Great Britain—for example, Home Energy Scotland—we often get calls from people not understanding their energy bills and how they are made up, similar to the example that Chris gave of people being in hospital for a long time and still having to pay standing charges, so this is just accruing. There is a massive piece of work that needs to be done from our point of view on supporting consumers.

In Scotland, we run Home Energy Scotland, which is an advice network that offers expert, impartial and tailored advice to consumers to help them reduce their energy use, improve the energy efficiency of their home and manage their bills better. This has been in operation for a number of years and has been a real success. It is really key in enabling people to make the changes in their homes for the long term.

An important point to make here is that energy bills will be brought down if we improve the efficiency of our housing stock. We have some of the most inefficient housing stock in Europe, and that has been one of the drivers of high energy bills.

Q15            Lloyd Russell-Moyle: To get that change for more home insulation, do we need to change the structure of the bill so that it is more on volumetric and less on the standing charge, or will that not make much difference?

Abigail Ward: I am not sure what difference that would make but, whatever changes are made, standing charges need to be reformed and energy prices brought down. Alongside that, households need to be future proofed from future price shocks, because it is going to be a long-term thing that needs to happen to bring down energy bills. We need to insulate people’s homes to protect them in the future.

Q16            Vicky Ford: We need to save energy. We need to encourage energy efficiency. If everybody has to pay equally towards the cost of infrastructure, through either standing charge or general taxation, no matter how much energy they waste, there is no incentive for people to save energy. Do you agree, Abigail? The idea is that you just take the standing charge and whack it on to general tax, so that everybody has to pay towards future infrastructure. Should you not put it on the unit charge instead?

Abigail Ward: That is one option that has been explored, but, as we have discussed, that could be detrimental for certain people.

Vicky Ford: But provided we can get the dialysis thing sorted.

Abigail Ward: Yes, we have the social tariffs. That is one option that could be taken forward. As I said before, we really need the Government to bring forward their affordability consultation, so that we can take into account the distributional impacts in that assessment. Without that, it is really hard to know what the impact will be. It is just modelling and guesswork at this point, so we really need that forum to be able to get a consensus of what the best way forward is to bring energy bills down as a whole.

Q17            Chair: Chris, you mentioned people on dialysis machines. We know that, depending on the measurement, between 13% and 30% of people are in fuel poverty. What percentage are using dialysis machines?

Chris Norbury: I will have to come back to the Committee in writing on that. I used that example, but, to the point that Sir Mark made, if you think about moving some of those costs on to the unit rate, those customers who use more energy will pay more.

I will just make one point, which might help. If I think about the comparison that we see between a customer living in, say, a 1970s or 1980s, three-bedroom, semi-detached house, and a customer living in a modern, five-bedroom, well-insulated home, it is the former customer who will be using more energy and, therefore, paying more, whereas their income may well be lower than the latter example.

Q18            Sir Mark Hendrick: Just before I move on to my question to address that last point, I would still imagine that the number of people using dialysis machines, albeit a very important issue, is minuscule in comparison to most consumers who cannot afford to pay bills and particularly standing charges at the current levels.

Simon, do standing charges in any way address fuel poverty in this country?

Simon Francis: Just to pick up on that point first, research that 38 Degrees and Survation have done suggests that between 10% and 15% of the population are reliant on energy for some form of medical needs, whether that be dialysis machines, charging wheelchairs or keeping medicines cool in a fridge. It is quite a significant chunk of the population.

Q19            Sir Mark Hendrick: What about dialysis machines in particular?

Simon Francis: I do not have a figure for dialysis machines.

Q20            Chair: You would have a fridge on anyway. You are not putting the fridge on for medicines. You are just putting something extra in it.

Simon Francis: You might turn the fridge off in order to save money. It is a broad term for those people who may be reliant on energy for some form of medical needs.

Q21            Chair: Is there any data on how many turn fridges off?

Simon Francis: No.

Mark Garnier: This is a really important point. You raised charging wheelchairs. There are huge numbers of pensioners who use mobility scooters across all of our constituencies, so there are good examples. The dialysis machine is probably not a brilliant example, because there are very few, but wheelchair charging is a good example.

Lloyd Russell-Moyle: Mr Chairman, Kidney Care UK says that it is possible to have the cost of your energy used for your dialysis machine fully reimbursed. Can we please get to some sensible discussion?

Q22            Sir Mark Hendrick: Simon wanted to enlarge on his answer. In addition to that, can I ask how standing charges discriminate against various social classes?

Simon Francis: We do not think that standing charges really help people, especially as they are going to create a bigger percentage of the bill as, hopefully, wholesale costs come down. Those who are on prepayment meters will be paying a standing charge, regardless of whether they use any energy, so there is clearly a problem there that needs to be looked at.

We need to look at all the ingredients that go into a standing charge, review them, bring them down as much as we can, and then look at the impact assessment of what would happen if we moved something on to unit costs or moved it on to general taxation. As charities, we do not have access to that analysis. Ofgem and the Government are the people who can run that analysis and provide information that will then help us to say whether we agree with proposals on that.

Q23            Sir Mark Hendrick: Abigail, what is your view from an energy-saving point of view on the issue of different social classes? Some people who are very poor might be living in an old house that is very badly insulated. Somebody who is quite well off and can afford it has made the investment in heat pumps and everything else. How do you square the circle in that case?

Abigail Ward: It is fair to say that protections for those on the lowest incomes or the most vulnerable are not fit for purpose right now, and that a lot of people fall through the cracks on these schemes that seek to identify these people. That is why, again, we really need this consultation brought forward by the Government. We need a well-targeted mechanism to identify these vulnerable consumers, which is just not there at the moment. Yes, there is the warm home discount and other schemes that pick up some people, but, on the whole, there are pockets of people who are being left behind.

We really need to work on a better mechanism for identifying and assessing households depending on their need. That is a really key step that needs to happen, as well as all these other things that come into play, such as reviewing standing charges and energy bills. We also need to get this targeted support. In an era of high energy bills that are not going away—Cornwall Insight says that we are going to be paying high energy bills into the next decade—we need to get the targeting right, because, as we have heard, debt is rising, energy bills are rising, and we need a long-term solution.

With affordability, there is also the importance, as I said, of energy efficiency and insulating people against high energy bills. Again, in an era of high energy bills, that is the quickest permanent and effective solution to reduce people’s energy bills in total in the long term.

Q24            Sir Mark Hendrick: Finally, Chris, what do standing charges do in terms of incentivising customer behaviour towards reducing consumption, or is it the converse, that they do not?

Chris Norbury: The key things that we have to do to really drive down energy bills and drive down the cost of energy are to reduce the amount of energy that people consume and, in doing that, to reduce the amount of energy that people import from the grid.

Q25            Sir Mark Hendrick: What do standing charges do, though? That is my question.

Chris Norbury: Standing charges do not provide an incentive or a disincentive to do that.

Sir Mark Hendrick: You are quite neutral on that.

Chris Norbury: A discussion on standing charges and their impact is not tackling the key drivers of the cost of energy. The key drivers of the cost of energy are the wholesale cost of energy and the network cost.

Sir Mark Hendrick: They are not driving behavioural change.

Chris Norbury: As I said, I do not believe that standing charges drive behavioural change.

Abigail Ward: I would agree that they are not driving that, which is why we need this holistic approach to review this. It is difficult to know the different impacts and changes that will happen from moving certain things off standing charges or on to unit costs. We really need that forum to discuss it. Like I said, Citizens Advice and the New Economics Foundation have done some fantastic work looking into how a social tariff might work with standing charges as well. We have the information that organisations have brought forward, so we now need to have a discussion and a debate on how to now take this forward, because everyone agrees that something needs to change.

Sir Mark Hendrick: Nobody seems to know what it is.

Q26            Mark Pawsey: When we visited Chris Norbury’s business in Coventry, he very kindly set out for us the components of the standing charge and how it was a very large proportion of the bill. I do not think that it is fair for each of our witnesses to say to us, “We are going to wait for the Government to bring a proposal before we tell you what we think should and should not be in the standing charge”. Chair, can we press each of our witnesses—they are here as experts—to tell us what they think should and should not be in the standing charge?

Sir Mark Hendrick: Or get rid of it all together.

Chair: The spotlight is on you, panel.

Simon Francis: We need to see a review of all the elements of it to get the costs down.

Q27            Chair: What should and should not be in it?

Simon Francis: We should not have the marketing costs and the operating costs of suppliers in there. They should be put on to the unit costs. You need to move the investment and the network costs on to general taxation, because it is a priority for the country. You also need to make sure that no headroom or EBIT allowances are on the standing charge, so that they are on unit costs as well. They are the main things.

Chris Norbury: We would be open to moving the operational costs associated with serving customers from the standing charge on to the unit rate. I do not believe that the distribution network costs should be moved from the standing charge on to the unit rate. There may be some unforeseen consequences from doing that.

Q28            Chair: What about moving it on to general taxation?

Chris Norbury: Moving it on to general taxation is not something that we have considered.

Abigail Ward: We have not considered what exactly should be moved around and where things should be going. I know that I keep coming back to it, but it is really important that we see the distributional impact from the Government, because different organisations have brought forward proposals that need to be discussed and decided on. We have not thought in detail about where they should go. We just know that the affordability of energy bills in the round needs to be addressed.

Q29            Mark Garnier: You will be delighted to hear that we are moving away from standing charges, to locational pricing. The catapult and FTI Consulting did some analysis and came to the conclusion that, if you go for nodal pricing, you will reduce energy bills by £51 billion over 2025 to 2040, which is £120 per household annually, or by £31 billion over the same period by going for zonal pricing. This sounds pretty impressive, given that we are looking to move energy pricing to where there is a high demand or high supply. None the less, it comes down to the fact that this is then spread among consumers. Abigail, is there a moral imperative to get on with this super quickly?

Abigail Ward: Yes, there is. If this was introduced, huge savings could be made across the GB market. While it is true that some consumers, for example, in the north of Scotland and northern England will benefit more, it is important to remember that the whole of GB will benefit from this in a substantial way. I do not have the exact numbers, but the price per megawatt that you pay for energy is brought down as a whole in that report.

