Written evidence submitted by E.ON (WIN0052)

 

Executive Summary

        The Government successfully supported customers during the energy crisis to help them afford to heat their homes last winter, but we remain in the middle of an energy crisis with bills staying almost double what they were before entering the crisis.

        A particular cohort of our customers (~150,000) are of particular concern heading into the next winter: these customers were already in debt ahead of the current crisis and their debt has grown substantially regardless of the support that has been available. Just under 100,000 of those customers have made no payment to us for their energy use since Summer 2022. There is still time for Government, Industry and Consumer Groups to come together and develop a package of targeted support that can help customers who will otherwise be struggling to heat their home this coming winter.  For example, a targeted form of the Energy Price Guarantee or an expanded Warm Homes Discount are just two ways in which this support could be provided for next winter.

        In the longer term, the key to helping customers is to help drive the cost of energy down by looking at measures across the energy supply chain.  There are choices to be made here, but the evidence is mounting that the ways in which we can help customers lower their bills are the same solutions to rising to the net zero challenge.  In particular, investing in an ambitious energy efficiency programme will help to cut energy bills by hundreds of pounds a year every year.  This not only reduces our dependency on gas where the price is set internationally irrespective of where it is produced but helps to create and sustain good local jobs and businesses and helps to cut our greenhouse gas emissions.

        Helping to cut the cost of energy on a permanent basis will also provide much broader benefits for society. E.ON are working with NHS partners to pilot new innovative ways of helping vulnerable people on low incomes and who have reoccurring health conditions as a result of a cold home to stay comfortable and warm in their own home: the Energy on Prescription trial should demonstrate the substantial cost savings available to the NHS from exploring cross sector initiatives. Alongside this we are working with other partners, such as Kidney Care UK, to help support customers with a medical need for heat or electricity.

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. E.ON is the UK’s largest supplier of electricity, supplying nearly one in five households and businesses across Britain with 100% renewable electricity on all tariffs, as standard, at no extra cost, and is the UK’s largest supplier of electricity to large industrial clients through our npower Business Solutions brand.

From a heritage of operating a major fleet of fossil-fuel (mostly coal or gas-fired) power stations across Britain and Europe, E.ON were pioneers in developing renewable infrastructure – building the first offshore windfarms in the UK, for example – before divesting largescale generation infrastructure in recent years to focus on customer-led, decentralised energy solutions.

E.ON believes that the need to tackle climate change by radically reducing our carbon emissions requires coordinated and consistent long-term action from industry, Governments, communities and individuals. We have committed to the ‘Race to Net Zero’, a science-based Net Zero by 2050 target.

We believe that the energy transition required to reduce carbon emissions is consistent with the need for Britain to become more self-sufficient in energy supplies and less reliant on increasingly volatile global markets for fossil-based fuels, and that taking action to achieve this outcome will have additional political benefits, such as reducing the cost of living and improving health outcomes.

We believe that the action to achieve these outcomes in the energy sector require the following priorities:

        A national programme of demand reduction and energy efficiency

        A focus on electrification replacing fossil-fuel use with a consequent increase in renewable energy generation using the UK’s natural resource advantages and the replacement of fossil fuel use in transportation and space heating by electric solutions (e.g. electric vehicles and heat pumps)

        A more dynamic energy network that effectively accommodates more renewable and decentralised electricity generation at scale and incentivises demand shifting from customers to cut peak demand which reduces the need for additional infrastructure as well as the costs to customers.

 

E.ON’s work in the UK is on consumer propositions, such as smarter retail tariffs, and infrastructure projects that will support these outcomes. For example, we are the leading installer of energy efficiency measures in homes, having installed around 1.5 million energy efficiency measures in homes over the last 12 years, allowing those households over £10 billion in lifetime savings on energy bills. We have also installed smart meters for more than 5 million of our UK customers, and are increasingly installing a range of other solutions, including electric vehicle charging points, solar PV and battery systems, and heat pumps. We work with a variety of major business clients in the UK to improve their energy infrastructure and reduce their greenhouse gas emissions.

Committee question responses

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

E.ON does not own or operate grid networks in the UK and has nothing to add.

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

Since October 2021, wholesale energy prices have reached unprecedented levels (more than ten times their previous levels).  The UK Government should be commended for its willingness to respond swiftly last year to the evidence base which was showing that energy bills were going to reach levels that would make it incredibly difficult for customers to be able to afford to pay them. 

