Written evidence submitted by OVO (WIN0034)

 

About OVO

OVO is a collection of companies at the forefront of innovation to zero carbon living. We are one of the UK's largest energy suppliers, serving 4.5 million members and employing 7,000 people. Our work goes far beyond that of a traditional energy retailer; we are a decarbonisation company for the home. Our sustainability strategy, Plan Zero, commits us to tackling the most critical issue of our time - the climate crisis. This includes our commitments to achieve net zero emissions across our operations by 2025 and support our members in eliminating their household emissions by 2035. Our vision is not just to help consumers cut carbon but to do so in a way that puts the value generated from decarbonisation directly back into consumers' pockets.

 

Summary

We welcome the opportunity to respond to the Committee’s important inquiry on ensuring energy consumers are protected this coming winter.

 

The Committee is right to focus on this important issue as we are still in an energy crisis. While energy bills have dropped, they remain almost double the historical average. The damaging impact of high bills is now being compounded by high inflation which, two years into the cost of living crisis, is exposing households to additional new cost pressures which they did not face last winter to the same degree. Mortgage repayments are going up as customers roll off their fixed term deals and food costs are nearly 15% higher than last year with food inflation hitting its highest level in 45 years.[1]

 

National Energy Action (NEA) has estimated that the total number of households across the UK in fuel poverty increased from around 4 million in summer 2020 to 6.7 million in October 2022 and they expect it to reach 7.5 million this year. Further, research by the Resolution Foundation think tank suggests that 35% of households in England will pay more for energy this coming winter than last, despite an expected decrease in the level of the energy price cap.[2]

 

However, despite the increasing pressures on households, and stubbornly high energy prices, the support schemes that helped many keep their heads above water last winter, have fallen away. The Energy Bill Support Scheme (EBSS, which gave all customers £400 over last winter) and the Energy Price Guarantee (EPG, which ensured no bill was above £2500) have expired. Customers therefore no longer have a safety net.

 

We think this situation is extremely worrying, and strongly urge the Government to reconsider its approach to this winter. We recognise the tight fiscal position the country is in and so understand that the universal support the government provided last year may not be possible again. We therefore consider that targeted support for the most vulnerable consumers this winter is essential.

 

This support could be delivered through the EPG and be provided to those on means-tested benefits, which is a good proxy for identifying those on low incomes at greatest risk of fuel poverty. This will ensure that the most vulnerable in society are protected. 

 

Moving forward we recognise the “sticking plaster” approach to consumer support cannot continue. We support the introduction of a carefully designed and costed social support policy that would permanently lower bills for those most in need. We consider this is vital both supporting consumers most at risk of falling fuel poverty and also ensuring the ongoing financial resilience of the retail market.

 

Aside from the challenges of consumer affordability, we believe it to be imperative that the sector, collectively with Ofgem and Government, work toward a stable but also thriving and investable market as soon as possible. Investment in innovation, including new carbon reduction focussed customer propositions and technologies is a critical element of progressing the nation's pursuit of net zero and energy security. However, there are significant barriers to this investment that must be overcome, and this starts with targeted reform of price control and careful consideration of the regulatory framework.

 

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

 

Nil response.

 

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

 

Under the liberalised and competitive UK energy market, it is right that suppliers are able to recover efficiently incurred costs from their customers - the price of generating and transporting energy should be reflected accurately in consumer bills. Therefore, without government intervention to insulate consumers from rising costs of energy, there is no way for all consumers to be fully protected from price shocks.

 

Looking back to last winter, energy consumers were protected from the worst of the price shocks witnessed following Russia’s invasion of Ukraine. Extremely generous government support, in the form of the Energy Price Guarantee (EPG) and Energy Bills Support Scheme (EBSS), universally limited customer bills and provided payment support.

 

This coming winter, more consumer support from the government is required. We recognise that under the more restrictive fiscal position the country is in at present means universal support is unlikely, nor do we believe it is needed. However, targeted support for the most vulnerable energy consumers is essential to prevent rising levels of fuel poverty.

