Written evidence submitted by Centrica (WIN0033)

 

As the UK’s leading energy supplier, providing energy and home services to over 9m homes and businesses, Centrica welcomes the Committee’s decision to hold an inquiry on the lessons learned from supporting energy consumers and energy supplier service.

 

Executive Summary

 

Since the start of the energy crisis, Centrica have committed £100m to supporting our customers – by far the biggest energy company customer support fund. This includes an additional £50m pledged in July as part of our ongoing commitment to donate 10 per cent of British Gas Energy profits throughout the crisis. Through the British Gas Energy Trust (BGET) – an independent charity funded solely by British Gas – we have distributed grants of up to £2000 to help those customers struggling the most. BGET also funds 56 frontline money advice centres. Our support fund has not been limited to households and we have also ringfenced £25m to support small business customers struggling with their energy costs. While prices are starting to fall, many of our customers are still struggling with their energy bills. Approximately 20% of the calls to or contact centres are around ability to pay.

 

Engagement is crucial for customers in financial difficulties. When consumers engage with their suppliers, they will usually benefit from a variety of support such as direct assistance or long-term payment plans. Where consumers fail to respond to suppliers after repeated contact, suppliers need to recover debts to ensure they are not borne by other consumers who themselves may be struggling.

 

Centrica have recruited 700 new call centre staff to manage increased demand throughout the energy crisis. All of our contact centre agents were upskilled on ability-to-pay conversations and self-disconnection to signpost additional support. British Gas also proactively identifies customers in payment difficulty to help them before their situation escalates and highlight the support available.

 

British Gas is the largest national distributor of the Warm Homes Discount (WHD) Scheme providing £85.5m annually to c.573,000 customers eligible for the £150 payment towards their bills. Last year, we responded proactively to the further Government support schemes which were implemented at pace and provided vital support for households. The schemes have worked best where customers have benefited from discounted tariffs, which is a simple delivery mechanism. Schemes worked less well where they involved posting vouchers, as effective delivery relied on accurate and current customer information and additional steps for customers so they could benefit from the support. As the Energy Bill Support Scheme demonstrated, smart meters are an important tool and can help get support to households quickly and effectively.

 

The energy crisis has demonstrated that the energy retail market requires reform. Centrica is calling for a series of reforms to make energy more affordable for those in need and easier to understand for all, to ensure customers are protected and prepared for the energy market of tomorrow:

  1. Introduce a social tariff with broad enough eligibility to ensure that energy is affordable for those least able to pay. The implementation of which we would encourage Government to consult on as soon as possible.  The price cap also plays an important role in giving confidence to consumers that they are paying a fair price for energy and helps maintain trust in the wider market.
  2. Fund policy costs – including a social tariff through general taxation, not through energy bills, which is regressive.
  3. Remove the standing charge to simplify the price cap, recovering all costs through a single unit rate. To promote consumer engagement and encourage energy saving.
  4. Remove regional variations in tariffs to simplify the market for household energy customers. Household customers should not face a postcode lottery for energy charges.
  5. Complete the smart meter roll-out with broader obligations and incentives, so consumers and the energy system can feel the full benefits of the smart meter rollout.
  6. Ringfence Customer Credit Balances to fully protect customer deposits.
  7. Transition to minimum capital requirements for energy suppliers. This should not be delayed until 31 March 2025.

 

Committee Questions

  1. What role did the UK grid play in the high domestic prices of winter 2022-23?

 

In response to the high prices of winter 2022-2023, National Grid launched the Demand Flexibility Service (DFS) to incentivise consumers and businesses to reduce their power consumption at certain times in case of supply shortages. Demonstration tests were scheduled to ensure that there was a benefit for consumers, even if suppliers were unaffected, and to prepare customers for real events. Customers taking part were asked to reduce their peak-time electricity use if they could during a one-hour period identified by National Grid.

 

Shifting demand using smart technology will become increasingly important in managing peak demand going forward as the UK further expands renewable generation in the transition to net zero. Testing this at scale and understanding the consumer response is an important element of the transition to net zero and something Centrica is keen to continue to invest in.

 

As a result, British Gas have launched PeakSave – our own demand flexibility initiative that rewards customers for using energy when it’s more readily available. Over 200,000 customers have been taking part in weekly sessions since June, where they have benefited from half price electricity and helped to save 13 tonnes of carbon at the halfway point of our scheme. We have paid almost half a million pounds to customers taking part in the scheme so far.

 

Our future energy system requires both greater upstream resilience – through batteries and hydrogen storage for example – and greater flexibility and responsiveness from energy users on the other-side of the grid.  To ensure the UK grid can fulfil its role in the future, there will need to be continued investment in the UK’s infrastructure, in particular grid connections to ensure new renewables are connected to the grid in a timely way. Without connection delays, the Grid would have had more generation and storage available last winter.