The package of measures announced by the Government for households, including the £400 Energy Bill Support Scheme (EBSS) and the Energy Price Guarantee (EPG), helped to ensure that the vast majority of consumers were able to continue to afford to heat and power their homes over the last winter. Without this timely intervention, annual bills for a household with typical consumptions patterns would have reached 4-5x times their typical levels pre-crisis. Many households would have fallen into debt and underheated their home, which would have increased excess winter deaths amongst other significant social and economic impacts.

Whilst the intervention by the Government helped to avoid the worst excesses of the crisis being inflicted on consumers, it is also important to recognise that energy bills over the last 12 months have been roughly double the amount households would have been used to paying before the crisis started.  Capping the unit rate and providing energy bill rebates were two key policies, but a third aspect of the bill around how much energy is consumed is an area where the Government could have focussed more attention in terms of its response. 

In some countries, the intervention was not just focussed on limiting the price effect but also on taking more active measures to cut energy consumption, notably in Germany[1].  Over the last winter, we saw energy consumption fall on average by around 15%, but there are question marks over how repeatable this is especially if the UK experiences a harsh winter. Whilst we have fully supported the introduction of the Great British Insulation Scheme (GBIS), one thing that the Government could have done is to have launched the programme much earlier to support delivery of measures during Winter 2022/23.  This could have benefited tens of thousands of households.

The impact of energy demand reduction in households should not be underestimated. Between 2005-2020, typical household consumption of gas fell by 32% and electricity by 25%[2]. If households had experienced the current energy crisis with typical consumption patterns from 2005, bills would have been approximately one third higher than they were: The peak January 2022 price cap rate for a typical household of £4,279 would have been more like £5,742.

The Office of Budget Responsibility (OBR) estimate that Government support for energy bills across 2022-23 & 23-24 totals £78.2 billion[3]. At 2005 energy consumption, the total cost of Government support at 2005 levels of consumption would have reached more than £100 billion.

Regardless, energy consumption patterns in many households in the UK remains needlessly higher than they need to be and much more could be done to support households (and businesses) to reduce their energy use and stop wastage.

Installation rates of energy efficiency measures in the UK have been far too low over the last ten years.  If we had carried on installing loft, cavity and solid wall insulation at the rate last seen in the early 2010s, millions more homes would have benefited from improved fabric efficiency, helping to reduce energy waste, and save those households many hundreds of pounds over the last winter, and in the process, limiting the impact for the Treasury in terms of its bill support scheme (as well as reducing risks for security of supply, improving health outcomes and wellbeing for thousands, etc.)

Chart 1: Energy Efficiency measures installed each year since 2010[4]

 

Chart 2: Average annual gas consumption by EPC Band in 2021[5]

 

This is arguably the biggest lesson to learn from the crisis.  The failure to have reduced energy waste and brought millions of UK homes up to a better living standard has ultimately cost the Treasury billions of pounds over the last year. 

It is also true that if the country had deployed more onshore wind since the late 2010s, (an effective moratorium since 2010 has prevented CfD onshore wind from being installed), more cheap electricity would have been produced and there would have been less of a reliance on expensive fossil fuels for electricity generation as well as heating during the crisis, helping to dampen the volatility of energy bills over the last year.

Another important factor to consider is the speed at which changing wholesale prices feed through into energy bills.  An important role of energy retailers (energy suppliers) is to purchase energy dispatch in advance, to hedge a position in the market to not only provide competitive advantage and be able to offer the lowest prices to customers, but to also ensure that customers do not directly experience the volatility of the wholesale energy markets. The wholesale gas market in particular is generally regarded as the most volatile commodity market in the world. Energy retailers provide a valuable function in the market by taking on these very significant financial risks.

The price cap (default tariff cap) means Ofgem effectively prescribes a specific hedging methodology that all retailers in the market must follow in order to minimise their financial and commercial risks.  In 2018, Ofgem decided to adopt an approach which essentially required suppliers to hedge wholesale energy costs over a 6-month period.  Last year, in 2022, Ofgem consulted on and agreed to move from a 6-monthly to 3-monthly cap, further reducing the period over which energy is hedged by retailers in the wholesale market.