 

We therefore believe that the Government should introduce targeted affordability support this winter, delivered through the existing EPG mechanism. We recognise that the time horizon to deliver such support is short, but we also note that EPG support has been delivered at pace in the past, and do not see any reason why this cannot be achieved again. The EPG is a proven mechanism that suppliers are familiar with and can implement quickly and reliably to get support to those eligible.

 

We also recognise the role that energy efficiency can play in reducing consumer energy demand, and in turn bills, as well as the longer term benefits to energy security and net zero progression. We were disappointed to see the government move away from a drive to increase the energy efficiency of UK housing stock before last winter, despite the recognition of the challenges in this space. We consider this an important learning, and one that must be acted upon when looking at this winter and beyond.

 

Longer term, we strongly support the introduction of an energy social support policy, or social tariff:

       This must be targeted at the right customers who are most in need of support, with eligibility based on a combination of income and essential energy needs

       The level of support should flex, within reasonable market scenarios, to the level of energy prices to ensure protections against fuel poverty

       The approach to eligibility and delivery must avoid the cliff edge scenarios that we have seen in the past, often leading to the ‘squeezed middle’ being overlooked despite also needing help

       Ultimately, we think identification and maintenance of eligibility should be managed centrally by government, in recognition that no single party currently holds all of the required data

       Support may need to be energy bill funded, but government must accept that levies on bills can only go so far, and HMT support may be needed in certain scenarios

       This policy should be delivered before the winter of 2024/25

 

Aside from government support, suppliers are also well placed to offer support to their own customers to help mitigate the impacts of price shocks. Last winter, OVO provided a generous Winter Support Package worth £50 million.[3] Under the package, we provided:

       Payment holidays for debt repayment for all prepayment meter customers so that every penny put on the meter went towards heating, not paying back debt

       200% increase in emergency top-up credit for customers on a prepayment meter and continued commitment to never disconnect a customer

       Free technology and services such as smart thermostats, electric throws and boiler checks

       A new charity partnership with the Trussell Trust to support food banks to meet increased needs – in addition to continued partnership with StepChange

 

We are currently preparing another Winter Support Package to help our customers with the challenges of energy bills over the coming winter period, and it will affirm our commitment to supporting our most vulnerable customers.

 

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

 

As providers of an essential service, energy suppliers must do all they can to support customers with their energy bills. Last year, we supported customers through our Winter Support Package, as detailed in response to question 2, and we plan to provide further assistance this year to those who most need help.

 

As a data-led organisation, to identify the consumers most in need of support we are constantly analysing our customers’ energy consumption and paying patterns and have established a dedicated vulnerability support squad in our customer service teams to provide specialist support.

 

If we have a customer who is persistently not paying, we have a duty to be proactive and engage them to find out why and offer a wide range of help. Our help includes:

       A wide range of repayment options and plans, based on each individual customer’s ability to pay

       Payment holidays and discretionary credit for prepayment meter customers

       Offering of alternative payment methods that can help with budgeting

       Advice on energy management and cost reduction, including innovative affordability assessments

       Signposting to third party support, including debt management charities and other consumer organisations

 

As a last resort, suppliers can look to change a customer’s meter to prepayment. However we have and would only ever pursue this option after we have exhausted all other options through an elongated engagement pathway . It is important to recognise that suppliers have a very limited set of options to pursue customer debt, and prepayment meters represent a far better outcome for customers than disconnection or litigation. They allow suppliers to limit the build up of customer debt, which is an important factor in ensuring the stability of the market. Without the option to install prepayment meters, energy bills would rise for all energy consumers, as the cost of debt is mutualised across the market (including for low income and vulnerable households).

 

Currently, all energy suppliers have paused their warrant installations and remote switches as the industry works with Ofgem to review these processes. We have signed up to Ofgem’s involuntary prepayment meter Code of Practice, and have already committed to not restart this activity before April 2024.

 

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

 

In the immediate aftermath of the energy crisis, Ofgem’s priority was rightly on protecting consumers by ensuring continuity of supply. To this end, they effectively ran the Supplier of Last Resort and Special Administration Regime processes, transferring millions of customers of failed suppliers safely to solvent suppliers.