It is really important that these wholesale market reforms are taken forward and that this is considered. As you said, 2035 is a way off, so we need to get on with it.

Q30            Mark Garnier: Chris, we are now talking about savings of up to £51 billion. Where are those savings coming from? It does not sound like everybody is going to benefit from it. If the consumers are saving this, where is the price going to? Who is going to pay more?

Chris Norbury: We would be supportive of a move to zonal pricing.

Mark Garnier: Zonal as opposed to nodal?

Chris Norbury: Yes. There are trade-offs in anything that we do here. We need to be careful. Zonal pricing will incentivise the build-out of renewable generation, for example, closer to the markets that it is intended to serve. It will incentivise solutions such as flexible assets and demand-side flexibility that help mitigate the capital cost of the upgrade required to the distribution and transmission networks, which drives a saving for customers.

At the same time, we need to be mindful of the fact that moving to zonal pricing could take up to five years to implement, and that there are other things that we can do to deliver benefits for customers in that period. For example, the energy on subscription trial that we are currently running in the north-west of England will, we believe, deliver bill savings of up to £800 per annum for the average customer. We should continue to reform the market to incentivise, for example, the implementation of heat networks in areas of high-density occupation, where you are recycling waste heat using solutions such as our ectogrid technology. These are all things that we can implement now, which will deliver significant bill savings to customers in a shorter period of time as a consequence.

Q31            Mark Garnier: This all sounds great. You are talking about finding this £51 billion out of savings in the grid and all the rest of it. What bothers me about this is that, in the midlands, for example, where you have a lot of energy consumption, the price will, presumably, go up relative to Unst in northern Shetland, where you cannot move for a wind farm and nobody is using electricity. At some point in the early stages of this, in order to drive the behaviour that you want, you are, presumably, going to see prices rising.

Chair: It is not quite true that nobody uses electricity in the Scottish islands.

Mark Garnier: Sorry.

Chris Norbury: There absolutely are trade-offs.

Mark Garnier: Long term, you get the smoothing out, and I get that. You have the price to market and the basic economics that drive it. To start off with, there has to be, at some point, a rise in prices in some areas.

Chris Norbury: There are potential trade-offs, such as that.

Q32            Mark Garnier: Simon, you must be thinking quite hard about this. There is quite a lot of poverty in these areas, and people are going to be affected. How do you protect consumers if they see their prices rise?

Simon Francis: We have regional pricing at the moment that discriminates against people especially in north Wales, Merseyside and Scotland. As another example, there is a tariff that has just come on the market from one of the upstart energy firms, which is discriminating against people in northern Scotland to the tune of £716 a year. That form of discriminatory tariff has to be banned by Ofgem. It was banned between 2009 and 2012. You could protect by banning discriminatory tariffs in the short term until you can see these solutions come through.

We are concerned about the impact of some locational pricing, especially on those areas that you talk about. Some of the things that can be used to offset that, as Chris has mentioned, are heat networks and community energy generation. It needs to be seen as a package.

Unfortunately, when we have asked the Department for Energy Security and Net Zero about impact assessments on this, so that we can give some answers to this, it has not done a quality impact assessment on its retail electricity market arrangements work to date.

Q33            Mark Garnier: Would you want us to press the Department on that?

Simon Francis: We absolutely would. Its consultation on that ended yesterday, but we cannot answer the questions because we do not have the information. It has not done the work to look at what the impacts are and who the people are who might lose out from that.

Abigail Ward: I just wanted to add that, potentially, costs will go up for some people in the short term. As I said before, the long-term permanent solution for lower energy bills is to drive energy efficiency at pace and scale across the country. We have the leakiest homes in Europe. According to the ECIU, the worst performing homes spent, on average, £600 more than an EPC C-rated home. Progress on improving the energy efficiency of our housing stock has been far too slow. As we increasingly move to a more renewables-based system, more efficient homes are going to help the grid by using less energy in the home. This needs to really be a national infrastructure priority from our point of view, because energy efficiency brings those bills down.

Mark Garnier: Just to summarise, locational zoning is no silver bullet. There will be problems in the short term because you will get price rises where you do not want them. You need to mitigate those price rises. In the long term, it drives the behaviour that you want in terms of where you generate and all the rest of it, but we still have to do all the other stuff as well.

Q34            Chair: Are you certain that there will be price rises? Constraint payments mean that customers are currently subsidising generators to the tune of up to £1 billion a year. If the removal of the constraint payments goes with zonal, everybody will have different forms of lower bills.

Chris Norbury: It could be a benefit associated with the removal of constraint payments. Equally, there are risks that need to be borne in mind in terms of liquidity in the market. Going back to the point that others have made, changes such as the introduction of zonal pricing should, in our view, be done only in conjunction with an increased investment in energy efficiency and the scale-up of new business models such as the energy on subscription trial that we are currently running, which delivers £800 bill savings to those customers who participate.

Chair: It is a great pleasure to bring in the newest member of the Committee, Dr Thérèse Coffey, who has joined us today.

Q35            Dr Coffey: I want to talk about location of a different kind. Some 15% of households are off the gas grid, and so, by default, it is automatically more expensive to heat their homes. That could be through oil or LPG, but also in inner cities, where it is solely electric. I wanted to find out from the panel about how help could be given there.

I am not looking to regulate the price of oil. Sections 36 and 37 of the Digital Economy Act 2017 were deliberately brought in to help the transfer of data so that energy companies could identify customers and reduce fuel costs. I just wanted to get a sense of why, with ECO4 and these other schemes, it still seems that we are spending half of the grant on admin, and only half, if that, on doing work to reduce energy costs. In particular, I would like to hear from Mr Norbury, but I would be grateful to hear from Ms Ward and Mr Francis too, about what efforts they are putting in.

Chris Norbury: You are right to call out some of the complexity associated with ECO4 and GBIS. If you take, for example, the requirement for a home to increase by two EPC ratings in order to be eligible, there is a degree of complexity there that is preventing us from delivering the benefits to customers that we all want to deliver.

I understand where some of the standards that are associated with the GBIS scheme come from, because of some of the history of insulation in the UK. In our view, the consumer standards that are being applied are too rigorous and are preventing us from deploying GBIS funding and getting insulation into the homes of those people who need it most. There is complexity associated with these schemes that can easily be addressed to reduce the admin burden and get the benefit into more homes more quickly.

Q36            Dr Coffey: I do not know if Ms Ward wants to comment, but I wanted to find out—and perhaps we can write to the energy companies—how you are using the powers available to you to get the information, so that you are not spending quite so much on the admin around finding eligible people. That is why the law was changed nearly seven years ago.

Abigail Ward: In terms of admin costs, you are completely right that too much valuable Government money is being spent rather than going towards households to help them upgrade their homes. In Scotland, we see from our delivery of advice to people that it dramatically reduces the admin cost, because people who come into Home Energy Scotland are directed to schemes that they are eligible for. A lot of people in England are probably not sure that they are eligible for certain schemes or are not even aware that they exist.

The advice that we have in place helps to match people with the measures that they are entitled to, and also means that Government money is spent in a more effective way as well. ECO, for example, goes towards many more of the homes that need it, whereas, in England, ECO does not go to between 10% and 30% of fuel-poor homes. Given that that is a fuel-poor scheme, it should be much higher.

On your point about rural communities, again, I will point to Scotland, where they have much better green finance on offer for homes in general, but also for off-grid gas homes. For example, for a heat pump, there is the boiler upgrade scheme that is worth £7,500, but the Scottish Government top that up to £9,000 if you live in a rural area, to take into account the more expensive measures. Grants are also available for those who are on low incomes. We see that as really driving the high installation rates that we see in Scotland, because it takes into account the fact that there are different types of households.

Q37            Vicky Ford: In terms of social tariffs, if one wanted to subsidise energy prices for those on very low incomes, who should pay for the subsidy?

Chris Norbury: We have set out a proposal that is a model that we see in the Dutch market and that our business in the Dutch market participates in. It is a co-funded model, where the energy sector and Government come together to fund what is, effectively, a social tariff, the eligibility for which is administered by the equivalent of a consumer champion.

Q38            Vicky Ford: So a mix of Government and energy companies.

Chris Norbury: It is joint Government and sector-wide funding.

Q39            Vicky Ford: Simon, who should pay?

Simon Francis: We need to make sure that it is the widest possible energy industry definition. As Chris said, that model in Holland sounds quite interesting, where you have the transmission network, distribution and generating companies.

Q40            Vicky Ford: You are saying that energy companies should pay.

Simon Francis: If that does not cover it, Government might well step in.

Abigail Ward: We do not have a firm view of who should pay for a social tariff. We just know that it is desperately needed.

Q41            Vicky Ford: If energy companies pay, are they not just going to charge their other customers more? Why should people who are just about managing, to use Theresa May’s description, have to pay higher energy bills to subsidise those of those on very low incomes?

Simon Francis: We do not want this to be added on to a standing charge or anything like that. This has to be done by the widest definition of the energy industry to get that money.

Q42            Vicky Ford: So energy customers should pay, but not necessarily through standing charges.

Simon Francis: Domestic energy customers should not be seeing an increase in their bills in order to fund this charge.

Q43            Vicky Ford: Where does the magic money come from?

Simon Francis: Some £420 billion has been generated by the energy industry since 2020.

Q44            Vicky Ford: So energy companies’ profits.

Simon Francis: Yes.

Chris Norbury: The model that we have set out does not include the redistribution of the cost on to customers’ energy bills.

Q45            Vicky Ford: Where does it come from, then?

Chris Norbury: Let us look at what we did this winter for our customers. We are not an upstream generator. We do not have an upstream gas position. We are not a network operator. Our margin in the UK is 2%. We spent £82 million this winter delivering a 50% or 25% discount on the energy bill for our customers on very low incomes. That is a model that can be followed, but it is limited, hence the joint funding.

Q46            Vicky Ford: It is a mixture of income from Government, so everybody’s tax is going up, and lower profits for energy distributors.

Chris Norbury: If you look at the cost of energy debt to the energy sector as a whole, at the cost of servicing energy debt to customers who can afford to pay their bills, and at the wider cost of debt to society, as Simon mentioned earlier, we believe that there is a payback there.

