Energy Security and Net Zero Committee 

Oral evidence: Work of the Department for Energy Security and Net Zero, HC 396

Wednesday 22 January 2025

Ordered by the House of Commons to be published on 22 January 2025.

Watch the meeting

Members present: Bill Esterson (Chair); Ms Polly Billington; Sir Christopher Chope; Wera Hobhouse; Luke Murphy; Mike Reader; Bradley Thomas; Claire Young.

Questions 407 - 501

Witnesses

I: Jonathan Brearley, Chief Executive, Ofgem; Tim Jarvis, Director General, Markets, Ofgem; Akshay Kaul, Director General, Infrastructure, Ofgem; Charlotte Friel, Director of Retail Pricing and Systems, Ofgem.

Examination of witnesses

Witnesses: Jonathan Brearley, Tim Jarvis, Akshay Kaul and Charlotte Friel.

Q407       Chair: Welcome to the Energy Security and Net Zero Select Committee, where we welcome Ofgem as part of our ongoing review and scrutiny of the work of the Department and its arm’s length bodies. Welcome to chief executive Jonathan Brearley, director general Tim Jarvis, director general Akshay Kaul, and the director for retail pricing and systems, Charlotte Friel. You are all very welcome.

Jonathan Brearley, I know that you want to make an opening statement, in which I will ask you to consider the following question. There is much discussion about your role in setting the price cap. Whose responsibility should it be to set energy prices in this country? Should it be Ofgem’s or the Government’s?

Jonathan Brearley: That is a great question. Thank you, Chair. I will just launch into a few things that I would like to say in advance of that. First of all, we are really pleased to be giving evidence for the first time to this Committee under your chairmanship. As a regulator, you know that we report to Parliament and, in effect, to you, so we look forward to working with all of you over the coming years.

As Ofgem, we are here to protect customers in today’s market but also to support the transition to net zero or, as the Secretary of State described it, the Government’s mission to become a clean energy superpower. When I think about that role, I generally start with where customers are today. We know that, given the cost of living crisis, things for many are still very difficult. Although prices are around 10% lower than they were a year ago, the price cap increased by £21. Because we are seeing further increases in the international gas market we are, unfortunately, likely to see further price rises in April.

Having spoken to many customers, I know, as do you, that many in both the household and the business sector are going to find this extremely challenging. Within that context, we are working hard to protect customers today. For example, we have stabilised the market and improved the financial resilience of retailers, protecting customers against the costs that appeared in 2021 and learning the lessons from the gas crisis. We are working to improve service standards and, although there is a lot more to do, we are seeing increases in customer satisfaction.

We are adapting our pricing regulation—I will come to your question, Chair, about whether we should be doing this—for example by potentially offering low and zero standing charge options in the future. Within our powers, we are working on a series of things that we can do to protect vulnerable customers, such as rules around company behaviour, reducing PPM tariffs, and quite radical proposals around how we might help the industry to address the debt problem.

I do need to be clear that, as a regulator, there are limits on what we can do. We are keen to pursue, with Government, options to focus targeted support at those who are most vulnerable to energy price rises. That is part of the problems that we face today.

There is another underlying truth, which the Secretary of State put forward when he came to this Committee. Right now, we rely heavily on the international gas market. Unless we transform our energy infrastructure, we will remain dependent on volatile international gas prices which, again, have leapt over the last few months.

Therefore, we are working hard with Government to support the drive to deliver clean power by 2030, and also to make sure that the market, when we get there, is fit for purpose for customers. Clearly, that means building out networks, fixing the connections issue, creating the right incentives for customers to be able to move their demand, and taking advantage of the economic opportunities, particularly given the conversations that we have had with the Chancellor within recent weeks.

I hope and expect that this is going to be a decade of change. That means change for the sector, but also for Ofgem itself. We welcome the Ofgem review, because we want to see a debate about our duties. We want to ask Parliament what you would like us to do and to focus on. Equally, we think we need new powers in a market where energy is bought, sold and used very differently.

Before I finish, I am just less than two weeks away from my first five years as CEO, and I am very grateful for all the hard work from the teams across Ofgem. Despite the challenges, I am very proud of the work that they do and the positive impact that they have for customers. I do want to finish where I started. We are here to protect customers today, but also to play our part in building that system for the future, and I look forward to working with the Committee as we do that.

In terms of who should set pricing, in a sense, within the mandate that we have, I do not think it is an unreasonable thing for a regulator to do, but you need to understand what we do and do not control. Within the formula that we use, the margin in the price cap, which is the regulated profit that a supplier might make, is about 2.5%. The rest of those features are, essentially, cost analysis, so they are a technical job reflecting the way that the market is.

As I said before, when I think about the way that prices change, a lot of it is outside not only Ofgem’s control but, quite frankly, Government’s control. It is really based on events in international markets, which is why we see the volatility we have seen over the last few years, given the geopolitical situation and the situation within the gas market.

I do not think it is wrong for the regulator to do it, but you need to know that the price cap is not a limit on prices in the same way that you might imagine it is. It is a reflection of the costs in the market, and those will change.

Chair: It is almost as if you were expecting the question. Congratulations on your reappointment, by the way. I should have said that before I asked you to give your opening statement. Chris Chope, I do not know whether you want to ask the question that you indicated to me before, because Mr Brearley hinted at it.

Q408       Sir Christopher Chope: You and other regulators recently had a meeting with the Chancellor of the Exchequer. Can you tell us what transpired and how you were able to say to the Chancellor of the Exchequer that electricity and energy prices are fundamental to our ability to grow as a nation and that, at the moment, we have the highest electricity prices in the western world? Surely, that is very inhibiting in terms of growth, so what were you able to say to the Chancellor about what you are going to do to ensure that we become a low-cost energy superpower?

Jonathan Brearley: In a sense, there were five things that we put forward to the Chancellor, and they are really divided into two areas. The first is how you secure investment in the sector, how you make sure that that happens at pace and, frankly, how you make sure that the regulator is not a blocker to that.

As the Secretary of State laid out last week, we agree that the best pathway to more stable prices is to move to a net zero system, simply because the costs that you put into the system are the capital that you spend up front, and are not dependent on the markets that we see around us.

To go through the five things it is, first of all, about making sure that we play a part in getting investment for clean power 2030. We agree that we need to resolve the connections issue, because when investors come to this country, one of their principal issues when investing in the energy market is being able to get connected to the grid. We need a more dynamic retail market to do exactly that: to make sure that all customers—both businesses and households—have the ability to minimise their costs in a system where you are going to see more in intermittent renewables in the future.

Coming down to how you make this energy system attractive for investors, there are two further things. The first is making sure that factories, when they arrive here, can connect to the grid. Secondly, there is a conversation that we would like to have about industrial costs. There is a scheme already where Government, for example, exempt some of the industry from some of the costs that are in the system, but that comes with trade-offs both for the taxpayer and, indeed, for other consumers.

In terms of minimising cost, we are four-square behind getting to 2030, because that is the best way to avoid some of the costs that we have seen in the last two years. I sat with businesses through the crisis. I sat with small businesses facing massive increases in their bills. All of that was driven by the volatility that we see in the gas market.

Q409       Sir Christopher Chope: It is also about the extent of the gas prices. You have not really mentioned the word “growth” in your answer. If the Chancellor really wants to go for economic growth, what are you saying that you are going to be able to do to help deliver that by reducing our overall costs of energy, particularly to industry? At the moment, we are exporting industry overseas because of the very high energy costs we have here. Surely, this should be the No. 1 priority for your organisation.

Jonathan Brearley: We are absolutely focused on reducing costs in the overall system. That is about designing a market where you can get to 2030. That is about making sure that we move away from this country’s and this industry’s dependence on gas. In the long term, that is where you want to get to, and we are four-square behind that. Quite frankly, that is a huge part of not just Ofgem’s but the Government’s growth mission.

Equally, alongside that there is a short-term question about how we distribute costs. We should be mindful of all the investors that want to come here and invest in the system, and get the right industrial prices as well.

Q410       Chair: Thank you very much. It sounds like the discussion is around how regulation can contribute to growth, and there is an ongoing discussion to be had there. How has the change of Government and having the mission-oriented approach, not least that 2030 goal, impacted on your work?

Jonathan Brearley: I will kick off, but I will ask Akshay to come in and take you through the detail. The first thing to say is that, by having the clarity of goal we have and, quite frankly, the really impressive work that the Department has done to lay out the action plan that came out towards the end of last year, we have across the industry, including the regulator, a set of clearly definable tasks that we are able to deliver against.

There are all sorts of delivery risks, and I am sure that Akshay will expand on where we need help from Government to make them work, but the to-do list is clear. The role for Ofgem, in my mind, is two things. It is, first of all, to make sure that the finance can flow, but also to make sure that customers get out of this system what they were promised. Akshay regularly says to me that “on time and on budget” is going to be the mantra, not just for the network industry but for all the industries that are building for 2030.

Akshay Kaul: The biggest thing that the clean power mission has done is to produce a system plan where all the numbers add up to a clean power target. The entire community—the Government, the regulator, the system operator and the industry—are clear about what we are aiming for in terms of different types of technologies, so how much wind, how much solar, how much battery, how much long-duration storage, what our respective roles are, and what the timescales are in which we need to achieve all of that.

This is not just a system plan that is a nice document or brochure to wave around at conferences. We are going to directly use the clean power action plan to reorder the connections queue. The connections queue will then contain the things that are needed in order to run a safe and secure system for 2030. That is a big step forward from the relatively unco-ordinated, market-led system that we used to have, which has produced all the problems that we see, such as the long connection queues and the high congestion costs.

Q411       Chair: Sorry to interrupt you, but is it possible to do this in time for the Government to hit the clean power 2030 target?

Akshay Kaul: It is a very considerable challenge. From an Ofgem perspective, we have four main areas that we are working on to enable clean power 2030. The first is to solve the connections problem, which is eminently doable once we have the clean power action plan. We can now reorder the queue and that reform is under way. We can talk a bit more about that, if you wish.

The second one is to get all of the network built by 2030. There are about 80 projects in the plan that are critical to the achievement of that target. Of those, nine have already been built, which leaves about 71, and 68 of those 71 are currently on track. Three are not currently on schedule for 2030, and we need to work with the Government to accelerate them.

The big challenge there, if I can orient the timescales for the Committee, is that 2030 is just five years away. If it takes three or four years to physically build the network, all these projects need to get planning consent by the end of 2026. That is going to mean a significant acceleration in their procurement and consenting within the existing planning system. I know that the Government very much have this in their sights.

The third area is long-duration energy storage. We do not have a lot of it. We have only about 2.8 GW. This winter, when you have a period of cold, still, cloudy weather, we have seen that the batteries and interconnectors are, on their own, not sufficient, so we are going to need to set up a brand-new cap and floor regime to attract the private capital into long-duration energy storage and get these assets built by 2030. Again, it is quite a considerable challenge to physically get things such as big pumped hydro schemes built in the time available, but we relish and are up for the challenge.