 

Since the energy crisis, Ofgem have also prioritised strengthening the financial resilience of the market through measures such as:

       Reforms to the price cap (for instance the move to quarterly updates) to make it more reflective of suppliers’ costs

       The market stabilisation charge and ban on acquisition only tariffs

       New tougher rules on financial resilience, for instance the new financial responsibility principle, minimum capital requirements, enhanced monitoring and reporting, and ringfencing of certain monies so they cannot be used as working capital

 

We support the principles that these measures are trying to achieve, as they are crucial to putting the retail market on a firmer and more stable footing. However, there is a risk that some of these interventions have become too prescriptive, and have been informed by incomplete analysis, which could in turn serve to weaken the sector.

 

With these reforms in place we believe Ofgem (and Government) must now think beyond the crisis. Continuing to operate in “crisis mode” risks overcorrection and consumer detriment from an overly prescriptive regulatory framework. We must collectively aim for a regulatory framework that delivers the market we need; one that ensures consumers are protected but are also encouraged to take up new products and services that help them to use energy more flexibly and to decarbonise their homes and reduce their bills. This is essential if our energy security and net zero ambitions are to be met.

 

Attaining this vision requires suppliers to be able to invest in research and development of new and innovative customer propositions. We need to be able to trial, and risk failing, new products and services to discover what works for consumers as home decarbonisation goes from being a niche proposition to mass market. This requires investment, and we can only attract the level of investment required if there is regulatory certainty and profitability. These must be the lodestars that drive Ofgem and Government’s strategy and ambitions for the retail market.

 

Critical to this is consideration of the future of consumer protection. For the most vulnerable, the price cap (which ensures a fair price but not necessarily an affordable one) should not be considered as the solution to protect customers from the risk of fuel poverty. Instead, the Government should work with suppliers to develop a social tariff, targeted at those customers who are most financially vulnerable with the aim of preventing and reducing increasing levels of fuel poverty throughout the UK. This will allow those most in need of support to receive a more substantial reduction in their bills and encourage all those who are able to engage with the market. OVO recognises that this is ultimately a choice for the Government and calls on Ministers to take action.

 

5. How effective is the Government's approach towards supporting the sector and delivering a functioning energy market?

 

Reforms are urgently required to create a fit-for-purpose regulatory framework that will enable the retail market to play its critical role in strengthening energy security and achieving net zero.

 

In particular, it is critical that suppliers operate within a set of rules that enable them to make a fair return. This is crucial for investment in the products and services that will encourage consumers to lower and flex their demand to manage a grid increasingly powered through intermittent generation. This represents a whole new relationship between consumers and the energy market: one that is critical for energy security and net zero.  Suppliers are uniquely placed to lead this part of the transition and ensure the retail market delivers value for all consumers. 

 

However, to deliver this, suppliers such as OVO need to operate within a financially resilient market that enables them - providing they innovate, operate efficiently and treat customers well - to make an appropriate profit margin commensurate with the provision of an essential service. As set out in response to question 4, this is a prerequisite to attracting the investment necessary for innovation and R&D.

 

We are at an inflection point for the retail market, as prices begin to fall and competition starts to emerge again we must consider what sort of market we need to deliver our energy security and net zero ambitions.

 

Although the government has recently published a new policy paper outlining its vision for retail energy market reforms, thinking remains at an early stage.

 

6. Is the legislative framework on pricing controls suitable for protecting consumers?

 

OVO supports the principle of price protection, but believes that the current model needs urgent adjustments in support of wider market goals, and longer term consideration against a changing energy system.

 

The goal of price protection must be to ensure that everyone receives a fair price for their energy, regardless of whether they are engaged or not. As a result, the price cap must always be cost-reflective. We believe this is important as without the price cap, we consider the risk to consumers of being overpriced remains.