Q47            Vicky Ford: Abigail, you have been listening to them on this. Who should pay the subsidy? Where should the money come from?

Abigail Ward: Again, we do not have a firm view on where it should come from.

Q48            Vicky Ford: I am interested in your view.

Abigail Ward: I am here representing the Energy Saving Trust, so I do not think that I can give my personal view. I will come back to the energy efficiency piece. If the Government invest in energy efficiency, everyone is going to pay lower bills anyway, so their bills are going to come down, which could make room for other things to be added on. It is really important to look at this as a whole affordability issue.

Q49            Vicky Ford: I am really glad that you said that. Do not forget about the energy efficiency incentives in anything that is structured. Should you not pay those on lower incomes more through other welfare benefits to then enable them to cover their bills?

Chris Norbury: That is absolutely an option. We have 960,000 customers on the priority services register who have a household income of less than £20,000 a year. Whatever the mechanism, those customers need to get support for what you quite rightly point out is a cost of living challenge. To Abigail’s point, we then need to drive energy bills down, as well as investing in energy efficiency and reducing customers’ exposure to the wholesale market through different models such as the ones that I have described.

Q50            Vicky Ford: Simon, why should we subsidise energy bills if we do not subsidise food bills, clothing bills or phone bills?

Simon Francis: The health impacts are another potential cost to the NHS from people living in cold, damp homes. The Institute of Health Equity has done some really good work on that cost, which would be worth you looking at. I do not have the figures to hand, I am afraid, but there is a massive cost there.

Q51            Vicky Ford: If you were trying to identify who should be eligible for social tariffs, is it reasonable to share household income data with private companies?

Chris Norbury: The way that the model works in the Netherlands is that the data is collated by a third party, which is, effectively, the consumer champion, and the administration of the scheme is through that consumer champion. The data sharing takes place, but via an independent third party. As a sector, there is a greater opportunity for data sharing as a whole to enable us to better identify those customers who need support.

Q52            Vicky Ford: I can understand the need to support those when energy prices were really high, but, in a normal year, if prices came down to pre-crisis level again, would there still be a need for this support?

Chris Norbury: Yes. Energy debt is rising.

Q53            Mark Pawsey: Chris, how can you be confident that the money that you are making available is going to the right people?

Chris Norbury: We can be confident in so far as the quality of our data, which we believe is very good and increasing, but we do not have access to the full dataset.

Q54            Mark Pawsey: You do not have access to DWP or HMRC data, so how can you be confident?

Chris Norbury: Hence my point in terms of data being shared with an independent third party from all of those sources to ensure the data quality and the administration of the scheme.

Q55            Mark Pawsey: Are you comfortable that you are providing support to the right people right now?

Chris Norbury: I am comfortable that we are doing the best that we can with the data that we have.

Q56            Chair: Mr Norbury, you mentioned that your profits are capped in the UK at 2%, because you are an energy retailer. Other companies work in the energy space in generation and in distribution. Their profits are not capped. Do you have any views on that, given that you have a 2% cap and others can make perhaps rapacious profits, as some people might say?

Chris Norbury: I do not have any views on that.

Q57            Barry Gardiner: Mr Norbury, the price cap that Ofgem has set this year will see consumers paying up to £1.3 billion in debt-related costs. That means that all of us who are billpayers are paying for any user of energy who has not paid their bill to you or who is behind in their payments. Does that give you a perverse incentive not to worry up to the tune of £1.3 billion?

Chris Norbury: No.

Q58            Barry Gardiner: Why not?

Chris Norbury: At the end of 2023, we had £930 million of debt on our books. Our bad and aged debt is, in round numbers, in excess of half a billion pounds. The cost of servicing the bad debt charge for our retail business in the UK is over 4.5%. The cost of servicing debt and of serving customers who are in debt, and the impact of that on our other customers, is significant. There is no incentive for us to do what you describe, because it is not in the interests of our customers.

Q59            Barry Gardiner: In all, the industry had £3.1 billion of debt. As you say, you are paying interest on that debt, but you are also sitting on £7 billion—more than double the amount—of consumer credit balances. Surely, the money you can make on the credit balance, that £7 billion, is offsetting, to some extent, the servicing of the £3.1 billion, is it not?

Chris Norbury: I will come back to the Committee in writing on the detail of that point.

Q60            Barry Gardiner: I am not asking you for the detail. By all means write to us and give us the detail. What I am asking you for is the common-sense principle. If you are able to get interest on £7 billion, surely that offsets the interest that you are paying on the £3.1 billion and, therefore, you do not need to be overcharging us, as Ofgem is allowing you to do, by £1.3 billion a year.

Chris Norbury: As I said, I will come back to the Committee in writing on the point that you make.

Q61            Vicky Ford: I would like to ask about innovation to reduce bills and energy efficiency. How does the current market structure encourage people to save money by improving the efficiency of their homes?

Abigail Ward: It does not.

Q62            Vicky Ford: What would you like it to look like?

Abigail Ward: From the Energy Saving Trust’s point of view, as I have mentioned, we really want a national retrofit plan for England to bring people’s bills down in the first place. We need to insulate people from long-term energy prices, which are not going away. Progress on upgrading the UK’s homes has been painfully slow, particularly in England.

As I mentioned, in Scotland there is a national advice service at people’s disposal to help them reduce their energy bills. It also helps them with behaviour change and knowing how to reduce their energy use. We see that as a massive gap in England, and one of our main calls to the Government is to set up a national retrofit advice service in England to really help consumers understand how they can make changes to their homes that will bring down their bills.

On top of this, we also need green finance to come into play here, which, again, we see in Scotland and have seen across the border in France as well, where the mix of tailored, impartial advice that is relevant to people’s homes, married with green finance to help them with the upfront costs of these, is getting things into people’s homes and making them more efficient and lower cost to run. It is a combination of a national retrofit plan, a national advice service and green finance that needs to come together.

Q63            Vicky Ford: I remember seeing some data a little while ago that suggested that quite a large proportion of social rented houses had been improved, and it was more about homeowners, especially those off-grid ones Thérèse was speaking about earlier. Is that correct?

Abigail Ward: Yes. There is some good work going on through ECO and through Warmer Homes Scotland, for example, where low-carbon technologies are being put into people’s homes as well as energy efficiency measures, which is fantastic.

Q64            Vicky Ford: Is that on social rented?

Abigail Ward: Yes. Owner-occupiers and those in the private rented sector are at quite a disadvantage, particularly in England. Like I said, in Scotland, advice is free to anyone. Green finance is available to everyone. In England, there are discrepancies in the support available to different parts of the market.

Q65            Vicky Ford: Do the cold weather payments help to incentivise people to make sure that their homes retain warmth?

Abigail Ward: In the era of high energy bills, I do not think that they do. Everyone’s energy bill is higher and it is just negating the high energy costs, and there needs to be a longer-term solution. Those payments are fantastic for people who are living on very low incomes and need that income to come in, but, in the long term, energy efficiency is the most effective and permanent solution.

Q66            Vicky Ford: Are the green finance initiatives that you have seen in France and Scotland public money? Is it about unlocking loans?

Abigail Ward: It is a mix of both. In Scotland, it is Government money, so Government grants and loans. We see it also unlocking private finance, because, if there is a national retrofit plan that gives a long-term view of what the Government expect to happen in England in terms of upgrading people’s homes, that also unlocks private money for certainty of long-term energy efficiency plans.

Q67            Vicky Ford: In France, is that private money?

Abigail Ward: I think that that is Government money, but I will have to double check that. In France, it is Government money that is offered on a tiered basis. The lower your income is, the more money you get as grant. That is in order to ensure equity. We have seen some really good models.

Q68            Vicky Ford: I would be very interested to see how you unlock non-Government money for homeowners to invest in savings in their homes. Are there any other fundamental changes that the gentlemen would like to speak about that would help to deliver warmer houses for vulnerable customers, but also for others?

Simon Francis: I would echo what Abigail said and reiterate the point around the private rented sector. That is a real challenge that we are seeing. There were attempts to improve the minimum energy efficiency standards in the private rented sector, which were abandoned. That would be something that the Government should look at again.

Chris Norbury: I would agree with the points that both Simon and Abigail have made in terms of energy efficiency, green finance and the private rented sector. In addition to that, we should be reforming the market to incentivise models, such as the energy on subscription model, which I have described, where we are currently running a trial in the north-west of England. That trial will deliver, on average, a bill saving of £800 per year to customers who participate.

Q69            Vicky Ford: Could you explain what that does? Sorry, I have not heard about it.

Chris Norbury: In that example, a customer takes a heat pump, solar panels and battery storage on subscription. There is no upfront capital cost. It is a subscription model. In doing that, fundamentally, the customer is importing less energy from the grid. The cost of energy reduces. The bill saving is, on average, £800 per customer. That is delivering a significant bill saving, which includes the cost of the subscription that I have described.

Q70            Vicky Ford: Basically, you hire purchase your heat pump, battery and solar panel.

Chris Norbury: It is a subscription model.

Vicky Ford: I would love to have more details on that.

Sir Mark Hendrick: It is like a mortgage.

Q71            Chair: Just before we finish off with this panel, people watching hear of energy companies. We know that there are three types of energy companies. We have the generators, the transmitters and the retailers. As I mentioned before, retailers such as E.ON, which has no other interest in any of the other parts, could have a 2% cap from Ofgem in the UK. Is the current balance of risk and reward just, first for consumers, and secondly for retailers, transmitters and generators? What are your thoughts, very briefly?

Simon Francis: No.

Q72            Chair: Why not?

Simon Francis: One thing that we would also like to highlight is the fact that, in the future, with things like time of use tariffs, we are also potentially uncovering people who might be discriminated against in the market, whether that is because they have a smart meter that does not work, because they cannot access a smart meter, because their energy firm says they are not eligible for one in their home, or because they have to leave the house. There are other energy exiles who might come into the market.

Q73            Chair: Is the balance of risk and rewards just between consumers, retailers, transmitters and generators?

Simon Francis: No.

Q74            Chair: Who is benefiting from the injustice?

Simon Francis: The transmitters, the network operators and the producers seem to be the ones who are making the most profit on that.

Q75            Barry Gardiner: Could each of you say to us which of those categories—the consumers, the generators and the suppliers—bears most risk and most reward on a scale of 1 to 10?