The fourth and final area that we are working on, which is probably the hardest of all four but possibly also, from a consumer perspective, the most rewarding, is consumer flexibility, which is the idea that consumers can, essentially, be rewarded for moving their consumption from a time of peak demand to a time when the system is less stressed.

The reason that that is a challenge is that we need to bring all the market arrangements, infrastructure and systems together across a range of organisations, and then engage with the public to get enough of the flexible demand response back into the system. The scale of the challenge is to go from 2 GW that we have now to 12 GW, so a sextupling of the resource that is available to us.

Chair: Thank you very much. There are a lot of questions that my colleagues are primed to ask as follow-ups to what we have heard already, so I encourage them to do so.

Q412       Claire Young: I am going to talk about grid connections reform, but, before I do, I just want to pick up on the issue of the reprioritisation of the queue. You cannot reprioritise yourself out of a problem if there just is not enough total capacity. Even if you reorder the queue, does your queue still extend beyond the timeline that you need for delivering clean power by 2030?

Akshay Kaul: We have more than enough capacity in the queue. The size of the queue now is about 750 GW. Even in the most ambitious scenarios, we will not need more than 200 GW or 220 GW in the system. It is a question of really weeding out the projects that are speculative, are not making any progress and are blocking the real projects that need to be connected to the system.

Q413       Claire Young: Can those connections be provided quickly enough?

Akshay Kaul: We are pretty confident that, once we clear up the queue, they can be.

Jonathan Brearley: Do you mean the capacity of the network?

Claire Young: I am talking about the capacity to deliver new connections.

Jonathan Brearley: You need both the queue reorganisation and the new build together to be able to do it.

Q414       Claire Young: Moving on to grid connections reform and your role in that, you are due to make a significant decision on NESO’s proposals for connections reform, and there is a presumption that you will approve them. Why should Ofgem rather than NESO ultimately be responsible for this process?

Akshay Kaul: NESO is the connection service provider. It operates the connection service to standards that are established by us as its regulator. Ofgem is the rule maker. We have to make sure that the proposals being put forward by NESO are transparent, fair and proportionate, and that they are in the interests of consumers. This is a healthy check and balance. NESO is the technical body. It is working with the industry to develop the proposals. Ofgem, as the rule maker, is able to balance consumer and industry interests, and arrive at an overall view.

Q415       Chair: Given that answer, the fact that we are even asking the question points to one of the challenges here, which is the confusion among the public and consumers. Is there a way of making this simpler and communicating better the way that you interrelate with NESO and, indeed, with the Department?

Jonathan Brearley: It is valid to say that, now that we have NESO, Ofgem and the Department in this space, there is still work to do to work through the institutional relationships. The way that I see it is that the Department sets the policy and the strategy. We should be implementing that, while making the economic trade-offs for and between different customer outcomes. NESO’s job is to provide the advice for that plan in the first place, but then to also support delivery through its technical work.

When you get down into the weeds, there will, over time, be debates about where our boundary sits, and there are things that we do and that NESO does that are fairly similar, but those are the principles that I would lay out as a starting point.

Q416       Chair: You made a very good point before about taking consumers with you and getting them to engage with this very important aspect of demand flexibility. The communication part of this is huge, is it not?

Jonathan Brearley: I completely agree. We would like to take a stronger role in communicating things to customers. For example, Charlie here has been working to explain some of the issues around meters, predominantly in Scotland, and how those might be changed. There is a bigger role that Ofgem can play, which is not our traditional role, in getting out there and explaining to customers how some of this works.

Chair: We look forward to the Ofgem roadshow, virtual or in person.

Jonathan Brearley: We might hire a good-looking front person, but not me.

Q417       Claire Young: Is it right for Government to take control of future connection offers through the deployment targets in their clean power plan, or is that backpedalling on the principle that the energy system should be independently regulated?

Jonathan Brearley: There is a genuine discussion. We talked about the Ofgem review and some of the things that we would like to have a debate about. One of them is about what role you would like Ofgem to have in a world where the Government are producing a strategic plan. It does not make sense, at first look, to have a regulator that has a different strategy to the one that the Government have laid out.

However, the energy system has a much stronger sense of direction now that we have that plan in place. I have been involved in electricity markets and energy market reform for over 15 years now. What we, including Ofgem, have always lacked is a sense of the direction that this market is going in. There is a compromise there. We have to be honest. Government are much more in this market than they were five years ago, but that sense of direction, in my mind, is incredibly valuable if you want to move at pace and make the sorts of changes that Government want to make.

Q418       Claire Young: The Government said that they will introduce legislation, when parliamentary time allows, to ensure that connection reform allies with the strategic energy and network plans and supports the delivery of clean power by 2030. Do you have an idea of when you need that to happen, given that they are being fairly vague on timings?

Akshay Kaul: The Government have said that they are supportive of bringing in legislation if that is necessary. At the moment we are working through the industry code modification process to get the new connections regime in place by the end of this year. Our base-case scenario is that that will just go through, so we will not necessarily need legislation to make that work.

The reason that the backstop is helpful is that, essentially, we will be reordering projects that have strong commercial interests to be in the queue or to be ahead of others. There is always a risk of legal opposition to these sorts of reforms, and that is where having a backstop for the legislation is incredibly helpful.

Q419       Claire Young: We know that decarbonising energy systems will require significant local action. However, there is still a lack of a clear framework for the involvement of local authorities and local area energy plans, and how these fit in or are considered. Can you explain Ofgem’s vision for the inclusion and empowerment of local authorities in energy planning?

Akshay Kaul: This is a really big area for us. We have been talking so far about the clean power action plan and the connections queue. All of this is happening at the national transmission level, but we know that the net zero transition is going to play out hugely at a local level with solar power, EVs and heat pump roll-outs, and also changes to the housing stock.

In addition to creating the apparatus for national system planning, one of our flagship regulatory initiatives has been to introduce a similar framework for regional system planning, working with local authorities and businesses in each of the areas, as well as NESO, to try to get coherent regional system plans that reflect the ambitions of local authorities in their area and allow the transmission and distribution grids to anticipate and respond to them.

Q420       Claire Young: We have heard that the Government’s heavy reliance on the distribution networks for solar generation is “wildly unrealistic”. Do you have any concerns about the level of industry consultation undertaken in developing these plans, by either NESO or the Government?

Akshay Kaul: Do you mean the increase in solar capacity in the clean power action plan?

Claire Young: It is about the increase, but how that relies on the distribution networks. It is not about not being able to do the projects quickly enough, but how that depends on the distribution networks.

Jonathan Brearley: I would say two things. First of all, we have a similar investment challenge, but not on the same scale, with those local networks, so they are going to have to ramp up very quickly. It is quite area and regional dependent—for example, the south-west has a lot of solar within it. As we have done on the national level, we are now, through the local network regulatory processes, making sure that they have access to the funding and finance available.

There then comes a second question, which is about their capacity to deliver, and there are two dimensions for me. One is these companies getting their projects up and running on time to be able to connect people quickly enough, and then there is a general question around local networks’ service delivery and how they interact with what we see as their customers—solar developers and charger developers, and so on. We are focusing on both of those areas in terms of our regulation.

Q421       Chair: We hear of examples from around the country of organisations that are installing their solar in quite decent amounts, but are having to wait. They are being given dates years in the future before they can get connected to the distribution network. Are you going to sort this out?

Jonathan Brearley: That is all part of the connections process that Akshay described, but I would go beyond that. We need DNOs to take a more proactive stance. The technical problem will be solved, but this is also about how they approach their customers and deliver for them.

Akshay Kaul: An under-appreciated fact is that two thirds of the queue at the distribution level is constrained by the transmission system right now. If we clear up the transmission-level queue, it will unlock a huge amount of capacity at the distribution grids.

Chair: Thank you very much. You mentioned in your opening remarks, Jonathan Brearley, both the price cap and standing charges; Polly Billington has some more detailed questions on both of them.

Q422       Ms Billington: Thank you very much, Chair, and apologies for my lateness. What more can be done to ensure that domestic customers are not paying more than they need to for energy and are given a greater sense of agency over their energy bills?

Tim Jarvis: I will kick off and then perhaps talk a bit about some of the specific things that we are doing on standing charges. It comes back to where the Chair started, which is the role of the price cap. The price cap is the main mechanism by which we can try to bear down on costs in the system and reduce them as far as possible for consumers, to the extent that those costs are within the control of us as the regulator.

If you look back at the history of the price cap, it was brought in to try to protect those customers who were not switching, not taking advantage of offers on the market, and, effectively, potentially being ripped off by suppliers at the expense of everybody else.

Q423       Ms Billington: It is funny that it took the crisis in Ukraine for the Government to decide that that might be the case. I am just making that observation. I have been in this field for a long time, and I have had people telling me that switching was supposed to transform the agency of consumers, but it has not, so we now have the cap. Is that what we are saying?

Tim Jarvis: The price cap predates the Russian invasion of Ukraine. It came under a lot of strain during it, which is why we had to introduce a lot of changes into the market. There remains this question about what sort of market we are looking for here, what the right level of switching is and how we protect those who do not switch.

You asked about the control and agency that people have over their bills, and this was a really strong theme of the consultation that we did on standing charges. The price cap can set an overall ceiling, if you like, on the price, but what sits underneath that and people’s individual needs vary hugely, which is where it does come under strain. When you think about how we deal with affordability challenges and how to make sure that we can target support at those who are really struggling to pay, the price cap is not an effective mechanism for that.

Charlie, you might want to pick up where we have got to on standing charges and how we are looking to bring in changes there to give people exactly the agency and control that you referred to.

Charlotte Friel: As Tim rightly says, we have consulted very extensively on standing charge reform. We absolutely recognise the frustration that many people feel at the level to which the electricity standing charge in particular has risen in recent years. We have had an unprecedented response. About 30,000 customers and broader stakeholders have responded. What we are hearing loud and clear is the challenge that there are vulnerable consumers on both ends of the standing charge debate.

Some of what we hear is, “Just get rid of them.” Some is, “Make them lower.” Some is just, “I want more control over how I manage this.” What those charges cover are the fixed costs of the system, so call centres, IT in some cases, and the electricity wires we have just talked about that move power around the system. We cannot make them go away—they are a part of providing energy to households and businesses—but we can move them around the bill, and we considered this really extensively last year.

The challenge that we face, of course, is that there is not a strong correlation in particular between energy usage and income. Where we considered potentially reducing them from the fixed charge and putting them on to the unit rate, we recognised that there would be many vulnerable households who could be really harmed by this. We had disability charities and Citizens Advice, for example, really urging us not to go down that road, or at least to approach with caution.

What we are able to do here is to recognise that, while we might not be able to move costs around the system quite so freely with the affordability support that is currently available, we can offer more choice. Customers want that ability to control so that, if they are turning down their energy use, they will see a benefit in their bill, so we recognise that perhaps giving an option where most of the costs are on the unit rate allows that empowerment. What we are due to consult on next month is introducing an additional tariff under the price cap that offers a low or zero standing charge option.