In a falling market, a shorter hedge allows price reductions to be passed on more quickly, but equally that in a rising market – of which winter 2022/23 is an extreme but instructive example - the unprecedented price shock fed through to customer bills much faster than if suppliers had been able to hedge to their own strategy over a longer period of time.

Prior to the price cap coming in, it was typical for suppliers to hedge over a much longer time horizon, included up to three years and more out. That kind of market strategy would have seen a longer shallower price shock, more akin to what Europe and other countries experienced.

The frequency with which the price cap is updated and the associated hedging strategy was an area raised by last year’s BEIS Select Committee inquiry[6].

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

The current energy crisis which has resulted in bills doubling over the last year, and which is set to remain at elevated levels for the foreseeable future (approximately double typical bills pre-crisis) will see more customers struggling to keep up with their payments.

Last winter, many households adopted unsustainable coping strategies to pay to heat and power their home, including using savings, paying on credit, using overdraft facilities or even selling possessions.  These strategies to cope with a rise in the cost of living are unsustainable and often unrepeatable. Customers may not be able to employ such strategies again this winter, and thus a risk remains that the number of customers struggling to pay bills and falling into problem debt increases rapidly.

Even though the cost of the energy price cap has declined recently, we are seeing more and more uptake for our support measures. Customers accessing online support via budgeting tools has increased substantially in the last 6 months. We have also seen an increase in payments being made by credit card: a sign that unsustainable methods are again being used to ensure the customer is keeping out of debt.

As energy retailers buy energy in the wholesale market in advance (as described in the answer to Q2 above), energy used by customers but not paid for transfers increased debt to energy retailers. Energy generators and producers, and the network companies, have in effect already been paid in advance by retailers so have no increased risk of non-payment from customers being unable to afford to pay for the energy they have used. The risks and costs associated with unpaid energy bills currently therefore sits solely with energy retailers (energy suppliers) and, ultimately, these costs are transferred to those customers that do pay their bills.

Where a customer has fallen behind with their payments and started building up debt on their account, we will look to proactively reach out to the customer and encourage them to speak to one of our energy specialists.  As many consumer bodies would say, it is important to have the conversation with an energy supplier earlier rather than later so that we can work with the customer to find a sustainable way forward. 

Our challenge is in convincing a customer to engage with us constructively when they are falling into payment difficulties.  It can sometimes take over 12 months from a customer falling into payment arrears before constructively engaging with their energy supplier (either proactively or responding to prompts via any number of communication methods from the supplier or other organisations), by which time the amount of debt accumulated can be substantial. 

Where we get good engagement with a customer, we explore all the options available to help manage their future energy spending and any existing arrears:

E.ON takes into consideration a customer’s ability to pay when deciding whether the installation of a prepayment meter (PPM) would be appropriate and will continue to assess whether a PPM remains appropriate after one is installed. With both voluntary and involuntary installations, E.ON will only fit a PPM where it is deemed safe and reasonably practicable to do so and a customer is unlikely to experience detriment as a result. If an independent review of a customer’s circumstances shows they do not have the ability to pay, we will not fit a PPM.

We have recently won the U-switch award in 2023 for providing the best and most consistent outcomes for customers through the recent energy and supplier crises (consistent performance throughout the energy crisis).  Over the last 4 years, the sector has been loss making, more than 30 suppliers have gone bust, and Ofgem recognises that the sector is still under-capitalised[7].

Given the scale of the continuing crisis, there is only so much that any individual supplier can do to support their customers through this challenging period as the sector is set to move into profit for the first time since 2018 after years of making significant losses[8].  Government in our view must continue to play an important role in supporting customers through this crisis and on an enduring basis where needed.

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

During the current energy crisis, Ofgem have broadly focussed on the right areas to improve the robustness of the market and protect customers. 

We have welcomed the focus around financial resilience which will benefit all customers if it helps to mitigate the potential for more suppliers to go into supplier of last resort or administration due to a more economically viable business model and a better approach to risk management.  There is a degree of discretion that Ofgem has given itself in the way it enforces these new rules, it is important that they make a meaningful difference.  Ofgem should enforce robustly, ensuring that suppliers who do not meet the full financial resilience targets face meaningful restrictions to ensure they quickly improve.