Simon Francis: The generators are getting the biggest benefit, followed by the transmission companies and then the retailers. The customers are at the bottom.

Q76            Chair: Chris Norbury, you are from one of these companies, as well as being a customer, you could argue.

Chris Norbury: The balance of risk is skewed towards retailers and customers, and is skewed away from the generators and the transmission operators.

Abigail Ward: As a consumer organisation, we would always say that consumers are at the forefront of our minds, so energy needs to be brought down as a whole. As I have said, we need to take a holistic view of bringing affordability to all consumers.

Q77            Chair: Where do you think the balance of risk is? Is there any injustice, or is it a just system of risk between those four groups?

Abigail Ward: We have seen from high energy bills that consumers are bearing the brunt.

Q78            Chair: If the scales of justice are not fair, who is benefiting from this?

Abigail Ward: I could not say exactly who is benefiting from it, but I know that the consumers are our priority.

Chair: Thank you very much for that quickfire, robust discussion. We were a big, well-attended Committee today. We are going to take a pause for two minutes and come back with panel two, which will be just as interesting, if not more so. Thank you.

Examination of witnesses

Witnesses: Chris O’Shea, Rachel Fletcher and Tony Green.

Q79            Chair: Welcome back to the Energy Security and Net Zero Committee for our second panel of the morning on domestic energy bills. Again, we have a panel of three. I will let them introduce themselves—name, rank and serial number.

Rachel Fletcher: I am Rachel Fletcher, regulation director for Octopus Energy.

Tony Green: I am Tony Green, future of energy director at SGN.

Chris O'Shea: I am Chris O’Shea, chief executive of Centrica, the parent company of British Gas and Hive.

Q80            Chair: It is good to see you. Thank you all for coming. Whose responsibility is it to ensure that energy remains affordable for domestic consumers?

Rachel Fletcher: Multiple parties have different roles to play. Certainly, as an energy supplier, we have an important role in terms of keeping our own costs down and helping customers with payment terms that allow them to afford their energy.

Equally, Government and the regulator have an important role to play in terms of making sure that the market drives a totally efficient system, getting us off dependence on gas and on to cheaper, more affordable renewable energy.

Ofgem plays a very important role in incentivising the monopoly network companies to be efficient and to deliver what is needed for customers.

Q81            Chair: In the last panel, I think what we heard—and I am going to generalise—was that the balance of risk between consumers, retailers, transmitters and generators was more heavily skewered against consumers and retailers by regulation and what have you, and that there was more unregulated space around generators. Do you have any particular comment on that and how that feeds down? Once electricity is generated at whatever price, the transmitters, retailers and consumers then have to deal with that.

Rachel Fletcher: I generally agree with the previous panel in terms of the skew of risk being towards retailers and consumers, but this is less about reward and more about the real incentives to drive efficiency. Not enough effort is being put into ensuring that we have a low-cost and low-carbon energy system. That is what we would like to see happening in terms of both how the wholesale markets work and how network companies are regulated.

Q82            Chair: Tony Green, where does the responsibility lie to make energy affordable for domestic consumers?

Tony Green: It lies across the whole sector. It has to. I broadly agree with what Rachel was saying, apart from the fact that I believe that a whole-systems approach is going to be required as we head towards net zero. It is really driving through that balance as we navigate the journey to net zero, some of which is very uncertain as we go forward.

As a network operator, we are regulated. We are allowed a 5% return on our investments. The way that Ofgem has set that out for us is very clear. We have to work within the efficiencies and allowances that we are provided.

Q83            Chair: Retailers are 2%. That is Octopus. Is that right?

Rachel Fletcher: It is a margin.

Q84            Chair: It is a 2% margin. You have 5%.

Tony Green: It is 5%.

Q85            Chair: Chris O’Shea, where does the responsibility lie for affordable energy for domestic consumers?

Chris O'Shea: It falls across everybody involved in the sector: energy producers, energy retailers, network companies, consumers, the regulator and Government. We all have to work together, along with NGOs and third-sector organisations, to figure out how best we serve consumers in the future with the cheapest energy possible.

Q86            Chair: We heard those 2% and 5% numbers. Does Ofgem regulate your margins?

Chris O'Shea: It does. We are regulated by a number of regulators. We are an energy retailer. We are one of the largest gas producers in the North sea. We are one of the largest electricity producers through our share of mainly nuclear power stations in the UK. We are regulated by a number of regulators.

Q87            Chair: What about in the generation space?

Chris O'Shea: In the generation space, Ofgem regulates us.

Q88            Chair: What is the margin there?

Chris O'Shea: The electricity production that we have now is completely merchant so there is no cap on the margin. There is a 75% tax for nuclear. There is a 78% tax for gas production. That is a cyclical business that goes from large losses in one period to large profits. We have come out of a period where profits were quite substantial, which saw far higher taxes. We paid £1 billion in UK tax last year.

Q89            Chair: Ofgem is taking a different fundamental approach to you. Presumably anybody can argue that they have losses and profits. Your profits do not get capped so you could charge anything.

Chris O'Shea: Our prices are set by the wholesale market. Ofgem regulates the wholesale market in the UK. It does not regulate our prices. It regulates the wholesale market. The wholesale market operates to set the price for electricity.

Some companies are regulated. They have contracts for difference. Effectively, wind farms have a fixed price. They have a subsidy from consumers. Nuclear power stations are not regulated. We get the price on the market. Over the last two years, we have made very strong profits. In the three years before that we made losses because the cost of producing the electricity was higher than the price we got in the market for selling that electricity.

Q90            Chair: If you have made strong profits, that means consumers have been paying more versus what you have been paying for the fuel to create the energy.

Chris O'Shea: The wholesale costs are about 43% of consumers’ bills at the moment. If you see higher wholesale costs, you see higher profits, therefore, for electricity companies.

Q91            Chair: That profit has to be coming from what consumers are paying because the energy has got more expensive. When energy got more expensive, you would have thought, “These guys’ profits will be affected because they are buying this energy”, but the profits are going up as energy is going up, which must mean consumers are paying more to line the pockets of generation companies.

Chris O'Shea: Ultimately, Ofgem sets the price that consumers pay based on observable wholesale market prices. As an electricity generator, our profit before tax has gone up over the last couple of years as the electricity price has been higher. Our tax last year in the UK went up fourfold from £250 million to £1 billion as a recognition of some of the windfall taxes that were put in place and the higher prices.

Q92            Chair: The tax that you pay is a function of the profits that you are making.

Chris O'Shea: Absolutely, yes.

Q93            Chair: Should the regulator not be in there making sure that these profits are capped and that consumers are not ultimately subsidising profits to large energy companies?

Chris O'Shea: When we had the start of the energy crisis, when we saw the Russian invasion of Ukraine, we offered to sell our gas and electricity at a fixed price under a contract for difference. That was something that was not taken forward. We made the offer to cap our profits voluntarily and the Government decided against doing that.

Q94            Chair: That was quite fortunate for the—

Chris O'Shea: No, we could see where the prices were going because—

Q95            Chair: It would have helped your profits.

Chris O'Shea: If we had capped our profits, it would have reduced them.

Q96            Chair: That is what I am saying. It was quite fortunate for the company that that was not taken.

Chris O'Shea: I do not really see it that way. The reason we proposed that to Government is that it is in our interest to have affordable energy for consumers. We have 7.5 million energy customers in the UK; we have about 24% of the market. It is not in our interest to have big profits in one part of our business and customers who cannot pay. We have seen substantial increases in bad debt.

Q97            Chair: Has energy been affordable or not?

Chris O'Shea: You have to look at the numbers at the moment. Energy is clearly less affordable now than it was four years ago. It has come back down below the level it was before the invasion of Ukraine by Russia, but we have seen a general cost of living issue. This is not just something that is limited to energy. People cannot pay their mortgage; they cannot pay their rent; they are using food banks. This is part of a broader issue. Energy is undoubtedly part of it.

Chair: The cost of energy is putting a squeeze on all that. I am stuck for time. I am going to go quickly to Mark Hendrick.

Q98            Sir Mark Hendrick: Just quickly, Chris, I have met you before.

Chair: Briefly, please.

Sir Mark Hendrick: I will not say too much. Is it true that you are effectively vertically integrated as a company?

Chris O'Shea: Yes.

Q99            Sir Mark Hendrick: Does that give you the advantage of being able to move money around between your different businesses in order to offset gains here and losses there? Does that give you a competitive advantage in terms of price?

Chris O'Shea: We are vertically integrated. We do not have any network investments. We produce and store gas and electricity. We ship it—we have a logistics business—and we retail gas and electricity.

We are not allowed to cross-subsidise. Article 19(b) of our licence conditions bans cross-subsidisation. If you have low energy prices, you might lose money in your generation business, but you might make slightly more because you have lower bad debts.

Sir Mark Hendrick: It is swings and roundabouts.

Chris O'Shea: Indeed, yes. That is the choice that we have made. Other companies have made a different choice. We think that is better because it is better for consumers that companies are well capitalised and, therefore, consumers do not bear any risk of any failure.

Chair: We will be touching on this more, I am sure.

Q100       Mark Pawsey: I want to ask about the role of smart meters, first in achieving the broader energy objectives but also in helping consumers by giving them incentives about time of use and encouraging efficiency.

We should all have had a smart meter by now, but they have not yet been installed in 20% or so of homes. The Department’s own figures show that 4.31 million are not working efficiently. That is before we switch off the 2G and 3G networks. To what extent is the failure of the smart meter programme adding to consumers’ energy costs? Rachel, would you have a stab at that?

Rachel Fletcher: Ultimately, we can have a much cheaper energy system if we give customers the tools to shift their energy consumption and make best use of cheap green power. We already have customers who are doing that and they are saving multiple hundreds of pounds.

Q101       Mark Pawsey: What proportion of your customers have a smart meter?

Rachel Fletcher: Between 60% and 70% of our customers have one.

Q102       Mark Pawsey: So 30% do not have one. Why not?

Rachel Fletcher: It is partly because it is a voluntary programme. The targets that we have been set run for another couple of years. Frankly, not all customers want a smart meter or are prepared to stay in for one.