The only other thing I would say is that many options already exist in the fixed tariff market. If customers are willing and interested in taking a one-year fix, for example, or purchasing additional services, there are already low standing charge offers out there, with between 12% and 30% reductions on the existing standing charge.

Q424       Ms Billington: This is tinkering round the edges. We had the Climate Change Committee in the other day, and its No. 1 recommendation was a significant rebalancing of energy retail costs between gas and electricity. What is your view on that?

Jonathan Brearley: Ultimately, that is a trade-off that the Treasury and the Secretary of State are going to have to make. I know why the Climate Change Committee wants it. I understand the argument, which is perfectly legitimate, that if you are moving a lot of the economy on to electricity, as we plan to do, having all the levies attached to the very thing that you want people to move on to does not make sense from an incentive perspective. As the Secretary of State said when he was here, there are big distributional consequences.

Q425       Ms Billington: I am aware of that, but you are the regulator. You are supposed to be worrying about that equity, so do you have some ideas for it?

Jonathan Brearley: We are, but, to come back to your first point about how we give more choice and agency to customers, the reason that we brought in low standing charge options is to allow people to be able to optimise themselves. As Charlie says, we did look at making a sweeping change across the board but, once again, you make people better off and worse off.

For all of these things, part of the reason that we think targeted support is necessary is not just because of the outcomes for those customers and what they need, which is pretty big right now, but that it allows you to make some of these changes that have distributional consequences. As a regulator, I would argue that one thing that we cannot do is to move money between different sorts of customers. Ultimately, that has to be done under policy guidance. The warm home discount is set by the Department.

Q426       Ms Billington: You will need to start exploring the implications of that and what that would do for the way that you have the pricing structures.

Jonathan Brearley: We will, and we are working very closely with the Department to do that, but it comes back to this: if you had a system where you had more support targeted at those who you were concerned about, you would have more flexibility to make some of the more economically rational choices that you might want to make.

Q427       Ms Billington: Should a future Secretary of State, if not the current one, choose to ask for that electricity market reform so that we were rebalancing between electricity and gas, while trying to address the distributional issues, would you be in favour of a social tariff, for example, in order to be able to protect vulnerable customers?

Jonathan Brearley: We have said for a number of years that we would like a serious look at a social tariff. Ultimately, there is a limit to how much a regulator can recommend policy, and we have probably gone as far as we can. We are enthusiastic about the idea.

Q428       Chair: What do you make of Nesta’s proposals for rebalancing the levies?

Jonathan Brearley: The Secretary of State laid it out very clearly last week, in a sense. You can all see the rationality of doing so—you can see it is the right thing to do from the perspective of getting to net zero—but if you do not have a plan to deal with the distributional consequences, you have a lot of people losing out, just like we have in our standing charge consultation. This is why you need a more holistic approach to those who are struggling to pay their bills.

Q429       Luke Murphy: Does that include working with the Department to think through the consequences of things such as locational pricing?

Jonathan Brearley: Yes.

Q430       Luke Murphy: Within whatever proposals you might come up with for the cap, does the current Act provide you with the flexibility for whatever changes you might want to make, or does it require amendment legislation?

Jonathan Brearley: I might kick off but hand over to Akshay for more detail on zonal pricing, which is one of the lead options that Government have identified.

There is a big debate on our board. This is not a unanimous issue but we are, broadly, very supportive of moving to a system that has zonal pricing. We think it improves efficiency. There are ways in which you can deal with some of the regional inequalities that might result. There are ways of rebalancing that to make sure that you do not have big regional disparities. For the long-term running of the system, that might make sense but, again, this is ultimately a matter for Ministers to decide and something that I know they are thinking through.

Akshay, is there anything else on zonal pricing? Tim, you might want to come back on the price cap options.

Akshay Kaul: We published our assessment of locational pricing in October 2023. Essentially, we concluded that it would produce benefits for consumers through the better operation of batteries and interconnectors, but there are risks to investment in terms of the disruption that a market reform would cause, and risks that are produced for renewable generation, which would need to be mitigated. As Jonathan said, we are confident that those risks can be mitigated. It just needs to be done carefully.

Tim Jarvis: If I can pick up on the cap, we put out a consultation last year. There are three things about the cap within the current legislation that we need to think about. One is that it is flat across the market. Another is that it is universal to all suppliers. We also have quite a stringent cap because of the pressure that everybody has on their bills at the moment.

We are looking at reforms that we might need to make as we move to this much more flexible world, with different prices at different times of day and the ability for people to flex, and at how we change the cap within that. There are some things that we can do within the current legislation but, if we wanted to look at quite radical reform around setting different caps for different types of customers, we would probably be looking to the Department to make legislative change.

Q431       Mike Reader: Thank you for coming in today. I recognise that this is your first time in front of this Committee, but you have been in front of others before. In 2022, in front of the BEIS Committee, you were asked if you were on the side of the consumer or of energy companies. You said that you were very much on the side of the consumer, whereas today we have heard you talk about a balance between driving investment, supporting the market and protecting consumers. How much is the Government’s growth mission driving you to not focus solely, or put most of your focus, on consumer debt, but to drive more money into the market?

Jonathan Brearley: As an organisation, everything that we do is focused on customers. Charlie may want to expand on this, but we are doing extensive work on trying to mitigate debt. We have, as I say, pretty much stretched the edge of our powers to deal with that, which we can come on to.

What I described in those areas—for example, getting investment into the sector and so on—is all about getting to the destination of clean power 2030. Like the Secretary of State, I have lived and worked in the regulator through the crisis in the last two years. I have seen the detrimental impact of relying on an international market with, frankly, huge geopolitical dependencies, and I have seen the damage that that has done to this country. Without a doubt it is not only in companies’ interests in terms of building all this stuff, but in consumers’ interests to make sure that we get there quickly and efficiently.

Although we are getting on very well with investors right now, I am absolutely sure that, in a year or two, when we are holding them to account for the progress that they need to make, things will probably get a bit more frictionful and a bit more frosty.

Q432       Mike Reader: Does that give confidence to my constituents now that they are going to see their energy bills reducing? They have heard for years from Government that things will get better in the future. We are now talking about 2030 as the next milestone, but people are seeing their debt and costs continuing to rise. Can they trust that you are going to deliver for them?

Jonathan Brearley: I spend a lot of time talking to customers in different circumstances, and I hear the same thing that you hear, which is deep disappointment that, despite £40 billion going into the market to subsidise customers, we have seen bills double. I have never seen that in my roughly 25 years in this industry. Of course, people are going to be asking questions, but I cannot think of any other infrastructure strategy that is going to get us away from that dependency.

Over time, I do expect things to stabilise, and I am hopeful that we will deliver, but it is not down to Ofgem. It is down to the Government and the sector to be able to do that on behalf of customers, and we will play our part in pushing them.

Q433       Mike Reader: On that point, while you recognise that Government set the policy and you help deliver it, you do say on your website, “Where we think there are important policy gaps that affect consumers, we can call this out”. Can you give us some examples of how you have called that out?

Tim Jarvis: We are very conscious of the affordability challenge in the market at the moment. As you would expect, we hear this a lot from consumers. We have really stretched our remit as far as we can in lots of ways. For example, we have now ensured that prepayment meter tariffs are the cheapest on the market. We have required suppliers to provide additional credits to customers who are at risk of going off supply.

In answer to your specific question, we have looked at what we have seen in the market over the last few years, which is a huge increase in customer debt as a result of the high prices that we have had. Frankly, this is unsustainable. We have put forward a proposal, which Charlie can give you some more detail on, about how we might have a one-off intervention to try to get that debt down and target some of the support at people who are carrying really high levels of debt and, as a result, struggling to heat their homes now because of the debt that they are carrying.

There is a case for that sort of intervention. We are going to need support from Government to underwrite it, but this is a proposal that we put out there as something that we think would make a big difference to the market.

Jonathan Brearley: I would highlight three areas where we have called out gaps in Government policy in the past, which you may recognise from things that I have said. In 2022, when we saw the dramatic rise in price rises, when we had, at that time, no Prime Minister, and when I was announcing bills of £3,500 for the country, we called for the Government to act to tackle that.

We have been on record for a number of years around targeted support for vulnerable customers. We, like a number of people on the infrastructure side, are saying that if we do not fix planning and do not have better work with the supply chain, we are not going to get to the goals that we have just described.

Q434       Ms Billington: I am interested in that, because when we asked the Secretary of State last week what he could do now to help people with their bills, he just said, basically, that there was not much to be done in the short term. He will need a set of proposals from you pretty sharpish, I would suggest, including perhaps some recommendations that, if you are talking about rescheduling, cancelling debt or whatever, those people who are in the most trouble get something that stops them from ending up in that pickle again.

Jonathan Brearley: We are working with Government on those issues.

Q435       Mike Reader: Current debt levels, as per your December report, are £3.82 billion. What level does debt need to get to before Government need to make a more serious intervention? We are tinkering with some ideas, but at some point there has to be a much more serious intervention to protect consumers. At what point is that going to come?

Jonathan Brearley: Charlie, do you want to talk about the debt relief support scheme?

Charlotte Friel: You rightly highlight that debt reached a peak of £3.8 billion towards the end of last year, and that has doubled in the last two years, almost entirely as a result of the high prices that we saw in the energy crisis.

Mike Reader: Your report says that it is a 91% increase in the last two years, so it has much more than doubled.

Charlotte Friel: There is a difference between some of those who are on repayment plans and not, but it has risen from about £2 billion to almost £4 billion.

Wera Hobhouse: A 91% increase is doubling.

Charlotte Friel: That is probably my bad maths.

Jonathan Brearley: Get the technical team. We will be back on in half an hour.

Charlotte Friel: We recognise that that is an unsustainable level of debt for customers, but it is not good for the market either. It is not good for market resilience and, left unmitigated, could present huge challenges that would drive additional costs into this market for all consumers. We saw the impacts of market resilience concerns in the last couple of years and the bill impact that that has had. That is exactly why we published some of the thinking on our debt strategy at the end of last year.

One of the biggest challenges we see is that 75% of that debt is held by around 2 million households, most of which are not on repayment plans. I have spent a lot of time with debt advice charities and some real experts in this area, who are looking at people not just in energy debt, but in a multitude of debts. In most cases, they want to be able to pay their bills but are struggling under such a mountain of debt that we are seeing from this crisis that they have no way out, so they disengage from the market. The challenge that we are dealing with is to try to reach these households and get them re-engaged.

That is why we have perhaps gone a bit further in the proposals that we set out at the end of last year. The debt relief scheme, which is a proposal at this stage, and we are consulting on whether it is the right thing to do, would look to provide debt relief to a subset of households who are really struggling. We are looking at different ways of assessing affordability metrics and how to make sure that the eligibility criteria are tackling the people who need it most. This would provide debt relief and, perhaps in some cases, debt-matching payments, to encourage those who are struggling to contribute towards their debt and bring them back into the system, reducing costs for all households.