 

On the consumption side, households must have a smart meter to enable them to participate in and benefit from new solutions designed to help reduce consumption and cut bills. And as more homes adopt wider smart energy technologies, there is further potential for consumers to benefit from supporting national and local grids through flexibility services. Smart meters will underpin the flexible energy system of the future, yet today only half (c.14m) UK households have a smart electricity meter installed. This is why Centrica is calling for more systemic changes to the smart meter policy framework do deliver broader incentives and obligations, including rebates, opt-out charges and installation requirements when switching suppliers or benefitting from government schemes and public-sector contracts.

 

We need new incentives and obligations for consumers that will deliver near universal penetration in the shortest possible timeframe. The alternative will be to remain trapped in a cycle of missed targets and Ofgem investigations. The two most obvious opportunities relate to more efficient allocation and potential pooling of resources involved in the delivery of the mandate and reducing the scope for consumers to decline to engage with the smart meter programme. To illustrate this issue, it’s worth noting that just 56% of the British Gas customer base has accepted a meter after 9 years of British Gas actively promoting and installing smart meters and vast numbers of customers have been contacted on multiple occasions yet have still declined the opportunity to have a smart meter installed.

 

  1. What more could have been done to prevent price shocks being passed to consumer bills?

 

Storage

 

The UK has some of lowest gas storage capacity in Europe at 12 days average or 7.5 peak winter days, compared to Germany at 89 days, France at 103 days and the Netherlands at 123 days. Storage facilities in the European Union are capable of meeting more than 20% of the annual demand for gas.

 

In response to this, last year Centrica re-opened Rough – the UKs largest gas storage facility, 18 miles off the coast of Yorkshire – following a major engineering and investment project. The first injection of gas into the site in over 5 years was made in October 2022. With a storage capacity of up to 30bn cubic feet (bcf) of gas over winter 2022/23, the re-opening of Rough increased the UK storage capacity by 50%.

 

Centrica have since further increased Rough’s storage capabilities to 54 bcf, providing the equivalent volume of gas to heat 2.4m homes over winter. Our long-term aim remains boosting UK energy resilience by turning the Rough gas field into the largest long duration energy storage facility in Europe, capable of storing both natural gas and hydrogen.

 

Rough will help keep prices down for consumers by balancing the UK’s gas market, injecting gas into the facility when there is excess supply and putting that gas back into the UK’s gas network when customers need it most, keeping prices lower at that point of peak demand. The additional capacity means Rough can now store up to 6 days of average UK gas use.

 

More broadly, the risks to investors when demand for energy is low are too great to attract the level of investment that the UK needs to significantly expand its storage assets. The UK requires a regulatory model that supports storage asset investment by treating storage assets as strategic assets for the country. Such an approach would come at no immediate cost to the consumer. Without a supporting regulatory model, there is unlikely to be any further investment to expand capacity at Rough for example.

 

The Cost of Failure

 

Half the UK’s energy suppliers went out of business over the last two years. We stepped in to supply 700,000 customers who were left without a supplier because of unsustainable business models, but the distributed cost of supplier failures has added more than £4.6bn to the bills of energy customers. Many of these supplier failures might have been avoided if a robust framework for financial resilience had been in place. The regulatory framework in place at the time made it possible to enter the market with very little capital invested, use customer credit balances to fund operations, undercut rivals by failing to manage risk, then walk away when their business fails, leaving consumers to cover the cost of losses. Whilst, Ofgem has begun to address these risks it’s new capital requirements will not take effect until 31st March 2025. Until these proposals take effect – and are actively enforced - moral hazard will remain in the current system. Urgent action is needed, to ensure we develop a market that is resilient enough to protect current and future customers, while providing a solid basis on which suppliers can invest and innovate to deliver key policy objectives like net zero. See section 4.

 

  1. How should energy companies respond if customers cannot pay their bills and what actions should they not have recourse to?

 

Engagement is crucial for customers in financial difficulties. When consumers engage with their suppliers, they will usually benefit from a variety of support such as direct assistance or long-term payment plans. Through the British Gas Energy Trust (BGET) – an independent charity funded solely by British Gas – we have distributed grants of up to £2000 to help those customers struggling the most. Overall, Centrica have committed £100m to supporting our customers through the energy crisis – by far the biggest energy company customer support fund. Where consumers fail to respond to suppliers after repeated contact, suppliers need to have the means to recover debts to ensure they are not borne by other consumers who themselves may be struggling.

 

British Gas proactively identify customers in payment difficulty to help them before their situation escalates and highlight the support available. Through our partnership with Post Office, we have delivered face-to-face energy advice sessions in local branches across the country to reach more people access help and support. Over 100 have taken place so far with more in the pipeline.

