E.ON (ATFF0004)

Written evidence submitted by E.ON (ATFF0004)

About E.ON

E.ON is one of the largest energy companies in the world. Across Europe, we have over 54 million customers and operate c1.5 million km of energy networks. In the UK, E.ON is the largest electricity supplier and we supply nearly one in five households and small businesses across Britain with 100% renewable electricity on all tariffs, as standard, at no extra cost.

We are at the heart of tackling the big issues the UK faces in meeting its ambitious Net Zero by 2050 target.  Over the past decade we have invested more than £2.5 billion into large scale, renewable energy projects throughout the country and the UK is now well on its way to decarbonising the power sector, burning 50% less fossil fuels in 2020 than it did in 2010.

Our focus now is on helping homes and businesses in their transition to Net Zero.  We have installed around 1.5 million energy efficiency measures in over 460,000 homes across the UK since 2008, giving households almost £10 billion in lifetime bill savings.  We have also installed smart meters in homes for more than 4 million of our UK customers and we have committed to the ‘Race to Net Zero’, a science based Net Zero by 2050 target.

Is the Government doing enough to protect the high number of households likely to fall into fuel poverty as a result of high fossil fuel prices over the coming year?

To what extent, and how rapidly, could energy saving or efficiency measures help to reduce reliance on oil and gas and relieve fuel poverty?

The Cost-of-Living Crisis – the increasing number of households in fuel poverty

In our view, not enough is currently being done to support those households who are likely to fall into fuel poverty as a result of rising energy bills.  In February this year the Chancellor announced a £9.1 billion package of measures to help customers with the April 2022 price cap rise.  After deliberation it has been decided that £150 of this would be allocated via a council tax rebate to those properties in bands A-D, whilst £200 of support would be given to each household through reductions in their energy bills from October.

Whilst this support was welcomed at the time, it is now clear that it does not go far enough to provide appropriate support to many households facing unprecedented energy price rises going into the next winter.  At the time of the Chancellor’s announcement, it was believed that April’s price cap rise would likely be a one off and that by October’s price cap adjustment, bills would be at a more normal level.  The evidence from the wholesale market now shows that this will not be the case.  Wholesale markets remain multiple times higher than normal levels which has been exacerbated by the ongoing conflict in Ukraine (which was not accounted for in April’s price cap increase as the cap was set in the beginning of February).  This means that the price cap in October could rise to as high as £3,000 a year for the average household[1].

These prices are unprecedented and the scope of households who are affected, and who are now facing fuel poverty, is increasing rapidly to unprecedented levels.  Analysis of our own customer base shows that we now consider more than 20% of E.ON customers to be regarded as fuel poor and therefore potentially unable to pay their energy bills[2], up from circa 10% a year ago. Should October’s price cap rise be as severe as the OBR expect, we anticipate 40% of our customers will then meet this threshold and potentially be unable to pay their bills, with the next 30% of E.ON customers hovering just under this threshold for fuel poverty. Our forecasts suggest that our levels of debt would then increase by an additional 50%, to £800 million.

This would be potentially catastrophic for both our customers and for our business. 

We believe that there is both short term and long-term action that can and must be taken to protect customers and the integrity of the energy retail sector.  We propose the following as a suite of options for Government:

1. Urgent and sustained action to reduce energy demand; in particular through the extension of the successful Energy Company Obligation (ECO) to 2030 which will provide the necessary longevity for the supply chain to scale up.  This should be complemented with £1 billion per year of additional Government funding to expand eligibility of ECO to more households, with a sliding scale of financial customer contributions for measures installed to those that do not meet the vulnerable eligibility criteria (currently only fully funded measures for the most vulnerable households are allowed via the scheme). We anticipate that with current prices, moving simply from an EPC D to EPC C could save households up to £500 a year[3].
2. Immediate targeted support on energy costs for the most vulnerable customers via the introduction of a social tariff priced £450 below the level of the current price cap.  The Government should fund the cost of the social tariff at least in the short term to prevent bills rising for the rest of the population.
3. Temporary removal of VAT from energy bills for 12 months from October that would deliver a c£100 saving.
4. Government funding of Supplier of Last Resort (SoLR) levy claims and some network costs for 12 months from October which could achieve a c£200 saving.
5. Permanently moving green levies from the electricity bill into Government expenditure saving around £150 this year.

Our analysis shows that, with these measures in place, we could ensure that all households spend less than 10% of their households’ budget on energy.