Jonathan Brearley: Can I lift it up a level slightly? That point is very close, if not now. Coming back to your question of, “Do we need to intervene to tackle debt?”, we do. We put out a proposal that basically says that we want to find some money that you would be able to put into the system, which would allow companies to, for example, match fund or write off debt, in order to move away from this place where we are strategically. We have this stock left over from the crisis.

The aim is to get the industry to a sustainable position that, more importantly, gets customers who otherwise would be able to manage on a day-to-day basis back on an even keel. We need help from Government to implement that scheme, but that is something we are very keen to do.

Q436       Luke Murphy: I have some questions about involuntary installations of prepayment meters. Given the level of crisis—you just talked about the rise in consumer debt levels—when you look back over the last few years is there anything that think Ofgem should have done differently that would have lessened the impact on consumers? You must look back and think, “There are things that we could learn lessons from.” What would you have done differently?

Jonathan Brearley: Post 2021 and through reports to other Select Committees, we talked about two major things. You mentioned involuntary installation of PPMs, and Tim can explain what we have done since then. There are two areas for me. One is the collapse of the retailers in 2021. Without a doubt, we have accepted the need for a regime to maintain financial resilience, so we have a very light-touch version of what happens with banks now. We look at how much money companies are holding and make sure they are not so economically vulnerable, because when they go bust, those costs are ultimately socialised among other customers.

My main reflection on PPM is that you always have this debate as a regulator between a principles-based regulation, which talks in broad terms about what you expect, and very detailed rules. The thing that I would like us to have done earlier is to have developed the detailed rules that we developed in the last two years around the installation of PPMs, because right now what the companies should do is very clear. Quite frankly, there was too much interpretation of what those broad principles suggested.

We are investigating companies and looking back at their behaviour against that broad assessment, but the lesson for me of the last five years has been moving from a retail market that was considered to be a market and, therefore, the regulator cleared up around the edges, to one where the regulator is setting much more of a direction for the outcomes that we want to seek.

It is about prepayment meters. It is about answering the phones. It is about some of the basics: making sure that companies are clear on what good looks like and are delivering against it.

Q437       Luke Murphy: What difference have the rules on involuntary installation had?

Tim Jarvis: We introduced new rules. As you may know, the first thing that Ofgem did was to put in a moratorium on installations. During that period we designed a new set of rules, working very closely with debt charities. They are now part of people’s licence conditions. They are very prescriptive. For example, there are categories of customers where we say that you should not install a prepayment meter without the consent of the household. That includes, for example, families with children under the age of two. It includes households where everyone in the house is over the age of 75. As you would expect, it includes people with long-term health conditions.

We have also set very strict rules about the processes that suppliers need to go through before they can get a warrant. For example, we require that they need to make at least 10 attempts to contact a household. It needs to be different types of contact. Some people will respond to emails, and others to letters and phone calls. That also includes a welfare visit to the property, and that visit has to be filmed or recorded. Likewise, when they get to the stage of getting to a warrant, the warrant visit is recorded. At any point in that process, that can be paused.

We have required suppliers to demonstrate to us that they have the right systems and processes to meet those rules. Where we have been satisfied that they have, we have given them permission to restart. We have had 11 suppliers restarting. They are, quite rightly in my view, taking a very cautious approach and starting off with a few. We are monitoring them very carefully and looking at bodycam footage.

Q438       Luke Murphy: What is their coverage in terms of proportion of customers?

Tim Jarvis: We have about 11 suppliers. I am trying to think what the proportion of the market is. The biggest supplier that has not yet restarted is British Gas, but most of the other large suppliers have restarted.

Q439       Luke Murphy: Why?

Jonathan Brearley: It is under investigation.

Tim Jarvis: We have an enforcement case against British Gas at the moment, and it is up to British Gas, in terms of the restart, to come to us.

Q440       Chair: Picking up on that point, what is your assessment of how well these rules are being followed? How are you policing them?

Tim Jarvis: I have a team who are scrutinising this, as you would expect, really closely. It is fair to say that the suppliers also recognise that they have a huge responsibility here. They are taking this very seriously and putting a lot of resource into it.

Q441       Luke Murphy: Presumably, the 11 that have been approved are taking it seriously. Is British Gas taking it seriously?

Tim Jarvis: British Gas has not restarted, to be fair, so it is up to British Gas. If it comes to us and says that it wants to restart and can demonstrate that it meets the rules, we will do that separately from the enforcement action. It is not that it is not taking it seriously, but that it is not doing it at the moment. Those that have restarted are taking it very seriously and we are monitoring it very closely.

What I would say about this is that I am confident that the suppliers are taking it very seriously and that my team are all over it and tracking it very carefully. At the end of the day, you are still relying on a company to find out who is living in that property and whether they have a vulnerability. Without data matching, and data that might be held by other parties such as Government, that is not without its risks.

It is important that if we are going to do this and target, quite rightly, those households who are vulnerable, we need a bit of help with matching with Government, so that we can say to suppliers, “These are the properties where you need to take particular care, or take a particular type of action.”

Q442       Luke Murphy: What are the numbers? How many involuntary installations occurred in 2022, 2023 and 2024?

Tim Jarvis: There were hardly any in 2023. That was the moratorium period. Following the restart, there have been coming up to 12,000, which includes remote switches. The same processes apply to both, by the way. If you are on a smart meter and are remotely switched, they still have to go through the same processes. There are about 12,000 of those, and just under 4,000 so far under warrant.

That compares with the year before the moratorium, when there were around 400,000 across the market. That is a huge reduction in the amount of that activity. What I would say on that is that it is quite right that the market is taking a very cautious approach and being careful but, as we talked earlier in respect of the rise of debt in the system, we need to move to a process where we have fair and appropriate ways of recovering debt, and the suppliers have the tools to do that.

Jonathan Brearley: To expand on the point that Tim made, the other thing we would like to work with Government on and would like from them—and the other gap, coming back to a previous question—is around data matching. There are huge amounts of data that you need in order to target support to vulnerable customers, or to identify different vulnerabilities.

Right now, we have a system where you can tell your supplier or your network company that you have a vulnerability, and that is logged and recorded, but that is inefficient, and many of the vulnerable groups that we are concerned about are not likely to do that. If we had much better access to and sharing of data between Government Departments and the sector—not just the energy sector, by the way—we would have much better responses to these issues.

Q443       Luke Murphy: On that point, is the Department taking it seriously?

Jonathan Brearley: Yes, absolutely.

Q444       Luke Murphy: Are wider Government taking it seriously?

Jonathan Brearley: The Department is definitely taking it seriously. We have a job to do to convince the rest of Government.

Chair: We will follow up with you in writing on this point, and one or two of the other things in those exchanges. It is a very important avenue to pursue.

Q445       Wera Hobhouse: I take a great interest in this issue, because I was putting down a private Member’s Bill asking for a moratorium while we were still in the winter. Finally, the moratorium happened when we were in the summer, and it was not so urgent any more, but I am still pleased that there was a moratorium.

My question is about vulnerable customers, because I still have constituents who seem to be getting an installation that they did not want. When it is already in place, how will the taking away of an installation that has happened without consent happen? What is the process? It takes some vulnerable households some time before they find out where they can go to, and they often end up with me when they are at the very end of the road and have already experienced a month of being cold or their electricity being cut off. That is definitely not what we want. Can you explain a little bit more what recourse those households have?

Tim Jarvis: The first thing that I will say is that we required suppliers to review all their customers on prepayment meters and to make sure that they were appropriate for the household concerned. If you have cases that have come to light, where you think people have prepayment meters where it is not safe and practical for them to have them, please let us know and we can get those looked into.

We have set some very clear rules for suppliers about how they need to protect vulnerable consumers. For example, I mentioned earlier that we required them to provide credits for people. If you have customers for whom this is just not the right method of payment, because of a particular vulnerability—I talked about some of those things earlier—they absolutely should be contacting their supplier.

Q446       Wera Hobhouse: I know, but it takes some time before they come forward and, in the meantime, they have sat for weeks being cold. That is my concern. A more proactive approach is probably also necessary, so that people know exactly where they can go to. If something is being installed, there should be a telephone number, a helpline or something that people can go to.

Tim Jarvis: If people are getting installed now against their permission, we are monitoring that very carefully, so please do refer anything that you think is happening in that space.

Q447       Wera Hobhouse: Moving on to the ban on acquisition-only tariffs, is there a risk that continuing this ban into 2026 will prevent consumers from significantly benefiting from competition in the market, which may otherwise look quite different from how it does now? It is basically the other side, where we have quite savvy customers who could benefit from not having a ban.

Tim Jarvis: To step back, when we initially introduced a ban on acquisition tariffs, it was one of a series of measures that we introduced to stabilise the market during the crisis. As we have come out of that crisis, we have looked to release a lot of those measures as we have taken steps, through our financial resilience regime, for example, to ensure that we have a much more stable market.

The original case for the ban on acquisition tariff, we would all accept, is probably weaker than it was. You do not necessarily need it to stabilise the market. There was one thing about a ban on acquisition tariff that we paused on. We did consult on this and it is a very finely balanced decision. One thing that we hear from consumers that they do not like is that if they stick with their current supplier, somebody else who is new to that supplier gets a better offer than theirs.

This is a market that, frankly, has had challenges with trust over the last few years. It is coming out of that. If you look at the last 12 months, we have seen customer satisfaction in this market going up by around 10%, and complaints going down by 10%. It is about rebuilding trust in the market, and having the ban on acquisition tariffs plays a role in helping to build that trust.

We extended it for another year. The reason that we are doing it only on a yearly basis is that we need to look at pricing in the round. We talked earlier about the price cap. We have a price cap that protects loyal customers. We have also a ban on acquisition tariffs. We need to think about what sort of pricing regime we want that provides sufficient incentives for people to switch, and to move around and get better deals, but also protects customers and the prices that they pay.

It is a finely balanced decision. We are monitoring it. We are seeing switching in the market increase. It has trebled over the last few months, but from quite a low base after the crisis, when people settled on the cap. We are monitoring it carefully. We have put it in place for another year. We need to look at, as I say, pricing regulation in the round.

Jonathan Brearley: I would add two things. The first is that when you look back at the causes of the retail crisis that I described in 2021, one was the fact that lots of companies were pricing while taking a great deal of risk, and usually under cost, which is why we ended up in the situation that we ended up in. Part of that was about acquisition tariffs from incumbents and new entrants trying to compete with those acquisition tariffs.

The second thing I would add is the challenge that we got from our board when we were discussing this: if a company is issuing a tariff, why would you exclude customers who are already there? There is a principled argument that says, “There is a price out there. Should people who are with that company not get access to it?” There is a principled as well as a technical reason for why we might keep it.

Q448       Wera Hobhouse: There is a balance, but can Ofgem even secure an optimal outcome for all customers? Is that ever possible? Is there a long-term solution?