Q103       Mark Pawsey: What needs to be done to encourage those who do not have one to take one?

Rachel Fletcher: We would like to see a much more customer-focused approach to the smart meter roll-out, frankly. The customers who will benefit most from a smart meter are those who are currently on traditional prepay. Giving them smart prepay will be transformational to their lives.

Q104       Mark Pawsey: On average, how much more are they paying a year by not having the smart meter?

Rachel Fletcher: They are not paying more, but they are having to go outside to top up their gas or electricity meter. When they go off supply, energy suppliers do not know that and so we cannot step in to help them. Smart meters for prepay customers are transformational.

We would also like to be able to devote our resources to fixing the meters that are not working. At the moment, those numbers are not included in our smart meter roll-out figures. We would like to be able to prioritise customers who are actively asking for a smart meter because they want to use it in order to save money. A customer-focused approach is the right way.

Q105       Mark Pawsey: Should we be focusing more on fixing the ones that do not work before we try to install more for the 30% of people who do not yet have one?

Rachel Fletcher: Yes, and meeting pent-up demand. That would drive a more positive customer attitude towards smart meters.

Q106       Mark Pawsey: Tony, what is your assessment of where we are on smart meters?

Tony Green: It is not something that we are involved in at all so I will have to pass on that one.

Q107       Mark Pawsey: Chris, can you comment from the Centrica point of view?

Chris O'Shea: Some 56% of our customers have taken a smart meter.

Q108       Mark Pawsey: That means 44% have not.

Chris O'Shea: Yes.

Q109       Mark Pawsey: That is an astonishingly high figure, given the original projections of the smart meter scheme.

Chris O'Shea: Some 600,000 of our customers have, after at least four contacts, confirmed that they do not want a smart meter. It is voluntary at the moment. I have customers who write to me saying, “Please stop bothering me. I do not want a smart meter”. If we want this to work properly—

Q110       Mark Pawsey: Should we just abandon the project, then? The benefits essentially arose when everybody had got one, did they not?

Chris O'Shea: Government figures show that gas consumption falls by 3.5% and electricity consumption falls by 3%, if you have a smart meter. Those who do not have smart meters, on average, will be paying more because they will be consuming more energy.

In order to have the proper smart grid that is required to keep costs low in the future and to have a more responsive grid, we think everybody should have a smart meter. One of the things that we should consider is whether this is a voluntary programme or a mandatory programme.

Q111       Mark Pawsey: Should it be a mandatory programme? You just said that 44% of your customers do not want one. Why are you going to compel them to do something that they do not want to do?

Chris O'Shea: Some 44% of our customers do not have them. About 600,000 or 8% of our customers have said they do not want one. For 36% of our customers, we are not 100% sure whether they will take one or not.

Q112       Mark Pawsey: You have been communicating with them for 10 years trying to persuade them to have one. Surely you know why they do not want one.

Chris O'Shea: There is a cost to the smart meter programme. The way that it works is that you get a certain allowance in the price cap. You get an allowance on the price cap. If you install fewer, you are fined by Ofgem. If you install more, you do not recover the cost.

Q113       Mark Pawsey: Does that regime need changing? It is clearly not working.

Chris O'Shea: If we want to have the smart grid that we all agree will reduce costs, we should embark on a programme whereby it is not the responsibility of retailers to install smart meters; it is the responsibility of certain companies. We have 1,700 smart meter installers. We would be very happy to install smart meters for any company, for Octopus, E.ON or anybody.

If we split the UK up street by street rather than customer by customer, we think you would get quite a lot of efficiencies. It would reduce the cost. If you mandated it and we had that change of programme, it could be done in the next five years or so.

Q114       Mark Pawsey: Did you say that you have an assessment of how much extra those who do not have a smart meter are paying?

Chris O'Shea: Those who have a smart meter are consuming, on average, 3.5% less electricity.

Q115       Mark Pawsey: Those who do not have one are paying 3.5% more than they need to.

Chris O'Shea: On average, those who do not have one, it would appear, are consuming more gas and electricity, and therefore they will be paying more for their energy.

Chair: We have three quick and brief interventions. I hope they are quick and brief. The first in was Mark Garnier.

Q116       Mark Garnier: Very quickly, I tried to get a smart meter in the two homes that I have. In one of those, I was told that my four-bedroom house was too complicated for a smart meter. By the way, it was neither of you two nor anyone on this panel. In another one, I was told that apparently my walls were a bit too granite-y.

What is going on? Can either of you two compete against this other person in order to deliver a smart meter? I would really like that.

Chris O'Shea: I can give it a go and then maybe Rachel can do the same. In some homes you have three-phase electricity. Smart meters are not designed for three-phase electricity. Larger homes sometimes have an industrial electricity supply. That is quite difficult.

Mark Garnier: A four-bedroom house is not a large home.

Chris O'Shea: I do not have an answer for that, but I am very happy to get someone to have a look at it. On the walls being too granite-y, the smart meter has to send a signal. It is like having a poor mobile phone signal in a home. There are some homes where it is just very difficult. Either you do not have the right coverage—

Q117       Mark Garnier: Put a wire and an aerial on the outside. There must be a way around it.

Chris O'Shea: There is a way around everything.

Rachel Fletcher: This illustrates the point that at the moment the focus of the smart meter programme is, “How many meters can we put on the wall?” That means there is very little incentive for a hard-pressed engineer to spend time looking for bespoke solutions for your properties.

Chair: Lloyd Russell-Moyle, if you want to come in, do so quickly.

Q118       Lloyd Russell-Moyle: Tony, your company maintains and runs the gas meter network. You are the single company to do the gas meter network. Is that right?

Tony Green: No, we run the pipeline assets. The actual meters are owned by other people. It will be the suppliers that look after the meters.

Q119       Lloyd Russell-Moyle: Chris is hinting at this, but would it be worth the DCC or some overarching body being the one that owned the meters and organised the supply of the meters? That body could contract you to do the physical installation, but, rather than it being owned and decided by you, it should surely be a central body, should it not?

Chris O'Shea: Any number of companies can own smart meters. We outsourced the ownership of our smart meters for many years. We have now brought that in-house. We own the smart meters that we put on walls and we get a rental for them.

You could outsource that. There are some specialist smart meter companies to which you could outsource that. We do not need to change that part of it. The financing is not the problem. It is the way that we go house to house and street to street. That is the way to solve it. There is plenty of finance for this.

Q120       Lloyd Russell-Moyle: Who should co-ordinate that, then? Is it something like the DCC or Ofgem?

Chris O'Shea: No, the DCC has enough of its own problems to sort out.

Q121       Chair: Is there anybody who should co-ordinate this or should we leave it to the companies?

Chris O'Shea: Ofgem is the perfect one to co-ordinate this.

Rachel Fletcher: This should not be done to consumers. We see people queuing up and asking for a smart meter. We are offering them tariffs or tools that allow them to use the smart meter to save much more than the 3% energy savings that have been quoted, up to hundreds of pounds a year.

Lloyd Russell-Moyle: I am with Octopus and I still do not see the advantage of it.

Chair: We have to move on.

Q122       Dr Coffey: Chris O’Shea, you just mentioned co-ordination. You could look at something like the digital TV switchover. I have two particular questions—feel free to write—for Rachel and Chris. Do you share with Ofcom and Ofgem where you cannot do a smart meter because of a lack of connection through mobiles? Ofcom is saying that we now have comprehensive coverage everywhere.

Secondly, there is a regulation that the person has to be in the house for you to do that installation. What proportion of your failures are down to people just not being there or you not being able to agree a time?

Chris O'Shea: I would need to come back to you on both. We do talk to mobile telephone companies when we cannot get a signal. There is not universal signal.

Q123       Chair: We can leave you coming back to us. Does anybody else want to chip in?

Rachel Fletcher: There is a specialist communications network for smart meters. This is a matter for the DCC, not Ofcom.

Q124       Dr Coffey: What about not being at home?

Rachel Fletcher: That is a significant proportion of failures.

Chair: We will now move to the very patient Barry Gardiner.

Q125       Barry Gardiner: I am struggling to work out who benefits and whether the energy market shares profits and losses fairly between consumers, retailers, transmitters and generators. The report that the UKERC produced said that the way the wholesale electricity market operates was making worse the impact of the energy crisis on consumers.

The associated bill to consumers rose by £29 billion in 2022 compared to pre-Covid levels. Most of the additional revenue was associated with gas generation and renewable generators, which are supported by the ROCs—renewables obligation certificates. Between them, they accounted for 70% of the increased revenues.

The revenues to gas generators substantially exceeded the rise in costs. When we look at the profits that Shell, Equinor, ExxonMobil and BP are making, we see surplus profits of £65 billion. The consumers are paying £29 billion more; the generators are making £65 billion more. Yet some of you would like to persuade us that this is a fair system and that the consumer is not being taken for a ride, Mr O’Shea.

Chris O'Shea: I am sorry. I am not sure what the question is.

Q126       Barry Gardiner: In that case, I cannot help you. You really do not understand the question.

Chair: Could we briefly rephrase?

Chris O'Shea: There was not a question in there. There was a statement. What is your question? I will answer your question, if you have one.

Q127       Barry Gardiner: I asked you whether you believe the risks and rewards were being equitably shared across consumers, generators, transmitters and every element of the industry.

Chris O'Shea: You have a system whereby consumers are protected by the price cap.

Q128       Barry Gardiner: They paid £29 billion extra at the same time as the generators were making £65 billion extra. Do not tell me they were protected. They may have had some protection, but they certainly saw a doubling, in most cases, of their fuel bills. Do not give me a relative and say, “They were protected by the price cap”. No, they were not. They saw a huge rise at the same time as people were making huge profits in this sector. How did that come about and how can you still say it is fair?

Chris O'Shea: The point I am making is that Ofgem is responsible for regulating the sector. Ofgem is answerable to this Committee. The price cap allows a profit of 2% for energy retail companies.

Q129       Barry Gardiner: What you are saying is, “Do not blame us; blame the regulator”.

Chris O'Shea: To be clear, you have mentioned BP, Shell and Equinor. I cannot answer for them. You will have to talk to them yourself to understand. They mostly are in gas retail rather than power generation.

