Chris Poses Pragmatic Questions To Ofgem Executives
Q408 Sir Christopher Chope: You and other regulators recently had a meeting with the Chancellor of the Exchequer. Can you tell us what transpired and how you were able to say to the Chancellor of the Exchequer that electricity and energy prices are fundamental to our ability to grow as a nation and that, at the moment, we have the highest electricity prices in the western world? Surely, that is very inhibiting in terms of growth, so what were you able to say to the Chancellor about what you are going to do to ensure that we become a low-cost energy superpower?
Jonathan Brearley: In a sense, there were five things that we put forward to the Chancellor, and they are really divided into two areas. The first is how you secure investment in the sector, how you make sure that that happens at pace and, frankly, how you make sure that the regulator is not a blocker to that.
As the Secretary of State laid out last week, we agree that the best pathway to more stable prices is to move to a net zero system, simply because the costs that you put into the system are the capital that you spend up front, and are not dependent on the markets that we see around us.
To go through the five things it is, first of all, about making sure that we play a part in getting investment for clean power 2030. We agree that we need to resolve the connections issue, because when investors come to this country, one of their principal issues when investing in the energy market is being able to get connected to the grid. We need a more dynamic retail market to do exactly that: to make sure that all customers—both businesses and households—have the ability to minimise their costs in a system where you are going to see more in intermittent renewables in the future.
Coming down to how you make this energy system attractive for investors, there are two further things. The first is making sure that factories, when they arrive here, can connect to the grid. Secondly, there is a conversation that we would like to have about industrial costs. There is a scheme already where Government, for example, exempt some of the industry from some of the costs that are in the system, but that comes with trade-offs both for the taxpayer and, indeed, for other consumers.
In terms of minimising cost, we are four-square behind getting to 2030, because that is the best way to avoid some of the costs that we have seen in the last two years. I sat with businesses through the crisis. I sat with small businesses facing massive increases in their bills. All of that was driven by the volatility that we see in the gas market.
Q409 Sir Christopher Chope: It is also about the extent of the gas prices. You have not really mentioned the word “growth” in your answer. If the Chancellor really wants to go for economic growth, what are you saying that you are going to be able to do to help deliver that by reducing our overall costs of energy, particularly to industry? At the moment, we are exporting industry overseas because of the very high energy costs we have here. Surely, this should be the No. 1 priority for your organisation.
Jonathan Brearley: We are absolutely focused on reducing costs in the overall system. That is about designing a market where you can get to 2030. That is about making sure that we move away from this country’s and this industry’s dependence on gas. In the long term, that is where you want to get to, and we are four-square behind that. Quite frankly, that is a huge part of not just Ofgem’s but the Government’s growth mission.
Equally, alongside that there is a short-term question about how we distribute costs. We should be mindful of all the investors that want to come here and invest in the system, and get the right industrial prices as well.
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Q471 Sir Christopher Chope: I am sorry that I had to absent myself, but I am on the Procedure Committee as well, and we had the Speaker coming to give evidence.
I am delighted to be able to get on to this issue, which is about non-domestic users, and domestic users of non-domestic contracts. I am very grateful to Tim Jarvis for having responded to some constituency correspondence, which I sent to him on behalf of residents at Oak Tree Park, which is a large park home residential site in my constituency. One of the constituents there has said that he understood that the price cap was, in round figures, about 24p, and he is being charged 31p. He asked what can be done about it.
I said earlier to the Chair that I got this very good response, and I am going to circulate it to the Committee so that we do not have to repeat what is contained in it. Essentially, what it says is, “Not me, guv,” in that there is a limit to what you are able to do as Ofgem. You refer to the maximum resale price rules, but then you say that Ofgem does not enforce the rules of the maximum resale price direction, as essentially this is a civil issue, and, ultimately, if you are a park home resident, you are going to have to take it to the tribunal if you cannot get agreement from the site owner.
This very day, I had a conversation with somebody who phoned up from a caravan site. He has been resident in a residential caravan, not a park home, for 25 years. He said that he is paying about £400 a month as a site fee, but paying about £100 a week for electricity. This gives the impression that there is a bit of a rip-off, and I wonder why Ofgem does not enforce the rules of the maximum resale price direction. Is that because it chooses not to or does not have the power so to do?
Tim Jarvis: Let me pick that up. I am sorry if it came across as a, “Not us, guv.” There are things that we can do and have done. There are challenges, and perhaps I will talk through some of that.
In answer to your specific question, we have set rules to ensure that anybody reselling energy to an end user cannot, effectively, make a profit out of that. The challenge we have, as you rightly point out, is that, at the moment, for a customer to exercise those rules, they have to go through the courts. That is because we do not have the power to take up cases on behalf of individual customers and enforce those rules. There is a question about whether that is the right thing to do.
In other parts of the market, for example, you would have access to some sort of alternative dispute resolution service. It would really help to enforce those rules if people such as your constituent had access to that, so that instead of having to go to court they could go to some ombudsman or an alternative dispute resolution service. We have made that case very strongly to Government and will continue to push on that, because it is an important way for people to be able to exercise the rules that we have put in place. You are right that, at the moment, we do not have the powers to investigate individual cases.
Q472 Sir Christopher Chope: Last year, my understanding is that the previous Government issued a consultation around this whole area. Where has that got to? What are you expecting to happen as a result of that, or is it dead in the water?
Tim Jarvis: We are talking to the Government about what their plans are and waiting to see what decisions might come out of this. There are a couple of areas that certainly bear looking at. The first is this one about alternative dispute resolution and whether you could put something in place. We have highlighted the fact that, for example, there is legislation going through Parliament at the moment around private renters, which introduces a dispute resolution service. Could you expand that and incorporate these cases into that, for example? That is one thing that we think could be worth doing.