There has been a lot of activity around protecting vulnerable customers in particular, including consumer standards and the work around pre-payment meters (PPM).  Ofgem have recognised that there are trade-offs particularly around the risks associated with an outright ban on forced PPM installs given how this could increase a customer’s energy debt to unmanageable levels and the direct effect this could have on those customers. Similarly, an outright ban is likely to increase unrecoverable debt across the sector which will ultimately increase costs for all customers.

To its credit, the regulator has also identified that a well-functioning retail market needs to have resilient suppliers that are able to invest in new innovative business models, which requires the sector to be able to earn a modest profit, something which for some years has not been the case, although 2023 appears to be the first year of recovery in this regard[9].

Ofgem has increasingly prioritised work around improving consumer standards. We have constructively worked with the regulator over many months to improve the performance of our service for customers.  We recognise that all customers, particularly those that are struggling should be able to get through and speak to an energy specialist in a timely manner, and after some challenges in this regard during the last winter, we have adapted our business model including recruiting  over 1,300 people to improve service and support customers through the ongoing cost of living crisis. We have piloted and are in the process of implementing a segmented team of Energy Specialists that support our most vulnerable customers particularly those with health-related matters so that they can speak to highly qualified colleagues that can provide a more bespoke approach. This approach will be implemented in time for the coming winter months.

Ofgem is also looking at other way to protect customers particularly those that are more vulnerable.  We support the work they are doing to examine how to share the costs of serving more expensive customers more fairly, rather than penalising those customers directly with more expensive tariffs.  We also welcome the work being undertaken to permanently remove the PPM premium over Direct Debit customers to build on the Government’s existing commitments.

Ofgem have also played a leading role in highlighting the merits of a social tariff to protect the most vulnerable in society.  This is an example where the hands of the regulator are tied, and where the Government will ultimately determine whether this path is to be pursued.  We await the Government consulting on future consumer protection arrangements including the possibility of a social tariff.

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

The Government over the last year has played a vital role in supporting the energy sector.  It has already spent £40-70bn to mitigate the extreme aspects of the energy price shock, and limited the amount of debt that consumers would otherwise have accumulated over the period, which would have put even greater strain of the balance sheets of energy retailers (suppliers).  Despite this huge intervention by taxpayers, energy bills still doubled over that period.

The exits of more than 30 suppliers over the last few years have also had a major impact on the investability of the sector and the effective functioning of the market.  The Supplier of Last Resort (SoLR) and Special Administration Regime (SAR) have enabled the market to continue to operate by ensuring that customers that have been impacted by suppliers going into administration have been able to continue to be supplied energy until a new retailer has been found.  However, it is important that we learn the lessons that led to unprecedented levels of supplier failure.

An independent report commissioned by Ofgem and conducted by Oxera[10], as well as excellent work by the National Audit Office[11] and an inquiry by the BEIS Select Committee[12], highlighted that during this period, the regulatory framework created the opportunity for new suppliers to enter the market and grow quickly whilst committing minimal levels of their own equity capital.

By operating unsustainable, short-term business models, new entrants were able to benefit from any upside, while being able to exit the market at no or minimal cost when the market environment turned against them (as we saw when wholesale markets began their upward trajectory and many of them were insufficiently hedged to manage this risk).

The outcome was a domestic retail market that was not sustainable or resilient.  In many ways the regulator was only carrying out instructions from the Government to bring new entrants into the market almost at any costs and with an over-zealous approach to switching being the only key metric for assessing whether the energy market was functioning effectively or not. 

The retail energy regulatory framework today is attempting to achieve the benefits of competition whilst, at the same time, overlaying prescriptive, one-size-fits-all price regulation. This framework is a contradiction in terms and in need of urgent reform by Ofgem and Government to return the sector to profitability and attract the investment and innovation needed to play its role in supporting customers and generating the economic opportunities of new technologies and services and meeting the net zero target. We must be honest and transparent about the trade-offs involved in the regulatory choices associated with our energy retail market framework and avoid further embedding an incoherent framework as an unintended consequence of high-level policy.

We believe consumers should have access to a far greater range of products and services, better tailored to their individual needs, and that better align with the UK’s net-zero ambitions, for example by providing incentives to shift consumption patterns where possible and profitable to do so, to reduce energy waste, and support adoption of low carbon-technologies. This will require a market that encourages a much longer-term focus, but the market today is still largely based on looking through the lens of switching and the view that high switching levels is a sign of a healthy market.  Instead, there should be much greater choice for customers so they have options that span both shorter term price focussed benefits to the merits of establishing mutually beneficial longer term relationships with their supplier.