 

Affordability is a significant challenge in the sector at present, as set out earlier in this response. However, the price cap should not be considered as a solution for this issue - a targeted social tariff policy must be developed urgently, and separately from reform of price control. 

 

The recent and ongoing impacts of the energy crisis have exposed a serious lack of agility and robustness within the current price cap methodology. As a result, the price cap has deviated from its intended purpose, and become a de facto affordability measure for energy consumers.

 

While at face value this appears to have delivered significant benefits to consumers, shielding them from the huge increases in the cost of energy over the last two years, it has also created a range of both short and long-term damaging consequences for the market. The resulting financial pressure on suppliers has been immense, so much so that 32 suppliers have exited the market since 2021, leaving consumers with an eye-watering multi-billion pound bill.

 

The impacts on consumers do not end there. Energy bills are likely to remain much higher than pre-energy crisis levels for years to come, and the price cap continues to restrain the sector’s recovery, driving ongoing instability and a lack of profitability for suppliers.

 

Ofgem have attempted to respond to these challenges with a series of price cap adjustments targeted at supplier cost recovery, but their approach has been varied and uncertain, while also generating a large amount of regulatory burden for suppliers and Ofgem, as well as confusion for consumers.

 

The draft Strategy and Policy Statement for Energy Policy in Great Britain (SPS) states that the retail market needs to work better for consumers and be more resilient and investable while supporting the transformation of the wider energy system. Regulatory and policy reform is urgently required to meet these objectives. Ofgem and Government must deliver a Price Cap framework that will increase the attractiveness of the sector to investment - investment that is needed to make the sector more resilient, and to deliver the innovation and development required to drive the sector forward in the pursuit of net zero.

 

OVO’s recommendation

To resolve the issues set out above, Ofgem must end the recent trend of ad hoc, iterative and uncertain price cap adjustments witnessed over the last three years. They must ensure that suppliers have an appropriate level of clarity and certainty over the way in which the costs of supplying energy to UK consumers are managed under the price cap.

 

From our first-hand experience of the challenges that the current price cap framework has created, we have considered a wide range of different reform options. Ultimately, we do not believe that fundamental policy reform is required, and instead the present issues can be resolved through two simple but key adjustments to the existing price cap methodology:

 

  1. Clarity on which cost elements suppliers are expected to risk manage outside of the price cap methodology.

 

Suppliers are well positioned to manage their recovery of certain cost elements. Conversely, there are other cost elements over which suppliers have limited or no control - for these, it would not be appropriate to expect suppliers to manage the risk of under-recovery themselves.

 

Ofgem should lead an industry consultation to decide upon this classification of different cost elements, the results of which should be clearly published as part of the price cap methodology to ensure absolute clarity for all market participants and observers.

 

For cost elements that suppliers are expected to risk manage, Ofgem should provide a suitable risk allowance within the price cap, but suppliers must accept that under normal market conditions, any under-recovery of costs will not become recoverable in future price cap periods.

 

  1. Certainty on a standardised cost-recovery process.

 

For cost elements that suppliers are not expected to risk manage, as established through the process set out in (1) above, Ofgem should develop and confirm a standardised process to be used in facilitating cost-recovery. This process should be written into the price cap methodology. 

 

When systematic and reasonably incurred costs exceed the existing relevant price cap allowance by a predetermined materiality threshold, Ofgem must run this process to allow suppliers to recover their losses under a future price cap period.

 

Longer term, we must consider how the price cap should evolve to account for the changing energy system, which may involve more radical reform. This is particularly relevant to the evolving nature of consumer billing and settlement of demand. As we progress toward an energy system more focussed on intermittent renewable generation, half-hourly settlement, and flexible tariff offerings, price control will need to adapt to ensure appropriate ongoing consumer protection. We believe the Government should begin to consult on such adaptations sooner rather than later.

 

August 2023

 

 

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[1] Cost of living insights - Office for National Statistics (ons.gov.uk)

[2] Resolution Foundation - Over one-in-three households across England will pay higher energy bills this winter than last winter – including almost half of poor families

[3] OVO announces £50m customer support package to help the most vulnerable this winter