The other thing that we are focused on and talking to Government about—this is coming up in our future regulation of heat networks, and may well come up in later questioning—is that where somebody’s energy costs are tied up with their contractual relationship for their housing, which is the example that we have here, and we also get it in heat networks, we cannot really regulate that at the moment. We cannot go beyond the contract that people have. If they have a contract to pay their energy through their rent, that takes us out of the equation. There is something there about these sorts of cases to ensure not only that we have the rules in place, but that people are able to enforce against them.
As I also referred to in the letter, there were industry codes and rules that made it difficult for people to move from taking their energy supply through their landlord to getting a contract directly with a supplier. We have very recently changed those rules to allow people to have access to a domestic supplier. You still come up against this slight challenge if it is part of your contractual arrangement with your rent. That is one of the things that we are talking to MHCLG about at the moment: how we make sure that we can get the right protections for those people.
Q473 Sir Christopher Chope: Is there anything else that you could do to bring to the attention of these residents their right to be informed about how much their landlord, for want of a better expression, is paying, so that they can then calculate whether they are being ripped off? At the moment, most people seem to be rather ignorant about those rights.
Tim Jarvis: Yes, absolutely. There are requirements on landlords to provide that information to their tenants, but we are always looking at what more we can do to highlight what people’s rights are, what they can ask for, and what information they can get. It is something we are constantly looking at.
Jonathan Brearley: There are two things that I would say. Coming back to this point about our communications role, we have something called the Energy Aware campaign, and we should take away making this part of it—making people aware of their rights in general, including this issue.
It relates to the kind of regulator that you might want in the future. The simple answer, Sir Christopher, is that we do not license landlords, so we do not have a licence through which we can set rules and fine, as we can retailers, networks and others.
Customers in 2035, or 2030, are going to be getting their energy from solar panels that have been installed, aggregators that may be operating them, or battery installers. People might use their car battery. My concern is that we do not have the suite of powers or the ability to manage our regulatory boundary to deal with that.
When we talk about the Ofgem review, start with the customer. Start with where their energy is coming from, and give the regulator the power to intervene and to protect customers, whichever way they get their energy. We are looking at models in financial services, for example, or, indeed, in Ofcom, where things are defined differently, allowing the regulator to be a bit more adaptable to a fast-changing market.
Q474 Sir Christopher Chope: Going back to the more general issue of non-domestic users, we touched on the costs at the very beginning of this evidence session. What more can you do to reduce energy costs for non-domestic business users, so that they are more internationally competitive? Our costs are so high.
Tim Jarvis: I will start at the macro level and work down, if you like. There are three things that determine our prices for non-domestic consumers and affect how they compare internationally. The first is our reliance on gas, which we have talked about at length. That is a broader issue that we are looking at through clean power 2030.
Sir Christopher Chope: Is that not a bit of a red herring? Gas prices are international. If they are international, why is it that our energy prices are higher than anybody else’s?
Tim Jarvis: The use of gas to generate our electricity is the issue there, and that is the thing that is moving through the Government. The second thing that drives our costs is policy costs and where they fall in the market, which is something we have also talked about, and I know Government are thinking about.
The thing that is in our control—Akshay may want to come in on this—is the network costs and how they are shared. We can move those costs between different types of consumers. We can move them from non-domestic businesses to domestic consumers. We have made decisions on that in the past, and that is something that we keep under review.
When you get to what we can do at the micro level, we did a big review of energy costs in the non-domestic sector, and one of the areas where we found a definite case for intervention was around the use of energy brokers and third-party intermediaries. There are some good ones in that market, but others where people are getting quite a poor deal. We have introduced rules to make sure that they are transparent, and the Government are consulting on the regulation of those intermediaries. There is potentially a future role for us in taking that on.
Jonathan Brearley: I have just one thing to add. As I mentioned, there is a Government scheme that is quite narrowly focused now on energy-intensive users in internationally competitive markets, which offers discounts to some of these charges that Tim has laid out. It is worth exploring whether we have the scope of that right and how that should be applied in a world of AI and data centres, where, clearly, a lot of energy-hungry investors are going to be looking for sites in countries such as Britain.
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Q499 Sir Christopher Chope: Is this talk about everybody having heat pumps or going on to hydrogen not a bit pie in the sky? I went on one of these ready reckoner things, which asked questions as to whether my property would be suitable for a heat pump. First of all, I found out it would not be suitable if it was a flat on the first floor or above. Secondly, it would not be suitable if it did not have an area of about 6 square metres where you could actually put the heat pump outside. There were various other conditions, including the need for a hot water cylinder.
How many properties in the United Kingdom, or in England, depending on what figures you have, do you think are incapable of being suitable for the installation of heat pumps? How many of those properties do you think would then be suitable for hydrogen, which is another pie-in-the-sky idea?
Jonathan Brearley: Again, I hate to say this, but this is something you need to ask the Department for. The Department owns and runs this strategy, including for households, but I would make the point that this is not just about heat pumps. This is about district heating as well as heat pumps and hydrogen. We do have time to work through these issues. We are keen on a policy direction from Government. There is a lot to do to make that part of the decarbonisation strategy work but, ultimately, there are options for different parts of the country.
Q500 Sir Christopher Chope: You do not know how many people could have heat pumps.
Jonathan Brearley: We do not plan the heat roll-out. We do two things: we regulate the networks to make sure the networks are ready, based on policy decisions that are made, and we run the boiler upgrade scheme. At the moment, that is a demand-led scheme. Customers sign up for that and they get the discount if they want it.
Sir Christopher Chope: The Department has the information I have asked for.
Jonathan Brearley: It does. I have every confidence in the Department.
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