08/04/14 – How is competition benefiting consumers?

Speakers: Ian Peters, MD for Residential Energy at British Gas; Nigel Cornwall of Cornwall Energy; Laura Sandys MP, former PPS to Climate Change Minister Greg Barker

The All Party Parliamentary Group on Energy Costs

8 April 2014 – meeting notes

‘How is competition benefiting consumers?’

British Gas (BG) circulated a diagram of a light bulb which broke down the components of a bill, illustrating the key point that the price of energy is dictated by external factors.

The interest in the Bill from the Energy and Climate Change Committee on the distribution networks is welcome. BG do control their operating costs, in the last 3 years there have been cuts. When operational costs fall, so do prices; over the last few years £300 million of costs have been removed from Ian Peter’s part of the company. BG was the first supplier to announce price cuts in line with the Government’s cut in ECO.

All the larger firms have roughly the same costs, which is why prices are so similar.

Industry critics suggest that the downstream operations are not where the “excessive” profits are made, rather this happens upstream. However the vertically integrated structure of the company and its size provides benefits for the consumer, for instance, it costs the company less to borrow and allows for things such as long-term contracts with international gas sellers.

In 2013 Ian’s department bought less than 20% of gas from Centrica, so the argument that the company benefits from self-supply is a myth. Each part of the business is run independently and reports independently and transparently. However, the industry overall does need more transparency on upstream operations.

He disagreed with the suggestion that a lack of completion resulted in price rises, arguing that without so much competition,  prices would have increased much more than they have. Competition does work; it has delivered benefits, although opacity of reporting feeds suspicion of companies and the market.

Regulated price changes are not always helpful, SSE price freeze tariff is higher than the cheapest tariff currently available to BG consumers.

Innovation within the industry is a sign of competition in the market; the company is taking a strong lead in the area of innovation. Competition does benefit consumer, keeping prices lower and driving service levels up and creates innovation.

Laura Sandys MP

The basic problem is that the markets should be shaped by consumers, whereas currently the energy product is shaped by engineers.

In terms of competition, there are actually lots of companies selling the same product, leaving the consumer with no choice. Laura Sandys might write to CMA to recommend innovative competition, which might produce “home services” products.

“Switching” is a diversion; consumers still don’t actually understand the unit prices. There is still a lack of competition in the product itself. Need an absolute radical change, e.g. white goods sector could go into energy sector. New entrants and full service packages would be real competition and innovation.

There should be many more than 4 different tariffs.

Nigel Cornwall

There are lots of positives in the sector at present, but there are also issues hampering progress in the sector. The sector has never been so political; the politics is a distraction at a time when the industry is facing difficulties. This is a critical point.

Competition is helping customers by making prices cheaper than they would have been otherwise; there were 10 major price/product interventions during March 2014, there are very competitive offers available.

Service levels have been improved by competition.  Different types of propositions (Green suppliers, micro CHP etc.) and different types of payment methods have developed in the market; independents are experimenting with some of these things.

The independent sector is healthier than it has ever been. However, green products have been withdrawn by the larger operations as a result of regulatory interference.

This is a vibrant market, there is now (as well as a ‘big six’) an intermediate 4: Ovo, Telecom Plus, First Utility, The Co-op. In the last six months the Energy Supplies Forum has worked with several new entrants in the market.

Whilst there are still important debates to be had, overall there is more competition in the market.

Questions and comments from the floor

Can companies be given the freedom to innovate and develop? Do the constant delays in smart meter roll-out hamper the cost benefits the technology is designed to deliver?

Laura Sandys MP. Worried about how it works, agreed there needs to be a communications roll-out first with the government spending money to fund it. Smart metering is part of the solution, but it also needs to be done in a way which is more intuitive.

Ian Peters. Whilst there was a need for a degree of standardisation, in-home displays will be redesigned, there will be some innovation. Agreed with the idea of customer disconnection, the use of terms such as “kilowatt hour” on bills is not helpful. Itemised bills will help to improve this situation. Innovation is in the proposition; smart meters allow for monitoring of energy consumption and action. BG looking at itemised bills, consumption reports, connected boilers and general connection of the home in controllable way.

Agreed that the uncertainty in the smart meter roll-out had created difficulties, however the indicators (from the BG roll-out) show that consumption is down, complaints are down.

Argument that pre-payment is stigmatised, there is no competition in the pre-payment market; there is £36.00 pa between the lowest and highest price tariff, most people can’t switch from these tariffs. Why is nothing being done about this?

Ian Peters. This would be relatively less competitive because smaller companies don’t go into that market. 8% of the customer-base for BG are in debt. BG will arrive at smart pre-pay 18 months ahead of the rest of the industry, at which point costs of running a pre-payment service is similar to the traditional systems. Smart meter-based pre-payments will work out once there is scale in smart meters at which point BG will drop prices, because smart meters will fundamentally change the proposition of pre-payment.

In relation to small-scale solar power what are BG working on for intelligent switching and local storage?

Ian Peters. The roll-out of smart meters can be seen as also laying the foundations for export of micro-generation to the grid. At present, this is quite clunky, but by the third generation of meters, this will be improved.

Nigel Cornwall. There are hard challenges, lots of the market is working quite well, there is a lot of competition on price, however there are many complicated elements, such as the settlement process and registration. The time is not right for a full competition enquiry at the moment. Perhaps the CMA will focus on non-commercial barriers to competition; this might help to create the changes which allow for there to be a market of 60,000 generators.

Laura Sandys MP. Agrees with the last point, that the system still feels clunky and “nationalised” at times.

The meeting closed at this point.