Jonathan Brearley: You need to protect customers. I was discussing getting more people engaged and, back to Polly’s comment, getting everyone switching in 2008-09, when we were in the Department. We were still having the same conversation in the late 2010s. We have to accept that, certainly for some time, there will be customers who do not engage in the market. Pricing regulation is really there to deal with that.

Our job is to make sure that, alongside that, you have a dynamic enough market that people can get better deals today and that, more importantly, as we get to net zero, people have big incentives to move to time-flexible tariffs. The way in which we see it broadly is that you might be dealing with two very different groups and making sure that you have regulation for both.

Q449       Mike Reader: We are going to talk about failing energy firms and the cost to consumers. I have a very quick question to begin with. Are you satisfied that all suppliers in the retail market are operating on a sustainable footing?

Tim Jarvis: As you allude to, we have introduced a new financial resilience regime, which puts requirements on suppliers to ensure that they are holding sufficient capital for shocks. That regime is coming in, in full, from March this year. In answer to your question, we are confident that all suppliers are working towards those rules. About two-thirds of them are already compliant and we expect the others to be compliant, or to have a plan to be so, over the next 12 months.

Q450       Mike Reader: What does being compliant mean?

Tim Jarvis: What this means, specifically for the capital adequacy rules, is that they are holding sufficient money to allow for a shock, which can come in different forms. It could be a parental guarantee or cash in the bank.

Q451       Luke Murphy: Are the firms that are not yet compliant random firms, or is it a particular type of firm that is struggling to be compliant?

Tim Jarvis: We could get very technical on all this. There are certain things that certain companies need to do, which we need to move around. As a whole, we are much more confident that we have a much more stable market now and that we are protecting consumers’ money. In any market, suppliers will exit the market from time to time, and that is the sign of a well-functioning market. We need to make sure that, if that happens, it happens in an orderly fashion, and that we are protecting consumers. The regime that we have in place now does that.

Jonathan Brearley: I will say two things. If you look at the drivers of this, there were two aspects. The first set of companies that failed were issuing tariffs without any hedging or protection. It just meant that I could offer you a £1,000 a year tariff, which was cheap at the time, but, when the market hit a price that was £1,200, I simply could no longer pay my bills to give you your energy. In a sense, one thing that our regime has done, which is broadly across the market, is to make sure that everyone is hedging properly, particularly against the price cap.

The other thing that Tim is referring to is that no company can guarantee that it is not going to have risks. If you have a cold day and high prices, that costs the retailer a lot to buy the energy on that day, and that needs to be somehow funded and managed. Therefore, we are saying to companies, “You need to hold enough cash that can get you through those times when you might face variances that you would normally see in the market.”

It is very much like the story with banks. We cannot say that the sector is perfect right now, but it is on that journey and we are moving this bell curve up to what we think is a much better place.

Q452       Mike Reader: If firms are still not compliant by March, what steps will you take?

Tim Jarvis: Where we need to get to by March, and I am confident we will, is that each supplier has a capitalisation plan agreed with us that brings them into compliance. We will get to that point. If not, we have measures that we can take against those companies, so we do have powers.

Q453       Mike Reader: What further measures could you put in place to reduce the risk of firms going bust and that cost being placed at the feet of consumers?

Tim Jarvis: The regime we have introduced is a comprehensive one. We went through a lot of consultation on it. We were challenged and appealed on it, and that was upheld. There are people out there who think it is far too onerous on the suppliers, and people who think that it does not go far enough. Our judgment is that we have the right balance.

There were costs to consumers from the failures during the gas crisis. They have largely now come out of the system, so those costs are now less than £1 a year per customer. The regime that we have now will ensure that we will see entry into and exit from this market, as you would expect, but in a way that controls and restricts those costs to consumers.

Jonathan Brearley: On a very practical level, we are at a point, as Tim says, where we expect every company to have a capitalisation plan. If we are not satisfied with the plan or, indeed, if the plan is not adhered to, there is a series of interventions that we can make. For example, we can stop that company taking on any customers. We cannot stop the risk that is there, but we can stop that risk growing. We can also take more traditional enforcement action and issue fines and so on, if we need to.

This is very much going to be something where we are working with the companies to make sure that they are sufficiently capitalised, but we have a set of regulatory tools to make them move if they need to.

Q454       Mike Reader: You have recognised that the costs have largely come down, but there was a big spike in standing charges, particularly through the supplier of last resort scheme. What steps have you taken to try to recoup some of the cost from the shareholders and owners of those companies that went bankrupt? Could you set out the legal and non-legal methods that you have used to try to recoup that money?

Jonathan Brearley: There are two aspects to this. There is one that we can tackle, and one that, when I think about new powers, I would like Ofgem to be able to tackle in the future. We can tackle areas where, for example, renewables obligation payments were not made and there were, in effect, debts to Government. We have pursued that through the courts and have been fairly successful.

One of the massive frustrations for me during the crisis was seeing companies go bust, where shareholders then walked away with valuable energy hedges that grew in value over time as the crisis went on. That points to a fundamental problem that we have in terms of the extent of our powers. In my view, if a set of shareholders or, indeed, executives have created that level of consumer harm or cost, there should be a call on the company in administration. Quite frankly, before anybody else is paid anything, customers need to be paid back. We cannot fully control that, and we need the powers to do so.

Q455       Chair: How were they able to separate these assets from those of the company?

Jonathan Brearley: When they go into supplier of last resort, the customers are moved away and the company is wound up. At that point in time, the company is negative value. If the market spikes after that point and those hedges suddenly become incredibly valuable, shareholders can realise some of that value.

Chair: They do not go to the administrator.

Jonathan Brearley: No, they do not go from the administrator back to customers, and we would like a way to be able to recover that.

Q456       Luke Murphy: You talked about the spike in value afterwards for some of these companies. Do we know what the quantum was?

Jonathan Brearley: It was material. It was hundreds of millions of pounds in the end, across different companies. We can send you the detailed figures, but it is something that we need to fix.

Q457       Chair: Does this sit outside company and insolvency law?

Jonathan Brearley: It does. In fact, there is an interaction with insolvency law that makes this very complicated. The general point I would make is that we are in a complex market already, with complex corporate structures, just like other regulated industries, and we are seeing a huge change coming in the next few years. No one, including us, can guarantee that there will not be issues that customers need to deal with. The regulator should have the power to identify where there has been significant customer harm and to ask for compensation when that happens.

Q458       Chair: Do you have any evidence that any of this was blatant or premeditated or, in some way, planned?

Jonathan Brearley: In the instances where we saw companies fail and shareholders able to make the sort of money that they made, I have no direct evidence that this was planned. The whole crisis was a situation that I do not think people anticipated, but do I think that some shareholders took advantage of it? Yes, I do.

Chair: That is another topic to pursue further.

Q459       Luke Murphy: I want to move on to smart meters and radio teleswitch meters. You mentioned earlier in your evidence that you saw there being two groups in the market under the price cap. Correct me if I am wrong, but you were suggesting that there is a group that are likely to respond more flexibly and move around, and those who would be more static. I want clarify that, because it is relevant to this question. I know it is a bit crude, but what proportion are in the static group versus those who are going to be super fleet of foot and flexible?

Jonathan Brearley: Let us look at history. When there was the most switching in the market, you had about 60% coverage of the price cap and about 40% of the market that was people who were engaging in the market. When you think about time-of-use tariffs, they are quite niche customers right now but, over time, we expect that to grow substantially.

I would like a market where everyone is able to engage in some of the advantages that we are going to see through more flexible use of demand. It is going to take smart meters and technical interventions; it is going to take a big shift in the way that we see and use our energy. My point is that until we get there, we need some form of pricing regulation.

Q460       Luke Murphy: How fundamental is the roll-out of smart meters to that market that we want to deliver? How do you think it is going?

Charlotte Friel: It is absolutely critical. We talked earlier about customers being able to engage and bringing them along in the journey. Smart metering is a gateway into visibility and understanding of your energy use, and not only that, but much improved customer service from having a smart meter.

I have spent time in suppliers’ call centres listening to customer calls, and you can see the difference in engagement that a call handler can have with a smart-metered customer versus not. They can see their usage. They can put credits on the meter remotely, for example. There is so much more support that a supplier can offer in the moment. There are a number of benefits, and it is absolutely critical to that trust and engagement piece.

In terms of how it is going, the Government’s smart meter roll-out programme has now reached about 65% market penetration on domestic households, and just under 60% for businesses. When you look at that compared to other jurisdictions that have quite a similar approach to their roll-out, it compares quite favourably, but there are challenges.

We see a lot of coverage, particularly at the moment, around smart meters that are not operating as they should be. Ninety per cent are, but 10% are not, and the challenge with that is that it immediately dampens the experience. You are not getting the benefits that you signed up for, and it leads to a poor reputation around smart metering. That is why this is really important to us, and 10% not working properly is too many.

Our role in the smart meter programme is largely around compliance and enforcement of supplier obligations against their installation targets, and meters operating as they should. Last year, we fined suppliers around £10 million for failing to meet installation targets. This year, we are taking our largest ever compliance action against the six largest suppliers, with a focus on meeting their installation targets and getting those meters operating as they should.

I am heartened to see that since we started that, we have seen 300,000 of those roughly 3 million non-operating meters come back online, but there is a lot more work to do. Our focus at the moment is on understanding the challenges while making sure that our expectations to suppliers are absolutely clear: that they have remedial plans to get back on track and to get these meters on walls, operating as they should. We will not hesitate to take further action if we need to.

Q461       Luke Murphy: Are there regional discrepancies in the roll-out of smart meters? What are they, and why is that?

Charlotte Friel: Anybody who wants a smart meter should have access to one. That is absolutely critical for us and that is our expectation of suppliers. We focus a lot on ensuring that they have adequate engineering capacity.

Q462       Luke Murphy: On that point, is there a notable difference in regional coverage?

Charlotte Friel: We do see a difference, although it can be quite variable. We see lower penetration rates, for example, in some more remote and rural regions. Equally, we see some challenges in heavy density urban areas too.

Ms Billington: HMOs.

Charlotte Friel: Yes, exactly. It is not necessarily solely regional, but there are different challenges in reaching different households and businesses.

Q463       Luke Murphy: Can I ask about non-acceptance? If a customer says, “I don’t want one and I never want one,” what is the answer?

Charlotte Friel: As things stand, it is not a requirement to have a smart meter. We see around 15% of households outright refuse. What we also see is a fair amount of agnostics who need persuading. They are open to getting a smart meter, potentially, but want to see the benefits in it for them.

There are some differences. You mentioned RTS earlier, for example. This is a programme where the meters will not continue working as expected after June this year. In that case, while a smart meter is not mandatory as the solution, those customers do need to get their meters upgraded and, in most cases, a smart meter is the best answer for them. At the moment, if a customer refuses, that is their right to do so.

Q464       Chair: What needs to happen? What needs to change so that people see the benefits? I take your point about those people who are going to say no, but what can be done to make it really attractive so that those agnostics want a smart meter?