Q130       Barry Gardiner: You are also a generator, though, are you not?

Chris O'Shea: We are a nuclear generator. We operate two very small standby generators that come on when the wind stops blowing. We have not been party to these huge profits that may or may not be made by gas generators. That is why I cannot give you an answer to that question on behalf of Centrica.

What I can tell you is that price regulation has reduced bills to consumers substantially. Is it perfect? Absolutely not, no. Should it be changed? That is for this Committee to think about. We have been very clear. We called for the abolition of the standing charge because we do not think that is right.

Barry Gardiner: We have been over that.

Chris O'Shea: We have not been over it in this session.

Barry Gardiner: Let me move to Mr Green and Ms Fletcher.

Tony Green: From our own perspective, our charges to customers have not changed throughout that entire period. Our bill is about £168 for the consumer. That is the average dual fuel bill. It is 7% to 8%. That is all incorporated within the standing charge. That has not changed throughout. We are not benefiting from any windfall at all. As I said earlier, we are regulated. We are allowed a 5% return on regulated assets. We have not seen any upside at all from the windfalls.

Rachel Fletcher: Consumers are currently exposed to international wholesale price increases that occurred as a result of the invasion of Ukraine. That is a result of us being overly dependent on imported fossil fuels. Consumers are exposed to inefficient energy system costs. Those costs could be brought down significantly—it has already been talked about this morning—by introducing zonal pricing and reducing the cost of constraints in particular. Consumers are exposed to the fact that we are not decarbonising quickly enough because renewable generators cannot get access to the networks because they have not been built and connections have not been dealt with properly.

We need to see stronger incentives and reforms to address all these things. If we do that, we could be taking billions of pounds off customers’ bills and insulating them from future geopolitical shocks. Everybody in the industry, companies, regulators and Government alike, needs to be focused on that.

Q131       Barry Gardiner: Mr Green and Mr O’Shea, how many quarters have you been in profit in the last 15 years?

Chris O'Shea: On an underlying basis, I estimate that we will have been in profit for most of those. That excludes the write-down of asset values, which would have seen a reasonable number of quarters of substantial losses. We can write to the Committee and let you know.

Tony Green: I would not have the details off the top of my head. Last year we were in profit; the year before we were in loss.

Q132       Barry Gardiner: You could write to the Committee.

Tony Green: We could write and give you that.

Q133       Barry Gardiner: Mr O’Shea, on a lighter note, I watched the interview, as I am sure many members of the Committee did, where you said that your own salary of £4.5 million then was unjustifiable. I think your salary has almost doubled to about £8 million since then.

Chair: That is annually.

Barry Gardiner: Annually, yes. I do not want to take you up on that, because you said it was the remuneration committee that decided these things. You could always make a recommendation through your remuneration committee, but I am going to leave that one there.

My worry was about your mother because you said that the reason you understood how the consumer felt and the poor people felt was that your mother was living on a pension. Please tell me that her son, who is earning £8 million a year, is seeing his mother all right.

Chris O'Shea: Do you want me to talk about my mother’s financial affairs?

Q134       Barry Gardiner: No, I want to reassure the world. You said the reason you understood what poor people were going through was that your mother was living on a pension. You raised the issue of your mother’s financial affairs.

Chris O'Shea: I see all sorts so I understand the pressure that people have been under over the past several years. I understand that the energy price increase came before Russia invaded Ukraine because we did not have the right investment in the energy network. Prices doubled before Russia invaded Ukraine.

I see that every day from customers. I get letters, emails and messages from customers every day. You get them from constituents. We work on that with you. I see this every single day. We have 10 million customers in the UK. People are struggling. The people who are struggling with their energy bills are struggling with their food costs, their mortgage, their rent and their council tax.

Q135       Chair: Is that not a function of inequality?

Chris O'Shea: You have to raise that question. There are a substantial number of people in the UK—

Q136       Barry Gardiner: Some 5.3 million people currently live in households that are in debt to their energy supplier. That is what Citizens Advice is telling us.

Chris O'Shea: Those households are not just in debt to energy suppliers. They will be behind with their council tax. They will be behind with their rent; they will be behind with their mortgage; they will be using food banks. Yes, there is inequality that we need to work together to solve.

Q137       Chair: Mr O’Shea, on the point of inequality, what is the average salary within your company? How long would it take the average salaried person in your company to earn the £8.1 million that you earn annually? How many years would it take for them to earn £8.1 million?

Chris O'Shea: We have 20,000 people in our company on average. The wage bill is about £1.3 billion.

Q138       Chair: What is the average salary?

Chris O'Shea: It is £65,000.

Q139       Chair: How long would it take? Would it take about 100 years?

Chris O'Shea: No, it would take less than 100 years.

Q140       Chair: It would be less than 100 years. Would it be 80 years?

Chris O'Shea: I do not have the number to hand.

Mark Garnier: It is 8 million divided by 65,000.

Chris O'Shea: To be clear, that is not a salary. I think that is slightly misleading. That is my compensation.

Q141       Barry Gardiner: That is your remuneration package.

Chris O'Shea: Yes, absolutely. There is fixed and there is—

Q142       Chair: How long would it take, then? You are saying that the average person in your company is getting a £65,000 salary.

Chris O'Shea: That is the average cost, yes.

Chair: How long would it take? It would take them 10 years to be at the foothills of that at £650,000. It would take them 100 years to be at £6.5 million. I was wrong. It is not less than 100 years. It is greater than 100 years. We are talking about inequality. Is there not inequality within your company? Should we not start at home?

I do not want to make this personal, but you are a personal example of this. Should companies such as your own, whose employees are making extreme fractions of the CEO, start to make equality something that is a core function of the company?

Q143       Barry Gardiner: Chair, if I may, I want to reinforce your point. Mr O’Shea, your company engaged in fire and rehire. You told people that they were fired, but they could get their job back if they took it back on worse terms and conditions. Some people refused to do that and they left your company. They were not earning huge amounts of money. That is what ultimately went to make the profitability of your company greater. That is ultimately what your remuneration package depends on.

That would be my beef on this one, Chair. Some people left the company because they refused to take their own jobs back on worse terms and conditions at the same time as the profitability was being increased, which helped your remuneration package.

Chris O'Shea: Mr Gardiner, you give half the facts there. The part of the business that we had the biggest dispute with was our in-home servicing business. Last year, that business lost £7 million. The reason that we had to restructure terms and conditions is that the cost base of that business was not competitive. You know that because we have exchanged letters on that.

We are now building that business back into profitability. The reason we took those difficult decisions was to secure its long-term future. Since then, we have recruited 1,500 apprentices. Before the terms and conditions changed, we had recruited 250 apprentices in six years. We are creating thousands of well-paid jobs.

Q144       Chair: We have gone a little off the point here, Mr O’Shea. The point was equality. It would take 124 years for somebody on a £65,000 salary to match £8.1 million. Does that seem to you a bit iniquitous?

Chris O'Shea: It is appropriate for us to have a debate about equality in general.

Q145       Chair: In general, does it seem iniquitous to you? Does it seem fair?

Chris O'Shea: Markets set salaries.

Q146       Chair: Is it fair, then?

Chris O'Shea: What is fair to one person is not fair to another.

Q147       Chair: Is it fair to you? That is the question I am asking.

Chris O'Shea: I have been very clear that I am incredibly fortunate to be in the position I am in.

Q148       Chair: Rachel Fletcher, just briefly, you mentioned that the wholesale price had risen as a result of the Ukraine war. Why has the rise in the wholesale price of the raw material to make energy, due to the war, resulted in profits for companies between the point of gas extraction and the consumer using energy? Where has the profiteering come from? I am not saying it is you.

Rachel Fletcher: I do not know whether there has been profiteering on the wholesale side of things or in the sale of gas.

Q149       Chair: Has anybody made profits on this?

Rachel Fletcher: We are an energy retail company.

Q150       Chair: You have not noticed anybody making profits.

Rachel Fletcher: We do not generate. We have seen, as you have mentioned, Government stepping in with a windfall tax on renewable generators that have benefited from higher wholesale prices. The general point I am making is that we need to insulate ourselves from these shocks in future. The way to do that is to accelerate our route to net zero.

Q151       Chair: One thing that is out of control is the profits of companies. We really cannot affect global events, if there is going to be a war, but we surely can regulate the profits of companies within this space. That is the point I am making.

Rachel Fletcher: Yes, I believe that has been done through the tax regime. We saw a new windfall tax introduced on renewable generators during the energy crisis as a result.

Chair: You have been waiting very patiently, Mr Russell-Moyle.

Q152       Lloyd Russell-Moyle: Tony, who should own the energy infrastructure?

Tony Green: That is an interesting question. In many situations, shareholders from around the world own our assets at the moment.

Q153       Lloyd Russell-Moyle: Your company is owned by some pension funds and National Grid.

Tony Green: We are owned by Brookfield, Ontario Teachers’ Pension Plan and GIP, which has just been bought out by BlackRock. We have three of the largest infrastructure funds owning our organisation now.

Q154       Lloyd Russell-Moyle: Who pays for the infrastructure?

Tony Green: We will invest in that infrastructure and then it is effectively leased back over time and paid for by consumers.

Q155       Lloyd Russell-Moyle: The consumers pay for it. There is a particular extra charge on energy bills. If the infrastructure is decommissioned, who should pay for it then?

Tony Green: This is one of the questions that are out there at the moment. The question of decommissioning the gas network is something that people are considering. Decommissioning is not as simple as people are making out.

Q156       Lloyd Russell-Moyle: As we know, for nuclear it is a very complicated and expensive process.

Tony Green: It is, but it is also about the importance of the gas network today. It provides a hugely resilient supply of energy to the country. There are 24 million gas consumers out there. There is industry on there. There are power stations on there. There are a lot of commercial applications on there. Decommissioning needs to be considered from a whole-systems point of view.

We need to think through a credible plan to achieve that. That credible plan then has to be delivered. To give you an idea, if we want to move domestic customers off, over 15,000 consumers a week have to be moved between now and 2050 to achieve that.