 

For customers that contact us with financial difficulties we have an ability-to-pay conversation to identify an appropriate level of support. Our debt customer care teams are made up of trained advisers equipped to support complex customer needs and empowered to offer repayment plans of up to 12 months based on customer assessments. For longer-term support we offer referrals to specialist debt advice organisations, including the British Gas Energy Trust (BGET). Overall, the support we have offered has helped customers with their bills on over 1m occasions since the start of the energy crisis, through financial support, arranging 500k payment plans, and helping 26,000 customers under the Breathing Space debt respite scheme.

 

We undertake a substantive process involving multiple steps before resorting to debt enforcement action. This includes billing and payment reminders through various communication channels; the offer of payment plans and support programs; prioritised assistance for vulnerable customers; and referral of customers to independent debt advice organisations. These measures aim to engage with customers, understand their financial difficulties, and explore alternatives to resolve the outstanding balance before taking more severe enforcement actions. A minimum of 10 attempts, over a 14-week period are made to engage a customer in a payment solution. At each stage it is possible for customers who engage to stay on credit meters. Our payment options for customers in debt include:

 

a)      Monthly Direct Debitup to 12 months, leaving <10% of balance at the end of the plan

b)      Monthly Direct Debitup to 12 months, reduced amount based on affordability if Open Banking assessment is complete (where customer gives agent access to their account)

c)       Quarterly/Monthly Variable Direct Debit – pay on demand for usage

d)      Magnetic Card Payment offering fortnightly and monthly repayments, based on affordability

e)      Prepayment Meter – any debt can be negotiated to as a low as £3.70pw on a repayment plan (we are currently not installing PPMs under warrant)

f)        Extended Payment Plan (EPP) - to extend debt repayment over a max of 5 years, whilst maintaining an affordable repayment of ongoing consumption (can be extend beyond 5 years in extreme circumstances)

g)       Fuel Direct – a last resort plan taking payment from customer benefits; this currently has to be instigated by the Department for Work and Pensions via the customer

 

All energy suppliers have an obligation & duty of care to prevent customers taking on debts they cannot afford, and – where unmanageable debt exists – to prevent accumulation of that debt. Bad debts pose a risk both to the households in that situation and to other bill payers that must cover the mutualised costs of bad debt.

 

Prepayment meters (PPMs) are also used as a tool to help some customers manage debts. Despite the concerns and challenges that we as a sector are addressing, policy makers recognise that prepayment meters can be a useful tool to help customers manage finances, budget for energy usage, and prevent the escalation of debt. There is also recognition that there is an ongoing role, in certain circumstances, for warrant installs of prepayment meters to manage debt and without them bad debts are likely to increase significantly. Where customers remain on credit meters, they amass further debt at a rate of £237 per month (2023 Jan-Jul average). In the case of British Gas alone, we estimate the debt impacts of banning prepayment meters could be over £100m of additional debt. Ultimately, this is paid for by everyone else through increased customer bills.

 

British Gas will not leave a customer without any energy. Customers can call us on a freephone number 24/7 and we will offer them credit. We are very aware of the risks around self-disconnection and have robust processes in place to monitor customers’ usage for signs of disconnection. We have an Off Supply Customers At Risk (OSCAR) process to identify customers who may have self-disconnected or at risk of self-disconnecting. Additionally, British Gas launched a £10m credit support fund in January, where we proactively identify customers struggling with energy costs to offer non-repayable prepayment meter credit up to £250.

 

Our staff have worked hard throughout the energy crisis to handle millions of queries through various contact channels. To manage this increased demand, Centrica announced that we would recruit 500 additional colleagues for our call centres – a target that we significantly exceeded with 700 new call centre staff. All of our contact centre agents were upskilled on ability-to-pay conversations and self-disconnection, to ensure consistency and to signpost additional support. We also support nearly 3m customers on our Priority Services Register which receives around 5,000 calls each week.

 

PPM Code

 

Ofgem introduced a new code of practice in April – currently being transposed into licence - which we helped to develop along with others in the industry and committed to implement. The code provides more detail around when a PPM should and shouldn’t be fitted, which should help the people on the frontline who are having to make these decisions. Yet the problem remains that energy suppliers do not always have all the details on vulnerabilities. As energy suppliers increasingly need to play a role in the welfare system, data sharing between Government (including Ofgem) and energy suppliers on physically or financially vulnerable customers should be improved as a priority to ensure that suppliers are equipped with the appropriate insights to assist them in determining the appropriate course of action and in identifying those customers who should not be considered for a PPM.

 

  1. Has Ofgem got its priorities right in addressing customer protection?

 

In July, Ofgem made decisions on key aspects of its proposals aimed at strengthening financial resilience of energy suppliers; notably on the ringfencing of customer credit balances, and the introduction of minimum capital requirements. 