Charlotte Friel: It is a point around empowerment and understanding their energy use. We see, for example, that many households, just from having a smart meter and having the in-home display or an app, or whatever it is that they use to look at their energy use, can reduce how much energy they are using in the first place and see bill savings.

We see increasingly that customers switch not just for bill savings, but for customer service. Where you can get better customer service with a smart meter, that is an enticing proposition. Particularly as we move into a world and a market where customers will be, or will need to be, more flexible and engaged, and potentially get real benefits from being so, it is that opportunity. Seeing more innovative products come into the market that offer customers savings and benefits from them contributing to and participating in their energy use is really key to making sure that there is adoption.

Jonathan Brearley: You talked about the importance of communication. It is a reflection that we would all make that the communication around smart meters has not been ideal. Just on a basic level, it means that you do not have to put in your meter readings. You are no longer running on an analogue system.

I cannot express strongly enough the benefits of smart prepayment meters over analogue meters. If you run out, you do not have to go down the street to a shop that may or may not be open in order to top up. There are real, material benefits today, as well as all the exciting things that people like us get enthusiastic about around flexible markets, and we need to do a better job of communicating those to customers.

Q465       Chair: So you think that a lot of it is that people do not realise how good this is.

Jonathan Brearley: Part of it is that. It does not help having some of the technical problems that we have had with the meters that are there but, particularly for prepayment meter customers, the benefits are material and we need to make that clear.

Q466       Luke Murphy: Just very quickly, going back to the regional point, does the way in which they communicate have an impact? Some rely on a cellular network and some on radio. Is that impacting the regional differential?

Charlotte Friel: You are right that there are two different technologies. There is a smart metering communications network across GB. In northern England and Scotland, it operates on a radio signal. In the south and Wales, it is a cellular network. We are exploring the impact that this potentially has on those non-operating meters, but it is only one of the reasons that we see that and is not necessarily the largest driver of non-operating smart meters.

Q467       Luke Murphy: Industry has said to me that it lacks certainty beyond the end of this year. It has also said that it finds some of the rigid targets not helpful. I am not necessarily saying that I agree with that, but I wanted to put the case to you that there is a bit of a flow. They want the end result, but some of them want more flexibility rather than the static targets. I am just interested in those two points. Is that something that you are open to? What do you think about the certainty around the framework post the end of this year?

Charlotte Friel: You are right that the smart meter roll-out framework, as currently designed by the Department, comes to an end at the end of 2025. The Department is thinking very carefully about what the future of that looks like, and we are supporting it in that. It is absolutely right to recognise the point that we are at. We are at 65% among domestic households, but we have perhaps reached some of the early adopters.

We are going to have new challenges in getting to harder-to-reach communities and households. We are seeing technology upgrades that are needed in the coming years as well. It is a good time to be thinking about what the future of that roll-out framework looks like.

On the targets, again, this would be for the Department to set. We recognise that there are different ways of thinking about this. There are different benefits to different types of customers, and we might want to think about prioritising some over others, but we certainly welcome the conversation with suppliers around the best way. They should be under no doubt that it is a benefit to them and their customers to get as many smart meters on walls as possible.

Jonathan Brearley: The only thing I would add is that there should be a debate about the incentives around this. There are already tariffs in the market that are attached to a smart meter, for example. It is quite good that we are having a break point to have a look at the regime and see how we deal with the remaining 35%.

Q468       Luke Murphy: My final question, to take us back to where we started, is around consumers moving around and changing behaviour. I wonder how much we might be expecting too much of consumers, given how long it has taken to get to a position where lots of people want to switch. I am being slightly crude, but no one is going to want to get up at 4 am to turn their washing machine on in order to benefit from the best tariff.

Are you looking into and working with the Department on how AI and technology can help with that? There are companies out there that are looking at how AI could help a household to identify what the best tariff for them is, based on their energy usage, which takes the burden away from consumers. That is quite a big expectation and most people do not have time to do a lot of that stuff.

Jonathan Brearley: I am a simple energy customer myself. I am not a super sophisticated customer. My principle, for myself and for others, is that, if this is going to take a huge amount of intellectual and analytical engagement, we are probably not going to be successful. The more this can be automated, the more you get the simplicity of the service and the more successful the industry and we will be.

Tim Jarvis: I was just going to say the same thing. The history of this market suggests that you should not expect consumers to make really complicated decisions or make it very difficult for them. We have tried to rely on that in the past and it has not happened.

There is a role for things like defaults. If you look at what we are doing now on electric vehicles, for example, you have defaults to ensure that they are charging at the cheapest times of the day. People do not have to make active decisions. There is definitely a role for thinking about that in the future.

Chair: The challenge that comes is that when you have three apps, you have to have them aligned in order to do these things.

Q469       Wera Hobhouse: We need a separate session on smart metering, because we are getting into the nitty‑gritty of this. Coming back to vulnerable customers, all of this is assuming that all people are digitally included and digitally literate. While we are possibly more engaged and digitally literate, there are lots of people out there who are not, and we really need to consider them. When, for example, a smart meter is being installed, people need a session on how to work it, and that is not happening. Those are massive issues that we have to consider during the roll-out of smart metering. Do you have any reflection on that, very quickly?

Charlotte Friel: You are absolutely right. We want to make sure that suppliers engage with their customers through a number of formats. The key thing is that while there is an element of learning how to use it, a smart meter can take away so much of the burden of thinking about end use. It can help a supplier engage with you, without you really having to do very much, because it can see your usage; perhaps it can put credits on the meter and things like that.

Jonathan Brearley: To pick up on that point, for prepayment meter customers this is much better. If you have an analogue meter with an old-fashioned key, as I used to have 20 years ago when I lived in my first flat in London, the company cannot see what you are doing. There are customers, as you mentioned, who end up being self-disconnected. The company does not have visibility and cannot really do anything to address that. If it wants to help you to top up, you are going to have to go down the street, as I mentioned, to be able to do so.

If you have a smart meter, even if you are digitally excluded, the company knows when you are going off supply. If you want to phone up and ask for additional credit or additional support, it can do that in an automatic way. That is a significant benefit for those customers.

Q470       Ms Billington: You said that there was 65% penetration at the moment and that 15% of people were refusers. Are the 15% included in the 65%, in that you basically say, “Yes, they are done because we asked them and they said no”?

Charlotte Friel: No.

Ms Billington: Sixty-five per cent are done and 15% said, “No, thanks,” so you are at 80%. I just want to understand whether the noes were included.

Chair: Are you calling the 20% agnostic?

Charlotte Friel: Yes.

Chair: Thank you very much. That was a very interesting part of the session. Chris Chope is now going to ask you about park homes and some related points.

Q471       Sir Christopher Chope: I am sorry that I had to absent myself, but I am on the Procedure Committee as well, and we had the Speaker coming to give evidence.

I am delighted to be able to get on to this issue, which is about non-domestic users, and domestic users of non-domestic contracts. I am very grateful to Tim Jarvis for having responded to some constituency correspondence, which I sent to him on behalf of residents at Oak Tree Park, which is a large park home residential site in my constituency. One of the constituents there has said that he understood that the price cap was, in round figures, about 24p, and he is being charged 31p. He asked what can be done about it.

I said earlier to the Chair that I got this very good response, and I am going to circulate it to the Committee so that we do not have to repeat what is contained in it. Essentially, what it says is, “Not me, guv,” in that there is a limit to what you are able to do as Ofgem. You refer to the maximum resale price rules, but then you say that Ofgem does not enforce the rules of the maximum resale price direction, as essentially this is a civil issue, and, ultimately, if you are a park home resident, you are going to have to take it to the tribunal if you cannot get agreement from the site owner.

This very day, I had a conversation with somebody who phoned up from a caravan site. He has been resident in a residential caravan, not a park home, for 25 years. He said that he is paying about £400 a month as a site fee, but paying about £100 a week for electricity. This gives the impression that there is a bit of a rip-off, and I wonder why Ofgem does not enforce the rules of the maximum resale price direction. Is that because it chooses not to or does not have the power so to do?

Tim Jarvis: Let me pick that up. I am sorry if it came across as a, “Not us, guv.” There are things that we can do and have done. There are challenges, and perhaps I will talk through some of that.

In answer to your specific question, we have set rules to ensure that anybody reselling energy to an end user cannot, effectively, make a profit out of that. The challenge we have, as you rightly point out, is that, at the moment, for a customer to exercise those rules, they have to go through the courts. That is because we do not have the power to take up cases on behalf of individual customers and enforce those rules. There is a question about whether that is the right thing to do.

In other parts of the market, for example, you would have access to some sort of alternative dispute resolution service. It would really help to enforce those rules if people such as your constituent had access to that, so that instead of having to go to court they could go to some ombudsman or an alternative dispute resolution service. We have made that case very strongly to Government and will continue to push on that, because it is an important way for people to be able to exercise the rules that we have put in place. You are right that, at the moment, we do not have the powers to investigate individual cases.

Q472       Sir Christopher Chope: Last year, my understanding is that the previous Government issued a consultation around this whole area. Where has that got to? What are you expecting to happen as a result of that, or is it dead in the water?

Tim Jarvis: We are talking to the Government about what their plans are and waiting to see what decisions might come out of this. There are a couple of areas that certainly bear looking at. The first is this one about alternative dispute resolution and whether you could put something in place. We have highlighted the fact that, for example, there is legislation going through Parliament at the moment around private renters, which introduces a dispute resolution service. Could you expand that and incorporate these cases into that, for example? That is one thing that we think could be worth doing.

The other thing that we are focused on and talking to Government about—this is coming up in our future regulation of heat networks, and may well come up in later questioning—is that where somebody’s energy costs are tied up with their contractual relationship for their housing, which is the example that we have here, and we also get it in heat networks, we cannot really regulate that at the moment. We cannot go beyond the contract that people have. If they have a contract to pay their energy through their rent, that takes us out of the equation. There is something there about these sorts of cases to ensure not only that we have the rules in place, but that people are able to enforce against them.

As I also referred to in the letter, there were industry codes and rules that made it difficult for people to move from taking their energy supply through their landlord to getting a contract directly with a supplier. We have very recently changed those rules to allow people to have access to a domestic supplier. You still come up against this slight challenge if it is part of your contractual arrangement with your rent. That is one of the things that we are talking to MHCLG about at the moment: how we make sure that we can get the right protections for those people.

Q473       Sir Christopher Chope: Is there anything else that you could do to bring to the attention of these residents their right to be informed about how much their landlord, for want of a better expression, is paying, so that they can then calculate whether they are being ripped off? At the moment, most people seem to be rather ignorant about those rights.

Tim Jarvis: Yes, absolutely. There are requirements on landlords to provide that information to their tenants, but we are always looking at what more we can do to highlight what people’s rights are, what they can ask for, and what information they can get. It is something we are constantly looking at.

Jonathan Brearley: There are two things that I would say. Coming back to this point about our communications role, we have something called the Energy Aware campaign, and we should take away making this part of it—making people aware of their rights in general, including this issue.