Preventing unnecessary costs of failure in future

At least £5 billion is likely to be added to customer bills due to the failure of numerous energy suppliers over the last few months. Our view is (in action No 4 above) that Government should fund these costs rather than customers in the short-term.

However, these failures were ultimately driven by a catastrophic failure of energy policy and regulation that led to some energy suppliers being allowed, and in some cases actively encouraged, to recklessly gamble with their customers’ rather than their investors’ money. Action is urgently required by both Government and Ofgem to implement clear, decisive and simple rules to prevent this from happening again in the future.

There are four specific actions that should be delivered urgently:

1. Ofgem to finally (after many years) introduce strict rules over the use of customers money as working capital, including the ringfencing of customer credit balances and RO receipts;
2. BEIS to legislate to require more frequent (quarterly) payments of the Renewables Obligation in 2022.  We are extremely disappointed that in its response last month to the consultation on such a proposal, BEIS have chosen to do nothing at this stage ahead of inviting further calls for evidence later this year;
3. Ofgem to implement stronger capital adequacy tests that require investors to put their own equity capital at risk.  This will incentivise shareholders to ensure companies are well run and able to navigate the uncertainties in a prudent way which helps address the current moral hazard; and
4. BEIS to legislate to reform the Supplier of Last Resort (SoLR) process to ensure outcomes for customers and investors match those seen in the Special Administration Regime (SAR). This means that investors of failed suppliers should not expect to receive their original investment back (ultimately funded by the rest of the market) as is currently the case under SoLR, in sharp contrast to SAR.

Energy Efficiency as a means of reducing reliance on fossil fuels and preventing fuel poverty

Whilst the Government’s energy security strategy provided a welcome step towards decarbonising the UK’s energy supply, it was in reality only an energy supply strategy, when we really needed an energy demand strategy.

At E.ON we’re proud of the work we do on energy efficiency.  Since CERT/CESP in 2008 and subsequently ECO in 2012, we’ve installed around 1.5 million measures in almost 500,000 homes, saving our customers ~£10 billion in lifetime savings.  We believe energy efficiency is as close to a silver bullet for home decarbonisation as you can get and it is undoubtedly the best way to reduce our immediate dependency on fossil fuels.

Research from the UK Energy Research Council (UKERC) has shown that a sustained energy efficiency programme could reduce the amount of energy we use by 25%[4], the equivalent to the output of 6 Hinkley Point C’s.  This would generate aggregate bill savings of more than £8 billion per year[5] based on current prices and additional savings of £47 billion when taking into account improved health outcomes, economic stimulus from installation and capacity saved in the electricity system.

Most significantly, energy efficiency can be scaled up to deliver benefits this year so long as any such announcement by Government commits to a long term programme of investment. However, we are currently in an unacceptable situation where there is no comprehensive energy efficiency programme lasting beyond 2022 in operation.  ECO 4, which was due to start on 1 April 2022 and run through to March 2026, has still not been passed into legislation and there is a very real chance it may not be done so until after the summer recess.

The uncertainty caused by the absence of ECO 4 being legislated for could have a drastic effect on smaller installers, who with such uncertainty will turn their attention away from ECO, and in a worst case scenario cease to install energy efficiency measures altogether.  At a time when energy prices are at the highest levels this century, the Government must prioritise passing ECO 4 legislation ahead of summer recess, otherwise we face heading into a Winter and October’s price cap rise with no substantial scheme delivering energy efficiency support to fuel poor households.

Once ECO 4 has been signed into legislation, our proposal for delivering energy efficiency rapidly and at scale is to boost funding via the delivery schemes we know work. ECO has been a tried and tested delivery mechanism for 10 years, installing measures and improving more than 2.4 million homes in that time.  We support industry calls for an ECO+ model, where the current ECO budget is doubled to £2 billion a year, with the additional £1 billion coming from general taxation as we have highlighted above. 

ECO+ should be open to the majority of the market who may not be considered fuel poor and thus ineligible for ECO 4 support but who cannot afford energy efficiency measures by their own means, and the scheme should focus on home insulation measures in its entirety.  With an additional £1 billion added to the scheme, we believe 150,000 homes could be improved every year, whilst a national insulation roll out would prepare homes for renewable forms of home heating, such as heat pumps.  There is also the added immediate benefit here that if we get homes up from just one EPC band (e.g. D, the UK average) to an EPC C (the Government’s target for all homes by 2035), households could be saving approximately £500 a year on their energy bills based on current prices.

May 2022