As we look to the future it is important that the Government and the regulatory framework deliver a market that rewards efficient and innovative players in the market through the ability to earn a sustainable level of profit.  Without profit and a return on investment, energy retailers will be unable to justify or attract new investment in order to innovate in new smarter and digitalised propositions that will be essential in helping households and businesses decarbonise.  In recent years the retail sector has been loss making, but with an expectation that the market is beginning to return to profitability in 2023, there are some green shoots of a recovery here[13].

 

Chart 3: EBIT Margin of large energy suppliers[14]

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

The market wide price cap introduced in January 2019 was intended to be a temporary measure.  Parliament at the time had rightly put in a sunset clause to reinforce this intention so that the cap would be removed in its current guise no later than 2023.

Since then, we have had multiple energy crises, included the present energy price shock.  Part of the response by the UK Government has been in the form of new legislation – The Energy Prices Act – which introduced new powers that enables the Government to extend the current price cap for as long as we are in the crisis, as well as in theory terminating the cap overnight.  We have long argued that these powers afforded to the Secretary of State do not allow for consultation or right of appeal, and effectively bypass established methods of industry consultation and regulation.  This is important because it is not clear to us that the current arrangements are indeed protecting customers.  Indeed, if suppliers were able to hedge over a much longer period, energy bills and therefore taxpayer support would have been lower over the crisis than ultimately turned out.

In fairness to the Government, some of the potential pitfalls with today’s price cap are recognised in its recent vision document[15], where it accepts that it could act as barrier to innovation and engagement and prevent consumers from feeling the full benefits of the transition to a smarter, more flexible energy system.  For example, as we move to market wide half hourly settlement in 2026, it is far from clear how today’s price cap design could fit around these essential reforms that will support much greater value from demand side flexibility being shared with consumers providing these services to the system.  We also agree with the Government that consumers care about more than just price.  Consumers are not homogenous.  Some will value price certainty over anything else.  Others will want support in adopting new green technologies and maximising their value through more dynamic tariffs or have a preference for a superior level of customer service above the normal regulatory expectations. 

We also need to be extremely mindful that we do not leave any households behind in the energy transition.  There will inevitably be a continued role for targeted intervention to protect various identified cohorts of customers, whether this is in the form of price protection or access to new greener technologies.

Government should commit to publishing options around future consumer protection arrangements this Autumn to enable the open and honest debate that is required to ensure more effective customer protections are put in place and to seek agreement on the kind of future retail market that we all want to see develop in the second half of this decade, including any necessary legislative changes required to facilitate change.   

August 2023

10

 


[1] https://www.politico.eu/article/germany-gets-one-energy-policy-right-efficiency/

[2] NEED – Median household consumption

[3] An international comparison of the cost of energy support packages - Office for Budget Responsibility (obr.uk)

[4] www.theccc.org.uk/publication/2023-progress-report-to-parliament/

[5] www.gov.uk/government/statistics/national-energy-efficiency-data-framework-need-consumption-data-tables-2023

[6] Energy pricing and the future of the Energy Market (parliament.uk)

[7] www.ofgem.gov.uk/sites/default/files/2023-07/FRC%20Decision%20doc%20-%20July%202023.pdf

[8] www.ofgem.gov.uk/sites/default/files/2023-07/Open%20letter%20on%20changes%20in%20the%20energy%20supply%20market%20and%20Ofgem%27s%20approach%20to%20regulation.pdf

[9] profitability in 2023 is driven, at least in part, by the one-off impact of retrospective price cap allowances: costs that were incurred by suppliers last year but recovered from customers this year.

[10] Review of Ofgem's regulation of the energy supply market 3 May 2022

[11] The energy supplier market - National Audit Office (NAO) report

[12] Energy pricing and the future of the Energy Market - Committees - UK Parliament

[13]www.ofgem.gov.uk/sites/default/files/202307/Open%20letter%20on%20changes%20in%20the%20energy%20supply%20market%20and%20Ofgem%27s%20approach%20to%20regulation.pdf

[14] Retail market indicators | Ofgem

[15] Delivering a better energy retail market (publishing.service.gov.uk)