It relates to the kind of regulator that you might want in the future. The simple answer, Sir Christopher, is that we do not license landlords, so we do not have a licence through which we can set rules and fine, as we can retailers, networks and others.

Customers in 2035, or 2030, are going to be getting their energy from solar panels that have been installed, aggregators that may be operating them, or battery installers. People might use their car battery. My concern is that we do not have the suite of powers or the ability to manage our regulatory boundary to deal with that.

When we talk about the Ofgem review, start with the customer. Start with where their energy is coming from, and give the regulator the power to intervene and to protect customers, whichever way they get their energy. We are looking at models in financial services, for example, or, indeed, in Ofcom, where things are defined differently, allowing the regulator to be a bit more adaptable to a fast-changing market.

Q474       Sir Christopher Chope: Going back to the more general issue of non-domestic users, we touched on the costs at the very beginning of this evidence session. What more can you do to reduce energy costs for non-domestic business users, so that they are more internationally competitive? Our costs are so high.

Tim Jarvis: I will start at the macro level and work down, if you like. There are three things that determine our prices for non-domestic consumers and affect how they compare internationally. The first is our reliance on gas, which we have talked about at length. That is a broader issue that we are looking at through clean power 2030.

Sir Christopher Chope: Is that not a bit of a red herring? Gas prices are international. If they are international, why is it that our energy prices are higher than anybody else’s?

Tim Jarvis: The use of gas to generate our electricity is the issue there, and that is the thing that is moving through the Government. The second thing that drives our costs is policy costs and where they fall in the market, which is something we have also talked about, and I know Government are thinking about.

The thing that is in our control—Akshay may want to come in on this—is the network costs and how they are shared. We can move those costs between different types of consumers. We can move them from non-domestic businesses to domestic consumers. We have made decisions on that in the past, and that is something that we keep under review.

When you get to what we can do at the micro level, we did a big review of energy costs in the non-domestic sector, and one of the areas where we found a definite case for intervention was around the use of energy brokers and third-party intermediaries. There are some good ones in that market, but others where people are getting quite a poor deal. We have introduced rules to make sure that they are transparent, and the Government are consulting on the regulation of those intermediaries. There is potentially a future role for us in taking that on.

Jonathan Brearley: I have just one thing to add. As I mentioned, there is a Government scheme that is quite narrowly focused now on energy-intensive users in internationally competitive markets, which offers discounts to some of these charges that Tim has laid out. It is worth exploring whether we have the scope of that right and how that should be applied in a world of AI and data centres, where, clearly, a lot of energy-hungry investors are going to be looking for sites in countries such as Britain.

Q475       Chair: Thank you very much indeed. I am now going to change tack. The former Secretary of State changed her mind about the sustainability of Drax—have you?

Jonathan Brearley: You need to understand our role. We do not make decisions such as whether Drax is, in policy terms, a good thing. That is for the Department, and it is for the Department to set the rules. Our job is to make sure that Drax complies with the rules that are there. You know about the investigation that we had, and what we found, to be clear, was not that Drax had breached the broad rules that set the financial subsidies within the scheme, but that it had misreported what was there. That is why it was fined £25 million.

Q476       Chair: There has been quite a lot of additional media reporting since your previous investigations, and the Financial Times and Private Eye raised concerns. Are you going to be investigating further?

Jonathan Brearley: There is nothing that has come to light that was not within the scope of the investigation that we carried out. One of the actions that we asked for from Drax as part of the conclusion of that investigation is that it now has to audit all of its supply chain. If any additional evidence comes to light, or if there is anything that we think reopens the conclusion that we came to, we will investigate again, but we are not at that point now.

Q477       Chair: Your request for audit was five months ago, if I have that right. Who is undertaking the audit? When is it going to be published? When will you be able to share an update on the audit with this Committee?

Jonathan Brearley: I will need to come back on who is doing it. It will take time. This is a very detailed assessment of supply chains to many countries, so it is going to take time to go through. I would expect it to take many months before we come to a conclusion, but it will be published.

Q478       Chair: KPMG reportedly carried out an internal review of Drax operations. There has, apparently, been a very significant number of whistleblowers as well. This was all in a House of Lords debate on 11 November. Have you followed up with Drax on any of the analysis and comments made in that debate?

Jonathan Brearley: The evidence that we saw includes the KPMG report that is mentioned. We have been in touch with a number of whistleblowers as part of that investigation. As I say, if anything new is highlighted that we think reopens the conclusions of the investigation, we will reopen. We will continue to actively monitor what is going on.

Q479       Chair: So far, in those discussions with whistleblowers, there has been nothing new.

Jonathan Brearley: There has been nothing that reopens the conclusions that we had.

Q480       Luke Murphy: I have a quick question on the auditor. Did you have to agree who the auditor was, or was that fully up to Drax to decide?

Jonathan Brearley: That is a combined decision of both scoping and the auditor, and how that audit is carried out.

Q481       Chair: There were emails referred to in the Financial Times article on 15 October. Are you able to share those with the Committee?

Jonathan Brearley: I would need to go back and ask what the legal position is on that, but the review that we carried out, which was over 3,000 documents, led to the conclusion that we came to.

To be clear, we did see the fact that Drax had reported wrongly where its feedstock was coming from, but not at a scale that would breach its obligations under the renewables obligation. That is partly because, in a sense, the renewable obligation has two parts: 70% of it is under very strict sustainability criteria, and 30% under looser criteria. You have to go quite far before you start breaching the financial part of the renewables obligation and, therefore, you get to begin to ask questions such as whether companies should return subsidies.

Q482       Chair: Barry Gardiner wrote to you on 15 January.

Jonathan Brearley: He did, yes.

Chair: When are you going to be able to reply to him?

Jonathan Brearley: In the coming weeks.

Chair: I am sure that he will discuss your response with us at that stage, and that we will have further exchanges in writing on this topic. Thank you very much indeed.

Q483       Ms Billington: This is about hydrogen heating and consumer agency. What is your assessment of the hydrogen heating trials that have taken place so far?

Akshay Kaul: The clear indication from the hydrogen heating trials experience is that consumers resist change. That is the challenge. There is only one trial left now, in terms of the H100 project that is being done by SGN. We are certainly going to continue to produce the evidence from that trial to make sure that hydrogen is safe, that it can be transported safely and that the consumer experience in the household of using hydrogen boilers is a good one.

The main thing the trials are not able to test at the moment is how you deal with the issue of change. Somebody has an existing system and you want to move them to a new heating system. There is that natural reluctance. As the Secretary of State indicated in his evidence to you last week, at the moment it is not particularly attractive, because you have to spend a lot of money to change your heating system, even though there is a Government grant in terms of moving to heat pumps, for instance. That is where we have to focus our efforts. We have to make it both better and cheaper as a heating service.

On hydrogen in particular, we have had a National Infrastructure Commission report that indicated that it felt that hydrogen is probably not going to be the dominant fuel for heating. Our assessment at the moment is that for the majority of households across the country, as long as we can address the issues I raised in terms of what is causing the resistance right now, electricity should be a really good solution in the long term for heating. There will probably be pockets where it is difficult to put heat pumps in and to electrify. That is where we need some alternatives and that is why we are carrying on with the H100 trial with SGN. We are also doing our work to introduce regulation into heat networks.

Q484       Ms Billington: I have a drafted question here, but I am going to ask you something on the basis of what you have said to me. You still think there needs to be a mix of solutions to heating, depending on where people live. That still creates quite a lot of uncertainty at the moment. The situation we are in creates quite a lot of uncertainty. What do you think Ofgem can do to reduce that uncertainty for the consumer?

Akshay Kaul: There are a range of things that we can do and are doing. The first and most important thing is to produce the evidence base on the alternatives. At the moment, heat pumps are a perfectly viable technology. We understand what is causing the resistance to the take-up of heat pumps. There is essentially an economic issue that has to be addressed, and that is a combination of the support that is provided to consumers and the industry trying to bring those costs down over time.

We can certainly play our part in looking at the cost of electricity versus the cost of gas. We have communicated to Government that we are very supportive of the rebalancing and, as Jonathan said and the Secretary of State said to you last week, Government are actively considering this. It is a complicated issue, but they are considering this.

Thirdly, we want to do our level best to ensure that, in terms of alternative heat networks and hydrogen for heating, we are able to produce the evidence that can help the Government to make informed decisions on the roll-out of those alternatives.

Q485       Ms Billington: They have been delaying this decision. Are they really delaying this decision because you have not given them enough evidence?

Jonathan Brearley: This is a policy decision for Government so we, like everybody, are waiting for them to be able to set that direction. That is what will provide clarity.

There is one thing I want to add. We do run the boiler upgrade scheme and that is what is catalysing the heat pump market. If I look back at history, it was the renewables obligation and FITs that started the whole renewables revolution we are seeing. I am hoping that by catalysing this market, we will see heat pumps in the same place, but ultimately there are limits to what we can do, because we need direction from Government.

Q486       Ms Billington: Also, a lot of people are saying, “We do not want to decommission the gas network, because we want to keep consumer agency over home heating and continue to have that as an option.” What level of hydrogen roll-out in home heating will be needed to avoid that decommissioning of the gas network?

Akshay Kaul: We will need to come back to you on that because, at the moment, we do not have very good scenarios for how much of different parts of the country will be suitable for hydrogen for home heating. That is why that Government decision is so important. Our best scenario at the moment is that for the next 10 years we are unlikely to see a big change in the gas networks. Therefore, it is probably premature to talk about the decommissioning of the gas networks.

In the price review that is coming up, we have indicated that we are going to start to increase the rate at which we return the capital that is invested in those gas networks, so that we have fairness in terms of how much gas consumers pay for the gas network over time.

Ms Billington: That is one of the problems, is it not?

Akshay Kaul: That is one of the issues. Over time, as consumers switch from gas to heat pumps, you have essentially a gas network that has a fixed cost that is going to be paid for by a reducing population of consumers, who will basically be paying higher and higher gas charges. We want to try, as far as we can, to equalise those.

To go back to your question about what we can do to point out potential policy gaps to the Government, we have been in dialogue with the Government to say that this is a system-wide issue. It would be really good to look at whether that cost of maintaining the gas networks to continue to provide a safe and reliable service to the people who are connected on the gas network, many of whom may not have the means to switch very easily to heat pumps, can be spread more fairly across the population of bill payers across the country. We are doing what we can within our powers, but there are certainly things that the Government could do to help us.

Jonathan Brearley: This is an active conversation with gas networks. They are aware of all scenarios for their future and we need to bring them into this conversation as well.

Q487       Ms Billington: I am also struck by you saying that it will be 10 years and it is too early to say. In energy terms, 10 years is tomorrow. If we are saying it is too early to start talking about decommissioning the gas network, are we really suggesting that the gas network is going to be here not just for 10 years, but for 20 or 25?

Akshay Kaul: You are highlighting exactly the reason why it would be helpful to have a policy decision on that sooner rather than later.