Q157       Lloyd Russell-Moyle: Whatever happens in terms of the bigger global plan, we know there is going to be less demand for the gas grid in some local areas and there might be more demand, if we use it for something alternatively, in other areas. It will need to be adapted. There will be some assets that are decommissioned, effectively, and some that are commissioned. At the moment, what percentage of commissioning and decommissioning is put on the bill?

Tony Green: At the moment there is no decommissioning apart from assets that are replaced during our regular—

Q158       Lloyd Russell-Moyle: How much of the commissioning is paid for out of the bill?

Tony Green: The main aspect of our commissioning work is our iron mains replacement programme. We invest around £400 million a year in that programme. That will run through to 2032. That is done on a safety basis.

Q159       Lloyd Russell-Moyle: How much of that £400 million comes, on an annual basis, from the bill and how much comes from your investors pumping more money in?

Tony Green: Our bill per annum is about £168. Half of that is utilised for capital expenditure.

Q160       Lloyd Russell-Moyle: I just want to be clear. Are you saying that half of the capital expenditure is paid out of the bill and the other half is paid by investment or is all of it paid out of the bill? Are your owners, your investors, putting cash in on an annual basis to develop new infrastructure or replace infrastructure, or is all the infrastructure paid for out of the billpayer?

Tony Green: The repex is paid for by the billpayer, so 50% of the bill is utilised for that mains replacement programme.

Q161       Lloyd Russell-Moyle: The billpayer is paying every penny for these new investments. There is no investment from your owners in this. They are effectively owning an old asset that might have been invested in years and years ago. The billpayer is paying everything. Why should there be any profit or any return to your owners on this infrastructure? They have not put a penny into it.

Tony Green: They have bought into our organisation.

Q162       Lloyd Russell-Moyle: They bought into your organisation that holds old assets. They own the old assets, yes, but why should they receive any returns from the new assets that are being invested in?

Tony Green: Our assets need to have a long life. We have to maintain a safe and reliable asset going forward.

Q163       Lloyd Russell-Moyle: That is what the other 50% of the bill pays for.

Tony Green: That aspect is for running our business. That is the operational costs of maintaining a frontline operation and 24/7 callout.

Q164       Lloyd Russell-Moyle: Chris, what benefits does the consumer get from paying for energy infrastructure development and the costs that go on the standing charge in their bills?

Chris O'Shea: There are two things here. First, what benefits do consumers get from paying the network charges? Secondly, should we have standing charges? We are very clear at Centrica: standing charges should be completely and utterly abolished.

Q165       Lloyd Russell-Moyle: They should be completely abolished. It should just be a per unit charge.

Chris O'Shea: Per unit, yes. We believe that the way to get consumers engaged better is something simpler. There should be one single price in the UK and no zonal pricing at all.

Q166       Lloyd Russell-Moyle: Why do you not do that, then?

Chris O'Shea: At the moment, the standing charge is £330 per year per customer. We make about £30 per customer. It would cost us £300 per customer. That would be £2.5 billion, just for one year, to abolish the standing charge. The way that some companies have done it is to take the standing charge off, but charge an inflated rate for energy. With some companies, you pay the entire standing charge over the first one to 10 units. That is a bit of an illusion. Only if you use nothing do you benefit. If you use a very small amount, you pay exactly the same.

Q167       Lloyd Russell-Moyle: You have flexibility to change the way that you are charging. You could decide to get rid of the standing charge or you could decide to put a standing charge in only once people have used X amount of energy. You could choose to do that. You say your policy is that you would like to get rid of it, so why not do it?

Chris O'Shea: We would have to get permission from Ofgem to change that because Ofgem sets the prices. We believe that what is in consumers’ interests is something that is understandable and very straightforward.

Some companies are saying there is no standing charge but then having an inflated rate for the first 10, 15 or 20 units. That does not simplify; that complicates. The easiest thing is to abolish the standing charge, have no zonal pricing and a progressive social tariff.

Q168       Lloyd Russell-Moyle: You want to have no zonal pricing.

Chris O'Shea: There should be no zonal pricing and a single price. Why do people have to play a postcode lottery? There should be a single price across the UK.

Q169       Chair: It might be cheaper for everybody and less profitable for the companies.

Chris O'Shea: It is interesting. DESNZ got some analysis done by LCP and Ofgem got some analysis done by FTI. The Ofgem analysis suggested that solar would move into the south-east of England and the DESNZ analysis suggested that it would move out. It is not very simple at all to model this. The idea that somebody can say, “This will be the saving, if you have zonal pricing”, is for the birds, in my view, because you can get two reports, as DESNZ and Ofgem have, that are contradictory.

As Rachel said earlier, we have to do this with consumers rather than to consumers. It has to be simple for them. How do you explain why somebody in Inverness pays more for their electricity than somebody in London but somebody in London pays more for the gas than somebody in Inverness?

Q170       Chair: If they were both to pay less than they are currently paying and the profits of the companies were to go down, you would be quite upset.

Chris O'Shea: No, because we have to have something that is in balance. We have to have something that allows companies to make enough profit to attract investment and gives customers something that is affordable. We are looking for an energy system that keeps prices down. That is not against the interests of companies like Centrica.

Q171       Chair: Has the UK achieved that? I am not certain it has.

Chris O'Shea: It has not yet, but it could.

Chair: I have to move on to Mark Garnier.

Q172       Mark Garnier: Can I flip this argument the other way? Mr O’Shea, you run a business that has a market cap of £7.1 billion. What is the profile of your shareholders?

Chris O'Shea: The vast majority of our shareholders are pension funds.

Rachel Fletcher: For us, it is pension funds and other international energy companies.

Q173       Mark Garnier: Their shareholders are pension funds as well. Dare I say it, having been an investment banker—

Chris O'Shea: We have 500,000 individual shareholders as well. A lot of them bought in at the time of privatisation.

Q174       Mark Garnier: Yes, but a utility company ultimately is a boring company and it reflects economic growth, and so therefore it appeals to pension funds. In particular, Mr O’Shea, you have a responsibility to many pensioners across this country. All of you have to run profitable businesses. What happens when you go bust? Let us say we put too much pressure on you and you cannot run viable businesses. Who loses the money? Is it your pension fund holders, your shareholders?

Chris O'Shea: It is shareholders, yes.

Mark Garnier: Just to clarify the insolvency law, if you go bust, it is your shareholders that are picking up the cost of what could be bad management on your part or bad legislation on our part.

Lloyd Russell-Moyle: They do not get the return on their investment. They are not picking up additional costs.

Q175       Mark Garnier: The risk lies with your shareholders, does it not?

Chris O'Shea: It does, absolutely. If I could make one additional point, though, this is the reason that Centrica has called consistently for the ring-fencing of customer credit balances. What happens if an energy retailer goes bust? The customer credit balances that they have held are socialised across other energy customers. It does not go against the shareholders. We believe that should be held separately.

Q176       Mark Garnier: It does not go to the shareholders.

Chris O'Shea: No. Ofgem runs a system that socialises consumer credit balances when they go bust. We have called consistently for these to be ring-fenced and held separately. We do that voluntarily in Centrica. We think that must happen.

Energy retailers also must hold adequate capital. At the moment, there are no capital adequacy requirements. Ofgem has brought something in from 31 March next year. It is £115 per customer. We believe it should be a multiple of that. That should be the case because, if an energy company does go bust, the hit should go to the shareholders. At the moment, they can make a one-way bet on under-capitalised energy companies. If the company continues to grow, some very rich individuals, who own some of these businesses, will get richer. If it goes under, the consumer picks up the cost. We think that is fundamentally wrong.

Mark Garnier: I agree with you 100%. I was not properly aware of that.

Rachel Fletcher: There has been a huge amount of work on this, which means excess credit balances are not being held by suppliers. The risk that we have seen in the past was less than 10% of the cost of failed suppliers. That stable door has already been bolted by Ofgem. There is now legislation in place that absolutely limits the volume of credit balances that can be held as a proportion of your balance sheet at any time. This concern about credit balances has now been dealt with, as has financial resilience. We now have a market that has ejected companies that were not financially resilient.

I want to go back to the point about standing charges. They are absolutely too high. They are an unavoidable tax on customers, which many of them cannot afford. We already do not charge the price cap standing charge. We charge below it. That is likely to cost us £100 million off our profit this year. That is not money that is recovered through a unit rate, but we would like to see further work on this.

Q177       Mark Garnier: Sorry, but I am trying to keep on what I want to ask questions about, not necessarily what you want to answer.

Just coming back to this whole insolvency piece, you have highlighted that, if one of these smaller suppliers or deliverers goes bust, it is now being shared across the wider market, which is wrong. There is quite a toxic argument that goes on around energy suppliers. A few months ago I was asking one of them—it was not any of your companies—about its credit rating and the ability of businesses to raise debt, as opposed to equity, although equity is the same. When you compare yourselves to businesses in other countries, is it more difficult to raise capital, be it debt or equity, because of the toxic environment here?

The implication given by this other person was that credit agencies give lower credit ratings to UK businesses than they do to competitors. Has any of you found that to be the case?

Chris O'Shea: It is more expensive rather than more difficult. The credit rating agencies have been explicit. The thresholds that we have at Centrica for our investment grade credit rating are higher than for other companies. Part of that explicitly is to do with being exposed to the retail market in the UK. The rating agencies are not comfortable with the margins that are earned and with the potential for political interference. That is a public fact. That is something that Moody’s and Standard & Poor’s have said quite publicly. It does impact our credit rating, yes.

Q178       Mark Garnier: Do you agree with that?

Rachel Fletcher: It would be very difficult for a standalone retail company to get an investment grade credit rating.

Q179       Mark Garnier: That is in the UK. What about compared to other countries?

Rachel Fletcher: I cannot talk internationally. This is a function of being a retailer, the volume and price risk that you are exposed to, as well as the regulatory risk that Chris has alluded to. That is why it is also very important that, as Ofgem looks at financial resilience regulation, it considers the impact of its own regulations on the cost of capital. Capital adequacy effectively means that non-working capital has to be tied up. Not surprisingly, investors do not like that.

Mark Garnier: This is a regulatory capital piece.

Rachel Fletcher: Yes, exactly. There is a very fine and important balance to be struck between the amount of capital that is effectively being put to one side to provide that resilience and keeping cost of capital down.