 

Customer Credit Balances

 

Given consumers have been hard hit by the distributed cost of supplier failures over recent years, we believe Ofgem’s decision not to require all suppliers to ring-fence the credit balances of their customers is a mistake. Ofgem’s initial position had been, rightly, that the use of customers’ monies to fund working capital by energy suppliers is akin to using “interest free company credit cards”. To now only potentially require that suppliers ringfence their customers’ credit balances when the supplier is in financial difficulty does not appear to be in the interests of consumers. Indeed, the signal this sends to suppliers at a period of volatile and unpredictable market conditions during which supplier finances are under extreme strain is deeply troubling.

 

Centrica have called for customer credit balances to fully ringfenced – a practice already undertaken by Centrica today. Customer deposits should never be put at risk, and energy suppliers should not be permitted to gamble their customers’ credit balances as working capital. Independent consumer research published in April last year showed that the vast majority (86%) of consumers want their energy supplier to protect their credit balances.

 

Capital Adequacy

 

While Centrica supports Ofgem’s proposals to introduce capital adequacy requirements, the implementation period proposed – with enforceable requirements only being introduced from April 2025 – is unnecessarily protracted. We do not find Ofgem’s argument that suppliers will take this long to secure the necessary finances compelling and have not seen any evidence to support this. Combined with a failure to act on credit balances, consumers have been left unprotected for an extended period.

 

  1. How effective is the Government's approach towards supporting the sector and delivering a functioning energy market? Is the legislative framework on pricing controls suitable for protecting consumers?

 

A pre-requisite for a well-functioning and investable energy market is that the legal and regulatory framework is stable and predictable in its operation. For this reason, we were concerned about the open-ended powers granted to the Secretary of State in the Energy Price Act to intervene in the market. These powers are unprecedented in the regulated market, and in effect overrule the tried and tested existing procedure whereby the regulator, Ofgem, grants licenses and amends license conditions, crucially after public consultation.

 

More broadly, Government’s previous focus in the energy market was on switching rates, as a sign of healthy competition, which led to some of the behaviours we saw before the energy crisis and led to the spate of supplier failures. We believe recent events have changed Government’s focus in this area and we support the plans, set out in July, to help facilitate competition and innovation in the energy market. The reforms are likely to give households better access to energy deals and more control over their energy use. However, we believe it’s important that Government also look at how the market should best support those most in need.

 

As we have seen during the recent crisis, energy prices set by the regulator to reflect the costs of supplying energy to homes and businesses can exceed the ability to pay for households already getting by on a tight budget. We support the retention of the price cap for customers on default tariffs to give confidence to consumers that they are paying a fair price for energy and help maintain trust in the wider market. We believe the price cap can be amended to address the limitations of its one-size-fits-all nature, ensuring it is fit for the future by supporting some key enablers of the net zero transition such as half hourly settlement.

 

Centrica have called for the introduction of a targeted social tariff with broad enough eligibility to ensure that energy is affordable for those least able to pay. Centrica have further called for policy costs to be funded through general taxation rather than through energy bills to ensure the transition to net zero is funded progressively. Energy suppliers do not have the data or ability to target support schemes, so this should be set at a Government level.

 

The design of the social tariff, as well as how it is targeted, will be vital, as will how it is paid for. Our view is that like policy costs, the social tariff should be funded via general taxation, rather than added to other bills. At a time when many are struggling with the cost of living, we believe it would be regressive for other consumers to pay for this.

 

We should also take learnings from the rollout of Government support schemes last year – namely the Energy Price Guarantee (EPG), Energy Bills Support Scheme (EBSS) and Energy Bill Relief Scheme (EBRS) for non-domestic customers, later replaced by the Energy Bill Discount Scheme (EBDS). The various schemes were implemented at pace and the short time frame for implementation made delivery more complex. We would therefore encourage Government to consult on the implementation of a possible social tariff as soon as possible. The schemes have worked best where customers have benefited from discounted tariffs, which is a simple delivery mechanism. In fact, Centrica believe that a social tariff could be implemented in a similar way. Schemes worked less well where they involved posting vouchers, as effective delivery relied on accurate and current customer information and additional steps for customers so they could benefit from the support. As demonstrated by the EBSS rollout, smart meters can help get support to households quickly and effectively.

 

More broadly, a well-functioning competitive market requires simplicity and transparency in pricing, but the range of variables that exist for energy pricing today – such as where you live, how you pay, as well as separate standing charges - make it difficult for the average customer to effectively engage with the market. Even Ofgem encourages consumers to use third party intermediaries (TPIs) to find the best deal for them. That is why Centrica is also calling for simplification of the price cap by removing the standing charge and recover all costs through a single unit rate, and for government to examine the removal of regional variations in tariffs for household energy customers. Household customers should not face a postcode lottery for energy charges. And, given their role in encouraging the unsustainable behaviours observed in the months and years leading up to the collapse of the energy supply market, TPIs should now be directly regulated without delay.

 

August 2023

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