03/09/13 – Government Policy on Energy

Speaker: Michael Fallon, MP, Energy Minster

All-Party Group on Energy costs Tuesday 3 September, 2013.

Laura Sandys opened the meeting and welcomed the Energy Minister, Michael Fallon.

Michael Fallon welcomed the idea that this All Party Group could help promote evidence-based discussion of energy policy. The Minister set out the government’s commitment to keep down costs for all consumers, domestic, business and industry. He also acknowledged that the EMR was the biggest reform to the market since the privatization of the 1980’s, but that this change was essential.

Further key factors to feed into policy were given as:

  • Energy and climate change policy, which would inevitably have an impact on prices.
  • 20% of the current generating capacity is dues to close in the next 20 years.
  • High renewable targets, which were legally binding and agreed to by the previous government.

The Government’s ambitions for energy policy are to:

  • Create a market that was fair, simple and could keep down prices.
  • Keep prices down by helping consumers to choose cheaper tariffs and reduce their energy use.

These objectives would be achieved by the Energy Bill, which included measures to enable:

  • Consumers to compare prices across providers and encourage switching
  • Consumers to pay only for what they use with the installation of smart meters; end estimated billing.
  • Help to incentivize companies to invest in replacing infrastructure.
  • Cut out waste.
  • Tackle the problem of legacy contracts
  • Create a more transparent system to help consumers get a better deal.

The government is at present helping domestic consumers with the cost of energy through:

  • The Green Deal, helping reduce consumption
  • Warm Homes Discount, providing assistance to the vulnerable.

In terms of business users support comes from:

  • The forthcoming report of the small business working group (DECC and No10) which had already encouraged some suppliers to end roll-over contracts.
  • Ofgem’s work on the retail market review.
  • Simplifying the climate change agreements.
  • Simplifying the Carbon Reduction Commitment schemes
  • Exempting energy intensive users from paying the cost of CfDs – compensation claims are being reviewed.

The Minister then went on to answer questions from the audience.

How the rules can be changed to allow more competition and choice?

The Minster agreed that the system was complicated and did need to become simpler, and that Ofgem was carrying out a lot of work in the area of market transparency. He urged the questioner to contribute to Ofgem’s consultations in this area.

It was pointed out that the capital markets needed to be convinced that the government had agreement from the public for the 6 -7 % pa increase in bills for infrastructure costs related to decarbonisation policies.

The Minister noted that the commitment to renewables is a treaty obligation. He re-iterated the fact that the present infrastructure was aging whilst agreeing that it was important to be able to encourage investment through creating more competition.

There was a call for more government action to stimulate consumer engagement and understanding to enable them to take ownership of their consumption; which could result in changes in demand patterns.

The Minister acknowledged that the government had more to do to explain the situation to the public about the cost of meeting the renewables target and the building of new infrastructure.

One contributor recommended that the UK follow the US system, which was simple, transparent (bills clearly detailed “cost of service” and “cost of gas”) and kept in place by regulators

The Minister agreed that he had been struck by the level of transparency in the US market and the lack of switching, which he suggested might have been down to that level of transparency.

There was a further exchange regarding what were the contributory factors towards level of switching and what a suitable level of switching in a market was. One contributor suggested that level had previously been high (previously 15-20%), but had been adversely affected by the mis-selling scandal and Ofgem’s subsequent ban on door-step sales, amongst other factors, and now reached a low of 6%.

In light of the different arguments put forward, the Minister concluded by posing the question, what would be a suitable level of switching for the UK market?

There was a question on role of shale gas in the portfolio of UK energy.

The Minister stated that shale gas had been successfully extracted in the US and that it had had a remarkable effect on prices and as such it would be irresponsible for the UK not to see if the same could not be achieved here. However, there are questions to be answered by exploration: how much shale is in the Southern and Scottish Wealds; how easily and cheaply could this be extracted? It was to answer these questions that the government had streamlined the planning system, introduced fiscal incentives and community benefits.

It was pointed out that shale and gas produced Co2 and that what was needed is successful carbon capture and storage, which would be cheaper than off-shore wind power. The questioner asked how the government could provide a quick and streamlined process for this?

The Minister said that the government were in the middle of a process to enable carbon capture in the UK market. A first competition had been run, it was close to being signed off with what DECC had thought was the best two technologies from a range. The two companies and systems would start operating in the next two years. He had been impressed by the level of competition and whilst this competition had sought a technology supplier with the incentive of Capex, he welcomed other projects from other companies, in-spite of there being no further Capex-based funding.

One contributor made the suggestion that the cost of the government mandated schemes: ROCs/Energy Efficiency Obligations be paid for by general taxation rather than incorporated into consumer bills.

After pointing out that these schemes pre-dated the government, the Minister asked what the case was for paying for these schemes through general taxation. The answer given was that this would be a less regressive mechanism which was more open to scrutiny. To which the Minister pointed out, with all that was going on, there was a lot of scrutiny at present.

It was suggested that big businesses might cull cheap tariffs as a result of recent policy interventions for more transparency.

In response, the Minister pointed out that Ofgem was doing a lot of work in this area and that he hoped that more than just the big 6 suppliers would help to make things as competitive as possible and that there were too many tariffs at present.

One questioner wondered if the general public were sufficiently aware of the aim of reducing costs by reduction of use, because the evidence suggested that this element of reduction would be difficult.

The Minister replied that energy prices were growing as a political issue, although it had been something of a specialist issue; using language and acronyms which shut the public out of the debate. Although attendance of meeting such as the APG had grown (in comparison to the period prior to privatisation), he then agreed that reducing use was difficult; whilst the results from energy efficient appliances had had good effects, reductions in housing and transport use had not been good.

Laura Sandys interjected to say that from her experience (having worked in the Consumer Association) the consumer point of view was that the sector was full of geeks and that there needed to be a new settlement with consumers which would allow them to engage with the bill.

There seemed to be general consensus that people needed to be convinced to use less energy and take responsibility for their use.

The session ended at 18:59 with a Division Bell sounding for a vote.