Q180       Mark Garnier: What would be the alternative? Regulatory capital is usually to keep a business going in the event of poor revenues. How would you replace that?

Rachel Fletcher: Generally, we agree with the direction of travel that Ofgem has taken on this, but the capital adequacy requirements that will come in next year are setting too high a bar. They are treating energy suppliers as if we pose the same systemic risks to the economy as banks, which we do not.

Q181       Mark Garnier: I am not entirely certain I would agree with that. There are an awful lot of businesses that need energy. It is a different type of nourishment for the business. Banks provide capital; you provide the resources that make businesses—

Rachel Fletcher: The energy still flows if a company goes bust, as we saw during the crisis.

Mark Garnier: Yes, as indeed it did through the banking crisis.

Chris O'Shea: To build on that, it does. I agree with Rachel. We think Ofgem’s approach is in the right direction, but it does not go far enough or fast enough. The energy will still flow. The idea of capital adequacy is to make sure that, when companies fail, it is not consumers who pick up the cost, which they were. Consumers in every single house, including my mum, were paying £88 through their standing charge because energy companies failed. When those companies did well, the money went into the pockets of the people who owned those companies.

Capital adequacy is not to make sure the energy continues to flow. Capital adequacy is to make sure the consumer does not pick up the cost when energy companies fail. We have been calling for this for a couple of years.

Q182       Mark Garnier: Would it not be easier just to reverse the insolvency law on this, which is that shareholders do pick up the cost of it?

Chris O'Shea: They do, but as you know—

Mark Garnier: If they run out of capital—

Chris O'Shea: Absolutely, that is the point. The costs are mutualised. We think that has to stop.

Q183       Chair: Socialism comes to save the companies in the end.

Chris O'Shea: You cannot socialise the losses and privatise the profits.

Chair: That is what is happening.

Chris O'Shea: That is what the current regulation does. That is why we have been very vocal.

Chair: Socialism rescues capitalism once more.

Chris O'Shea: That cannot be right.

Mark Garnier: Socialism does not rescue capitalism. It is market intervention.

Chair: That is basically what he has told us.

Chris O'Shea: I get misquoted often. Please do not misquote me on that.

Barry Gardiner: It is the rich what gets the pleasure; it is the poor what gets the blame.

Mark Garnier: We have always had a proxy of a market economy, which is based on the fact that you have interventions.

Sir Mark Hendrick: He realises that his pension is safe.

Q184       Mark Garnier: Sorry, I am being interrupted by Mark. I doubt it was an important point that you were trying to make, Mark.

Does the current market system and structure incentivise lower energy bills, Chris?

Chris O'Shea: This will sound twee or glib, and I do not mean it to be. Higher prices incentivise lower energy bills because they encourage people to use less. We have seen a reduction in consumption. There are some things. We spoke about the ECO scheme at the earlier session. We spend about £400 million a year on the ECO scheme. We spend about £10,000 a home across 40,000 homes. The UK has 28 million homes.

The cheapest energy is the energy that you do not use. There are incentives to reduce energy consumption. The reason that we have to have smart meters rolled out across the piece, the reason that we should have time of use tariffs and more innovation in the market, is to reduce the price to consumers. That is what has to happen. We need more wind, more solar, more backup gas generation and a reliable system that gives cheaper prices.

Q185       Mark Garnier: I get that. You are trying to incentivise better use of energy, but, ultimately, what about competition? Is it better or worse that we get more people into the market? That is what we have tried to encourage.

Chris O'Shea: Some of the competition that has come in over the last three, four or five years has been really good for the market. Those companies have innovated and brought new tariffs and new products to customers. Some of the incumbent companies have a lot to learn from that.

There has, however, been the illusion of competition for these companies that have come in and sold at a loss. They knew it was a one-way bet. All you need to get an energy licence is a £420 deposit. They knew it was a one-way bet. Thirty of them went bust. It cost consumers £3 billion, £88 per home. That was not competition. All of this switching was not competition. It was merely a gamble that paid off for some. For those it did not pay off for, it cost consumers a fortune.

Q186       Sir Mark Hendrick: Can I ask each of the panellists how the market can be structured so that the increase in global prices can benefit the whole system, including the consumers, rather than particularly the generators and transmitters at the moment?

Chris O'Shea: That is difficult. Consumers benefit from the increase in global prices from generators through higher tax revenues. Our taxes have gone up by 400%. That goes into the general Exchequer. You could argue that consumers benefit from that.

In reality, something that increases the wholesale price of energy is never really going to benefit the consumer of energy because the price is going to go up. The question is how much of that increased profit goes into the Exchequer and for the general good. It is not possible to design a system whereby higher wholesale prices mean benefits for consumers.

Q187       Sir Mark Hendrick: You cannot structure the market, but how can you incentivise it that way?

Chris O'Shea: Higher prices will incentivise lower consumption. When people figure out how to consume less, you tend to find that they keep that consumption lower even when prices go down. A spike is not good for consumers, but one of the few good things that come out of it is that it increases awareness of energy efficiency.

Tony Green: I would largely agree with Chris. As a network operator, it is not really something that we can get involved with overall, but I would largely agree. Yes, the higher price does trigger people to focus, but we need to be looking at how we reduce energy use overall and educate vulnerable customers to use less. There are market considerations, but focusing on our customers is probably more important.

Rachel Fletcher: What we have been through over the last couple of years should have us all focusing very tightly on getting off gas. That is not just in terms of improving the proportion of renewable generation; it is also making sure we get customers off gas in their homes as well.

It is right that there is a focus on energy efficiency, but we have situations where customers are paying nothing for electricity because that is the current value of electricity in the market at the time that they are using it. We are seeing people saving hundreds of pounds through smart tariffs and making use of low-cost electricity when it is plentiful. The more that we can shift away from fossil fuels, and electrify and green electrify our system, the more we can have customers benefiting from shifting their power out of expensive periods and making use of plentiful renewables, which otherwise we are going to have to pay to constrain off the system.

Q188       Sir Mark Hendrick: I would agree with you. I would like to see us not using gas. At the moment, people are trying to say that carbon capture is a solution to global warming and gas, but we will leave that aside.

Just finally, the risk-reward issue has been discussed quite a lot today. What policies can the Government introduce to move that risk reward across the whole energy sector rather than it being focused perhaps on one part rather than others?

Chris O'Shea: Regulation that has the consumer at its heart is very important. Regulation that makes sure, as you say, we have responsible energy companies that have adequate capital and protect customer balances is an absolute minimum.

Taking a whole-systems approach is very important. What are we trying to do? We are trying to make sure that, when people put the light switch on, electricity comes through and the lights go on. How do we put together that system whereby you have adequate recognition of the risks and rewards, and you have something that is as cheap as possible for consumers? That is in the interests of everybody in the energy sector.

Tony Green: It is absolutely important to make sure we follow that whole-systems approach and we do not leave anybody behind in the energy transition.

Rachel Fletcher: I agree. There are so many things that we could be doing to make the energy system much cheaper. We could be saving billions a year through policy choices, wholesale market reform, better access to markets for flexible demand, for example, and improving the efficiency of networks.

We need to take that whole-system strategic approach. In the meantime, though, we need to be protecting customers from risk through targeted bill support. As has been discussed, although bills are coming down, there are still far too many households in this country that cannot afford their energy. They are either racking up debt or going without food in order to pay their energy bills. We need to address that.

Sir Mark Hendrick: I would agree with that.

Q189       Chair: There was a mention of customers and bills there and I want to make a quick comment. None of you are in the firing line for this, but Mr Mansbridge from Bournemouth on the south coast of England has written to us ahead of the discussion this morning to point out that people on low incomes who live in residential homes, in retirement flats or in multiple occupancy buildings have no direct relationship with their energy companies and are forced to buy energy from the owner of the park.

The owner does not make a profit, but these businesses buy their energy through commercial contracts, which means that, when they split the invoices, some residents in retirement flats can be charged up to 80p a unit when the price cap is 32p a unit. I can imagine what the answer will be, but should Ofgem quickly look into this? It is a scandal.

Rachel Fletcher: There are blind spots in the regulatory protection for customers.

Chair: Ofgem should look into it.

Rachel Fletcher: This is a good example of it. In most cases, I imagine those care homes are being treated as a business customer. They may have bought through a broker.

Chair: These are retirement flats.

Lloyd Russell-Moyle: I have hundreds and thousands of residents who are in situations like this. This is very big.

Q190       Chair: Should Ofgem look into it or not?

Rachel Fletcher: Yes, but it also involves looking at the brokers that serve businesses.

Tony Green: From the sound of it, it sounds like Ofgem should look into it.

Chris O'Shea: Yes, absolutely.

Q191       Dr Coffey: Very briefly, Rachel, you have just mentioned that you had 10 years as a regulator of water and electricity. Can I just clarify something? One of the issues for inner-city dwellers who rely solely on electricity is that they cannot take advantage of your zero-cost electricity because they are not allowed to use their appliances during the times that you are selling electricity at zero. In fact, you have been paying people to use it then. Can you work out how you might be able to do that? Often they are the most deprived people of all.

Rachel Fletcher: Are you alluding to a situation where the tenant’s electric heating is being controlled by the landlord?

Q192       Dr Coffey: Yes, or the electricity to wash clothes or whatever. At the moment you are pricing your electricity so that you are paying people to do their washing at a time when some of the lowest-income people in the country are not allowed to. You are subsidising richer people—I am not saying “rich”, but “richer”—at the expense of higher costs for people in inner cities who cannot necessarily take advantage of your tariffs.

Rachel Fletcher: To be clear, customers who cannot flex their electricity demand are not subsidising those who do. In fact, those who can shift their energy demand are helping to keep the overall system costs down, including network costs and wholesale costs, for everybody.

We would like to and are innovating every day to find more and more ways to help a whole range of customers benefit from low-priced electricity, including customers who are using night storage heating, which is something we are looking actively at right now. No, customers are not paying more if they do not flex when others do. They should be and are benefiting overall.

Chair: Thank you all very much. Time has got the better of us. Prime Minister’s questions has started. Can I thank all of you? It was robust at times, but we can be grateful that Barry’s worry about mothers has been somewhat allayed. I hope you enjoyed it. We certainly found it useful. Thank you again.