Ms Billington: That is so polite, Akshay. Can we note that?

Akshay Kaul: We have been quite vocal about the fact that it is a very difficult decision to make. I have a lot of sympathy for the Government. They have to think through it very carefully but, once you make a policy decision on electricity versus other alternatives, then we can start to plan the future of the system, particularly on the gas side, much better. We can also start to take a look at these economic issues in terms of who pays, how much and at what time.

Jonathan Brearley: With direction, this becomes a whole lot easier for us.

Q488       Chair: I want to go back to something you touched on. You seemed to say that there are significant parts of the country where the gas network just is not suitable for hydrogen. Have I correctly heard you?

Akshay Kaul: No. The gas networks can transport the hydrogen. What I was saying was that for large parts of the country hydrogen will be a much more expensive solution compared to heat pumps. Therefore, it makes sense to electrify them for heat pumps.

Chair: It is the cost of generation.

Akshay Kaul: Heat pumps are much more efficient than hydrogen, essentially.

Q489       Mike Reader: You might have answered my question, so I will frame it slightly differently. You picked up on the point that as we have a reducing number of people using the gas network, the cost of maintaining—I know you talked about decommissioning—will sit on fewer and fewer consumers.

The Government’s drive towards heat pumps is pretty inevitable. I know you say you are waiting for a final policy decision, but all the mood music is directing us one way. Is Ofgem already working on how you are going to protect consumers who cannot use heat pumps and will bear the cost of maintaining the gas network? There is no other option for them, is there?

Akshay Kaul: Yes. We are very concerned about exactly the issue that you describe. We have indicated in the ongoing price review that we want to start accelerating the depreciation of the gas network. That is a very technical term. In practice, that means that we want to start returning the sum of money that has been invested in the gas networks to investors more quickly so that, over time, consumers pay broadly similar rates for the service that they receive from the gas network.

Q490       Mike Reader: That is something you are already working on. There is a function or a team in Ofgem who are looking at this specifically now, to get ahead of this, rather than waiting for the policy decision before taking action to protect consumers.

Akshay Kaul: There is a team in Ofgem and we are encouraging the Government to think about the future of gas systematically, as I mentioned, so that when we have a policy decision on heat, it comes alongside a plan for the transition of the gas networks.

Jonathan Brearley: This is an active conversation through our price controls and through the network regulation that we have.

Q491       Claire Young: Lots of the questions I had about decommissioning the gas network have probably already been covered, although I do not think you actually told us a point in time by which policy decisions need to be made on addressing the share of the costs of decommissioning the grid and all those issues. Are you able to put a date on it?

Akshay Kaul: The current policy date is 2026. That is when the Government are currently planning to make a policy decision on heat. We have a price review that is going to essentially set prices for the gas networks that go from 2026 to 2031. This price review is fine. We can manage by just accelerating the depreciation, as I mentioned. That is a perfectly reasonable temporary measure, but for the next price review, 2031 to 2036, it is going to be very important that we have a clear policy decision in 2026 and a plan then for the transition of the gas networks thereafter.

Q492       Claire Young: Do you think there is a tipping point in the decommissioning process where the remainder of the gas network just will not be viable and will have to be removed, with the last users forced on to alternative heating systems?

Akshay Kaul: As you said, there is a practical issue with the gas networks. If you are supplying gas through pipes into a community, you cannot decommission the pipes until every user has transitioned to something else. Where you have a patchwork with hydrogen and electricity, that makes it more complicated. It is the reason why we introduced this idea of the regional system planners, so that we can start to plan the gas and electricity networks together in each of the regions across the country. Then we can work out almost street by street where you have to continue the service and where you can start to turn the gas pipes off.

It is quite a considerable undertaking. It is not at all a trivial question when you start thinking about the decommissioning of the gas networks and there are quite significant safety issues with maintaining the pressure through the pipes as the population of consumers changes.

Q493       Claire Young: Do you think that will then force a point where a policy decision will have to be made that users will have to move on to alternatives? At the moment, what you are describing is that you can do it by looking at how much they have switched and taking certain places off and not others, but there will surely come a point.

Akshay Kaul: There is a point at which it becomes self-perpetuating, if you like. For instance, if you do not do anything and consumers start to switch away from gas networks to heat pumps—to electricity—and the population of consumers shrinks, then the price of staying on gas goes up and up. That drives more and more people to switch away from gas to heat. Then you get into this potential spiral.

We are very keen to avoid a disorderly spiral away from gas to electricity. It is much better to have an orderly transition.

Jonathan Brearley: Remember, a lot of this, ultimately, is for Government to decide. That is why you need regional and local leadership to drive this in a co‑ordinated way. We do not have answers to what you do when that gas network gets to a certain stage, but that is why we need the policy direction from Government. This is going to need to be thought through carefully to make sure it works for all customers.

Q494       Claire Young: Some consumers—those last ones left on network—may well be those who, for economic reasons, are going to struggle to make the change.

Akshay Kaul: Yes, exactly.

Claire Young: What do you see as your role at that stage, where gas prices are increasing massively and the poorest in society are having to pay those prices on an ongoing basis, because they cannot make the changes to their heating system that are needed?

Akshay Kaul: It would be a failure of the system if we ended up in that place, because we can anticipate this. That is why we are so keen to work with the Government to plan for that scenario and avoid a situation in which very vulnerable or low-income families are left to pay eye-wateringly high prices for their gas service.

Jonathan Brearley: Clearly, there are things you can do to socialise some of those costs among others and, as I say, have much greater local planning in how you go about doing it.

Q495       Chair: How confident are you that you can avoid a disorderly transition and contribute to an orderly transition?

Akshay Kaul: If we plan the transition properly, then I am pretty confident that we can do it in a controlled manner, but it does require a sequence of things. It requires a very clear policy decision on heat to be taken and then to have a sense in different parts of the country of the broad composition of electricity versus other alternatives. Then we can start to work up the plan with the gas networks.

As Jonathan said, a very important consideration here is having more than just gas consumers as an alternative to pay for the gas network that remains. That is the key here to make the transition orderly.

Q496       Ms Billington: I want to tease out a little bit what you said about how there might be some people or some places where heat pumps might not be suitable, and therefore we might keep them on gas or hydrogen. That is quite an interesting balance for me, because I thought we were probably going to be using hydrogen where we might have surplus, because it was near an energy intensive industry cluster or something like that.

What are the conditions, both geographical and demographic, that might drive you to conclude that those places and people should continue to have home heating on gas or hydrogen, rather than heat pumps or district heating?

Akshay Kaul: Heat networks are a good example where, for reasons of space, for instance, you might not be able to fit everybody with heat pumps. For instance, if you have lots of people living in lots of flats with confined spaces, you might be better off having a communal heating solution. That could, indeed, be driven by hydrogen, if you are in a particular area where there is a hydrogen production facility.

Ms Billington: For flats in Runcorn, yes, but for HMOs in the centre of Leeds, maybe not.

Akshay Kaul: Yes, which is exactly why we need to look at this region by region and work out what the sources of energy are going to be in each of those regions and what the ability is to have a relatively easy transition to heat pumps. Where you have households who will not easily be able to make that transition and you have a local alternative like hydrogen, those are the areas where it would make sense to work up that alternative.

Q497       Luke Murphy: Do the Government not already have all the evidence they need to make a decision? Why does it need to take another year?

Jonathan Brearley: Quite frankly, this is a matter you need to take up with the Secretary of State. I am afraid we have probably gone as far as we can in advising you on what they should be doing.

Chair: We may well just do that. Thank you very much.

Q498       Wera Hobhouse: Going back to vulnerable households, a lot of them are in the private rented sector. A private landlord currently has no incentive whatsoever and no stake to switch to an electric heat pump or switch away from the gas network. I really believe we need to put our mind to that pretty quickly.

I met with Wales & West Utilities, which provides the gas network around my area, and was given a lot of food for thought. These companies need to maintain the current gas network. The cost of doing that is an investment for the company that it might, at some point, not want to make, since it knows that the gas network is a type of stranded asset. Will that not also worry you in terms of safety?

Jonathan Brearley: Safety is paramount for us. When we look at the next price control that we have, we will make sure that it is maintained as safely as it is today. That has to be the case for the customers who are on the gas network. Again, without retreating towards the Secretary of State, the Secretary of State has a warm homes plan, and part of that plan will need to address the issue of what we do with the private rented sector.

Q499       Sir Christopher Chope: Is this talk about everybody having heat pumps or going on to hydrogen not a bit pie in the sky? I went on one of these ready reckoner things, which asked questions as to whether my property would be suitable for a heat pump. First of all, I found out it would not be suitable if it was a flat on the first floor or above. Secondly, it would not be suitable if it did not have an area of about 6 square metres where you could actually put the heat pump outside. There were various other conditions, including the need for a hot water cylinder.

How many properties in the United Kingdom, or in England, depending on what figures you have, do you think are incapable of being suitable for the installation of heat pumps? How many of those properties do you think would then be suitable for hydrogen, which is another pie-in-the-sky idea?

Jonathan Brearley: Again, I hate to say this, but this is something you need to ask the Department for. The Department owns and runs this strategy, including for households, but I would make the point that this is not just about heat pumps. This is about district heating as well as heat pumps and hydrogen. We do have time to work through these issues. We are keen on a policy direction from Government. There is a lot to do to make that part of the decarbonisation strategy work but, ultimately, there are options for different parts of the country.

Q500       Sir Christopher Chope: You do not know how many people could have heat pumps.

Jonathan Brearley: We do not plan the heat roll-out. We do two things: we regulate the networks to make sure the networks are ready, based on policy decisions that are made, and we run the boiler upgrade scheme. At the moment, that is a demand-led scheme. Customers sign up for that and they get the discount if they want it.

Sir Christopher Chope: The Department has the information I have asked for.

Jonathan Brearley: It does. I have every confidence in the Department.

Chair: I think we had evidence at previous sessions about the proportion of homes that will be likely to take heat pumps, as well as those for district heating and the remainder. We will return to those.

Jonathan Brearley: I have one further comment. This is just a personal comment. We saw, when we started the renewables roll-out, all sorts of perceived and real problems with the development of things like solar panels and wind turbines. I have sat in Government Departments where we found the idea that, in a country like ours, solar was going to play a big part in our roll-out slightly eccentric. Particularly when you see the evolution of small modules, you see companies innovate, change and adapt the service offered. What is true for a heat pump today may not be true in 10 years’ time.

Q501       Chair: Should we be learning from other countries, then?

Jonathan Brearley: That is absolutely right. Heat pumps are not new technologies, but there are companies here that are genuinely trying to innovate, not just to tackle the building fabric issues, but also to make sure that the heat pump in your home mimics the ease and convenience of a condensing gas boiler.

Chair: With that optimistic view of the future, we will conclude the session. Can I thank you very much indeed for your evidence today? Thank you very much indeed to Charlotte Friel, Jonathan Brearley, Tim Jarvis and Akshay Kaul from Ofgem. We will end the session there.